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 ) 53 Financial Statements: Consolidated Balance Sheets as of December 31, 2022 and 2021 57 Consolidated Statements of Income for the years ended December 31, 2022, 2021, and 2020 58 Consolidated Statements of Comprehensive Income for the years ended December 31, 2022, 2021, and 2020 59 Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021, and 2020 60 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2022, 2021, and 2020 62 Notes to Consolidated Financial Statements 63 52 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, 2022 and 2021, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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 15, 2023 expressed an opinion that the Company had not maintained effective internal control over financial reporting as of December 31, 2022, 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 Matter The critical audit matter communicated below is a matter 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 especially challenging, subjective, or complex judgments. The communication of a critical audit matter 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 matter below, providing a separate opinion on the critical audit matter 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 impaired the goodwill balance of its NewGen reporting unit, and reported an impairment loss of $25.6 million for the year ended December 31, 2022, 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 compared the estimated fair value of the reporting unit, which was determined using a combination of an income approach, the discounted cash flow method, and a market approach, the guideline public company, with the carrying value of the reporting unit, including goodwill. Based on the amount by which the carrying value of the NewGen reporting unit exceeded its estimated fair value, the reporting unit’s goodwill balance was determined to be fully impaired. 53 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, management’s selection of the discount rate, management’s estimate of the terminal value, and management’s selection of guideline public companies. 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: • Evaluated 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 methods used by management and testing the mathematical accuracy of the calculations. 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 the mathematical accuracy of the calculation. o Evaluating the reasonableness of the discount rate by comparing the underlying source information to publicly available market data and testing the mathematical accuracy of the calculation. /s/ RSM US LLP We have served as the Company’s auditor since 2006. Richmond, Virginia March 15, 2023 54 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, 2022, 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 weaknesses 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, 2022, 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, 2022 and 2021, 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, 2022, and the related notes to the consolidated financial statements of the Company and our report dated March 15, 2023 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 weaknesses have 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. The business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted . There were deficiencies in the design and operation of controls associated with the risk assessment component of the Company’s internal control framework, specifically as it relates to identifying risks around segregation of duties within the financial reporting function, and the identification of all risks relating to the financial statements and controls that would address such risks. This impacts business process controls (automated and manual) throughout financial reporting and the business transaction cycles. These material weaknesses were considered in determining the nature, timing and extent of audit tests applied in our audit of the 2022 financial statements, and this report does not affect our report dated March 15, 2023 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. 55 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 15, 2023 56 Table of Contents Turning Point Brands, Inc. and Subsidiaries Consolidated Balance Sheets December 31, 2022 and 2021 (dollars in thousands except share data) December 31, December 31, 2022 2021 ASSETS Current assets: Cash $ 106,403 $ 128,320 Accounts receivable, net of allowances of $ 114 in 2022 and $ 262 in 2021 8,377 6,496 Inventories 119,915 87,607 Other current assets 22,959 26,746 Total current assets 257,654 249,169 Property, plant, and equipment, net 22,788 18,650 Deferred income taxes 8,443 1,363 Right of use assets 12,465 15,053 Deferred financing costs, net 282 388 Goodwill 136,253 162,333 Other intangible assets, net 83,592 87,485 Master Settlement Agreement (MSA) escrow deposits 27,980 31,720 Other assets 22,649 35,399 Total assets $ 572,106 $ 601,560 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 8,355 $ 7,361 Accrued liabilities 33,001 32,937 Current portion of long-term debt - - Other current liabilities 20 38 Total current liabilities 41,376 40,336 Notes payable and long-term debt 406,757 414,172 Lease liabilities 10,593 13,336 Total liabilities 458,726 467,844 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 ; 19,801,623 issued shares, 17,485,163 outstanding shares at December 31, 2022 , and 19,690,884 issued shares, 18,395,476 outstanding shares at December 31, 2021 198 197 Common stock, nonvoting, $ 0.01 par value; authorized shares, 10,000,000 ; issued and outstanding shares - 0 - - - Additional paid-in capital 113,242 108,811 Cost of repurchased common stock ( 2,316,460 shares at December 31, 2022 and 1,295,408 shares at December 31, 2021) ( 78,093 ) ( 48,869 ) Accumulated other comprehensive loss ( 2,393 ) ( 195 ) Accumulated earnings 78,691 71,460 Non-controlling interest 1,735 2,312 Total stockholders’ equity 113,380 133,716 Total liabilities and stockholders’ equity $ 572,106 $ 601,560 The accompanying notes are an integral part of the consolidated financial statements. 57 Table of Contents Turning Point Brands, Inc. and Subsidiaries Consolidated Statements of Income for the years ended December 31, 2022, 2021, and 2020 (dollars in thousands except share data) For the year ended December 31, 2022 2021 2020 Net sales $ 415,013 $ 445,471 $ 405,111 Cost of sales 209,475 227,637 215,121 Gross profit 205,538 217,834 189,990 Selling, general, and administrative expenses 130,024 127,513 125,563 Operating income 75,514 90,321 64,427 Interest expense, net 19,524 20,500 13,487 Investment loss (gain) 13,303 6,673 ( 198 ) Goodwill and intangible impairment loss 27,566 - - Gain on extinguishment of debt ( 885 ) ( 2,154 ) - Net periodic benefit cost, excluding service cost - - 989 Income before income taxes 16,006 65,302 50,149 Income tax expense 4,849 14,040 11,957 Consolidated net income 11,157 51,262 38,192 Net loss attributable to non-controlling interest ( 484 ) ( 797 ) - Net income attributable to Turning Point Brands, Inc. $ 11,641 $ 52,059 $ 38,192 Basic income per common share: Net income attributable to Turning Point Brands, Inc. $ 0.65 $ 2.75 $ 1.97 Diluted income per common share: Net income attributable to Turning Point Brands, Inc. $ 0.64 $ 2.52 $ 1.85 Weighted average common shares outstanding: Basic 17,899,794 18,917,570 19,398,474 Diluted 18,055,015 22,381,994 22,937,441 The accompanying notes are an integral part of the consolidated financial statements. 58 Table of Contents Turning Point Brands, Inc. and Subsidiaries Consolidated Statements of Comprehensive Income for the years ended December 31, 2022, 2021, and 2020 (dollars in thousands) For the year ended December 31, 2022 2021 2020 Consolidated net income $ 11,157 $ 51,262 $ 38,192 Other comprehensive income (loss), net of tax Amortization of unrealized pension and postretirement gain (loss), net of tax of $ 0 in 2022 , $ 0 in 2021 , and $ 57 in 2020 - - 1,830 Unrealized (loss) gain on MSA investments, net of tax of $ 860 in 2022 and $ 81 in 2021 and $ 0 in 2020 ( 2,879 ) ( 272 ) - Foreign currency translation, net of tax of $ 0 in 2022, 2021 and 2020 ( 269 ) 260 - Unrealized gain (loss) on derivative instruments, net of tax of $ 273 in 2022 , $ 813 in 2021 and $ 233 in 2020 857 2,634 ( 692 ) ( 2,291 ) 2,622 1,138 Consolidated comprehensive income 8,866 53,884 39,330 Comprehensive loss attributable to non-controlling interest ( 577 ) ( 615 ) - Comprehensive income attributable to Turning Point Brands, Inc. $ 9,443 $ 54,499 $ 39,330 The accompanying notes are an integral part of the consolidated financial statements. 59 Table of Contents Turning Point Brands, Inc. and Subsidiaries Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021, and 2020 (dollars in thousands) For the year ended December 31, 2022 2021 2020 Cash flows from operating activities: Consolidated net income $ 11,157 $ 51,262 $ 38,192 Adjustments to reconcile net income to net cash provided by operating activities: Gain on extinguishment of debt ( 885 ) ( 2,154 ) - Pension settlement and curtailment loss - - 1,188 (Gain) loss on sale of property, plant, and equipment ( 9 ) ( 54 ) 123 Impairment loss - - 149 Loss on goodwill impairment 25,585 - - Loss on intangible asset impairment 1,981 - - Loss on investments 13,570 7,100 - Depreciation expense 3,388 3,105 3,237 Amortization of other intangible assets 1,911 1,907 1,781 Amortization of deferred financing costs 2,576 2,541 2,230 Deferred income taxes ( 6,506 ) ( 1,485 ) 4,742 Stock compensation expense 5,273 7,557 2,554 Noncash lease (income) expense ( 29 ) ( 167 ) 370 Gain on MSA escrow deposits ( 54 ) ( 255 ) - Changes in operating assets and liabilities: Accounts receivable ( 2,103 ) 3,317 ( 2,112 ) Inventories ( 32,653 ) ( 9 ) ( 8,004 ) Other current assets 4,581 ( 134 ) ( 5,373 ) Other assets 420 996 2,076 Accounts payable 1,240 ( 2,367 ) ( 5,064 ) Accrued postretirement liabilities - - ( 54 ) Accrued liabilities and other 830 ( 2,943 ) 7,643 Net cash provided by operating activities $ 30,273 $ 68,217 $ 43,678 Cash flows from investing activities: Capital expenditures $ ( 7,685 ) $ ( 6,156 ) $ ( 6,135 ) Acquisitions, net of cash acquired - ( 16,416 ) ( 39,441 ) Payments for investments ( 1,000 ) ( 16,657 ) ( 19,250 ) Restricted cash, MSA escrow deposits ( 10,170 ) ( 19,664 ) - Proceeds on sale of property, plant and equipment 62 54 3 Net cash used in investing activities $ ( 18,793 ) $ ( 58,839 ) $ ( 64,823 ) 60 Table of Contents Turning Point Brands, Inc. and Subsidiaries Consolidated Statements of Cash Flows (cont.) for the years ended December 31, 2022, 2021, and 2020 (dollars in thousands) For the year ended December 31, 2022 2021 2020 Cash flows from financing activities: Proceeds from Senior Notes $ - $ 250,000 $ - Payments of 2018 first lien term loan - ( 130,000 ) ( 16,000 ) Settlement of interest rate swaps - ( 3,573 ) - Payments of Convertible Senior Notes ( 9,000 ) - - Proceeds from call options 51 - - 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 ) Payment of dividends ( 4,250 ) ( 4,096 ) ( 3,802 ) Payments of financing costs - ( 6,921 ) ( 194 ) Exercise of options 504 2,071 862 Redemption of options ( 155 ) ( 2,111 ) ( 1,523 ) Surrender of restricted stock ( 1,229 ) - - Common stock repurchased ( 29,224 ) ( 38,678 ) ( 10,191 ) Net cash provided by (used in) financing activities $ ( 43,303 ) $ 57,067 $ ( 29,340 ) Net increase (decrease) in cash $ ( 31,823 ) $ 66,445 $ ( 50,485 ) Effect of foreign currency translation on cash $ ( 320 ) $ 191 $ - Cash, beginning of period: Unrestricted 128,320 41,765 95,250 Restricted 15,155 35,074 32,074 Total cash at beginning of period 143,475 76,839 127,324 Cash, end of period: Unrestricted 106,403 128,320 41,765 Restricted 4,929 15,155 35,074 Total cash at end of period $ 111,332 $ 143,475 $ 76,839 Supplemental disclosures of cash flow information: Cash paid during the period for interest $ 18,717 $ 12,539 $ 11,455 Cash paid during the period for income taxes, net $ 13,369 $ 16,063 $ 3,384 Supplemental schedule of noncash financing activities: Issuance of note payable for acquisition $ - $ - $ 10,000 Dividends declared not paid $ 1,354 $ 1,261 $ 1,099 The accompanying notes are an integral part of the consolidated financial statements. 61 Table of Contents Turning Point Brands, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2022, 2021, and 2020 (dollars in thousands) Accumulated Common Additional Cost of Other Accumulated Non- Voting Stock, Paid-In Repurchased Comprehensive Earnings Controlling Shares Voting Capital Common Stock Income (Loss) (Deficit) Interest Total Beginning balance January 1, 2020 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 Unrealized loss on MSA investments, net of tax of $ 860 - $ - $ - $ - $ ( 2,879 ) $ - $ - $ ( 2,879 ) Unrealized gain on derivative instruments, net of tax of $ 273 - - - - 857 - - 857 Foreign currency translation, net of tax of $ 0 - - - - ( 176 ) - ( 93 ) ( 269 ) Stock compensation expense - - 5,273 - - - - 5,273 Exercise of options 35,394 1 503 - - - - 504 Redemption of options - - ( 155 ) - - - - ( 155 ) Issuance of performance based restricted stock units 69,756 - - - - - - - Redemption of performance based restricted stock units - - ( 1,141 ) - - - - ( 1,141 ) Issuance of restricted stock units 5,589 - - - - - - - Redemption of restricted stock units - - ( 88 ) - - - - ( 88 ) Cost of repurchased common stock ( 1,021,052 ) - - ( 29,224 ) - - - ( 29,224 ) Settlement of call options, net of tax of $ 12 - - 39 - - - - 39 Dividends - - - - - ( 4,410 ) - ( 4,410 ) Net income - - - - - 11,641 ( 484 ) 11,157 Ending balance December 31, 2022 17,485,163 $ 198 $ 113,242 $ ( 78,093 ) $ ( 2,393 ) $ 78,691 $ 1,735 $ 113,380 The accompanying notes are an integral part of the consolidated financial statements. 62 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 satisfy evolving consumer preferences. Our three focus segments are led by our core, proprietary brands: Zig-Zag ® and CLIPPER ® 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 ® ) in the NewGen Products segment. The Company’s products are available in more than 217 ,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 U.S. (“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 is 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 a significant portion of Turning Point Brands Canada’s business activities. 63 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 20, “Segment Information”. An additional disaggregation of contract revenue by sales channel can be found within Note 20 as well. Derivative Instruments Foreign Currency Forward Contracts: The Company enters into foreign currency contracts to hedge a portion of its exposure to changes in foreign currency exchange rates on inventory purchase commitments. The Company accounts for its foreign currency 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 100 % of its non-inventory purchases in the denominated invoice currency. Foreign currency contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by market prices on the measurement date. Gains and losses on these foreign currency 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. 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 $ 24.2 million, $ 27.6 million, and $ 22.8 million in 2022, 2021, and 2020, 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 $ 0.6 million, $ 1.1 million, and $ 1.3 million in 2022, 2021, and 2020, 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. 64 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 is tested 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. When testing goodwill for impairment, the Company has the option to first perform qualitative testing to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If the Company chooses not to complete a qualitative assessment for a given reporting unit or if the initial assessment indicates that it is more likely than not that the carrying value of a reporting unit exceeds its estimated fair value, additional quantitative testing is required. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized in the amount by which the carrying value of the reporting unit exceeds its fair value, limited to the amount of goodwill at the reporting unit. The Company determines fair values for each of the reporting units using a combination of the income approach and/or market approach. Under the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. Under the market approach, the Company selects peer sets based on close competitors and reviews the Revenue and EBITDA multiples to determine the fair value. See Note 10, “Goodwill and Other Intangible Assets” for further information on goodwill. Indefinite-lived intangible assets are tested for impairment at least annually; however, these tests are performed more frequently when events or changes in circumstances indicate that the asset may be impaired. Impairment exists when carrying value exceeds fair value. The Company’s fair value methodology is primarily based on the relief from royalty approach. Definite-lived intangible assets are amortized over their estimated useful lives, generally on a straight-line basis for periods ranging primarily from 3.5 to 15 years . The Company continually evaluates the reasonableness of the useful lives of these assets. 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. 65 Table of Contents 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 $ 9.3 million, $ 12.1 million, and $ 5.2 million for the years ended December 31, 2022, 2021, and 2020, 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 through 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. The U.S. 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. 66 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, 2022, the Company had on deposit approximately $ 32.1 million, the fair value of which was approximately $ 28.0 million. At December 31, 2021, the Company had on deposit approximately $ 32.1 million, the fair value of which was approximately $ 31.7 million. The drop in fair value was due to increasing interest rates affecting the fair value of US government securities held in the MSA escrow account. 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 2022, 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. 67 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. Governmental agency obligations held in such account for the periods indicated. As of December 31, 2022 As of December 31, 2021 Gross Gross Estimated Gross Gross Estimated Unrealized Unrealized Fair Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value Cash and cash equivalents $ 1,929 $ - $ - $ 1,929 $ 12,155 $ - $ - $ 12,155 U.S. Governmental agency obligations (unrealized position < 12 months) 10,226 - ( 1,251 ) 8,975 19,918 4 ( 357 ) 19,565 U.S. Governmental agency obligations (unrealized position > 12 months) 19,918 - ( 2,842 ) 17,076 - - - - Total $ 32,073 $ - $ ( 4,093 ) $ 27,980 $ 32,073 $ 4 $ ( 357 ) $ 31,720 As of December 31, 2022 Less than one year $ - One to five years 7,443 Five to ten years 20,746 Greater than ten years 1,955 Total $ 30,144 The following shows the amount of deposits by sales year for the MSA escrow account: Sales Deposits as of December 31, Year 2022 2021 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 82 Total $ 32,073 $ 32,073 68 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, 2022, federal excise taxes are not assessed on certain novel nicotine products, including nicotine pouches, e-cigarettes and related products. As of December 31, 2022, 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. A number of states have begun to enact taxes on other novel nicotine products, such as nicotine pouches, as well. We expect the number of states implementing taxes on new and novel nicotine products to increase. Several states have also implemented additional regulations on new and novel nicotine products, 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, e-liquids, and other nicotine-containing tobacco-derived products 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 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. Subsequently, on April 14, 2022, the FDA Center for Tobacco Products also obtained jurisdiction over non-tobacco nicotine products (“NTN Products”), including synthetic nicotine. That law subjects NTN Products to the same requirements as tobacco-derived products, including not selling these products to persons under 21 years of age, not marketing these products as modified risk tobacco products without authorization, and not distributing free samples of these products. Additionally, NTN Products became subject to premarket filing requirements. Under the new law, manufacturers were required to file a PMTA by May 14, 2022, in order to continue selling products currently on the market. NTN Products subject of a timely-filed PMTA, and not in receipt of a negative action, were allowed to remain on the market until July 13, 2022, at which time these products became subject to enforcement, similar to tobacco-derived products remaining under review. 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. We submitted premarket filings prior to the September 9, 2020 deadline for certain of our tobacco and tobacco-derived products, all of which remain under review. We likewise filed premarket submissions for certain of our NTN Products ahead of the May 14, 2022 deadline. We have continued to supplement these applications with additional information; however, there can be no guarantee that the FDA will accept such amendments or that the applications will meet the standard of “appropriate for the protection 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. Despite these stated enforcement priorities, given the FDA’s limited resources we expect that for a period of time there may be a lack of enforcement, which may adversely impact our ability to compete in the marketplace against those who continue to sell unauthorized products. There can be no guarantee that the FDA will not shift its enforcement priorities or that it will increase in ability to enforce against unauthorized products over time. 69 Table of Contents 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 (collectively, the “Rules”) indicate that any new or additional requirements will not retroactively apply to currently pending PMTAs for tobacco and tobacco-derived products; however, the information outlined in the rule remains important to the FDA’s substantive review of an application. The FDA has yet to indicate how it might apply these Rules to NTN Product filings. 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. 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 generated by lower priority SKUs. 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 May 4, 2022, the FDA proposed 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. On June 21, 2022, the FDA also issued a proposed product standard related to restricting the level of nicotine in traditional cigarettes. These product standards are required to go through the formal rulemaking process where we 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, the PACT Act as part of the Further Consolidated Appropriations Act, 2021, was signed 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 U.S. 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, 2022 and 2021, the Company had bank deposits, including MSA escrow accounts, in excess of federally insured limits of approximately $ 105.2 million and $ 137.2 million, respectively. During 2022 and 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 U.S. 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 2022, 2021, or 2020. 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. 70 Table of Contents 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 2022 and 2021 is as follows: December 31, December 31, 2022 2021 Balance at beginning of period $ 262 $ 150 Additions to allowance account during period 191 237 Deductions of allowance account during period ( 339 ) ( 125 ) Balance at end of period $ 114 $ 262 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 acquired assets are 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. 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. 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 $ 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 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. 71 Table of Contents 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. During 2022, the Company executed various foreign exchange contracts, which met hedge accounting requirements for the purchase of € 28.9 million and sale of € 28.9 million. The Company did no t execute any foreign exchange contracts during 2021. At December 31, 2022, the Company had foreign currency contracts for the purchase of € 18.5 million and sale of € 18.5 million. The foreign currency contracts’ fair value at December 31, 2022, resulted in an asset of $ 1.2 million included in Other current assets and a liability of $ 0.0 million included in Accrued liabilities. At December 31, 2021, the Company had no forward contracts. Losses of $ 0.1 million were reclassified from Accumulated other comprehensive loss to Cost of sales for the years ended December 31, 2022. There were no amounts reclassified from Accumulated other comprehensive loss in 2021 or 2020. 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 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 fixed LIBOR at 2.755 %. The swap agreements met the hedge accounting requirements; thus, any change in fair value was 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. Losses of $ 0.1 million and $ 1.5 million were reclassified into interest expense for the years ended December 31, 2021 and 2020, 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 an 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. 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. Long-Term Debt The Company’s Senior Secured Notes (as defined below) bear interest at a rate of 5.625 % per year. As of December 31, 2022, the fair value approximated $ 226.4 million, with a carrying value of $ 250 million. As of December 31, 2021, the fair value approximated $ 250 million with a carrying value of $ 250 million. The Convertible Senior Notes bear interest at a rate of 2.50 % per year. As of December 31, 2022, the fair value approximated $ 139.2 million, with a carrying value of $ 162.5 million. As of December 31, 2021, the fair value approximated $ 159.8 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, 2022, the Company had foreign currency contracts for the purchase of € 18.5 million and sale of € 18.5 million. The fair value of the foreign exchange contracts are based upon quoted market prices for similar instruments, thus leading to a Level 2 classification within the fair value hierarchy, and resulted in an asset of $ 1.2 million and a liability of $ 0.0 million as of December 31, 2022. At December 31, 2021, the Company had no foreign currency contracts. As there were no open contracts as of December 31, 2021, there is no resulting balance sheet position related to the fair value. 72 Table of Contents Note 6. Inventories The components of inventories are as follows: December 31, December 31, 2022 2021 Raw materials and work in process $ 7,283 $ 6,936 Leaf tobacco 43,468 35,900 Finished goods - Zig-Zag Products 42,279 25,663 Finished goods - Stoker’s Products 9,667 8,959 Finished goods - NewGen Products 15,431 8,591 Other 1,787 1,558 Inventories $ 119,915 $ 87,607 The following represents the inventory valuation allowance roll-forward, for the years ended December 31: 2022 2021 Balance at beginning of period $ ( 7,668 ) $ ( 9,924 ) Charged to cost and expense ( 987 ) ( 2,795 ) Deductions for inventory disposed 4,122 5,051 Balance at end of period $ ( 4,533 ) $ ( 7,668 ) Note 7. Other Current Assets Other current assets consists of: December 31, December 31, 2022 2021 Inventory deposits $ 6,395 $ 12,091 Insurance deposit 3,000 3,000 Prepaid taxes 448 - Other 13,116 11,655 Total $ 22,959 $ 26,746 Note 8. Property, Plant and Equipment, Net Property, plant and equipment consists of: December 31, December 31, 2022 2021 Land $ 22 $ 22 Buildings and improvements 3,096 3,096 Leasehold improvements 5,404 5,374 Machinery and equipment 25,832 19,591 Furniture and fixtures 9,264 9,402 Gross property, plant and equipment 43,618 37,485 Accumulated depreciation ( 20,830 ) ( 18,835 ) Net property, plant and equipment $ 22,788 $ 18,650 73 Table of Contents Note 9. Deferred Financing Costs, Net Deferred financing costs relating to the 2021 Revolving Credit Facility consist of: December 31, December 31, 2022 2021 Deferred financing costs, net of accumulated amortization of $ 200 and $ 94 , respectively $ 282 $ 388 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, 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 Acquisitions - - - - Impairment - - ( 25,585 ) ( 25,585 ) Cumulative translation adjustment ( 495 ) - - ( 495 ) Balance as of December 31, 2022 $ 103,663 $ 32,590 $ - $ 136,253 The Company tests goodwill for impairment annually during the fourth quarter, or more frequently when events or changes in circumstances indicate that the fair value is below its carrying value. The Company performed quantitative testing on its NewGen reporting unit as of December 31, 2022, using a combination of the income approach utilizing Level 3 unobservable inputs and the market approach. Based on the analysis performed the Company concluded that the carrying amount of the reporting unit exceeded its fair value resulting in a non-cash goodwill impairment charge of $ 25.6 million included in Goodwill and intangible impairment loss for the year ended December 31, 2022. Continued regulatory uncertainty in the vape industry, along with revised views of recovery in the vape industry based on a leadership change in the fourth quarter 2022, resulted in the impairment. The Company performed quantitative testing on its two remaining reporting units as part of its annual impairment test and determined that no further goodwill impairments existed. For the quantitative assessment, the Company used a combination of discounted cash flow models (income approach) utilizing Level 3 unobservable inputs and the Guideline Public Company Method (market approach). The Company’s significant assumptions in these analyses include, but are not limited to, projected revenue, the weighted average cost of capital, the terminal growth rate, derived multiples from comparable market transactions and other market data. The Company’s goodwill impairment analysis referenced above used the discounted cash flow model (income approach) utilizing Level 3 unobservable inputs. The Company’s significant assumptions in this analysis included, but were not limited to, future cash flow projections, the weighted average cost of capital, the terminal growth rate, and the tax rate. The Company’s estimates of future cash flows are based on current regulatory and economic climates, recent operating results, and planned business strategies. These estimates could be negatively affected by changes in federal, state, or local regulations or economic downturns. Future cash flow estimates are, by their nature, subjective and actual results may differ materially from the Company’s estimates. If the Company’s ongoing estimates of future cash flows are not met or if discount rates change, the Company may have to record additional impairment charges in future periods. The Company also used the Guideline Public Company Method (market approach). The significant assumptions used in this analysis include, but are not limited to, the derived multiples from comparable market transactions and other market data. The selection of comparable businesses is based on the markets in which the reporting unit operates giving consideration to risk profiles, size, geography, and diversity of products. The Company probability-weighted scenarios for both the income and market approaches and also applied an overall probability-weighting to the income and market approaches to determine the concluded fair value of the reporting unit given the uncertainty in the current economic environment to determine the concluded fair value of the reporting unit. The Company believes the current assumptions and estimates utilized in the income and market approaches are both reasonable and appropriate. 74 Table of Contents The following tables summarize information about the Company’s other intangible assets. Gross carrying amounts of unamortized, indefinite-lived intangible assets are shown below: December 31, 2022 December 31, 2021 Zig-Zag Stoker’s NewGen Total Zig-Zag Stoker’s NewGen Total Unamortized, indefinite life intangible assets: Trade names $ - $ 8,500 $ 9,162 $ 17,662 $ - $ 8,500 $ 10,786 $ 19,286 Formulas 52,217 53 - 52,270 52,217 53 - 52,270 Total $ 52,217 $ 8,553 $ 9,162 $ 69,932 $ 52,217 $ 8,553 $ 10,786 $ 71,556 In the fourth quarter 2022, based on its annual impairment testing the fair value of the trade name in the NewGen segment was less than its carrying amount resulting in an impairment of $ 1.6 million included in Goodwill and intangible impairment loss for the year ended December 31, 2022. The circumstances giving rise to this impairment are consistent with those resulting in the NewGen goodwill impairment discussed above. As a result of such circumstance, as of January 1, 2023 the Company will begin to amortize this trade name over its estimated useful life of 15 years and transferred the asset to amortized intangible assets consistent with its other trade names. Amortized intangible assets consists of: Zig-Zag Stoker’s NewGen December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 December 31, 2022 December 31, 2021 Gross Accumulated Gross Accumulated Gross Accumulated Gross Accumulated Gross Accumulated Gross Accumulated Carrying Amortization Carrying Amortization Carrying Amortization Carrying Amortization Carrying Amortization Carrying Amortization Amortized intangible assets: Customer relationships (useful life of 8 - 10 years) $ - $ - $ - $ - $ - $ - $ - $ - $ 6,936 $ 4,768 $ 6,936 $ 3,939 Trade names (useful life of 15 years) - - - - 2,372 475 2,372 316 7,158 2,137 7,158 1,677 Master distribution agreement (useful life of 15 years) 5,489 915 5,489 549 - - - - - - - - Franchise agreements (useful life of 8 years) - - - - - - - - 780 780 780 325 Non-compete agreements (useful life of 3.5 years) - - - - - - - - 100 100 100 100 Total $ 5,489 $ 915 $ 5,489 $ 549 $ 2,372 $ 475 $ 2,372 $ 316 $ 14,974 $ 7,785 $ 14,974 $ 6,041 In the fourth quarter 2022, the Company recorded an asset impairment charge of $ 0.3 million related to the franchise agreements intangible asset within the NewGen segment included in Goodwill and intangible impairment loss for the year ended December 31, 2022. The Company exited the franchise business and determined that the intangible asset was fully impaired. Annual amortization expense for the next five years is estimated to be approximately $ 2.2 million for 2023 and 2024 and $ 1.6 million for 2025 through 2027, assuming no additional transactions occur that require the amortization of intangible assets. Note 11. Other Assets Other assets consists of: December 31, December 31, 2022 2021 Equity investments $ 13,376 $ 25,649 Debt security investment 7,820 8,000 Other 1,453 1,750 Total $ 22,649 $ 35,399 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. Equity Investments In April 2022, 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 $ 0.1 million and $ 0.0 million in 2022 and 2021, respectively. There were no amounts payable to Docklight Brands, Inc. at December 31, 2022 and 2021. 75 Table of Contents 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 loss of $ 0.1 million and income $ 0.1 million for years ended December 31, 2022 and 2021, respectively. Purchases of inventory from Wild Hempettes was $ 0.4 million and $ 2.1 million in 2022 and 2021, respectively. There were no amounts payable to Wild Hempettes at December 31, 2022 and 2021. In October 2020, the Company invested $ 15.0 million in dosist TM , a global cannabinoid company. 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 U.S., rescheduling cannabis and/or permitting the general cultivation, distribution and possession of cannabis in the U.S.. 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 resulting in a loss of $ 7.1 million which was recorded in investment loss for the year ended December 31, 2021. In the second and fourth quarters of 2022, based on contemplated sales of the assets of dosist TM , the Company deemed its investment was impaired resulting in decreasing of the fair value of the investment to $ 1.6 million and $ 0.0 , respectively. These impairments resulted in a loss of $ 7.9 million which is recorded in investment loss for the year ended December 31, 2022. 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 the Level 3 input to the valuation, the Company has determined that the non-recurring valuation resulted in a Level 3 classification within the fair value hierarchy. There were no purchases of inventory from dosist TM in 2022 or 2021. 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 2022 or 2021. 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. In October 2020, CASH merged with Real Brands, Inc. (“Real Brands”), an over the counter traded shell company. CASH continued business under the Real Brands name. The Company maintained its ownership position in Real Brands subsequent to the merger. In the fourth quarter 2022, as a result of a significant decline in the enterprise value, the Company determined that the fair value of the investment was $ 0.0 and fully impaired the investment. The impairment resulted in a loss of $ 4.3 million which is recorded in investment loss for the year ended December 31, 2022. There were no purchases of inventory from Real Brands in 2022 or 2021. There were no amounts payable to Real Brands at December 31, 2022 and 2021. In December 2018, the Company acquired a minority ownership position in General Wireless Operations, Inc. (d/b/a RadioShack; “RadioShack”) from 5G gaming LLC for $ 0.4 million. There were no amounts payable to General Wireless Operations, Inc. at December 31, 2022 and 2021. Debt Security Investment In July 2021, the Company invested $ 8.0 million in Old Pal Holding Company LLC (“Old Pal”). In July 2022, the Company invested an additional $ 1.0 million in Old Pal. The Company invested in the form of a convertible note which includes additional follow-on investment rights. The accrued interest of $ 0.2 million was rolled into the note in July 2022 resulting in a total investment of $ 9.2 million. Old Pal is a leading brand in the cannabis lifestyle space that operates a non-plant touching licensing model. 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, 2022. 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, 2022. 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. Quarterly, we perform a qualitative assessment to determine if the fair value of the investment could be less than the amortized cost basis. The fourth quarter 2022 qualitative assessment determined that the fair value of the investment could be less than the amortized cost basis and therefore the Company performed a quantitative assessment of the fair value of the investment. The fair value as of December 31, 2022 was determined to be $ 7.9 million based on a Monte Carlo simulation (Level 3). The Company determined that the impairment was a result of credit related factors and, as such, recorded an allowance for credit losses of $ 1.4 million which is included in investment loss for the year ended December 31, 2022. The Company has recorded accrued interest receivable of $ 0.1 million at December 31, 2022, in other current assets on our Consolidated Balance Sheets. 76 Table of Contents Note 12. Accrued Liabilities Accrued liabilities consists of: December 31, December 31, 2022 2021 Accrued payroll and related items $ 7,685 $ 6,974 Customer returns and allowances 7,291 6,497 Taxes payable 1,867 2,053 Lease liabilities 3,102 2,976 Accrued interest 7,277 7,318 Other 5,779 7,119 Total $ 33,001 $ 32,937 Note 13. Notes Payable and Long-Term Debt Notes payable and long-term debt consists of the following in order of preference: December 31, December 31, 2022 2021 Senior Secured Notes $ 250,000 $ 250,000 Convertible Senior Notes 162,500 172,500 Gross notes payable and long-term debt 412,500 422,500 Less deferred finance charges ( 5,743 ) ( 8,328 ) Net notes payable and long-term debt $ 406,757 $ 414,172 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. The Company may redeem the Senior Secured Notes, in whole or in part, at any time prior to February 15, 2023, at the redemption prices (expressed as a percentage of the principal amount to be redeemed) set forth below, plus accrued and unpaid interest, if any, on the Senior Secured Notes to be redeemed to (but not including) the applicable redemption date if redeemed during the period indicated below: On or after February 15, 2023 102.813 % On or after February 15, 2024 101.406 % On or after February 15, 2025 and thereafter 100.000 % 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 22, “ Dividends and Share Repurchases”, 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. 77 Table of Contents 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. 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 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. 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. In the fourth quarter 2022 a wholly owned subsidiary of the Company purchased $ 10.0 million in aggregate principal of its Convertible Senior Notes on the open market for $ 9.0 million that remain in the Treasury and may be redeemed subject to compliance with applicable securities law. The transaction resulted in a $ 0.9 million gain on extinguishment of debt. As of December 31, 2022, $ 162.5 million aggregate principal remains outstanding. The Convertible Senior Notes are convertible into approximately 3,029,699 shares of our voting common stock under certain circumstances prior to maturity at a conversion rate of 18.6443 shares per $ 1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $ 53.64 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, 2022. 78 Table of Contents 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 $ 53.64 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. Note 14. Income Taxes Income tax expense (benefit) for the years ended December 31 consists of the following components: 2022 2021 2020 Current Deferred Total Current Deferred Total Current Deferred Total Federal $ 8,457 $ ( 4,713 ) $ 3,744 $ 11,315 $ ( 583 ) $ 10,732 $ 5,285 $ 3,642 $ 8,927 State and Local 2,815 ( 1,291 ) 1,524 4,210 ( 637 ) 3,573 1,930 1,100 3,030 Foreign 83 ( 502 ) ( 419 ) - ( 265 ) ( 265 ) - - - Total $ 11,355 $ ( 6,506 ) $ 4,849 $ 15,525 $ ( 1,485 ) $ 14,040 $ 7,215 $ 4,742 $ 11,957 Deferred tax assets and liabilities consists of: December 31, December 31, 2022 2021 Assets Liabilities Assets Liabilities Inventory $ 1,384 $ - $ 2,096 $ 2 Property, plant, and equipment - 2,856 - 3,259 Goodwill and other intangible assets - 2,812 - 8,573 Foreign NOL carryforward 561 - 265 - State NOL carryforward 2,483 - 2,421 - Unrealized loss on investments 5,168 - 1,322 - Leases 3,544 3,222 4,150 3,826 Original issue discount 1,604 - 2,720 - Other 8,614 2,963 9,003 2,305 Gross deferred income taxes 23,358 11,853 21,977 17,965 Valuation allowance ( 3,062 ) - ( 2,649 ) - Net deferred income taxes $ 20,296 $ 11,853 $ 19,328 $ 17,965 At December 31, 2022, the Company had state net operating loss (“NOL”) carryforwards for income tax purposes of approximately $ 30.7 million, which expire between 2034 and 2042, $ 24.0 million of which has an indefinite carryforward period. The Company has determined that, at December 31, 2022 and 2021, 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 for state NOL carryforwards of $ 2.4 million and $ 2.6 million has been recorded at December 2022 and 2021, respectively. 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, 2022, 2021, and 2020, 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 2019. 79 Table of Contents Reconciliation of the federal statutory rate and the effective income tax rate for the years ended December 31 is as follows: 2022 2021 2020 Federal statutory rate 21.0 % 21.0 % 21.0 % Foreign rate differential - 0.5 % - 0.1 % 0.0 % State taxes 5.7 % 3.4 % 2.9 % Permanent differences - 0.2 % - 4.1 % - 1.6 % Other 1.7 % 0.7 % 4.7 % Valuation allowance 2.6 % 0.6 % - 3.2 % Effective income tax rate 30.3 % 21.5 % 23.8 % The permanent differences for the year ended December 31, 2022 are not significant in the aggregate. The permanent difference for the year 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 are primarily related to income tax benefits of $ 3.3 million ($ 0.7 million tax effected) 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 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 2022 2021 2020 2022 2021 2020 Service cost $ - $ - $ - $ - $ - $ - Interest cost - - 190 - - - Expected return on plan assets - - ( 322 ) - - - Amortization of (gains) losses - - 72 - - ( 131 ) Settlement and Curtailment loss (gain) - - 1,180 - - - Net periodic benefit cost (income) $ - $ - $ 1,120 $ - $ - $ ( 131 ) 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 2022 and 2021 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 $ 1.5 million for 2022, $ 1.6 million for 2021 and $ 1.6 million for 2020. 80 Table of Contents Note 16. Lease Commitments The Company’s operating leases consist primarily of leased property for manufacturing warehouse, head offices and retail space. The Company’s capital leases consist of 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, 2022 2021 2020 Operating lease cost Cost of sales $ 940 $ 907 $ 908 Selling, general and administrative 1,622 1,907 1,480 Variable lease cost (1) 765 1,182 587 Short-term lease cost 37 48 131 Sublease income - ( 60 ) ( 120 ) Total $ 3,364 $ 3,984 $ 2,986 (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. For the year ended December 31, 2022 2021 2020 Financing lease cost Selling, general and administrative $ 1,138 $ 1,094 $ 922 Total $ 1,138 $ 1,094 $ 922 December 31, December 31, 2022 2021 Assets: Right of use assets - Operating $ 10,967 $ 12,883 Right of use assets - Financing 1,498 2,170 Total lease assets $ 12,465 $ 15,053 Liabilities: Current lease liabilities - Operating (2) $ 2,007 $ 1,950 Current lease liabilities - Financing (2) 1,095 1,026 Long-term lease liabilities - Operating 10,243 12,261 Long-term lease liabilities - Financing 350 1,075 Total lease liabilities $ 13,695 $ 16,312 (2) Reported within accrued liabilities on the balance sheet As of December 31, 2022 2021 Weighted-average remaining lease term - operating leases 6.5 years 7.3 years Weighted-average discount rate - operating leases 5.19 % 5.21 % Weighted-average remaining lease term - financing leases 1.8 years 2.0 years Weighted-average discount rate - financing leases 3.42 % 3.37 % 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. 81 Table of Contents Maturities of operating lease liabilities consisted of the following: December 31, 2022 2023 $ 2,564 2024 2,392 2025 2,121 2026 2,084 2027 2,035 Years thereafter 5,344 Total lease payments $ 16,540 Less: Imputed interest 4,290 Present value of lease liabilities $ 12,250 Maturities of financing lease liabilities consisted of the following: December 31, 2022 2023 $ 1,122 2024 174 2025 129 2026 63 Total lease payments $ 1,488 Less: Imputed interest 43 Present value of lease liabilities $ 1,445 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, 2022, net of forfeitures, there were 103,282 Restricted Stock Units (“RSUs”), 109,119 options and 16,978 Performance Based Restricted Stock Units (“PRSUs”) granted under the 2021 Plan. There are 1,160,673 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. 82 Table of Contents 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: Weighted Weighted Stock Average Average Option Exercise Grant Date Shares Price Fair Value 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 Granted 114,827 30.58 10.34 Exercised ( 40,331 ) 12.49 4.08 Forfeited ( 11,117 ) 32.60 9.35 Outstanding, December 31, 2022 683,214 $ 29.74 $ 9.24 Under the 2006, 2015 and 2021 Plans, the total intrinsic value of options exercised during the years ended December 31, 2022, 2021, and 2020, was $ 0.7 million, $ 7.9 million, and $ 3.7 million, respectively. At December 31, 2022, under the 2006 Plan, the outstanding stock options’ exercise price for 74,379 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 1.50 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, 2022, 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, May 17, March 7, March 20, October 24, March 18, February 18, May 3, 2017 2017 2018 2019 2019 2020 2021 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, 2022 20,000 44,983 58,067 141,784 25,000 93,248 93,448 12,000 Number exercisable at December 31, 2022 20,000 44,983 58,067 141,784 25,000 61,081 39,097 4,080 Exercise price $ 13.00 $ 15.41 $ 21.21 $ 47.58 $ 20.89 $ 14.85 $ 51.75 $ 47.76 Remaining lives 4.12 4.38 5.19 6.22 6.82 7.22 8.14 8.34 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 83 Table of Contents The following table outlines the assumptions for options granted under the 2021 Plan. May 17, March 14, April 29, 2021 2022 2022 Number of options granted 7,500 100,000 14,827 Options outstanding at December 31, 2022 7,500 98,148 14,827 Number exercisable at December 31, 2022 2,550 - - Exercise price $ 45.05 $ 30.46 $ 31.39 Remaining lives 8.38 9.21 9.33 Risk free interest rate 0.84 % 2.10 % 2.92 % Expected volatility 31.50 % 35.33 % 35.33 % Expected life 6.000 6.000 6.000 Dividend yield 0.63 % 1.01 % 0.98 % Fair value at grant date $ 13.23 $ 10.23 $ 11.07 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 $ 1.1 million, $ 2.3 million and $ 1.2 million for the years ended December 31, 2022, 2021 and 2020, respectively. Total unrecognized compensation expense related to options at December 31, 2022, is $ 0.7 million, which will be expensed over 1.77 years. Performance-based restricted stock units 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, 2022, there are 469,733 PRSUs outstanding, 469,733 of which are unvested. The following table outlines the PRSUs granted and outstanding as of December 31, 2022. March 7, March 20, July 19, March 18, December 28, February 18, March 14, 2018 2019 2019 2020 2020 2021 2022 Number of PRSUs granted 96,000 92,500 88,582 94,000 88,169 100,000 49,996 PRSUs outstanding at December 31, 2022 89,600 77,380 21,342 85,810 58,779 91,190 45,632 Fair value as of grant date $ 21.21 $ 47.58 $ 52.15 $ 14.85 $ 46.42 $ 51.75 $ 30.46 Remaining lives - 1.00 - 2.00 1.00 3.00 4.00 The Company recorded compensation expense related to the PRSUs of approximately $ 2.9 million, $ 5.0 million and $ 1.4 million in the consolidated statements of income for the years ended December 31, 2022, 2021 and 2020, respectively, based on the probability of achieving the performance condition. Total unrecognized compensation expense related to these awards at December 31, 2022, is $ 2.5 million, which will be expensed over the service period based on the probability of achieving the performance condition. RSUs are stock units subject to service-based vesting conditions from one to five years . At December 31, 2022, there are 89,696 RSUs outstanding, 89,696 of which are unvested. The following table outlines the RSUs granted and outstanding as of December 31, 2022. March 14, March 14, April 29, April 29, 2022 2022 2022 2022 Number of RSUs granted 50,004 28,726 11,393 4,522 RSUs outstanding at December 31, 2022 45,055 28,726 11,393 4,522 Fair value as of grant date $ 30.46 $ 30.46 $ 31.39 $ 31.39 Remaining lives 4.00 2.00 0.32 4.00 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 $ 1.3 million, $ 0.3 million and $ 0.0 for the years ended December 31, 2022, 2021 and 2020, respectively. Total unrecognized compensation expense related to RSUs at December 31, 2022, is $ 1.6 million, which will be expensed over 3.36 years. 84 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 moo t. The remaining defendants attended a mediation in late November 2022 where a tentative settlement was reached. The impact to the Company is not expected to be material. 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 regulatory 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. 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. We have reached an agreement to arbitrate a claim brought by a former franchisee. This matter 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 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 we have good and valid substantive defenses against the claims and intend on vigorously defending our interests in this matter. Note 19. Earnings 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, 2022 December 31, 2021 December 31, 2020 Per Per Per Income Shares Share Income Shares Share Income Shares Share Basic EPS: Numerator Net income attributable to Turning Point Brands, Inc. $ 11,641 $ 52,059 $ 38,192 Denominator Weighted average 17,899,794 $ 0.65 18,917,570 $ 2.75 19,398,474 $ 1.97 Diluted EPS: Numerator Net income attributable to Turning Point Brands, Inc. $ 11,641 $ 52,059 $ 38,192 Interest expense related to Convertible Senior Notes, net of tax - 4,317 4,188 Diluted consolidated net income $ 11,641 $ 56,376 $ 42,380 Denominator Basic weighted average 17,899,794 18,917,570 19,398,474 Convertible Senior Notes (1) - 3,208,172 3,202,808 Stock options 155,221 256,252 336,159 18,055,015 $ 0.64 22,381,994 $ 2.52 22,937,441 $ 1.85 (1) The effect of 3,208,172 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. 85 Table of Contents Note 20. 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 and (c) CLIPPER reusable lighters. The Stoker’s Products segment (a) manufactures and markets moist snuff and (b) contracts for and markets loose-leaf chewing tobacco products. The NewGen 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 Vapor Beast; 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 U.S. and Canada while products in the NewGen segment are distributed primarily through e-commerce to non-traditional retail outlets and direct to consumers in the U.S. 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 2022, 2021, or 2020. 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. The tables below present financial information about reportable segments: For the year ended December 31, 2022 2021 2020 Net sales Zig-Zag products $ 190,403 $ 176,491 $ 132,812 Stoker’s products 130,826 124,280 115,866 NewGen products 93,784 144,700 156,433 Total $ 415,013 $ 445,471 $ 405,111 Gross profit Zig-Zag products $ 106,576 $ 102,739 $ 78,278 Stoker’s products 71,254 68,084 61,764 NewGen products 27,708 47,011 49,948 Total $ 205,538 $ 217,834 $ 189,990 Operating income (loss) Zig-Zag products $ 73,342 $ 77,109 $ 61,932 Stoker’s products 53,331 52,073 45,042 NewGen products 1,506 2,263 5,801 Corporate unallocated (1)(2) ( 52,665 ) ( 41,124 ) ( 48,348 ) Total $ 75,514 $ 90,321 $ 64,427 Interest expense, net 19,524 20,500 13,487 Investment loss (income) 13,303 6,673 ( 198 ) Goodwill and intangible impariment loss 27,566 - - Gain on extinguishment of debt ( 885 ) ( 2,154 ) - Net periodic benefit (income) cost, excluding service cost - - 989 Income before income taxes $ 16,006 $ 65,302 $ 50,149 Capital expenditures Zig-Zag products $ 4,641 $ 141 $ - Stoker’s products 3,044 5,960 5,815 NewGen products - 55 320 Total $ 7,685 $ 6,156 $ 6,135 Depreciation and amortization Zig-Zag products $ 412 $ 388 $ 182 Stoker’s products 2,972 2,565 2,215 NewGen products 1,915 2,059 2,621 Total $ 5,299 $ 5,012 $ 5,018 (1) Includes corporate costs that are not allocated to any of the three reportable segments. (2) Includes costs related to PMTA of $ 4.6 million, $ 2.6 million and $ 14.4 million in 2022, 2021 and 2020, respectively. 86 Table of Contents December 31, December 31, 2022 2021 Assets Zig-Zag products $ 225,893 $ 227,554 Stoker’s products 151,241 142,334 NewGen products 39,624 72,746 Corporate unallocated (1) 155,348 158,926 Total $ 572,106 $ 601,560 (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, 2022 2021 2020 Business to Business $ 76,462 $ 107,235 $ 107,976 Business to Consumer - Online 16,836 37,069 43,517 Business to Consumer - Corporate store - - 4,751 Other 486 396 189 Total $ 93,784 $ 144,700 $ 156,433 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, 2022 2021 2020 Domestic $ 381,723 $ 415,514 $ 391,705 Foreign 33,290 29,957 13,406 Total $ 415,013 $ 445,471 $ 405,111 87 Table of Contents Note 21. Selected Quarterly Financial Information (Unaudited) The following table presents the quarterly operating results: 1st 2nd 3rd 4th 2022 Net sales $ 100,894 $ 102,925 $ 107,802 $ 103,392 Gross profit 51,794 51,469 52,712 49,563 Net income attributable to Turning Point Brands, Inc. 10,998 5,424 11,536 ( 16,317 ) Basic net income attributable to Turning Point Brands, Inc. per share 0.60 0.30 0.65 ( 0.93 ) Diluted net income attributable to Turning Point Brands, Inc. per share $ 0.55 $ 0.30 $ 0.60 $ ( 0.93 ) (1) 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 (1) The effect of 3,213,796 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 22. Dividends and Share Repurchase The Company currently pays a quarterly cash dividend. 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, 2022, was 1,021,052 shares for a total cost of $ 29.2 million and an average price per share of $ 28.62 . On October 25, 2021, the Board increased the approved share repurchase program by $ 30.7 million and by another $ 24.6 million on February 24, 2022. $ 27.2 million remains available for share repurchases under the program at December 31, 2022. 88 Table of Contents Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None.