Turning Point Brands, Inc. 10-K

Item 8. Financial Statements and Supplementary Data TURNING POINT BRANDS, INC. CONTENTS Page Reports of RSM US LLP (PCAOB ID: 49 ) 58 Financial Statements: Consolidated Balance Sheets as of December 31, 2021 and 2020 62 Consolidated Statements of Income for the years ended December 31, 2021, 2020, and 2019 63 Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020, and 2019 64 Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020, and 2019 65 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2021, 2020, and 2019 67 Notes to Consolidated Financial Statements 68 57 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Turning Point Brands, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Turning Point Brands, Inc. and its subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Our report dated March 11, 2022 expressed an opinion that the Company had not maintained effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate. Goodwill Impairment Analysis for the NewGen Reporting Unit As described in Note 10 to the financial statements, the Company’s goodwill balance in the NewGen segment, which is also a reporting unit, was $25.6 million at December 31, 2021, and as described in Note 2 to the financial statements, goodwill is tested for impairment, at the reporting unit level, at least annually on December 31 or more frequently if indicators of impairment require the performance of an interim impairment assessment. To test goodwill for impairment, management compares the estimated fair value of the reporting unit, which is determined using a discounted cash flow method, with the carrying value of the reporting unit, including goodwill. 58 Table of Contents We identified the goodwill impairment assessment for the NewGen reporting unit as a critical audit matter because of the significant estimates and assumptions used by management when estimating the fair value of this reporting unit, including management’s forecasts of expected revenue growth rates, managements selection of the discount rate, and management’s estimate of the terminal value . Auditing management’s estimates and assumptions involved a high degree of auditor judgment and increased audit effort, including the use of our valuation specialists, due to the impact these assumptions have on the estimated fair value of the NewGen reporting unit for goodwill impairment testing. Our audit procedures related to the assessment of goodwill impairment for the NewGen reporting unit included the following, among others: • Evaluating the reasonableness of management’s forecasts of revenue growth rates by comparing the projections to historical results and to publicly available market data. • Tested the accuracy of management’s estimation process by comparing current year results to prior year estimates . • We utilized valuation specialists to assist in the following, among others: o Evaluating the appropriateness of the valuation method used by management and testing its mathematical accuracy. o Evaluating the appropriateness of the methodology used by management to estimate the terminal value, comparing the inputs used by management to estimate the terminal value to market data, and testing its mathematical accuracy. o Evaluating the reasonableness of the discount rate by comparing the underlying source information to publicly available market data and testing the accuracy of the calculation. Fair Value of dosist TM Investment As described in Note 11 to the financial statements, at December 31, 2021 the Company estimated the fair value of its investment in warrants for preferred shares of dosist TM to be $7.9 million, which resulted in the Company recording an impairment loss of $7.1 million for the year ended December 31, 2021. Because the Company’s investment in dosist TM does not have a readily determinable fair value, the Company has elected a practical expedient to record this investment at the original cost , as adjusted for impairment and observable price changes. Under the practical expedient, if a qualitative analysis indicates impairment exists, the fair value of the investment is required to be estimated and any excess of the carrying value over the estimated fair value is recognized as an impairment loss. At December 31, 2021, the Company’s qualitative assessment of its investment in dosist TM identified significant deterioration in economic performance and adverse cannabinoid market conditions as indicators of impairment. Consequently, the Company estimated the fair value of its investment in dosist TM using a probability weighted average of market approaches, including a valuation derived from changes in a relevant market index and a valuation derived from adjusted market multiples. The Company then compared its estimated fair value to the carrying value of the investment and recorded an impairment loss equal to the difference. We identified the estimate of the fair value of the dosist TM investment as a critical audit matter because of the complexity and judgment involved in estimating the fair value of an investment without a readily determinable fair value. Auditing management’s estimate of fair value of the dosist TM investment, which included the use of our valuation specialists, involved a high degree of auditor judgment , increased audit effort, and subjectivity to evaluate the audit evidence obtained. Our audit procedures related to the estimated fair value of the dosist TM investment included the following, among others: • Evaluating the relevance and reliability of the underlying business-related data by comparing it to the investee’s historical financial results. • Comparing the rights and preferences of the various dosist TM equity classes to the governance documents of dosist TM . • Utilizing valuation specialists to assist in developing a range of independent estimates of the fair value of the dosist TM investment through the use of market data, including guideline public companies and guideline transactions. • Comparing the range of the independent estimate of fair value developed by our valuation specialists to management’s estimate of fair value. /s/ RSM US LLP We have served as the Company’s auditor since 2006. Richmond, Virginia March 11, 2022 59 Table of Contents Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Turning Point Brands, Inc. Opinion on the Internal Control Over Financial Reporting We have audited Turning Point Brands, Inc.’s (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, because of the effect of the material weakness described below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes to the consolidated financial statements of the Company and our report dated March 11, 2022 expressed an unqualified opinion. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. There were deficiencies in the design and operation of information technology general controls (“ITGCs”) in the areas of user access and program change-management over certain information technology (“IT”) systems that support the Company’s financial reporting processes. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2021 financial statements, and this report does not affect our report dated March 11, 2022 on those financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. 60 Table of Contents Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ RSM US LLP Richmond, Virginia March 11, 2022 61 Table of Contents Turning Point Brands, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2021 and 2020 (dollars in thousands except share data) December 31, 2021 December 31, 2020 ASSETS Current assets: Cash $ 128,320 $ 41,765 Accounts receivable, net of allowances of $ 262 in 2021 and $ 150 in 2020 6,496 9,331 Inventories 87,607 85,856 Other current assets 26,746 26,451 Total current assets 249,169 163,403 Property, plant, and equipment, net 18,650 15,524 Deferred income taxes 1,363 610 Right of use assets 15,053 17,918 Deferred financing costs, net 388 641 Goodwill 162,333 159,621 Other intangible assets, net 87,485 79,422 Master Settlement Agreement (MSA) escrow deposits 31,720 32,074 Other assets 35,399 26,836 Total assets $ 601,560 $ 496,049 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 7,361 $ 9,201 Accrued liabilities 32,937 35,225 Current portion of long-term debt - 12,000 Other current liabilities 38 203 Total current liabilities 40,336 56,629 Notes payable and long-term debt 414,172 302,112 Lease liabilities 13,336 16,117 Other long-term liabilities - 3,704 Total liabilities 467,844 378,562 Commitments and contingencies Stockholders’ equity: Preferred stock; $ 0.01 par value; authorized shares 40,000,000 ; issued and outstanding shares - 0 - - - Common stock, voting, $ 0.01 par value; authorized shares, 190,000,000 ; 19,690,884 issued shares, 18,395,476 outstanding shares at December 31, 2021 , and 19,532,464 issued shares, 19,133,794 outstanding shares at December 31, 2020 197 195 Common stock, nonvoting, $ 0.01 par value; authorized shares, 10,000,000 ; issued and outstanding shares - 0 - - - Additional paid-in capital 108,811 102,423 Cost of repurchased common stock ( 1,295,408 shares at December 31, 2021 and 398,670 shares at December 31, 2020) ( 48,869 ) ( 10,191 ) Accumulated other comprehensive loss ( 195 ) ( 2,635 ) Accumulated earnings 71,460 23,645 Non-controlling interest 2,312 4,050 Total stockholders’ equity 133,716 117,487 Total liabilities and stockholders’ equity $ 601,560 $ 496,049 The accompanying notes are an integral part of the consolidated financial statements. 62 Table of Contents Turning Point Brands, Inc. and Subsidiaries Consolidated Statements of Income for the years ended December 31, 2021, 2020, and 2019 (dollars in thousands except share data) For the year ended December 31, 2021 2020 2019 Net sales $ 445,471 $ 405,111 $ 361,989 Cost of sales 227,637 215,121 224,872 Gross profit 217,834 189,990 137,117 Selling, general, and administrative expenses 127,513 125,563 109,887 Operating income 90,321 64,427 27,230 Interest expense, net 20,500 13,487 14,435 Investment loss (income) 6,673 ( 198 ) ( 2,648 ) (Gain) loss on extinguishment of debt ( 2,154 ) - 1,308 Net periodic benefit cost (income), excluding service cost - 989 ( 4,961 ) Income before income taxes 65,302 50,149 19,096 Income tax expense 14,040 11,957 2,863 Consolidated net income 51,262 38,192 16,233 Net loss attributable to non-controlling interest ( 797 ) - - Net income attributable to Turning Point Brands, Inc. $ 52,059 $ 38,192 $ 16,233 Basic income per common share: Net income attributable to Turning Point Brands, Inc. $ 2.75 $ 1.97 $ 0.83 Diluted income per common share: Net income attributable to Turning Point Brands, Inc. $ 2.52 $ 1.85 $ 0.78 Weighted average common shares outstanding: Basic 18,917,570 19,398,474 19,627,093 Diluted 22,381,994 22,937,441 23,240,348 The accompanying notes are an integral part of the consolidated financial statements. 63 Table of Contents Turning Point Brands, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020, and 2019 (dollars in thousands) For the year ended December 31, 2021 2020 2019 Consolidated net income $ 51,262 $ 38,192 $ 16,233 Other comprehensive income (loss), net of tax Amortization of unrealized pension and postretirement gain (loss), net of tax of $ 0 in 2021 , $ 57 in 2020 , and $ 136 in 2019 - 1,830 ( 1,150 ) Unrealized (loss) gain on MSA investments, net of tax of $ 81 in 2021 and $ 0 in 2020 and $ 351 in 2019 ( 272 ) - 1,174 Foreign currency translation, net of tax of $ 0 in 2021, 2020 and 2019 260 - - Unrealized gain (loss) on derivative instruments, net of tax of $ 813 in 2021 , $ 233 in 2020 and $ 377 in 2019 2,634 ( 692 ) ( 1,261 ) 2,622 1,138 ( 1,237 ) Consolidated comprehensive income 53,884 39,330 14,996 Comprehensive loss attributable to non-controlling interest ( 615 ) - - Comprehensive income attributable to Turning Point Brands, Inc. $ 54,499 $ 39,330 $ 14,996 The accompanying notes are an integral part of the consolidated financial statements. 64 Table of Contents Turning Point Brands, Inc. and Subsidiaries Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020, and 2019 (dollars in thousands) For the year ended December 31, 2021 2020 2019 Cash flows from operating activities: Consolidated net income $ 51,262 $ 38,192 $ 16,233 Adjustments to reconcile net income to net cash provided by operating activities: (Gain) loss on extinguishment of debt ( 2,154 ) - 1,308 Pension settlement and curtailment loss - 1,188 - (Gain) loss on sale of property, plant, and equipment ( 54 ) 123 7 Impairment loss - 149 301 Gain on postretirement plan termination - - ( 4,915 ) Loss (gain) on investments 7,100 - ( 2,000 ) Depreciation expense 3,105 3,237 2,638 Amortization of other intangible assets 1,907 1,781 1,451 Amortization of deferred financing costs 2,541 2,230 1,458 Deferred income taxes ( 1,485 ) 4,742 ( 3,400 ) Stock compensation expense 7,557 2,554 3,629 Noncash lease (income) expense ( 167 ) 370 357 Gain on MSA escrow deposits ( 255 ) - - Changes in operating assets and liabilities: Accounts receivable 3,317 ( 2,112 ) ( 3,464 ) Inventories ( 9 ) ( 8,004 ) 20,665 Other current assets ( 134 ) ( 5,373 ) ( 1,196 ) Other assets 996 2,076 ( 2,864 ) Accounts payable ( 2,367 ) ( 5,064 ) 6,608 Accrued postretirement liabilities - ( 54 ) ( 168 ) Accrued liabilities and other ( 2,943 ) 7,643 1,147 Net cash provided by operating activities $ 68,217 $ 43,678 $ 37,795 Cash flows from investing activities: Capital expenditures $ ( 6,156 ) $ ( 6,135 ) $ ( 4,815 ) Acquisitions, net of cash acquired ( 16,416 ) ( 39,441 ) ( 7,704 ) Payments for investments ( 16,657 ) ( 19,250 ) ( 1,421 ) Restricted cash, MSA escrow deposits ( 19,664 ) - 29,718 Proceeds on sale of property, plant and equipment 54 3 123 Net cash (used in) provided by investing activities $ ( 58,839 ) $ ( 64,823 ) $ 15,901 65 Table of Contents Turning Point Brands, Inc. and Subsidiaries Consolidated Statements of Cash Flows (cont.) for the years ended December 31, 2021, 2020, and 2019 (dollars in thousands) For the year ended December 31, 2021 2020 2019 Cash flows from financing activities: Proceeds from Senior Notes $ 250,000 $ - $ - Payments of 2018 first lien term loan ( 130,000 ) ( 16,000 ) ( 8,000 ) Settlement of interest rate swaps ( 3,573 ) - - Payments of 2018 second lien term loan - - ( 40,000 ) Payments of 2018 revolving credit facility - - ( 26,000 ) Proceeds from Convertible Senior Notes - - 172,500 Payment of promissory note ( 9,625 ) - - Payment of IVG note - ( 4,240 ) - Proceeds from unsecured note - 7,485 - Standard Diversified Inc. reorganization, net of cash acquired - ( 1,737 ) - Payments for call options - - ( 20,528 ) Payment of dividends ( 4,096 ) ( 3,802 ) ( 3,531 ) Payments of financing costs ( 6,921 ) ( 194 ) ( 7,117 ) Exercise of options 2,071 862 738 Redemption of options ( 2,111 ) ( 1,523 ) ( 12 ) Surrender of restricted stock - - ( 84 ) Common stock repurchased ( 38,678 ) ( 10,191 ) - Net cash provided by (used in) financing activities $ 57,067 $ ( 29,340 ) $ 67,966 Net increase (decrease) in cash $ 66,445 $ ( 50,485 ) $ 121,662 Effect of foreign currency translation on cash $ 191 $ - $ - Cash, beginning of period: Unrestricted 41,765 95,250 3,306 Restricted 35,074 32,074 2,356 Total cash at beginning of period 76,839 127,324 5,662 Cash, end of period: Unrestricted 128,320 41,765 95,250 Restricted 15,155 35,074 32,074 Total cash at end of period $ 143,475 $ 76,839 $ 127,324 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 12,539 $ 11,455 $ 11,828 Cash paid during the period for income taxes, net $ 16,063 $ 3,384 $ 11,332 Supplemental schedule of noncash financing activities: Issuance of note payable for acquisition $ - $ 10,000 $ - Dividends declared not paid $ 1,261 $ 1,099 $ 962 The accompanying notes are an integral part of the consolidated financial statements. 66 Table of Contents Turning Point Brands, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2021, 2020, and 2019 (dollars in thousands) Voting Shares Common Stock, Voting Additional Paid-In Capital Cost of Repurchased Common Stock Accumulated Other Comprehensive Income (Loss) Accumulated Earnings (Deficit) Non- Controlling Interest Total Beginning balance January 1, 2019 19,553,857 $ 196 $ 110,466 $ - $ ( 2,536 ) $ ( 21,526 ) $ - $ 86,600 Unrecognized pension and postretirement cost adjustment, net of tax of $ 136 - - - - ( 1,150 ) - - ( 1,150 ) Unrealized gain on MSA investments, net of tax of $ 351 - - - - 1,174 - - 1,174 Unrealized loss on derivative instruments, net of tax of $ 377 - - - - ( 1,261 ) - - ( 1,261 ) Stock compensation expense - - 3,600 - - - - 3,600 Restricted stock forfeitures ( 1,947 ) - ( 84 ) - - - - ( 84 ) Exercise of options 128,763 1 738 - - - - 739 Redemption of options - - ( 12 ) - - - - ( 12 ) Dividends - - - - - ( 3,579 ) - ( 3,579 ) Purchase of call options, net of tax of $ 5,195 - - ( 15,333 ) - - - - ( 15,333 ) Fair value of earn-out - - 1,155 - - - - 1,155 Net income - - - - - 16,233 - 16,233 Ending balance December 31, 2019 19,680,673 $ 197 $ 100,530 $ - $ ( 3,773 ) $ ( 8,872 ) $ - $ 88,082 Unrecognized pension and postretirement cost adjustment, net of tax of $ 57 - $ - $ - $ - $ 1,830 $ - $ - $ 1,830 Unrealized loss on derivative instruments, net of tax of $ 233 - - - - ( 692 ) - - ( 692 ) Stock compensation expense - - 2,554 - - - - 2,554 Exercise of options 96,005 - 862 - - - - 862 Redemption of options - - ( 1,523 ) - - - - ( 1,523 ) Cost of repurchased common stock ( 398,670 ) - - ( 10,191 ) - - - ( 10,191 ) Standard Diversified Inc. reorganization, net ( 244,214 ) ( 2 ) - - - ( 1,735 ) - ( 1,737 ) Dividends - - - - - ( 3,940 ) - ( 3,940 ) ReCreation acquisition - - - - - - 4,050 4,050 Net income - - - - - 38,192 - 38,192 Ending balance December 31, 2020 19,133,794 $ 195 $ 102,423 $ ( 10,191 ) $ ( 2,635 ) $ 23,645 $ 4,050 $ 117,487 Unrealized loss on MSA investments, net of tax of $ 81 - $ - $ - $ - $ ( 272 ) $ - $ - $ ( 272 ) Unrealized gain on derivative instruments, net of tax of $ 813 - - - - 2,634 - - 2,634 Foreign currency translation, net of tax of $ 0 - - - - 78 - 182 260 Stock compensation expense - - 7,557 - - - - 7,557 Exercise of options 158,420 2 2,069 - - - - 2,071 Redemption of options - - ( 2,111 ) - - - - ( 2,111 ) Cost of repurchased common stock ( 896,738 ) - - ( 38,678 ) - - - ( 38,678 ) Acquisition of ReCreation Marketing interest - - ( 1,127 ) - - - ( 1,123 ) ( 2,250 ) Dividends - - - - - ( 4,244 ) - ( 4,244 ) Net income - - - - - 52,059 ( 797 ) 51,262 Ending balance December 31, 2021 18,395,476 $ 197 $ 108,811 $ ( 48,869 ) $ ( 195 ) $ 71,460 $ 2,312 $ 133,716 The accompanying notes are an integral part of the consolidated financial statements. 67 Table of Contents Turning Point Brands, Inc. and Subsidiaries Notes to Consolidated Financial Statements (dollars in thousands, except where designated and per share data) Note 1. Organizations and Basis of Presentation Description of Business Turning Point Brands, Inc. and its Subsidiaries (collectively referred to herein as the “Company,” “we,” “our,” or “us”) is a leading manufacturer, marketer and distributor of branded consumer products. We sell a wide range of products to adult consumers consisting of staple products with our iconic brands Zig-Zag ® and Stoker’s ® to our next generation products to fulfill evolving consumer preferences. Our three focus segments are led by our core, proprietary brands: Zig-Zag ® in the Zig-Zag Products segment; Stoker’s ® along with Beech-Nut ® and Trophy ® in the Stoker’s Products segment; along with our distribution platforms ( Vapor Beast ® , VaporFi ® and Direct Vapor ® ) and Solace ® in the NewGen Products segment. The Company’s products are available in more than 215 ,000 retail outlets in North America. We operate in three segments: (i) Zig-Zag Products, (ii) Stoker’s Products, and (iii) NewGen Products . Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Company’s significant estimates include those affecting the valuation of goodwill and other intangible assets, deferred income tax valuation allowances, the valuation of investments and the valuation of inventory, including reserves. Certain prior year amounts have been reclassified to conform to the current year’s presentation. The changes did not have an impact on the Company’s consolidated financial position, results of operations, or cash flows in any of the periods presented. Note 2. Summary of Significant Accounting Policies Consolidation The consolidated financial statements include the accounts of the Company, its subsidiaries, all of which are wholly owned, and variable interest entities (“VIEs”) for which the Company is considered the primary beneficiary. All significant intercompany transactions have been eliminated. GAAP requires the Company to identify entities for which control is achieved through means other than voting rights and to determine whether the Company is the primary beneficiary of VIEs. A VIE is broadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financial support; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb the expected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; and (c) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The Company consolidates its investment in a VIE when it determines that it is the VIE’s primary beneficiary. The Company may change its original assessment of a VIE upon subsequent events such as the modification of contractual arrangements that affects the characteristics or adequacy of the entity’s equity investments at risk and the disposition of all or a portion of an interest held by the primary beneficiary. The primary beneficiary of a VIE as the entity that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits of the VIE that could be significant to the entity. The Company performs this analysis on an ongoing basis. Management of the Company has determined that Turning Point Brands Canada (formerly ReCreation Marketing) is a VIE for which the Company is considered the primary beneficiary due to the power the Company has over the activities that most significantly impact the economic performance of Turning Point Brands Canada and the right to receive benefits and the obligation to absorb losses of Turning Point Brands Canada through the Company’s 65 % equity interest, additional subordinated financing provided by the Company to Turning Point Brands Canada and the distribution agreement with Turning Point Brands Canada for the sale of the Company’s products that makes up substantially all of Turning Point Brands Canada’s business activities. See Note 3, “Acquisitions” for further details regarding the consolidation of Turning Point Brands Canada . 68 Table of Contents Revenue Recognition The Company recognizes revenues in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (Topic 606), which includes excise taxes and shipping and handling charges billed to customers, net of cash discounts for prompt payment, sales returns and sales incentives, upon delivery of goods to the customer—at which time the Company’s performance obligation is satisfied—at an amount that the Company expects to be entitled to in exchange for those goods in accordance with the five-step analysis outlined in Topic 606: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied. The Company excludes from the transaction price, sales taxes and value-added taxes imposed at the time of sale (which do not include excise taxes on smokeless tobacco, cigars, or vaping products billed to customers). The Company records an allowance for sales returns, based principally on historical volume and return rates, which is included in accrued liabilities on the consolidated balance sheets. The Company records sales incentives, which consist of consumer incentives and trade promotion activities, as a reduction in revenues (a portion of which is based on amounts estimated as being due to wholesalers, retailers and consumers at the end of the period) based principally on historical volume and utilization rates. Expected payments for sales incentives are included in accrued liabilities on the consolidated balance sheets. A further requirement of ASC 606 is for entities to disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Company management views business performance through segments that closely resemble the performance of major product lines. Thus, the primary and most useful disaggregation of the Company’s contract revenue for decision making purposes is the disaggregation by segment which can be found in Note 21, “Segment Information”. An additional disaggregation of contract revenue by sales channel can be found within Note 21 as well. Derivative Instruments Foreign Currency Forward Contracts: The Company enters into foreign currency forward contracts to hedge a portion of its exposure to changes in foreign currency exchange rates on inventory purchase commitments. The Company accounts for its forward contracts under the provisions of ASC 815, Derivatives and Hedging. Under the Company’s policy, the Company may hedge up to 100 % of its anticipated purchases of inventory in the denominated invoice currency over a forward period not to exceed twelve months . The Company may also, from time to time, hedge up to ninety percent of its non-inventory purchases in the denominated invoice currency. Forward contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by market prices on the measurement date, except any hedge ineffectiveness which is recognized currently in income. Gains and losses on these forward contracts are transferred from other comprehensive income into inventory as the related inventories are received and are transferred to net income as inventory is sold . Changes in fair value of any contracts that do not qualify for hedge accounting or are not designated as hedges are recognized currently in income. Interest Rate Swap Agreements: The Company enters into interest rate swap contracts to manage interest rate risk and reduce the volatility of future cash flows. The Company accounts for its interest rate swap contracts under the provisions of ASC 815, Derivatives and Hedging. Swap contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by market prices on the measurement date, except any hedge ineffectiveness which is recognized currently in income. Gains and losses on these swap contracts are transferred from other comprehensive income into net income upon settlement of the derivative position or at maturity of the interest rate swap contract. Changes in fair value of any contracts that do not qualify for hedge accounting or are not designated as hedges are recognized currently in income. Shipping Costs The Company records shipping costs incurred as a component of selling, general and administrative expenses. Shipping costs incurred were approximately $ 27.6 million, $ 22.8 million, and $ 18.1 million in 2021, 2020, and 2019, respectively. Research and Development and Quality Assurance Costs Research and development and quality assurance costs are expensed as incurred. These expenses, classified as selling, general and administrative expenses, were approximately $ 1.1 million, $ 1.3 million, and $ 2.5 million in 2021, 2020, and 2019, respectively. Cash and Cash Equivalents The Company considers any highly liquid investments with a maturity of three months or less from the date of purchase to be cash equivalents. 69 Table of Contents Inventories Inventories are stated at the lower of cost or net realizable value. Cost was determined using the first-in, first-out (“FIFO”) method. Leaf tobacco is presented in current assets in accordance with standard industry practice, notwithstanding the fact that such tobaccos are carried longer than one year for the purpose of curing. Property, Plant and Equipment Property, Plant and Equipment are stated at cost less accumulated depreciation and impairment. Depreciation is provided using the straight-line method over the lesser of the estimated useful lives of the assets or the life of the leases for leasehold improvements ( 4 to 7 years for machinery, equipment and furniture, 10 to 15 years for leasehold improvements, and up to 15 years for buildings and building improvements). Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and improvements are capitalized and depreciated over their estimated useful lives. Upon disposition of fixed assets, the costs and related accumulated depreciation amounts are relieved. Any resulting gain or loss is reflected in operations during the period of disposition. Long-lived assets are reviewed for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill and Other Intangible Assets The Company follows the provisions of ASC 350, Intangibles – Goodwill and Other in accounting for goodwill and other intangible assets. Goodwill and indefinite-lived intangible assets are reviewed for impairment annually on December 31, or more frequently if certain indicators are present, in accordance with ASC 350-20-35 and ASC 350-30-35, respectively. If the carrying value of a reporting unit including goodwill exceeds its fair value, which is determined using the discounted cash flows, goodwill is considered impaired. The amount of impairment loss is measured as the difference between the carrying value and the fair value of the reporting unit but is limited to the total goodwill allocated to the reporting unit. If the carrying value of an indefinite-life intangible asset exceeds its fair value, which is determined using discontinued cash flows or relief-from-royalty, the intangible asset is considered impaired and is reduced to fair value. For goodwill, the determination of a reporting unit’s fair value involves, among other things, the Company’s market capitalization and application of the income approach, which includes developing forecasts of future cash flows and determining an appropriate discount rate. Based on the Company’s annual goodwill impairment testing, the estimated fair values of each of our reporting units were in excess of the respective carrying values at December 31, 2021. The Company had no such impairment of goodwill or other intangible assets during the year ended December 31, 2021. However, there could be an impairment of the goodwill of the NewGen reporting unit if future revenues do not achieve our expected future cash flows or if macroeconomic conditions result in future increases in the weighted average cost of capital used to estimate fair value. See Note 10, “Goodwill and Other Intangible Assets”, for further details regarding the Company’s goodwill and other intangible assets as of December 31, 2021. Fair Value GAAP establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3). The three levels of the fair value hierarchy under GAAP are described below: • Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date. • Level 2 – Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. • Level 3 – Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. 70 Table of Contents Retirement Plans The Company follows the provisions of ASC 715, Compensation – Retirement Benefits. ASC 715-30, Defined Benefit Plans – Pensions, which requires an employer to (a) recognize in its statement of financial position the funded status of a benefit plan, measured as the difference between the fair value of plan assets and benefit obligations, (b) recognize net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost, and (c) measure defined benefit plan assets and obligations as of the date of the employer’s statement of financial position. Deferred Financing Costs Deferred financing costs are amortized over the terms of the related debt obligations using the effective interest method. Unamortized amounts are expensed upon extinguishment of the related borrowings. Deferred financing costs are presented as a direct deduction from the carrying amount of that debt liability except for deferred financing costs relating to our revolving credit facility, which are presented as an asset. Income Taxes The Company records the effects of income taxes under the liability method in which deferred income tax assets and liabilities are recognized based on the difference between the financial and tax basis of assets and liabilities using the enacted tax rates in effect for the years in which the differences are expected to reverse. The Company assesses its ability to realize future benefits of deferred tax assets by determining if they meet the “more likely than not” criteria in ASC 740, Income Taxes. If the Company determines that future benefits do not meet the “more likely than not” criteria, a valuation allowance is recorded. Advertising and Promotion Advertising and promotion costs, including point of sale materials, are expensed as incurred and amounted to $ 12.1 million, $ 5.2 million, and $ 12.0 million for the years ended December 31, 2021, 2020, and 2019, respectively. Stock-Based Compensation The Company measures stock-based compensation costs related to its stock options on the fair value-based method under the provisions of ASC 718, Compensation – Stock Compensation. The fair value-based method requires compensation cost for stock options to be recognized over the requisite service period based on the fair value of stock options granted. The Company determined the fair value of these awards using the Black-Scholes option pricing model. The Company grants performance-based restricted stock units (“PRSU”) subject to both performance-based and service-based vesting conditions. The fair value of each PRSU is the Company’s stock price on the date of grant. For purposes of recognizing compensation expense as services are rendered in accordance with ASC 718, the Company assumes all employees involved in the PRSU grant will provide service through the end of the performance period. Stock compensation expense is recorded based on the probability of achievement of the performance conditions specified in the PRSU grant. The Company grants restricted stock units (“RSU”) subject to service-based vesting conditions. The fair value of each RSU is the Company’s stock price on the date of grant. The Company recognizes compensation expense as services are rendered in accordance with ASC 718. Stock compensation expense is recorded over the service period in the RSU grant. Risks and Uncertainties Manufacturers and sellers of tobacco products are subject to regulation at the federal, state, and local levels. Such regulations include, among others, labeling requirements, limitations on advertising, and prohibition of sales to minors. The tobacco industry is likely to continue to be heavily regulated. There can be no assurance as to the ultimate content, timing, or effect of any regulation of tobacco products by any federal, state, or local legislative or regulatory body, nor can there be any assurance that any such legislation or regulation would not have a material adverse effect on the Company’s financial position, results of operations, or cash flows. In a number of states targeted flavor bans have been proposed or enacted legislatively or by the administrative process. Depending on the number and location of such bans, that legislation or regulation could have a material adverse effect on the Company’s financial position, results of operations or cash flows. Food and Drug Administration (“FDA”) continues to consider various restrictive regulations around our products, including targeted flavor bans; however, the details, timing, and ultimate implementation of such measures remain unclear. 71 Table of Contents The tobacco industry has experienced and is experiencing significant product liability litigation. Most tobacco liability lawsuits have been brought against manufacturers and sellers of cigarettes for injuries allegedly caused by smoking or exposure to smoke. However, several lawsuits have been brought against manufacturers and sellers of smokeless products for injuries to health allegedly caused by use of smokeless products. Typically, such claims assert that use of smokeless products is addictive and causes oral cancer. Additionally, several lawsuits have been brought against manufacturers and distributors of NewGen products due to malfunctioning devices. There can be no assurance the Company will not sustain losses in connection with such lawsuits and that such losses will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows. Master Settlement Agreement (MSA): Forty-six states, certain U.S. territories, and the District of Columbia are parties to the Master Settlement Agreement (“MSA”) and the Smokeless Tobacco Master Settlement Agreement (“STMSA”). To the Company’s knowledge, signatories to the MSA include 49 cigarette manufacturers and/or distributors. The only signatory to the STMSA is US Smokeless Tobacco Company. In the Company’s opinion, the fundamental basis for each agreement is the states’ consents to withdraw all claims for monetary, equitable, and injunctive relief against certain tobacco products manufacturers and others and, in return, the signatories have agreed to certain marketing restrictions and regulations as well as certain payment obligations. Pursuant to the MSA and subsequent states’ statutes, a “cigarette manufacturer” (which is defined to also include MYO cigarette tobacco) has the option of either becoming a signatory to the MSA or opening, funding, and maintaining an escrow account, with sub-accounts on behalf of each settling state. The STMSA has no similar provisions. The MSA escrow accounts are governed by states’ statutes that expressly give the manufacturers the option of opening, funding, and maintaining an escrow account in lieu of becoming a signatory to the MSA. The statutes require companies who are not signatories to the MSA to deposit, on an annual basis, into qualified banks, escrow funds based on the number of cigarettes or cigarette equivalents, i.e., the pounds of MYO tobacco, sold. The purpose of these statutes is expressly stated to be to eliminate the cost disadvantage the settling manufacturers have as a result of entering into the MSA. Such companies are entitled to direct the investment of the escrowed funds and withdraw any appreciation, but cannot withdraw the principal for twenty-five years from the year of each annual deposit, except to withdraw funds deposited pursuant to an individual state’s escrow statute to pay a final judgment to that state’s plaintiffs in the event of such a final judgment against the company. Either option – becoming an MSA signatory or establishing an escrow account – is permissible. The Company chose to open and fund an MSA escrow account as its means of compliance. It is management’s opinion, due to the possibility of future federal or state regulations, though none have to date been enacted, that entering into one or both of the settlement agreements or establishing and maintaining an escrow account would not necessarily prevent future regulations from having a material adverse effect on the results of operations, financial position, and cash flows of the Company. Various states have enacted or proposed complementary legislation intended to curb the activity of certain manufacturers and importers of cigarettes that are selling into MSA states without signing the MSA or who have failed to properly establish and fund a qualifying escrow account. To the best of the Company’s knowledge, no such statute has been enacted which could inadvertently and negatively impact the Company, which has been, and is currently, fully compliant with all applicable laws, regulations, and statutes. However, there can be no assurance that the enactment of any such complementary legislation in the future will not have a material adverse effect on the results of operations, financial position, or cash flows of the Company. Pursuant to the MSA escrow account statutes, in order to be compliant with the MSA escrow requirements, companies selling products covered by the MSA are required to deposit such funds for each calendar year into a qualifying escrow account by April 15 of the following year. At December 31, 2021, the Company had on deposit approximately $ 32.1 million, the fair value of which was approximately $ 31.7 million. At December 31, 2020, the Company had on deposit approximately $ 32.1 million, the fair value of which was approximately $ 32.1 million. Inputs to the valuation methodology of the MSA escrow deposits when funds are invested include unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date. During 2021, no monies were deposited into this qualifying escrow account. The investment vehicles available to the Company are specified in the state escrow agreements and are limited to low-risk government securities. The Company discontinued its generic category of MYO in 2019 and its Zig-Zag branded MYO cigarette smoking tobacco in 2017. Thus, pending a change in MSA legislation, the Company has no remaining product lines covered by the MSA and will not be required to make future escrow deposits . The Company has chosen to invest a portion of the MSA escrow, from time to time, in U.S. Government securities including TIPS, Treasury Notes, and Treasury Bonds. These investments are classified as available-for-sale and carried at fair value. Realized losses are prohibited under the MSA; thus, any investment with an unrealized loss position will be held until the value is recovered, or until maturity. 72 Table of Contents Fair values for the U.S. Governmental agency obligations are Level 2 in the fair value hierarchy. The following tables show cost and estimated fair value of the assets held in the MSA account, respectively, as well as the maturities of the U.S. Government al agency obligations held in such account for the periods indicated. As of December 31, 2021 As of December 31, 2020 Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value Cost and Estimated Fair Value Cash and cash equivalents $ 12,155 $ - $ - $ 12,155 $ 32,074 U.S. Governmental agency obligations (unrealized gain position < 12 months) 19,918 4 ( 357 ) 19,565 - Total $ 32,073 $ 4 $ ( 357 ) $ 31,720 $ 32,074 As of December 31, 2021 Less than one year $ - One to five years 5,996 Five to ten years 12,966 Greater than ten years 956 Total $ 19,918 The following shows the amount of deposits by sales year for the MSA escrow account: Sales Deposits as of December 31, Year 2021 2020 1999 $ 211 $ 211 2000 1,017 1,017 2001 1,673 1,673 2002 2,271 2,271 2003 4,249 4,249 2004 3,714 3,714 2005 4,553 4,553 2006 3,847 3,847 2007 4,167 4,167 2008 3,364 3,364 2009 1,619 1,619 2010 406 406 2011 193 193 2012 199 199 2013 173 173 2014 143 143 2015 101 101 2016 91 91 2017 82 83 Total $ 32,073 $ 32,074 73 Table of Contents Federal Excise Taxes: Tobacco products, cigarette papers, and cigarette tubes are subject to federal excise taxes. Any future increases in federal excise taxes on the Company’s products could have a material adverse effect on the results of operations or financial condition of the Company. The Company is unable to predict the likelihood of passage of future increases in federal excise taxes. As of December 31, 2021, federal excise taxes are not assessed on e-cigarettes and related products. As of December 31, 2021, approximately half of the states and certain localities impose excise taxes on electronic cigarettes and/or liquid vapor. In addition, there are several local taxing jurisdictions with an excise tax on e-cigarettes. Several states have also implemented additional measures on e-cigarettes, such as licensing requirements. FDA: On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”) authorized the FDA to immediately regulate the manufacture, sale, and marketing of four categories of tobacco products – cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless tobacco. On August 8, 2016, the FDA deeming regulation became effective. The deeming regulation gave the FDA the authority to also regulate cigars, pipe tobacco, e-cigarettes, vaporizers, and e-liquids as “deemed” tobacco products under the FSPTCA. The FDA assesses tobacco product user fees on six classes of regulated tobacco products and computes user fees using a methodology similar to the methodology used by the U.S Department of Agriculture to compute the Tobacco Transition Payment Program (“TTPP,” also known as the “Tobacco Buyout”) assessment. First, the total, annual, congressionally established user fee assessment is allocated among the various classes of tobacco products using the federal excise tax weighted market share of tobacco products subject to regulation. Then, the assessment for each class of tobacco products is divided among individual manufacturers and importers. In August 2016, the FDA’s regulatory authority under the Tobacco Control Act (the “TCA”) was extended to all tobacco products not previously covered, including: (i) certain NewGen products (such as electronic cigarettes, vaporizers and e-liquids) and their components or parts (such as tanks, coils and batteries); (ii) cigars and their components or parts (such as cigar tobacco); (iii) pipe tobacco; (iv) hookah products; and (v) any other tobacco product “newly deemed” by the FDA. These “deeming regulations” apply to all products made or derived from tobacco intended for human consumption, but excluding accessories of tobacco products (such as lighters). Accordingly, the FDA has since regulated our cigar and cigar wrap products as well as our vapor products containing tobacco-derived nicotine and products intended or reasonably expected to be used to consume such e-liquids. Under the deeming regulations, the FDA has responsibility for conducting premarket review of “new tobacco products”—defined as those products not commercially marketed in the United States as of February 15, 2007. There are three pathways for obtaining premarket authorization, including submission of a premarket tobacco product application (“PMTA”). We submitted premarket filings prior to the September 9, 2020 deadline for certain of our products and have continued to supplement these applications with additional information. A successful PMTA must demonstrate that the subject product is “appropriate for the protection of public health,” taking into account the effect of the marketing of the product on all sub-populations while a Substantial Equivalence Report must demonstrate that a new product either has the same characteristics as its predicate product or different characteristics, but does not raise different questions of public health. The FDA has indicated its enforcement priority is those applicants who have received negative action on their application, such as a Marketing Denial Order or Refuse to File notification and who continue to illegally sell those unauthorized products, as well as products for which manufacturers failed to submit a marketing application. The FDA has issued a number of rules related to premarket filings; however, those rules were not finalized prior to the September 9, 2020, deadline. On October 5, 2021, the FDA finalized two rules related to the Substantial Equivalence process and the Premarket Tobacco Product Application process, respectively, which both became effective November 4, 2021. Both Final Rules indicate that any new or additional requirements will not retroactively apply to currently pending PMTAs; however, the information outlined in the rule remains important to the FDA’s substantive review of an application. We believe we have products that meet the Rules and have filed premarket filings supporting a showing of the respective required standards. However, there is no assurance that the FDA’s guidance or regulations will not change, or that the FDA will not prioritize its enforcement in a manner that negatively affects our pending applications, or that unforeseen circumstances will not arise that prevent us from sufficiently supplementing or completing our applications or otherwise increases the amount of time and money we are required to spend to receive all necessary marketing orders. On September 14, 2021, the FDA issued a Marketing Denial Order (“MDO”) for certain of the Company’s proprietary e-liquid products subject of these PMTAs. The Company filed a Petition for Review in the Sixth Circuit Court of Appeals on September 23, 2021, followed by an Emergency Motion for a Stay Pending Review on September 30, 2021. On October 7, 2021, we were informed that the FDA had rescinded its September 14, 2021, MDO. We therefore withdrew both the Petition and Emergency Stay on October 8, 2021. The Rescission Letter indicated that FDA had found additional relevant information that was not adequately assessed. Although we filed many premarket applications in a timely manner, no assurance can be given that the applications will ultimately be successful. This may result in the prioritization of supplementing or completing applications for high priority SKUs in our inventory position, which could adversely impact future revenues. At the time of receipt of the MDO, the Company quarantined approximately $ 0.7 million in aggregate inventories of the affected products or materials subject to the MDO, which were subsequently released, once the FDA rescinded the MDO. 74 Table of Contents In addition, we currently distribute many third-party manufactured vapor products for which we are completely dependent on the manufacturer complying with the premarket filing requirements. There can be no assurance that these third-party products will receive a marketing order or otherwise remain in compliance with relevant legal requirements. While we will take measures to pursue regulatory compliance for our own privately-branded or proprietary vape products that compete with these third-party products, there is no assurance that such proprietary products would be as successful in the marketplace or can fully displace third-party products that are currently being distributed by us, which could adversely affect our results of operations and liquidity. For a period of time after the filing deadline, we expect there to be a lack of enforcement, which may adversely affect our ability to compete in the marketplace against those who continue to sell unauthorized products. On April 29, 2021, the FDA announced plans to propose two tobacco product standards related to combusted tobacco products: (1) a ban on menthol as a characterizing flavor in cigarettes; and (2) a ban on all characterizing flavors (including menthol) in cigars. These product standards are required to go through the formal rulemaking process where we would have the opportunity to comment on the proposed rule with regard to any impact on any of our products. The FDA’s policy on these and other regulated products may change or expand over time in ways not yet known and may significantly impact our products or our premarket filings. Prevent All Cigarette Trafficking Act (“PACT Act”): On December 27, 2020, President Trump signed the Further Consolidated Appropriations Act, 2021, into law. This law included an amendment to the Jenkins Act expanding the definition of “cigarette” to include “electronic nicotine delivery systems,” or ENDS, and required that the United States Postal Service (USPS) promulgate regulations clarifying the applicability of the prohibition on delivery sales of cigarettes to ENDS. USPS issued its final rule on October 21, 2021. We have received appropriate shipping exemptions from carrier services we use to carry the affected freight. Failure to comply with the PACT Act could result in significant financial or criminal penalties. To the extent we are unable to respond to, or comply with, these new requirements, we could lose our shipping exemptions, be subject to civil or criminal penalties, or there could be a material adverse effect on our business, results of operations and financial condition. Concentration of Credit Risk: At December 31, 2021 and 2020, the Company had bank deposits, including MSA escrow accounts, in excess of federally insured limits of approximately $ 137.2 million and $ 69.7 million, respectively. During 2021, the Company invested a portion of the MSA escrow accounts in U.S. Government securities including TIPS, Treasury Notes, and Treasury Bonds. The Company sells its products to distributors, retail establishments, and consumers throughout the United States and also sells Zig-Zag ® premium cigarette papers in Canada and some smaller quantities in other countries. The Company had no customers that accounted for more than 10% of net sales for 2021, 2020, or 2019. The Company performs periodic credit evaluations of its customers and generally does not require collateral on trade receivables. Historically, the Company has not experienced significant credit losses. Accounts Receivable Accounts receivable are recognized at their net realizable value. All accounts receivable are trade related, recorded at the invoiced amount, and do not bear interest. The Company maintains allowances for doubtful accounts receivable for estimated uncollectible invoices resulting from a customer’s inability to pay (bankruptcy, out of business, etc., i.e. “bad debt” which results in write-offs). The activity of allowance for doubtful accounts during 2021 and 2020 is as follows: December 31, 2021 December 31, 2020 Balance at beginning of period $ 150 $ 280 Additions to allowance account during period 237 86 Deductions of allowance account during period ( 125 ) ( 216 ) Balance at end of period $ 262 $ 150 Recent Accounting Pronouncements Adopted In December 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-12 to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This ASU became effective beginning in the first quarter of the Company’s fiscal year 2021. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The ASU was effective for the Company beginning in the first quarter of 2021. The ASU did not have an impact to the Company’s financial statements and related disclosures. 75 Table of Contents In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). This guidance simplifies the accounting for convertible debt instruments by reducing the number of accounting models and the number of embedded conversion features that could be recognized separately from the convertible instrument. This guidance also enhances transparency and improves disclosures for convertible instruments and earnings per share guidance. This ASU is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. This update permits the use of either the modified retrospective or fully retrospective method of transition. The Company early adopted this ASU effective January 1, 2021 using the full retrospective method of transition. The adoption resulted in a $ 7.1 million increase in Accumulated earnings, a $ 24.2 million increase in Notes payable and long-term debt, a $ 6.3 million decrease in deferred income taxes and a $ 24.9 million decrease in Additional paid-in capital as of December 31, 2020, and a $ 2.2 million decrease in Accumulated deficit and a $ 24.9 million decrease in Additional paid-in capital as of December 31, 2019. Interest expense decreased by $ 6.7 million annually and weighted average diluted common shares outstanding increased by approximately 3.2 million shares. Change in Accounting Principle Effective January 1, 2021, the Company changed its method of accounting for inventory from the LIFO method to the FIFO method. Costs determined using the LIFO method would have been utilized on approximately 45.1 % and 49.4 % of inventories at December 31, 2020 and 2019, respectively, prior to this change in method, and consisted primarily of tobacco inventory. The Company believes the FIFO method is preferable because it: (i) conforms the accounting for all inventory with the method utilized for the majority of its inventory; (ii) better represents how management assesses and reports on the performance of the tobacco and other LIFO product lines as LIFO is excluded from management’s economic decision making; (iii) better aligns the accounting with the physical flow of that inventory; and (iv) better reflects inventory at more current costs. The Company applied this change retrospectively to all prior periods presented. This change resulted in a $ 6.1 million increase in inventories, a $ 1.6 million decrease in deferred taxes and a $ 4.5 million increase in Accumulated earnings as of December 31, 2020, and a $ 5.8 million increase in inventories, a $ 1.5 million decrease in deferred taxes and a $ 4.3 million decrease in Accumulated deficit as of December 31, 2019. All prior periods presented in the consolidated financial statements have previously been retrospectively adjusted to apply the effects of the change in accounting principle from the LIFO method to the FIFO method of accounting and the adoption of ASU 2020-06 . Note 3. Acquisitions Unitabac In July 2021, the Company acquired certain assets of Unitabac, a marketer of mass-market cigars, for $ 10.7 million in total consideration, comprised of $ 9.6 million in cash and $ 1.1 million of capitalized transaction costs. The acquisition is comprised of a portfolio of cigarillo products and all related intellectual property, including Cigarillo Non-Tip (NT) Homogenized Tobacco Leaf (HTL) products and Rolled Leaf and Natural Leaf Cigarillo Products. The transaction was accounted for as an asset purchase with $ 10.0 million assigned to intellectual property, which has an indefinite life, and $ 0.7 million assigned to inventory. The intellectual property asset is deductible for tax purposes. 76 Table of Contents Direct Value Wholesale In April 2021, Turning Point Brands Canada, a VIE for which the Company is considered the primary beneficiary, purchased 100 % of the equity interests of Westhem Ventures LTD d/b/a Direct Value Wholesale (“DVW”) for $ 3.9 million, net of cash acquired, with $ 3.5 million paid in cash at closing and $ 0.5 million in accrued consideration paid during 2021. DVW is a Canadian distribution entity that operates in markets not primarily served by Turning Point Brands Canada. The acquisition expands Turning Point Brands Canada’s markets in Canada. On April 13, 2021, in connection with the acquisition of DVW, the Company provided a $ 3.7 million unsecured loan to Turning Point Brands Canada bearing interest at 8 % per annum and maturing April 13, 2023. The unsecured loan is eliminated in the consolidation of Turning Point Brands Canada. As of December 31, 2021, Turning Point Brands Canada had not completed the accounting for the acquisition. The following table summarizes the consideration transferred and calculation of goodwill based on excess of the acquisition price over the estimated fair value of the identifiable net assets acquired and are based on management’s preliminary estimates: Total consideration transferred $ 3,462 Adjustments to consideration transferred: Cash acquired ( 43 ) Accrued consideration 472 Adjusted consideration transferred 3,891 Assets acquired: Working capital (primarily AR and inventory) 1,334 Fixed assets and Other long term assets 27 Net assets acquired $ 1,361 Goodwill $ 2,530 The goodwill of $ 2.5 million consists of the synergies expected from combining the operations and is deductible for tax purposes. Turning Point Brands Canada (formerly ReCreation Marketing) In July 2019, the Company obtained a 30 % stake in a Canadian distribution entity, Turning Point Brands Canada for $ 1 million paid at closing. In November 2020, the Company invested an additional $ 1 million related to our 30 % stake. In November 2020, the Company also invested an additional $ 2 million increasing its ownership interest to 50 %. The Company received board seats aligned with our ownership position. The Company also provided a $ 2.0 million unsecured loan to Turning Point Brands Canada bearing interest at 8 % per annum and maturing November 19, 2022. As discussed in Note 2, the Company has determined that Turning Point Brands Canada is a VIE due its required subordinated financial support. The Company has determined it is the primary beneficiary due its 50 % equity interest, additional subordinated financing and distribution agreement with Turning Point Brands Canada for the sale of the Company’s products. As a result, the Company began consolidating Turning Point Brands Canada effective November 2020. The Company completed the accounting for the acquisition during the fourth quarter of 2021. The following table summarizes the consideration transferred and calculation of goodwill based on excess of the acquisition price over the estimated fair value of the identifiable net assets acquired: Total consideration transferred $ 4,000 Adjustments to consideration transferred: Cash acquired ( 3,711 ) Working capital 418 Debt eliminated in consolidation 2,000 Adjusted consideration transferred 2,707 Assets acquired: Working capital (primarily AR and inventory) 1,551 Fixed assets and Other long term assets 70 Other liabilities ( 203 ) Non-controlling interest ( 4,050 ) Net assets acquired $ ( 2,632 ) Goodwill $ 5,339 The goodwill of $ 5.3 million consists of the synergies expected from combining the operations and is currently not deductible for tax purposes. In July 2021, the Company invested an additional $ 2.3 million in Turning Point Brands Canada increasing its ownership interest to 65 %. The Company received board seats aligned with its ownership position. The Company has determined that Turning Point Brands Canada continues to be a VIE due to its required subordinated financial support. The Company has determined it remains the primary beneficiary due to its 65% equity interest, additional subordinated financing and distribution agreement with Turning Point Brands Canada for the sale of the Company’s products. As a result of the Company remaining the primary beneficiary, the increase in ownership interest resulted in a decrease in Non-controlling interest of $ 1.1 million and a decrease in Additional paid-in capital of $ 1.1 million. 77 Table of Contents Standard Diversified Inc. (“SDI”) Reorganization On July 16, 2020, the Company completed its merger with SDI, whereby SDI was merged into a wholly-owned subsidiary of the Company in a tax-free downstream merger. Under the terms of the merger, the holders of SDI’s Class A Common Stock and SDI’s Class B Common Stock (collectively, “SDI Common Stock”) received in the aggregate, in return for their SDI Common Stock, TPB Voting Common Stock (“TPB Common Stock”) at a ratio of 0.52095 shares of TPB Common Stock for each share of SDI Common Stock at the time of the merger. SDI divested its assets, other than SDI’s TPB Common Stock, prior to close such that the net liabilities at closing were minimal and the only assets that SDI retained were the remaining TPB Common Stock holdings. The transaction was accounted for as an asset purchase for $ 236.0 million in consideration, comprised of 7,934,704 shares of TPB Common Stock valued at $ 234.3 million plus transaction costs and assumed net liabilities. The $ 236.0 million was assigned to the 8,178,918 shares of TPB Common Stock acquired. The 244,214 shares of TPB Common Stock acquired in excess of the shares issued were retired resulting in a charge of $ 1.7 million recorded in Accumulated earnings. The Company no longer has a controlling shareholder Durfort Holdings In June 2020, the Company purchased certain tobacco assets and distribution rights from Durfort Holdings S.R.L. (“Durfort”) and Blunt Wrap USA for $ 47.7 million in total consideration, comprised of $ 37.7 million in cash, including $ 1.7 million of capitalized transaction costs, and a $ 10.0 million unsecured subordinated promissory note (“Promissory Note”). With this transaction, the Company acquired co-ownership in the intellectual property rights of all of Durfort’s and Blunt Wrap USA’s Homogenized Tobacco Leaf (“HTL”) cigar wraps and cones. The Company also entered into an exclusive Master Distribution Agreement to market and sell the original Blunt Wrap ® cigar wraps within the USA which was effective October 9, 2020. Durfort is an industry leader in alternative cigar and cigar wrap manufacturing and distribution. Blunt Wrap USA has been an innovator of new products in the smoking alternative market since 1997 and has secured patents in the USA and internationally for novel smoking wrappers and cones. The transaction was accounted for as an asset purchase with $ 42.2 million assigned to intellectual property, which has an indefinite life, and $ 5.5 million assigned to the Master Distribution Agreement, which has a 15 year life. Both assets are currently deductible for tax purposes. Note 4. Derivative Instruments Foreign Currency The Company’s policy is to manage the risks associated with foreign exchange rate movements. The policy allows hedging up to 100 % of its anticipated purchases of inventory over a forward period that will not exceed 12 rolling and consecutive months. The Company may, from time to time, hedge currency for non-inventory purchases, e.g., production equipment, not to exceed 90 % of the purchase price. The Company did no t execute any forward contracts during 2021. During 2020, the Company executed various forward contracts, which met hedge accounting requirements, for the purchase of € 19.7 million and sale of € 21.4 million with maturity dates ranging from December 2020 to November 2021. At December 31, 2021, the Company had no forward contracts. At December 31, 2020, the Company had forward contracts for the purchase of € 18.0 million and sale of € 19.6 million. The foreign currency contracts’ fair value at December 31, 2020, resulted in an asset of $ 0.4 million included in Other current assets and a liability of $ 0.0 million included in Accrued liabilities. Interest Rate Swaps The Company’s policy is to manage interest rate risk by reducing the volatility of future cash flows associated with debt instruments bearing interest at variable rates. In March 2018, the Company executed various interest rate swap agreements for a notional amount of $ 70 million with an expiration of December 2022. The swap agreements fix LIBOR at 2.755 %. The swap agreements met the hedge accounting requirements; thus, any change in fair value is recorded to other comprehensive income. The Company uses the Shortcut Method to account for the swap agreements. The Shortcut Method assumes the hedge to be perfectly effective; thus, there is no ineffectiveness to be recorded in earnings. The swap agreements’ fair values at December 31, 2020, resulted in a liability of $ 3.7 million included in other long-term liabilities. Losses of $ 0.1 million, $ 1.5 million and $ 0.3 million were reclassified into interest expense for the year ending December 31, 2021, 2020 and 2019 respectively. The Company terminated the interest rate swap agreements in conjunction with the prepayment of all outstanding amounts under the 2018 First Lien Credit Facility (as defined below) in the first quarter of 2021 with the early termination payment made by the Company in the amount of $ 3.6 million which was reclassified out of accumulated other comprehensive loss into loss on extinguishment of debt. 78 Table of Contents Note 5. Fair Value of Financial Instruments The estimated fair value amounts have been determined by the Company using the methods and assumptions described below. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash and Cash Equivalents Cash and cash equivalents are, by definition, short-term. Thus, the carrying amount is a reasonable estimate of fair value. Accounts Receivable The fair value of accounts receivable approximates their carrying value due to their short-term nature. Note Payable – Promissory Note The Company’s Promissory Note bore interest at a rate of 7.5 % per year. The fair value of the Promissory Note approximated its carrying value of $ 10.0 million at December 31, 2020, due to the recency of the note’s issuance, related to the year ended December 31, 2020. The Company prepaid all outstanding amounts under the Promissory Note in the third quarter of 2021. Note Payable – Unsecured Loan The Company ’ s Unsecured Note bore interest at a rate of 1.0 % per year. The fair value of the Unsecured Note approximated its carrying value of $ 7.5 million at December 31, 2020, due to the recency of the note’s issuance, related to the year ended December 31, 2020. The Unsecured Note was forgiven in the fourth quarter of 2021. Long-Term Debt The Company’s Senior Secured Notes (as defined below) bear interest at a rate of 5.625 % per year and the fair value of the Senior Secured Notes approximate its carrying value of $ 250 million due to the recency of the notes’ issuance, related to the year ended December 31, 2021. The Company’s 2018 Credit Facility bore interest at variable rates that fluctuated with market rates. The carrying values of the 2018 Credit Facility approximated its respective fair values. As of December 31, 2020, the fair value of the 2018 First Lien Term Loan approximated $ 130.0 million. The Company prepaid all outstanding amounts under the 2018 First Lien Credit Facility in the first quarter of 2021. The Convertible Senior Notes bear interest at a rate of 2.50 % per year. As of December 31, 2021, the fair value approximated $ 159.8 million, with a carrying value of $ 172.5 million. As of December 31, 2020, the fair value approximated $ 155.3 million, with a carrying value of $ 172.5 million. See Note 13, “Notes Payable and Long-Term Debt”, for further information regarding the Company’s long-term debt. Foreign Exchange At December 31, 2021, the Company had no forward contracts. As there were no open contracts as of December 31, 2021, there is no resulting balance sheet position related to the fair value. At December 31, 2020, the Company had forward contracts for the purchase of € 18.0 million and sale of € 19.6 million. The fair value of the foreign exchange contracts are based upon quoted market prices for similar instruments, thus leading to a level 2 distinction within the fair value hierarchy, and resulted in an asset of $ 0.4 million and a liability of $ 0.0 million as of December 31, 2020. Interest Rate Swaps The Company had swap contracts for a total notional amount of $ 70 million at December 31, 2020. The fair values of the swap contracts were based upon quoted market prices for similar instruments, thus leading to a level 2 distinction within the fair value hierarchy, and resulted in a liability of $ 3.7 million as of December 31, 2020. The Company terminated the swap contracts in conjunction with the prepayment of all outstanding amounts under the 2018 First Lien Credit Facility in the first quarter of 2021. 79 Table of Contents Note 6. Inventories The components of inventories are as follows: December 31, 2021 December 31, 2020 Raw materials and work in process $ 6,936 $ 8,137 Leaf tobacco 35,900 32,948 Finished goods - Zig-Zag Products 25,663 14,903 Finished goods - Stoker’s Products 8,959 9,727 Finished goods - NewGen Products 8,591 18,916 Other 1,558 1,225 Inventories $ 87,607 $ 85,856 The following represents the inventory valuation allowance roll-forward, for the years ended December 31: 2021 2020 Balance at beginning of period $ ( 9,924 ) $ ( 21,502 ) Charged to cost and expense ( 2,795 ) ( 2,867 ) Deductions for inventory disposed 5,051 14,445 Balance at end of period $ ( 7,668 ) $ ( 9,924 ) Note 7. Other Current Assets Other current assets consists of: December 31, 2021 December 31, 2020 Inventory deposits $ 12,091 $ 7,113 Insurance deposit 3,000 3,000 Prepaid taxes - 813 Other 11,655 15,525 Total $ 26,746 $ 26,451 80 Table of Contents Note 8. Property, Plant and Equipment Property, plant and equipment consists of: December 31, 2021 December 31, 2020 Land $ 22 $ 22 Buildings and improvements 3,096 2,750 Leasehold improvements 5,374 4,702 Machinery and equipment 19,591 15,612 Furniture and fixtures 9,402 9,025 Gross property, plant and equipment 37,485 32,111 Accumulated depreciation ( 18,835 ) ( 16,587 ) Net property, plant and equipment $ 18,650 $ 15,524 Note 9. Deferred Financing Costs Deferred financing costs relating to the 2018 Revolving Credit Facility (which was terminated in February 2021) and the 2021 Revolving Credit Facility consist of: December 31, 2021 December 31, 2020 Deferred financing costs, net of accumulated amortization of $ 94 and $ 705 , respectively $ 388 $ 641 81 Table of Contents Note 10. Goodwill and Other Intangible Assets The following table summarizes goodwill by segment: Zig-Zag Stoker’s NewGen Total Balance as of December 31, 2019 $ 96,107 $ 32,590 $ 25,585 $ 154,282 Acquisitions 5,339 - - 5,339 Balance as of December 31, 2020 $ 101,446 $ 32,590 $ 25,585 $ 159,621 Acquisitions 2,530 - - 2,530 Cumulative translation adjustment 182 - - 182 Balance as of December 31, 2021 $ 104,158 $ 32,590 $ 25,585 $ 162,333 The following tables summarize information about the Company’s allocation of other intangible assets. Gross carrying amounts of unamortized, indefinite life intangible assets are shown below: December 31, 2021 December 31, 2020 Zig-Zag Stoker’s NewGen Total Zig-Zag Stoker’s NewGen Total Unamortized, indefinite life intangible assets: Trade names $ - $ 8,500 $ 10,786 $ 19,286 $ - $ 8,500 $ 10,786 $ 19,286 Formulas 52,217 53 - 52,270 42,245 53 - 42,298 Total $ 52,217 $ 8,553 $ 10,786 $ 71,556 $ 42,245 $ 8,553 $ 10,786 $ 61,584 Amortized intangible assets included within the NewGen segment consists of: December 31, 2021 December 31, 2020 Gross Carrying Accumulated Amortization Gross Carrying Accumulated Amortization Amortized intangible assets: Customer relationships (useful life of 8 - 10 years) $ 6,936 $ 3,939 $ 6,936 $ 3,111 Trade names (useful life of 15 years) 9,530 1,993 9,530 1,375 Master distribution agreement (useful life of 15 years) 5,489 549 5,489 183 Franchise agreements (useful life of 8 years) 780 325 780 228 Non-compete agreements (useful life of 3.5 years) 100 100 100 100 Total $ 22,835 $ 6,906 $ 22,835 $ 4,997 During 2020, $ 2.4 million in trade names related to Wind River Brands in the Stoker’s Product segment were determined to no longer be indefinite lived and began to be amortized. Annual amortization expense for each of the next five years is estimated to be approximately $ 1.9 million for 2022 through 2024 and $ 1.2 million for 2025 through 2026, assuming no additional transactions occur that require the amortization of intangible assets. 82 Table of Contents Note 11. Other Assets Other assets consists of: December 31, 2021 December 31, 2020 Equity investments $ 25,649 $ 24,018 Debt security investment 8,000 - Other 1,750 2,818 Total $ 35,399 $ 26,836 The Company records its equity investments without a readily determinable fair value, that are not accounted for under the equity method, at cost, with adjustments for impairment and observable price changes. In July 2021, the Company invested $ 8 million in Old Pal Holding Company LLC (“Old Pal”). The Company invested in the form of a convertible note which includes additional follow-on investment rights. Old Pal is a leading brand in the cannabis lifestyle space that operates a non-plant touching licensing model. The Company’s investment will enable Old Pal to expand product offerings in existing states, which include California, Nevada, Michigan, Oklahoma, Ohio, Washington and Massachusetts, and will help create the infrastructure necessary to support continued territory and product expansion. The convertible note bears an interest rate of 3.0 % per year and matures July 31, 2026. Interest and principal are receivable at maturity. Old Pal has the option to extend the maturity date in one-year increments. The interest rate is subject to change based on sales levels of Old Pal meeting certain thresholds. The weighted average interest rate was 3.0 % for the year ended December 31, 2021. Old Pal has the option to convert the note into shares once sales reach a certain threshold. The conditions required to allow Old Pal to convert the note were not met as of December 31, 2021. Additionally, the Company has the right to convert the note into shares at any time after January 1, 2022. The Company has classified the debt security with Old Pal as available for sale. The Company records the debt security at fair value and includes unrealized gains and losses recorded in stockholders’ equity as a component of accumulated other comprehensive income on our Consolidated Balance Sheets. The Company reports interest income on available for sale debt securities, in interest income in our Consolidated Statements of Income. The fair value of the debt security approximated its carrying value of $ 8.0 million at December 31, 2021, due to the recency of the debt security’s purchase, related to the year ended December 31, 2021. The Company has recorded accrued interest receivable of $ 0.1 million at December 31, 2021, in other current assets on our Consolidated Balance Sheets. In April 2021, the Company invested $ 8.7 million in Docklight Brands, Inc., a pioneering consumer products company with celebrated brands including Marley Natural ® cannabis and Marley ™ CBD. The Company has additional follow-on investment rights. As part of the investment, the Company has obtained exclusive U.S. distribution rights for Docklight’s Marley ™ CBD topical products. Purchases of inventory from Docklight Brands, Inc. were $ 0.0 million in 2021. There was $ 0.0 million outstanding at December 31, 2021. In October 2020, the Company acquired a 20 % stake in Wild Hempettes LLC (“Wild Hempettes”), a leading manufacturer of hemp cigarettes under the WildHemp™ and Hempettes™ brands, for $ 2.5 million. The Company has options to increase its stake to a 100 % ownership position based on certain milestones. As part of the transaction, the Wild Hempettes joint venture was spun off from Crown Distributing LLC and formed as a vehicle for the Company to be the exclusive distributor of Hempettes™ to U.S. bricks and mortar retailers under a profit-sharing arrangement. The Company has provided Wild Hempettes with a secured line of credit up to $ 2.0 million with a term up to 5 years. The Company accounts for its investment in Wild Hempettes as an equity method investment. The Company recorded investment income of $ 0.1 million and $ 0.1 million for years ended December 31, 2021 and 2020, respectively. Purchases of inventory from Wild Hempettes was $ 2.1 million and $ 0.5 million in 2021 and 2020, respectively. There were no amounts outstanding at December 31, 2021 and 2020. In October 2020, the Company invested $ 15.0 million in dosist TM , a global cannabinoid company, with an option to invest an additional $ 15.0 million on pre-determined terms over the 12 month period ending October 2021. The Company received a warrant exercisable for preferred shares of dosist TM that will automatically be exercised upon the changing of certain federal cannabis laws in the United States, rescheduling cannabis and/or permitting the general cultivation, distribution and possession of cannabis. In the fourth quarter 2021, based on the financial results of dosist TM and the overall cannabinoid market, the Company deemed our investment was impaired resulting in the fair value of our investment decreasing to $ 7.9 million. Fair value was determined using a valuation derived from a relevant market index (Level 2) and relevant revenue multiples (Level 3). The valuations were probability weighted based on anticipated outcomes. Given the significance of Level 3 input to the valuation, we have determined that the non-recurring valuation resulted in Level 3 classification within the fair value hierarchy. This resulted in a loss of $ 7.1 million which is recorded in investment loss for the year ended December 31, 2021. There were no purchases of inventory from dosist TM in 2021 or 2020. In October 2020, the Company invested $ 1.8 million in BOMANI Cold Buzz, LLC (“BOMANI”), a manufacturer of alcohol-infused cold brew coffee. The Company received rights to receive equity in BOMANI in the event of an equity financing. There were no purchases of inventory from BOMANI in 2021 or 2020. 83 Table of Contents The Company has a minority ownership position in Canadian American Standard Hemp (“CASH”). CASH is headquartered in Warwick, Rhode Island, and manufactures cannabidiol isolate (“CBD”) developed through highly efficient and proprietary processes. The investment in CASH positions the Company to participate in the market for hemp-derived products. In the fourth quarter 2019, CASH completed a fundraising round, resulting in the fair value of our investment increasing to $ 4.0 million. This resulted in a gain of $ 2 million which is recorded in investment income for 2019. In October 2020, CASH merged with Real Brands, Inc. (“Real Brands”), an over the counter traded shell company. CASH will continue business under the Real Brands name. The Company maintained its ownership position in Real Brands subsequent to the merger. There were no purchases of inventory from CASH in 2021 or 2020. There were no amounts outstanding at December 31, 2021 and 2020. In December 2018, the Company acquired a minority ownership position in General Wireless Operations, Inc. (d/b/a RadioShack; “RadioShack”) from 5G gaming LLC, which is owned by Standard General LP, for $ 0.4 million. Standard General LP has a controlling interest in the Company and qualifies as a related party. There were no amounts outstanding at December 31, 2021 and 2020. Note 12. Accrued Liabilities Accrued liabilities at consists of: December 31, 2021 December 31, 2020 Accrued payroll and related items $ 6,974 $ 9,459 Customer returns and allowances 6,497 5,259 Taxes payable 2,053 4,326 Lease liabilities 2,976 3,228 Accrued interest 7,318 2,096 Other 7,119 10,857 Total $ 32,937 $ 35,225 Note 13. Notes Payable and Long-Term Debt Notes payable and long-term debt consists of the following in order of preference: December 31, 2021 December 31, 2020 Senior Secured Notes $ 250,000 $ - 2018 First Lien Term Loan - 130,000 Convertible Senior Notes 172,500 172,500 Note payable - Promissory Note - 10,000 Note payable - Unsecured Loan - 7,485 Gross notes payable and long-term debt 422,500 319,985 Less deferred finance charges ( 8,328 ) ( 5,873 ) Less current maturities - ( 12,000 ) Net notes payable and long-term debt $ 414,172 $ 302,112 Senior Secured Notes On February 11, 2021, the Company closed a private offering (the “Offering”) of $ 250 million aggregate principal amount of its 5.625 % senior secured notes due 2026 (the “Senior Secured Notes”). The Senior Secured Notes bear interest at a rate of 5.625 % and will mature on February 15, 2026 . Interest on the Senior Secured Notes is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on August 15, 2021. The Company used the proceeds from the Offering to (i) repay all obligations under and terminate the 2018 First Lien Credit Facility, (ii) pay related fees, costs, and expenses and (iii) for general corporate purposes. Obligations under the Senior Secured Notes are guaranteed by the Company’s existing and future wholly-owned domestic subsidiaries (the “Guarantors”) that guarantee any Credit Facility (as defined in the Indenture governing the Senior Secured Notes or the “Senior Secured Notes Indenture”), including the 2021 Revolving Credit Facility, or capital markets debt securities of the Company or Guarantors in excess of $ 15.0 million. The Senior Secured Notes and the related guarantees are secured by first-priority liens on substantially all of the assets of the Company and the Guarantors, subject to certain exceptions. 84 Table of Contents The Company may redeem the Senior Secured Notes, in whole or in part, at any time prior to February 15, 2023, at a price equal to 100 % of the principal amount of the Notes redeemed plus accrued and unpaid interest, if any, to, but excluding the applicable redemption date, plus a “make-whole” premium. Thereafter, the Company may redeem the Senior Secured Notes, in whole or in part, at established redemption prices set forth in the Senior Secured Notes Indenture, plus accrued and unpaid interest, if any. In addition, on or prior to February 15, 2023, the Company may redeem up to 40 % of the aggregate principal amount of the Senior Secured Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 105.625 %, plus accrued and unpaid interest, if any to the redemption date; provided, however , that at least 50 % of the original aggregate principal amount of the Senior Secured Notes (calculated after giving effect to the issuance of any additional notes) remains outstanding. In addition, at any time and from time to time prior to February 15, 2023, but not more than once in any twelve-month period, the Company may redeem up to 10 % of the aggregate principal amount of the Senior Secured Notes at a redemption price of 103 % of the aggregate principal amount of Senior Secured Notes redeemed plus accrued and unpaid interest, if any to but not including the redemption date, on the Senior Secured Notes to be redeemed. If the Company experiences a change of control (as defined in the Senior Secured Notes Indenture), the Company must offer to repurchase the Senior Secured Notes at a repurchase price equal to 101 % of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest. The Indenture contains covenants that, among other things, limit the ability of the Company and its restricted subsidiaries to: (i) grant or incur liens; (ii) incur, assume or guarantee additional indebtedness; (iii) sell or otherwise dispose of assets, including capital stock of subsidiaries; (iv) make certain investments; (v) pay dividends, make distributions or redeem or repurchase capital stock; (vi) engage in certain transactions with affiliates; and (vii) consolidate or merge with or into, or sell substantially all of our assets to another entity. These covenants are subject to a number of limitations and exceptions set forth in the Indenture. See Note 23, “ Dividends”, for further information regarding dividend restrictions. The Indenture provides for customary events of default. The Company incurred debt issuance costs attributable to the issuance of the Senior Secured Notes of $ 6.4 million which are amortized to interest expense using the effective interest method over the expected life of the Senior Secured Notes. 2021 Revolving Credit Facility In connection with the Offering, the Company also entered into a new $ 25 million senior secured revolving credit facility (the “2021 Revolving Credit Facility”) with the lenders party thereto (the “Lenders”) and Barclays Bank PLC, as administrative agent and collateral agent (in such capacity, the “Agent”). The 2021 Revolving Credit Facility provides for a revolving line of credit of up to $ 25.0 million. Letters of credit are limited to $ 10 million (and are a part of, and not in addition to, the revolving line of credit). The Company has no t drawn any borrowings under the 2021 Revolving Credit Facility but does have letters of credit of approximately $ 3.6 million outstanding under the facility. The 2021 Revolving Credit Facility will mature on August 11, 2025 if none of the Company’s Convertible Senior Notes are outstanding, and if any Convertible Senior Notes are outstanding, the date which is 91 days prior to the maturity date of July 15, 2024 for such Convertible Senior Notes. Interest is payable on the 2021 Revolving Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate plus an applicable margin of 3.50 % (with step-downs upon de-leveraging). The Company also has the option to borrow at a rate determined by reference to the base rate. The obligations under the 2021 Revolving Credit Agreement are guaranteed on a joint and several basis by the Guarantors. The Company’s and Guarantors’ obligations under the 2021 Revolving Credit Facility are secured on a pari passu basis with the Senior Secured Notes. The 2021 Revolving Credit Agreement contains covenants that are substantially the same as the covenants in the Senior Secured Notes Indenture. The 2021 Revolving Credit Facility also requires the maintenance of a Consolidated Leverage Ratio (as defined in the 2021 Revolving Credit Agreement) of 5.50 to 1.00 (with a step down to 5.25 to 1.00 beginning with the fiscal quarter ending March 31, 2023) at the end of each fiscal quarter when extensions of credit under the 2021 Revolving Credit Facility and certain drawn and undrawn letters of credit (excluding (a) letters of credit that have been cash collateralized and (b) letters of credit having an aggregate face amount less than $ 5 ,000,000) in the aggregate outstanding exceeds 35 % of the total commitments under the 2021 Revolving Credit Facility. The 2021 Revolving Credit Agreement provides for customary events of default. The Company incurred debt issuance costs attributable to the issuance of the 2021 Revolving Credit Facility of $ 0.5 million which are amortized to interest expense using the effective interest method over the expected life of the 2021 Revolving Credit Facility. 85 Table of Contents 2018 Credit Facility On March 7, 2018, the Company entered into $ 250 million of credit facilities consisting of a $ 160 million 2018 First Lien Term Loan and a $ 50 million 2018 Revolving Credit Facility (collectively, the “2018 First Lien Credit Facility”), in each case, with Fifth Third Bank, as administrative agent, and other lenders, in addition to a $ 40 million 2018 Second Lien Term Loan (the “2018 Second Lien Credit Facility,” and, together with the 2018 First Lien Credit Facility, the “2018 Credit Facility”) with Prospect Capital Corporation, as administrative agent, and other lenders. The 2018 Credit Facility contained a $ 40 million accordion feature. In the first quarter of 2021, the Company used a portion of the proceeds from the issuance of the Senior Secured Notes to prepay all outstanding amounts under and terminate the 2018 First Lien Credit Facility in the amount of $ 130.0 million, and the transaction resulted in a $ 5.7 million loss on extinguishment of debt, which includes a $ 3.6 million loss from the early termination of the interest rate swap agreement. 2018 First Lien Credit Facility: The 2018 First Lien Term Loan and the 2018 Revolving Credit Facility bore interest at LIBOR plus a spread of 2.75 % to 3.50 % based on the Company’s senior leverage ratio. The 2018 First Lien Term Loan had quarterly required payments of $ 2.0 million beginning June 30, 2018, increasing to $ 3.0 million on June 30, 2020, and increasing to $ 4.0 million on June 30, 2022. The 2018 First Lien Credit Facility had a maturity date of March 7, 2023 . The 2018 First Lien Term Loan was secured by a first priority lien on substantially all of the assets of the borrowers and the guarantors thereunder, including a pledge of the Company’s capital stock, other than certain excluded assets (the “Collateral”). 2018 Second Lien Credit Facility: The 2018 Second Lien Credit Facility bore interest at a rate of LIBOR plus 7.00 % and had a maturity date of March 7, 2024 . The 2018 Second Lien Term Loan was secured by a second priority interest in the Collateral and was guaranteed by the same entities as the 2018 First Lien Term Loan. Based on an excess cash covenant for the facility, a $ 4.5 million principal payment was made in the second quarter 2019, resulting in a $ 0.2 million loss on extinguishment of debt. The Company used a portion of the proceeds from the issuance of the Convertible Senior Notes to prepay all outstanding amounts related to the 2018 Second Lien Credit Facility in the third quarter 2019. The principal paid in the third quarter amounted to $ 35.5 million, and the transaction resulted in a $ 1.1 million loss on extinguishment of debt. Convertible Senior Notes In July 2019 the Company closed an offering of $ 172.5 million in aggregate principal amount of its 2.50 % Convertible Senior Notes due July 15, 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes bear interest at a rate of 2.50 % per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. The Convertible Senior Notes will mature on July 15, 2024 , unless earlier repurchased, redeemed or converted. The Convertible Senior Notes are senior unsecured obligations of the Company. The Convertible Senior Notes are convertible into approximately 3,208,172 shares of our voting common stock under certain circumstances prior to maturity at a conversion rate of 18.598 shares per $ 1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $ 53.77 per share, subject to adjustment under certain conditions, but will not be adjusted for any accrued and unpaid interest. Upon conversion, the Company may pay cash, shares of common stock or a combination of cash and stock, as determined by the Company at its discretion. The conditions required to allow the holders to convert their Convertible Senior Notes were not met as of December 31, 2021. The Company early adopted ASU 2020-06 effective January 1, 2021 on a retrospective basis to all periods presented. Under ASU 2020-06, the Company accounts for the Convertible Senior Notes entirely as a liability and no longer separately accounts for the Convertible Senior Notes with liability and equity components. See Note 2 for further discussion of the impact of the adoption of ASU 2020-06. The Company incurred debt issuance costs attributable to the Convertible Senior Notes of $ 5.9 million which are amortized to interest expense using the effective interest method over the expected life of the Convertible Senior Notes. In connection with the Convertible Senior Notes offering, the Company entered into privately negotiated capped call transactions with certain financial institutions. The capped call transactions have a strike price of $ 53.77 per and a cap price of $ 82.86 per, and are exercisable when, and if, the Convertible Senior Notes are converted. The Company paid $ 20.53 million for these capped calls and charged that amount to additional paid-in capital. Promissory Note On June 10, 2020 , in connection with the acquisition of certain Durfort assets, the Company issued the Promissory Note in the principal amount of $ 10.0 million (the “Principal Amount”), with an annual interest rate of 7.5 % , payable quarterly , with the first payment due September 10, 2020 . The Principal Amount was payable in two $ 5.0 million installments, with the first installment due 18 months after the closing date of the acquisition ( June 10, 2020 ), and the second installment due 36 months after the closing date of the acquisition. The second installment was subject to reduction for certain amounts payable to the Company as a holdback. The Company prepaid all outstanding amounts under and terminated the Promissory Note in the third quarter of 2021 in the amount of $ 9.6 million. The transaction resulted in a $ 0.4 million gain on extinguishment of debt. 86 Table of Contents Unsecured Loan On April 6, 2020 , the 2018 First Lien Credit Facility was amended to allow for an unsecured loan under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES”). On April 17, 2020 , National Tobacco Company, L.P., a subsidiary of the Company, entered into a loan agreement with Regions Bank guaranteed by the Small Business Administration for a $ 7.5 million unsecured loan. The proceeds of the loan were received on April 27, 2020 . The loan was scheduled to mature on April 17, 2022 and had a 1.00 % interest rate. During 2021, the Company applied for forgiveness for the loan. On October 15, 2021, the Company received notice that its application for forgiveness was fully approved. The extinguishment of the unsecured loan occurred in the fourth quarter of 2021 resulting in a $ 7.5 million gain on extinguishment of debt . The Company is subject to audit relating to the unsecured loan until 2027 which could result in repayment of some or all of the unsecured loan previously forgiven. However, the Company believes that repayment of any amount is not probable. Note Payable – IVG In September 2018, the Company issued a note payable to IVG’s former shareholders (“IVG Note”). The IVG Note had a principal amount of $ 4.0 million with an interest rate of 6.0 % per year and matured on March 5, 2020 . All principal and accrued and unpaid interest under the IVG Note were subject to indemnification obligations of the sellers pursuant to the International Vapor Group Stock Purchase Agreement dated as of September 5, 2018. The carrying amount of the IVG Note, $ 4.2 million, was deposited into an escrow account in the first quarter of 2020 pending agreement with the sellers of any indemnification obligations. The escrow funds were distributed in the first quarter of 2021. Note 14. Income Taxes Income tax expense (benefit) for the years ended December 31 consists of the following components: 2021 2020 2019 Current Deferred Total Current Deferred Total Current Deferred Total Federal $ 11,315 $ ( 583 ) $ 10,732 $ 5,285 $ 3,642 $ 8,927 $ 5,281 $ ( 2,626 ) $ 2,655 State and Local 4,210 ( 637 ) 3,573 1,930 1,100 3,030 982 ( 774 ) 208 Foreign - ( 265 ) ( 265 ) - - - - - - Total $ 15,525 $ ( 1,485 ) $ 14,040 $ 7,215 $ 4,742 $ 11,957 $ 6,263 $ ( 3,400 ) $ 2,863 Deferred tax assets and liabilities consists of: December 31, 2021 December 31, 2020 Assets Liabilities Assets Liabilities Inventory $ 2,096 $ 2 $ 2,567 $ - Property, plant, and equipment - 3,259 - 3,107 Goodwill and other intangible assets - 8,573 - 8,144 Foreign NOL carryforward 265 - - - State NOL carryforward 2,421 - 2,236 - Unrealized loss on investments 81 - 876 - Leases 4,150 3,826 4,920 4,557 Original issue discount 2,720 - 3,800 - Other 10,244 2,305 6,611 2,356 Gross deferred income taxes 21,977 17,965 21,010 18,164 Valuation allowance ( 2,649 ) - ( 2,236 ) - Net deferred income taxes $ 19,328 $ 17,965 $ 18,774 $ 18,164 At December 31, 2021, the Company had state net operating loss (“NOL”) carryforwards for income tax purposes of approximately $ 55.2 million, which expire between 2025 and 2041, $ 19.8 million of which has an indefinite carryforward period. The Company has determined that, at December 31, 2021 and 2020, its ability to realize future benefits of its state NOL carryforwards does not meet the “more likely than not” criteria in ASC 740, Income Taxes. Therefore, a valuation allowance of $ 2.6 million and $ 2.2 million has been recorded at December 2021 and 2020, respectively. 87 Table of Contents ASC 740-10-25 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company has determined that they did no t have any uncertain tax positions requiring recognition as a result of the provisions of ASC 740-10-25. The Company’s policy is to recognize interest and penalties accrued on uncertain tax positions as part of interest expense. For the years ended December 31, 2021, 2020, and 2019, no estimated interest or penalties were recognized for the uncertainty of tax positions taken. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. In general, the Company is no longer subject to U.S. federal and state tax examinations for years prior to 2018. Reconciliation of the federal statutory rate and the effective income tax rate for the years ended December 31 is as follows: 2021 2020 2019 Federal statutory rate 21.0 % 21.0 % 21.0 % Foreign rate differential - 0.1 % 0.0 % 0.0 % State taxes 3.4 % 2.9 % 0.7 % Permanent differences - 4.1 % - 1.6 % - 5.6 % Other 0.7 % 4.7 % - 3.1 % Valuation allowance 0.6 % - 3.2 % 2.0 % Effective income tax rate 21.5 % 23.8 % 15.0 % The permanent differences for the year ended December 31, 2021 are primarily related to income tax benefits of $ 7.5 million ($ 1.6 million tax effected) as a result of the forgiveness of the $ 7.5 million unsecured loan and $ 7.2 million ($ 1.5 million tax effected) as a result of stock option exercises. The permanent differences for the years ended December 31, 2020 and 2019 are primarily related to income tax benefits of $ 3.3 million ($ 0.7 million tax effected), and $ 4.6 million ($ 1.0 million tax effected), respectively, as a result of stock option exercises. Note 15. Pension and Postretirement Benefit Plans The Company had a defined benefit pension plan. Benefits for hourly employees were based on a stated benefit per year of service, reduced by amounts earned in a previous plan. Benefits for salaried employees were based on years of service and the employees’ final compensation. The defined benefit pension plan was frozen. The Company’s policy was to make the minimum amount of contributions that can be deducted for federal income taxes. In the fourth quarter 2019, the Company elected to terminate the defined benefit pension plan, effective December 31, 2019 with final distributions made in the third quarter of 2020. The Company sponsored a defined benefit postretirement plan that covered hourly employees. This plan provided medical and dental benefits. This plan was contributory with retiree contributions adjusted annually. The Company’s policy was to make contributions equal to benefits paid during the year. In the fourth quarter 2019, the Company amended the plan to cease benefits effective June 30, 2020. The plan amendment eliminated a significant amount of the benefits under the plan, resulting in a curtailment of $ 3.2 million for the year ended December 31, 2019. The curtailment resulted in $ 1.8 million being reclassified from accumulated other comprehensive income to income in 2019. The total gain on the curtailment was $ 4.9 million for the year ended December 31, 2019, and is recorded in Net periodic benefit cost (income), excluding service cost in the income statement. 88 Table of Contents The following tables provide a reconciliation of the changes in the plans’ benefit obligations and fair value of assets for the year ended December 31, 2020: Pension Benefits Postretirement Benefits 2020 2020 Reconciliation of benefit obligations: Benefit obligation at January 1 $ 14,217 $ 115 Service cost - - Interest cost 190 - Actuarial loss (gain) 249 ( 83 ) Assumptions - - Settlement/curtailment ( 1,869 ) - Annuities purchased ( 12,116 ) - Benefits paid ( 671 ) ( 32 ) Benefit obligation at December 31 $ - $ - Reconciliation of fair value of plan assets: Fair value of plan assets at January 1 $ 15,903 $ - Actual return on plan assets 1,139 - Employer contributions - 32 Settlement/curtailment ( 1,869 ) - Annuities purchased ( 12,116 ) - Benefits paid ( 671 ) ( 32 ) Asset reversion upon termination ( 2,386 ) - Fair value of plan assets at December 31 $ - $ - The following table provides the components of net periodic pension and postretirement benefit costs and total costs for the plans for the years ended December 31: Pension Benefits Postretirement Benefits 2021 2020 2019 2021 2020 2019 Service cost $ - $ - $ 104 $ - $ - $ - Interest cost - 190 520 - - 101 Expected return on plan assets - ( 322 ) ( 645 ) - - - Amortization of (gains) losses - 72 147 - ( 131 ) ( 169 ) Settlement and Curtailment loss (gain) - 1,180 - - - ( 4,915 ) Net periodic benefit cost (income) $ - $ 1,120 $ 126 $ - $ ( 131 ) $ ( 4,983 ) The Company also sponsors a voluntary 401(k) retirement savings plan. Eligible employees may elect to contribute up to 15 % of their annual earnings subject to certain limitations. For the 2021 and 2020 Plan Years, the Company contributed 4 % to those employees contributing 4 % or greater. For those employees contributing less than 4 %, the Company matched the contribution by 100 %. Additionally, for all years presented, the Company made discretionary contributions of 1 % to all employees, regardless of an employee’s contribution level. Company contributions to this plan were approximately $ 1.6 million for 2021, $ 1.6 million for 2020 and $ 1.5 million for 2019. 89 Table of Contents Note 16. Lease Commitments The Company’s leases consist primarily of leased property for manufacturing warehouse, head offices and retail space as well as vehicle leases. In general, the Company does not recognize any renewal periods within the lease terms as there are not significant barriers to ending the lease at the initial term. Lease and non-lease components are accounted for as a single lease component. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for these leases is recognized on a straight-line basis over the lease term. The components of lease expense consists of the following: For the year ended December 31, 2021 2020 2019 Operating lease cost Cost of sales $ 907 $ 908 $ 874 Selling, general and administrative 3,001 2,402 2,973 Variable lease cost (1) 1,182 587 463 Short-term lease cost 48 131 147 Sublease income ( 60 ) ( 120 ) ( 110 ) Total $ 5,078 $ 3,908 $ 4,347 (1) Variable lease cost includes elements of a contract that do not represent a good or service but for which the lessee is responsible for paying. December 31, 2021 December 31, 2020 Assets: Right of use assets $ 15,053 $ 17,918 Total lease assets $ 15,053 $ 17,918 Liabilities: Current lease liabilities (2) $ 2,976 $ 3,228 Long-term lease liabilities 13,336 16,117 Total lease liabilities $ 16,312 $ 19,345 (2) Reported within accrued liabilities on the balance sheet 90 Table of Contents As of December 31, 2021 2020 Weighted-average remaining lease term - operating leases 6.7 years 7.2 years Weighted-average discount rate - operating leases 4.92 % 4.93 % Nearly all the lease contracts for the Company do not provide a readily determinable implicit rate. For these contracts, the Company uses a discount rate that approximates its incremental borrowing rate at the time of the lease commencement. Maturities of lease liabilities consisted of the following: December 31, 2021 2022 $ 3,674 2023 3,613 2024 2,439 2025 2,125 2026 2,084 Years thereafter 5,344 Total lease payments $ 19,279 Less: Imputed interest 2,967 Present value of lease liabilities $ 16,312 Minimum lease payments for operating leases that had initial or remaining non-cancelable lease terms in excess of one year consisted of the following: Year Payments 2022 $ 2,596 2023 2,568 2024 2,396 2025 2,125 2026 2,084 Years thereafter 5,344 Total $ 17,113 The Company recognized $ 0.0 million and $ 0.1 million in impairments of right of use assets in 2021 and 2020, respectively, related to store closures. 91 Table of Contents Note 17. Share Incentive Plans On March 22, 2021, the Company’s Board of Directors adopted the Turning Point Brands, Inc. 2021 Equity Incentive Plan (the “2021 Plan”), pursuant to which awards may be granted to employees, non-employee directors, and consultants. In addition, the 2021 Plan provides for the granting of nonqualified stock options to employees of the Company or any subsidiary of the Company. Pursuant to the 2021 Plan, 1,290,000 shares, plus 100,052 shares remaining available for issuance under the 2015 Equity Incentive Plan (the “2015 Plan”), of TPB Common Stock are reserved for issuance as awards to employees, non-employee directors, and consultants as compensation for past or future services or the attainment of certain performance goals. The 2021 Plan is scheduled to terminate on March 21, 2031. The 2021 Plan is administered by the compensation committee (the “Committee”) of the Company’s Board of Directors. The Committee determines the vesting criteria for the awards, with such criteria to be specified in the award agreement. As of December 31, 2021, net of forfeitures, there were 8,637 Restricted Stock Units (“RSUs”) and 7,500 options granted under the 2021 Plan. There are 1,383,469 shares available for grant under the 2021 Plan. On April 28, 2016, the Board of Directors of the Company adopted the 2015 Plan, pursuant to which awards could have been granted to employees, non-employee directors, and consultants. In addition, the 2015 Plan provided for the granting of nonqualified stock options to employees of the Company or any subsidiary of the Company. Pursuant to the 2015 Plan, 1,400,000 shares of the Company’s voting common stock were reserved for issuance as awards to employees, non-employee directors, and consultants as compensation for past or future services or the attainment of certain performance goals. The 2015 Plan was scheduled to terminate on April 27, 2026. Upon adoption of the 2021 Plan, the 2015 Plan was terminated, and the Company determined no additional grants would be made under the 2015 Plan. However, all awards issued under the 2015 Plan that have not been previously terminated or forfeited remain outstanding and continue unaffected. There are no shares available for grant under the 2015 Plan. The 2015 Plan was administrated by the Committee. On February 8, 2006, the Board of Directors of the Company adopted the 2006 Equity Incentive Plan (the “2006 Plan”) of North Atlantic Holding Company, Inc., pursuant to which awards may be granted to employees. The 2006 Plan provides for the granting of nonqualified stock options and restricted stock awards to employees. Upon the adoption of the Company’s 2015 Equity Incentive Plan in connection with its IPO, the Company determined no additional grants would be made under the 2006 Plan. However, all awards issued under the 2006 Plan that have not been previously terminated or forfeited remain outstanding and continue unaffected. There are no shares available for grant under the 2006 Plan. Stock option activity for the 2006, 2015 and 2021 Plans is summarized below: Stock Option Shares Weighted Average Exercise Price Weighted Average Grant Date Fair Value Outstanding, December 31, 2019 696,716 $ 18.13 $ 6.17 Granted 155,000 14.85 4.41 Exercised ( 135,146 ) 6.37 2.74 Forfeited ( 5,510 ) 27.25 8.64 Outstanding, December 31, 2020 711,060 19.58 6.42 Granted 119,500 50.93 13.58 Exercised ( 202,768 ) 10.22 6.35 Forfeited ( 7,957 ) 33.22 9.63 Outstanding, December 31, 2021 619,835 $ 28.51 $ 8.70 92 Table of Contents Under the 2006 Plan, the total intrinsic value of options exercised during the years ended December 31, 2021, 2020, and 2019, was $ 7.9 million, $ 3.7 million, and $ 5.0 million, respectively. At December 31, 2021, under the 2006 Plan, the outstanding stock options’ exercise price for 87,340 options is $ 3.83 per share, all of which are exercisable. The weighted average of the remaining lives of the outstanding stock options is approximately 2.43 years for the options with the $ 3.83 exercise price. The Company estimates the expected life of these stock options is ten years from the date of grant. For the $ 3.83 per share options, the weighted average fair value of options was determined using the Black-Scholes model assuming a ten-year life from grant date, a current share price and exercise price of $ 3.83 , a risk-free interest rate of 3.57 %, a volatility of 40 %, and no assumed dividend yield. Based on these assumptions, the fair value of these options is approximately $ 2.17 per share option granted. At December 31, 2021, under the 2015 and 2021 Plans, the risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. The expected volatility is based on the average long-term historical volatilities of peer companies. We intend to continue to consistently use the same group of publicly traded peer companies to determine expected volatility until sufficient information regarding volatility of our share price becomes available or until the selected companies are no longer suitable for this purpose. Due to our limited trading history, we are using the simplified method presented by SEC Staff Accounting Bulletin No. 107 to calculate expected holding periods, which represent the periods of time for which options granted are expected to be outstanding. We will continue to use this method until we have sufficient historical exercise experience to give us confidence in the reliability of our calculations. The fair values of these options were determined using the Black-Scholes option pricing model. The following table outlines the assumptions for options granted under the 2015 Plan. February 10, 2017 May 17, 2017 March 7, 2018 March 20, 2019 October 24, 2019 March 18, 2020 February 18, 2021 May 3, 2021 Number of options granted 40,000 93,819 98,100 155,780 25,000 155,000 100,000 12,000 Options outstanding at December 31, 2021 27,050 47,483 67,417 142,284 25,000 106,361 97,400 12,000 Number exercisable at December 31, 2021 27,050 47,483 67,417 110,015 16,750 33,167 9,500 - Exercise price $ 13.00 $ 15.41 $ 21.21 $ 47.58 $ 20.89 $ 14.85 $ 51.75 $ 47.76 Remaining lives 5.12 5.38 6.19 7.22 7.82 8.22 9.14 9.34 Risk free interest rate 1.89 % 1.76 % 2.65 % 2.34 % 1.58 % 0.79 % 0.56 % 0.84 % Expected volatility 27.44 % 26.92 % 28.76 % 30.95 % 31.93 % 35.72 % 28.69 % 29.03 % Expected life 6.000 6.000 6.000 6.000 6.000 6.000 6.000 6.000 Dividend yield - - 0.83 % 0.42 % 0.95 % 1.49 % 0.55 % 0.59 % Fair value at grant date $ 3.98 $ 4.60 $ 6.37 $ 15.63 $ 6.27 $ 4.41 $ 13.77 $ 13.06 93 Table of Contents The following table outlines the assumptions for options granted under the 2021 Plan. May 17, 2021 Number of options granted 7,500 Options outstanding at December 31, 2021 7,500 Number exercisable at December 31, 2021 - Exercise price $ 45.05 Remaining lives 9.38 Risk free interest rate 0.84 % Expected volatility 31.50 % Expected life 6.000 Dividend yield 0.63 % Fair value at grant date $ 13.23 The Company has recorded compensation expense related to the options based on the provisions of ASC 718 under which the fixed portion of such expense is determined as the fair value of the options on the date of grant and amortized over the vesting period. The Company recorded compensation expense related to the options of approximately $ 2.3 million, $ 1.2 million and $ 1.7 million for the years ended December 31, 2021, 2020 and 2019, respectively. Total unrecognized compensation expense related to options at December 31, 2021, is $ 0.6 million, which will be expensed over 1.91 years. Performance-based restricted stock units (“PRSUs”) are restricted stock units subject to both performance-based and service-based vesting conditions. The number of shares of common stock a recipient will receive upon vesting of a PRSU will be calculated by reference to certain performance metrics related to the Company’s performance over a three to five-year period. PRSUs will vest on the measurement date, which is no more than 65 days after the performance period, provided the applicable service and performance conditions are satisfied. At December 31, 2021, there are 558,661 PRSUs outstanding, 558,661 of which are unvested. The following table outlines the PRSUs granted and outstanding as of December 31, 2021. March 31, 2017 March 7, 2018 March 20, 2019 July 19, 2019 March 18, 2020 December 28, 2020 February 18, 2021 Number of PRSUs granted 94,000 96,000 92,500 88,582 94,000 88,169 100,000 PRSUs outstanding at December 31, 2021 83,000 93,000 84,600 21,342 91,350 88,169 97,200 Fair value as of grant date $ 15.60 $ 21.21 $ 47.58 $ 52.15 $ 14.85 $ 46.42 $ 51.75 Remaining lives - 1.00 2.00 1.00 3.00 2.00 4.00 The Company recorded compensation expense related to the PRSUs of approximately $ 5.0 million, $ 1.4 million and $ 1.9 million in the consolidated statements of income for the years ended December 31, 2021, 2020 and 2019, respectively, based on the probability of achieving the performance condition. Total unrecognized compensation expense related to these awards at December 31, 2021, is $ 8.5 million, which will be expensed over the service period based on the probability of achieving the performance condition. During 2021, the Company granted 8,637 RSUs which vest over one year . The Company has recorded compensation expense related to the RSUs based on the provisions of ASC 718 under which the fixed portion of such expense is determined as the fair value of the RSUs on the date of grant and amortized over the vesting period. The Company recorded compensation expense related to the RSUs of approximately $ 0.3 million for the year ended December 31, 2021. Total unrecognized compensation expense related to RSUs at December 31, 2021, is $ 0.1 million, which will be expensed over 0.38 years. 94 Table of Contents Note 18. Contingencies On October 9, 2020, a purported stockholder of Turning Point Brands, Inc., Paul-Emile Berteau, filed a complaint in the Delaware Court of Chancery relating to the merger of SDI with a TPB subsidiary pursuant to the Agreement and Plan of Merger and Reorganization, dated as of April 7, 2020, by and among TPB, SDI and Merger Sub. The complaint purports to assert two derivative counts for breach of fiduciary duty on TPB’s behalf and against the TPB Board of Directors and certain SDI affiliates. The third count purports to assert a direct claim against TPB and its Board of Directors based on allegations that TPB’s Amended and Restated Bylaws are inconsistent with TPB’s certificate of incorporation. On October 26, 2020, the TPB Board of Directors adopted Amendment No. 1 to TPB’s Amended and Restated Bylaws, which amended the challenged section of the bylaws. On June 30, 2021, the court granted in part and denied in part the defendants’ motions to dismiss. Among other things, the court dismissed TPB director H.C. Charles Diao as a defendant in the action and dismissed the third count of the plaintiff’s complaint as moot. The remaining defendants answered the complaint on August 23, 2021. While the Company believes it has good and valid defenses to the claims, there can be no assurance that the Company will prevail in this case, and it could have a material adverse effect on the Company’s business and results of operations. Other major tobacco companies are defendants in product liability claims. In a number of these cases, the amounts of punitive and compensatory damages sought are significant and, if such a claim were brought against the Company, could have a material adverse effect on our business and results of operations. The Company is subject to several lawsuits alleging personal injuries resulting from malfunctioning vaporizer devices and may be subject to claims in the future relating to our other NewGen products. The Company is still evaluating these claims and the potential defenses to them. For example, the Company did not design or manufacture the products at issue; rather, the Company was merely the distributor. Nonetheless, there can be no assurance that the Company will prevail in these cases, and they could have a material adverse effect on the financial position, results of operations or cash flows of the Company. We have several subsidiaries engaged in making, distributing, and selling vapor products. As a result of the overall publicity and controversy surrounding the vapor industry generally, many companies have received informational subpoenas from various regulatory bodies and in some jurisdictions lawsuits have been filed regarding marketing practices and possible underage sales. We expect that our subsidiaries will be subject to some such cases and investigative requests. In the acquisition of the vapor businesses, we negotiated financial “hold-backs,” which we have used to defray expenses associated with the information production and the cost of defending any such lawsuits as well as the franchisee lawsuit. To the extent that litigation becomes necessary, we believe that the subsidiaries have strong factual and legal defenses against claims that they unfairly marketed vapor products. We have two franchisor subsidiaries. Like many franchise businesses, in the ordinary course of their business, these subsidiaries are from time to time responding parties to arbitration demands brought by franchisees. One of our subsidiaries, which we acquired in 2018, is the franchisor of the VaporFi system. This subsidiary is a responding party in an arbitration brought by a former franchisee claiming, among other things, violations of Federal Trade Commission Rules and Florida law. While we believe we have good and valid substantive defenses against these claims, to avoid the protracted expense of arbitration, we reached a settlement in principle with the claimants and expect the settlement to be finalized by the end of the first quarter of 2022. We have also been named in a lawsuit brought by a different former franchisee represented by the same firm that represents the plaintiff in the action described above. This case relates to the termination of the franchise agreement by the franchisor for failure to pay franchising fees and our subsequent demand that the franchisee cease using our marks and de-image locations formerly housing the franchises. The franchisee filed suit against us in the U.S. District Court for the Southern District of Florida sixteen months after our demand. The franchisee is claiming tortious interference and conversion. We believe the franchisor’s ultimate termination of the franchise agreement for multiple uncured material defaults by the franchisee was proper. We believe that the suit was improperly brought before the U.S. District Court for the South District of Florida because the related franchising agreements included a mandatory arbitration clause. We also believe we have good and valid substantive defenses against the claims and intend on vigorously defending our interests in this matter. 95 Table of Contents Note 19. Legal Settlement The Company engaged in discussions and mediation with VMR Products LLC (“VMR”), which was acquired in 2018. Pursuant to a Distribution and Supply agreement (“VMR Agreement”), VMR was providing the Company with V2 e-cigarettes for the exclusive distribution in bricks-and-mortar stores in the United States. Under the terms of the VMR Agreement, in the event of termination following a change in control, the acquirer was required to make a payment to the Company under a formula designed to provide the Company with a fair share of the value created by the Company’s performance under the VMR Agreement. The discussions have been completed and the Company received $ 6.7 million in the second quarter 2019 to settle the issue. Net of legal costs and reserves for anticipated future returns associated with the discontinuance, the Company recorded a $ 5.5 million gain in the second quarter of 2019, which was recorded as a reduction to selling, general, and administrative expenses. Note 20. Income Per Share T he following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations of net income: December 31, 2021 December 31, 2020 December 31, 2019 Income Shares Per Share Income Shares Per Share Income Shares Per Share Basic EPS: Numerator Net income attributable to Turning Point Brands, Inc. $ 52,059 $ 38,192 $ 16,233 Denominator Weighted average 18,917,570 $ 2.75 19,398,474 $ 1.97 19,627,093 $ 0.83 Diluted EPS: Numerator Net income attributable to Turning Point Brands, Inc. $ 52,059 $ 38,192 $ 16,233 Interest expense related to Convertible Senior Notes, net of tax 4,317 4,188 1,958 Diluted consolidated net income $ 56,376 $ 42,380 $ 18,191 Denominator Basic weighted average 18,917,570 19,398,474 19,627,093 Convertible Senior Notes 3,208,172 3,202,808 3,202,808 Stock options 256,252 336,159 410,447 22,381,994 $ 2.52 22,937,441 $ 1.85 23,240,348 $ 0.78 Note 21. Segment Information In accordance with ASC 280, Segment Reporting, the Company has three reportable segments, (1) Zig-Zag Products; (2) Stoker’s Products; and (3) NewGen Products. The Zig-Zag Products segment markets and distributes (a) rolling papers, tubes, and related products; and (b) finished cigars and MYO cigar wraps. The Stoker’s Products segment (a) manufactures and markets moist snuff and (b) contracts for and markets loose leaf chewing tobacco products. The NewGen Products segment (a) markets and distributes liquid vapor products and certain other products without tobacco and/or nicotine; (b) distributes a wide assortment of products to non-traditional retail outlets via VaporBeast; and (c) markets and distributes a wide assortment of products to individual consumers via the VaporFi B 2 C online platform. Products in the Zig-Zag Products and Stoker’s Products segments are distributed primarily through wholesale distributors in the United States while products in the NewGen Products segment are distributed primarily through e-commerce to non-traditional retail outlets and direct to consumers in the United States. The Other segment includes the costs and assets of the Company not assigned to one of the three reportable segments such as intercompany transfers, deferred taxes, deferred financing fees, and investments in subsidiaries. The Company had no customer that accounted for more than 10% of net sales in 2021, 2020, or 2019. The accounting policies of these segments are the same as those of the Company. Corporate costs are not directly charged to the three reportable segments in the ordinary course of operations. The Company evaluates the performance of its segments and allocates resources to them based on operating income. 96 Table of Contents The tables below present financial information about reportable segments: For the year ended December 31, 2021 2020 2019 Net sales Zig-Zag products $ 176,491 $ 132,812 $ 108,733 Stoker’s products 124,280 115,866 99,894 NewGen products 144,700 156,433 153,362 Total $ 445,471 $ 405,111 $ 361,989 Gross profit Zig-Zag products $ 102,739 $ 78,278 $ 59,414 Stoker’s products 68,084 61,764 52,620 NewGen products 47,011 49,948 25,083 Total $ 217,834 $ 189,990 $ 137,117 Operating income (loss) Zig-Zag products $ 77,109 $ 61,932 $ 45,086 Stoker’s products 52,073 45,042 35,008 NewGen products 2,263 5,801 ( 20,629 ) Corporate unallocated (1)(2) ( 41,124 ) ( 48,348 ) ( 32,235 ) Total $ 90,321 $ 64,427 $ 27,230 Interest expense, net 20,500 13,487 14,435 Investment loss (income) 6,673 ( 198 ) ( 2,648 ) (Gain) loss on extinguishment of debt ( 2,154 ) - 1,308 Net periodic benefit (income) cost, excluding service cost - 989 ( 4,961 ) Income before income taxes $ 65,302 $ 50,149 $ 19,096 Capital expenditures Zig-Zag products $ 141 $ - $ - Stoker’s products 5,960 5,815 2,823 NewGen products 55 320 1,992 Total $ 6,156 $ 6,135 $ 4,815 Depreciation and amortization Zig-Zag products $ 388 $ 182 $ - Stoker’s products 2,565 2,215 1,608 NewGen products 2,059 2,621 2,481 Total $ 5,012 $ 5,018 $ 4,089 (1) Includes corporate costs that are not allocated to any of the three reportable segments. (2) Includes costs related to PMTA of $ 2.6 million, $ 14.4 million and $ 2.2 million in 2021, 2020 and 2019, respectively. 97 Table of Contents December 31, 2021 December 31, 2020 Assets Zig-Zag products $ 227,554 $ 206,900 Stoker’s products 142,334 133,016 NewGen products 72,746 91,116 Corporate unallocated (1) 158,926 65,017 Total $ 601,560 $ 496,049 (1) Includes assets not assigned to the three reportable segments. All goodwill has been allocated to the reportable segments. Revenue Disaggregation—Sales Channel Revenues of the Zig-Zag Products and Stoker’s Products segments are primarily comprised of sales made to wholesalers while NewGen sales are made business to business and business to consumer, both online and through our corporate retail stores. NewGen net sales are broken out by sales channel below. NewGen Segment For the year ended December 31, 2021 2020 2019 Business to Business $ 107,235 $ 107,976 $ 112,580 Business to Consumer - Online 37,069 43,517 31,348 Business to Consumer - Corporate store - 4,751 9,273 Other 396 189 161 Total $ 144,700 $ 156,433 $ 153,362 Net Sales: Domestic and Foreign The following table shows a breakdown of consolidated net sales between domestic and foreign. For the year ended December 31, 2021 2020 2019 Domestic $ 415,514 $ 391,705 $ 347,616 Foreign 29,957 13,406 14,373 Total $ 445,471 $ 405,111 $ 361,989 98 Table of Contents Note 22. Selected Quarterly Financial Information (Unaudited) The following table presents the quarterly operating results: 1st 2nd 3rd 4th 2021 Net sales $ 107,641 $ 122,643 $ 109,904 $ 105,283 Gross profit 53,261 59,973 54,269 50,331 Net income attributable to Turning Point Brands, Inc. 11,783 15,355 13,468 11,454 Basic net income attributable to Turning Point Brands, Inc. per share 0.62 0.81 0.71 0.61 Diluted net income attributable to Turning Point Brands, Inc. per share $ 0.57 $ 0.73 $ 0.65 $ 0.57 2020 Net sales $ 90,689 $ 104,963 $ 104,174 $ 105,285 Gross profit 41,431 47,936 48,307 52,316 Net income attributable to Turning Point Brands, Inc. 4,499 10,295 9,020 14,378 Basic net income attributable to Turning Point Brands, Inc. per share 0.23 0.53 0.47 0.75 Diluted net income attributable to Turning Point Brands, Inc. per share $ 0.22 (1) $ 0.49 $ 0.44 $ 0.68 (1) The effect of 3,202,808 shares issuable upon conversion of the Convertible Senior Notes were excluded from the diluted net income per share calculation because the effect would have been antidilutive. The amounts presented in the table above are computed independently for each quarter. As a result, their sum may not equal the total year amounts. Note 23. Dividends and Share Repurchase On November 9, 2017 , the Company’s Board of Directors approved the initiation of a cash dividend to shareholders. The initial quarterly dividend of $ 0.04 per common share was paid on December 15, 2017 , to shareholders of record at the close of business on November 27, 2017 . The most recent dividend of $ 0.055 per common share, an increase of approximately 38 %, was paid on January 7, 2022 , to shareholders of record at the close of business on December 17, 2021 . Dividends are considered restricted payments under the Senior Secured Notes Indenture and 2021 Revolving Credit Facility. The Company is generally permitted to make restricted payments provided that, at the time of payment, or as a result of payment, the Company is not in default on its debt covenants. Additional earning and market capitalization restrictions limit the aggregate amount of restricted, quarterly dividends during a fiscal year. On February 25, 2020, the Company’s Board of Directors approved a $ 50.0 million share repurchase program, which is intended for opportunistic execution based upon a variety of factors including market dynamics. The program is subject to the ongoing discretion of the Board. The total number of shares repurchased for the year ended December 31, 2021, was 896,738 shares for a total cost of $ 38.7 million and an average price per share of $ 43.13 . On October 25, 2021, the Board increased the approved share repurchase program by $ 30.7 million. $ 31.8 million remains available for share repurchases under the program at December 31, 2021. On February 24, 2022, the Board increased the approve share repurchase program by $ 24.6 million. 99 Table of Contents Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None.