TPB filing — read by section

Item 1. Financial Statements

Item 1.
 Financial Statements 

 Turning Point Brands, Inc. 

 Consolidated
 
 Balance Sheets

 (dollars in thousands except share data)

 (unaudited)

 September 30, 

 December 31, 

 ASSETS

 2023

 2022

 Current assets:

 Cash

 $

 96,071 

 $

 106,403 

 Accounts receivable, net of allowances of $ 59 in 2023 and $ 114 in 2022 

 10,493 

 8,377 

 Inventories, net

 116,926 

 119,915 

 Other current assets

 23,322 

 22,959 

 Total current assets

 246,812 

 257,654 

 Property, plant, and equipment, net

 24,613 

 22,788 

 Deferred income taxes

 8,190 

 8,443 

 Right of use assets

 12,060 

 12,465 

 Deferred financing costs, net

 203 

 282 

 Goodwill

 136,280 

 136,253 

 Other intangible assets, net

 81,725 

 83,592 

 Master Settlement Agreement (MSA) escrow deposits

 27,534 

 27,980 

 Other assets

 16,526 

 22,649 

 Total assets

 $

 553,943 

 $

 572,106 

 LIABILITIES AND STOCKHOLDERS’ EQUITY

 Current liabilities:

 Accounts payable

 $

 11,237 

 $

 8,355 

 Accrued liabilities

 27,227 

 33,001 

 Current portion of long-term debt

 48,248 

 – 

 Other current liabilities

 6 

 20 

 Total current liabilities

 86,718 

 41,376 

 Notes payable and long-term debt

 316,573 

 406,757 

 Lease liabilities

 10,433 

 10,593 

 Total liabilities

 413,724 

 458,726 

 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 ; 19,912,882 issued shares and 17,596,422 outstanding shares at September 30 , 2023 , and 19,801,623 issued shares and 17,485,163 outstanding shares at December 31 , 2022 

 199 

 198 

 Common stock, nonvoting, $ 0.01 par value; authorized shares, 10,000,000 ; issued and outstanding shares - 0 -

 – 

 – 

 Additional paid-in capital

 117,143 

 113,242 

 Cost of repurchased common stock ( 2,316,460 shares at September 30 , 2023 and December 31 , 2022 ) 

 ( 78,093 

 )

 ( 78,093 

 )

 Accumulated other comprehensive loss

 ( 3,855 

 )

 ( 2,393 

 )

 Accumulated earnings

 103,517 

 78,691 

 Non-controlling interest

 1,308 

 1,735 

 Total stockholders’ equity

 140,219 

 113,380 

 Total liabilities and stockholders’ equity

 $

 553,943 

 $

 572,106 

 The accompanying notes are an integral part of the consolidated financial statements.

 5 

 Table of Contents 

 Turning Point Brands, Inc. 

 Consolidated
 
 Statements of Income 

 (dollars in thousands except share data)

 (unaudited)

 Three Months Ended

 September 30,

 2023

 2022

 Net sales

 $

 101,722 

 $

 107,802 

 Cost of sales

 50,100 

 55,090 

 Gross profit

 51,622 

 52,712 

 Selling, general, and administrative expenses

 31,385 

 32,891 

 Operating income

 20,237 

 19,821 

 Interest expense, net

 3,984 

 4,802 

 Investment loss (gain)

 2,101 

 ( 75 

 )

 Gain on extinguishment of debt

 ( 481 

 ) 

 – 

 Income before income taxes

 14,633 

 15,094 

 Income tax expense

 3,767 

 3,797 

 Consolidated net income

 10,866 

 11,297 

 Net gain (loss) attributable to non-controlling interest

 35 

 ( 239 

 )

 Net income attributable to Turning Point Brands, Inc.

 $

 10,831 

 $

 11,536 

 Basic income per common share:

 Net income attributable to Turning Point Brands, Inc.

 $

 0.62 

 $

 0.65 

 Diluted income per common share:

 Net income attributable to Turning Point Brands, Inc.

 $

 0.58 

 $

 0.60 

 Weighted average common shares outstanding:

 Basic

 17,595,980 

 17,749,294 

 Diluted

 20,098,450 

 21,102,006 

 The accompanying notes are an integral part of the consolidated financial statements.

 6 

 Table of Contents 

 Turning Point Brands, Inc. 

 Consolidated Statements of
 
 Income 

 (dollars in thousands except share data)

 (unaudited)

 Nine
 Months Ended

 September 30,

 2023

 2022

 Net sales

 $

 308,273 

 $

 311,621 

 Cost of sales

 155,556 

 155,646 

 Gross profit

 152,717 

 155,975 

 Selling, general, and administrative expenses

 94,093 

 98,779 

 Operating income

 58,624 

 57,196 

 Interest expense, net

 12,013 

 15,142 

 Investment loss

 10,980 

 6,074 

 Gain on extinguishment of debt

 ( 1,858 

 )

 – 

 Income before income taxes

 37,489 

 35,980 

 Income tax expense

 9,573 

 8,706 

 Consolidated net income

 27,916 

 27,274 

 Net loss attributable to non-controlling interest

 ( 437 

 )

 ( 684 

 )

 Net income attributable to Turning Point Brands, Inc.

 $

 28,353 

 $

 27,958 

 Basic income per common share:

 Net income attributable to Turning Point Brands, Inc.

 $

 1.61 

 $

 1.55 

 Diluted income per common share:

 Net income attributable to Turning Point Brands, Inc.

 $

 1.51 

 $

 1.45 

 Weighted average common shares outstanding:

 Basic

 17,569,493 

 18,021,554 

 Diluted

 20,415,786 

 21,401,485 

 The accompanying notes are an integral part of the consolidated financial statements.

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 Table of Contents 

 Turning Point Brands, Inc. 

 Consolidated Statements of
 Comprehensive Income 

 (dollars in thousands)

 (unaudited)

 Three Months Ended

 September 30,

 2023

 2022

 Consolidated net income

 $

 10,866 

 $

 11,297 

 Other comprehensive income (loss), net of tax

 Unrealized loss on MSA investments, net of tax of $ 168 in 2023 and $ 333 in 2022 

 ( 527 

 )

 ( 1,046 

 )

 Foreign currency translation, net
 of tax of $ 0 in 2023 and 2022 

 270 

 ( 160 

 )

 Unrealized loss on derivative instruments, net of tax of $ 102 in 2023 and $ 67 in 2022 

 ( 320 

 )

 ( 210 

 )

 ( 577 

 )

 ( 1,416 

 )

 Consolidated comprehensive income

 10,289 

 9,881 

 Comprehensive gain (loss) attributable to non-controlling interest

 35 

 ( 295 

 )

 Comprehensive income attributable to Turning Point Brands, Inc.

 $

 10,254 

 $

 10,176 

 Nine
 Months Ended

 September 30,

 2023

 2022

 Consolidated net income

 $

 27,916 

 $

 27,274 

 Other comprehensive income (loss), net of tax

 Unrealized loss on MSA
 investments, net of tax of $ 108 in 2023 and $ 934 in 2022 

 ( 339 

 )

 ( 2,940 

 )

 Foreign currency translation, net
 of tax of $ 0 in 2023 and 2022 

 23 

 ( 122 

 )

 Unrealized loss on
 derivative instruments, net of tax of $ 361 in 2023 and $ 67 in 2022 

 ( 1,136 

 )

 ( 210 

 )

 ( 1,452 

 )

 ( 3,272 

 )

 Consolidated comprehensive income

 26,464 

 24,002 

 Comprehensive loss attributable to non-controlling interest

 ( 437 

 )

 ( 727 

 )

 Comprehensive income attributable to Turning Point Brands, Inc.

 $

 26,901 

 $

 24,729 

 The accompanying notes are an integral part of the consolidated financial statements.

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 Table of Contents 

 Turning Point Brands, Inc. 

 Consolidated Statements of 
 
 Cash Flows 

 (dollars in thousands)

 (unaudited)

 Nine
 Months Ended

 September 30,

 2023

 2022

 Cash flows from operating activities:

 Consolidated net income

 $

 27,916 

 $

 27,274 

 Adjustments to reconcile net income to net cash provided by operating activities:

 Gain on extinguishment of debt

 ( 1,858 

 )

 – 

 Loss (gain) on sale of property, plant, and equipment

 34 

 ( 8 

 )

 Depreciation and other amortization expense

 2,388 

 2,611 

 Amortization of other intangible assets

 2,315 

 1,373 

 Amortization of deferred financing costs

 1,795 

 1,936 

 Deferred income tax expense (benefit)

 694 

 ( 431 

 )

 Stock compensation expense

 4,660 

 4,103 

 Noncash lease income

 ( 48 

 )

 – 

 Loss on investments

 11,162 

 6,244 

 Changes in operating assets and liabilities:

 Accounts receivable

 ( 2,112 

 )

 ( 5,030 

 )

 Inventories

 3,036 

 ( 26,467 

 )

 Other current assets

 ( 1,384 

 )

 1,891 

 Other assets

 ( 5,110 

 )

 1,211 

 Accounts payable

 2,865 

 2,074 

 Accrued liabilities and other

 ( 6,348 

 )

 ( 392 

 )

 Net cash provided by operating activities

 $

 40,005 

 $

 16,389 

 Cash flows from investing activities:

 Capital expenditures

 $

 ( 4,206 

 )

 $

 ( 6,662 

 )

 Payments for investments

 ( 200 

 ) 

 ( 1,000 

 ) 

 Restricted cash, MSA escrow deposits

 – 

 ( 10,169 

 )

 Proceeds on the sale of property, plant and equipment

 3 

 63 

 Net cash used in investing activities

 $

 ( 4,403 

 )

 $

 ( 17,768 

 )

 Cash flows from financing activities:

 Convertible Senior Notes repurchased

 $ 

 ( 41,794 

 ) 

 $ 

 – 

 Proceeds from call options

 114 

 – 

 Payment of dividends

 ( 3,354 

 )

 ( 3,259 

 )

 Exercise of options

 419 

 504 

 Redemption of options

 ( 346 

 ) 

 ( 155 

 ) 

 Redemption of performance restricted stock units

 ( 995 

 ) 

 ( 1,228 

 ) 

 Common stock repurchased

 – 

 ( 27,032 

 )

 Net cash used in financing activities

 $

 ( 45,956 

 )

 $

 ( 31,170 

 )

 Net decrease in cash

 $

 ( 10,354 

 )

 $

 ( 32,549 

 )

 Effect of foreign currency translation on cash

 $

 22 

 $

 ( 324 

 )

 Cash, beginning of period:

 Unrestricted

 $

 106,403 

 $ 

 128,320 

 Restricted

 4,929 

 15,155 

 Total cash at beginning of period

 $ 

 111,332 

 $ 

 143,475 

 Cash, end of period:

 Unrestricted

 $ 

 96,071 

 $ 

 105,672 

 Restricted

 4,929 

 4,930 

 Total cash at end of period

 $

 101,000 

 $

 110,602 

 Supplemental schedule of noncash investing activities:

 Accrued capital expenditures

 $

 66 

 $

 57 

 Accrued consideration for acquisition of investments

 $

 250 

 $

 – 

 Supplemental schedule of noncash financing activities:

 Dividends declared not paid

 $

 1,187 

 $

 1,089 

 The accompanying notes are an integral part of the consolidated financial statements.

 9 

 Table of Contents 

 Turning Point Brands, Inc. 

 Consolidated Statements of
 Changes in
 Stockholders’ Equity 

 For the Three Months Ended September 30, 2023 and 2022

 (dollars in thousands except share data)

 (unaudited)

 Cost of 

 Accumulated 

 Common 

 Additional 

 Repurchased 

 Other 

 Non- 

 Voting 

 Stock, 

 Paid-In 

 Common 

 Comprehensive 

 Accumulated 

 Controlling 

 Shares

 Voting

 Capital

 Stock

 Income (Loss)

 Earnings

 Interest

 Total

 Beginning balance July 1, 2023 

 17,595,579 

 $

 199 

 $

 115,272 

 $

 ( 78,093 

 )

 $

 ( 3,181 

 )

 $

 93,873 

 $

 1,176 

 $

 129,246 

 Unrealized loss on MSA investments, net of tax of $ 168 

 –

 – 

 – 

 – 

 ( 527 

 )

 – 

 – 

 ( 527 

 )

 Unrealized loss on derivative instruments, net of tax of $ 102 

 – 

 – 

 – 

 – 

 ( 320 

 ) 

 – 

 – 

 ( 320 

 ) 

 Foreign currency translation, net of tax of $ 0 

 –

 – 

 – 

 – 

 173 

 – 

 97 

 270 

 Stock compensation expense

 –

 – 

 1,824 

 – 

 – 

 – 

 – 

 1,824 

 Exercise of options

 843 

 – 

 13 

 – 

 – 

 – 

 – 

 13 

 Settlement of call options, net of tax of $ 11 

 – 

 – 

 34 

 – 

 – 

 – 

 – 

 34 

 Dividends

 –

 – 

 – 

 – 

 – 

 ( 1,187 

 )

 – 

 ( 1,187 

 )

 Net income

 –

 – 

 – 

 – 

 – 

 10,831 

 35 

 10,866 

 Ending balance September 30 , 2023 

 17,596,422 

 $

 199 

 $

 117,143 

 $

 ( 78,093 

 )

 $

 ( 3,855 

 )

 $

 103,517 

 $

 1,308 

 $

 140,219 

 Beginning balance July 1, 2022 

 17,890,441 

 $

 198 

 $

 110,563 

 $

 ( 68,287 

 )

 $

 ( 2,064 

 )

 $

 85,641 

 $

 1,880 

 $

 127,931 

 Unrealized loss on MSA investments, net of tax of $ 333 

 – 

 – 

 – 

 – 

 ( 1,046 

 ) 

 – 

 – 

 ( 1,046 

 ) 

 Unrealized loss on derivative instruments, net of tax of $ 67 

 – 

 – 

 – 

 – 

 ( 210 

 ) 

 – 

 – 

 ( 210 

 ) 

 Foreign currency translation, net of tax of $ 0 

 – 

 – 

 – 

 – 

 ( 104 

 ) 

 – 

 ( 56 

 ) 

 ( 160 

 ) 

 Stock compensation expense

 –

 – 

 1,442 

 – 

 – 

 – 

 – 

 1,442 

 Exercise of options

 3,053 

 – 

 29 

 – 

 – 

 – 

 – 

 29 

 Performance restricted stock units issuance 

 835 

 – 

 – 

 – 

 – 

 – 

 – 

 – 

 Cost of repurchased common stock

 ( 307,207 

 )

 – 

 – 

 ( 7,614 

 )

 – 

 – 

 – 

 ( 7,614 

 )

 Dividends

 –

 – 

 – 

 – 

 – 

 ( 1,089 

 )

 – 

 ( 1,089 

 )

 Net income

 –

 – 

 – 

 – 

 – 

 11,536 

 ( 239 

 )

 11,297 

 Ending balance September 30 , 2022 

 17,587,122 

 $

 198 

 $

 112,034 

 $

 ( 75,901 

 )

 $

 ( 3,424 

 )

 $

 96,088 

 $

 1,585 

 $

 130,580 

 The accompanying notes are an integral part of the consolidated financial statements.

 10 

 Table of Contents 

 Turning Point Brands, Inc.

 Consolidated Statements of Changes in Stockholders’ Equity 

 For the Nine Months Ended September 30, 2023 and 2022

 (dollars in thousands except share data) 

 (unaudited)

 Accumulated 

 Common 

 Additional 

 Cost of

 Other 

 Non- 

 Voting 

 Stock, 

 Paid-In 

 Repurchased

 Comprehensive 

 Accumulated 

 Controlling 

 Shares

 Voting

 Capital

 Common Stock

 Income (Loss)

 Earnings

 Interest

 Total

 Beginning balance January 1, 2023

 17,485,163 

 $

 198 

 $

 113,242 

 $

 ( 78,093 

 )

 $

 ( 2,393 

 )

 $

 78,691 

 $

 1,735 

 $

 113,380 

 Unrealized gain on MSA investments, net of tax of $ 108 

 –

 – 

 – 

 – 

 ( 339 

 )

 – 

 – 

 ( 339 

 )

 Unrealized loss on derivative instruments, net of tax of $ 361 

 – 

 – 

 – 

 – 

 ( 1,136 

 ) 

 – 

 – 

 ( 1,136 

 ) 

 Foreign currency translation, net of tax of $ 0 

 –

 – 

 – 

 – 

 13 

 – 

 10 

 23 

 Stock compensation expense

 –

 – 

 4,660 

 – 

 – 

 – 

 – 

 4,660 

 Exercise of options

 30,214 

 – 

 419 

 – 

 – 

 – 

 – 

 419 

 Redemption of options

 ( 15,985 

 ) 

 – 

 ( 346 

 ) 

 – 

 – 

 – 

 – 

 ( 346 

 ) 

 Performance restricted stock units issuance 

 140,324 

 1 

 77 

 – 

 – 

 – 

 – 

 78 

 Performance restricted stock units redeemed 

 ( 43,294 

 ) 

 – 

 ( 995 

 ) 

 – 

 – 

 – 

 – 

 ( 995 

 ) 

 Settlement of call options, net of tax of $ 28 

 – 

 – 

 86 

 – 

 – 

 – 

 – 

 86 

 Dividends

 –

 – 

 – 

 – 

 – 

 ( 3,527 

 )

 – 

 ( 3,527 

 )

 Net income

 –

 – 

 – 

 – 

 – 

 28,353 

 ( 437 

 )

 27,916 

 Ending balance September 30, 2023

 17,596,422 

 $

 199 

 $

 117,143 

 $

 ( 78,093 

 )

 $

 ( 3,855 

 )

 $

 103,517 

 $

 1,308 

 $

 140,219 

 Beginning balance January 1, 2022

 18,395,476 

 $

 197 

 $

 108,811 

 $

 ( 48,869 

 )

 $

 ( 195 

 )

 $

 71,460 

 $

 2,312 

 $

 133,716 

 Unrealized loss on MSA investments, net of tax of $ 934 

 – 

 – 

 – 

 – 

 ( 2,940 

 ) 

 – 

 – 

 ( 2,940 

 ) 

 Unrealized loss on derivative instruments, net of tax of $ 67 

 – 

 – 

 – 

 – 

 ( 210 

 ) 

 – 

 – 

 ( 210 

 ) 

 Foreign currency translation, net of tax of $ 0 

 – 

 – 

 – 

 – 

 ( 79 

 ) 

 – 

 ( 43 ) 

 ( 122 

 ) 

 Stock compensation expense

 –

 – 

 4,103 

 – 

 – 

 – 

 – 

 4,103 

 Exercise of options

 35,394 

 – 

 504 

 – 

 – 

 – 

 – 

 504 

 Redemption of options 

 – 

 – 

 ( 155 

 ) 

 – 

 – 

 – 

 – 

 ( 155 

 ) 

 Performance restricted stock units issuance

 75,345 

 1 

 ( 1 

 ) 

 – 

 – 

 – 

 – 

 – 

 Performance restricted stock units redeemed

 – 

 – 

 ( 1,141 

 ) 

 – 

 – 

 – 

 – 

 ( 1,141 

 ) 

 Redemption of restricted stock units 

 – 

 – 

 ( 87 

 ) 

 – 

 – 

 – 

 – 

 ( 87 

 ) 

 Cost of repurchased common stock

 ( 919,093 

 )

 – 

 – 

 ( 27,032 

 )

 – 

 – 

 – 

 ( 27,032 

 )

 Dividends

 –

 – 

 – 

 – 

 – 

 ( 3,330 

 )

 – 

 ( 3,330 

 )

 Net income

 –

 – 

 – 

 – 

 – 

 27,958 

 ( 684 

 )

 27,274 

 Ending balance September 30, 2022

 17,587,122 

 $

 198 

 $

 112,034 

 $

 ( 75,901 

 )

 $

 ( 3,424 

 )

 $

 96,088 

 $

 1,585 

 $

 130,580 

 The accompanying notes are an integral part of the consolidated financial statements.

 11 

 Table of Contents 

 Turning Point Brands, Inc. 

 Notes to Consolidated Financial
 Statements

 (dollars in thousands, except where designated and per share data)

 Note 1. Description of Business 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. The Company sells a wide range of products to adult consumers consisting of staple products with its iconic brands Zig-Zag ® and Stoker’s ® and its next generation products to fulfill
 evolving consumer preferences. Its segments are led by its core, proprietary brands: Zig-Zag ® and CLIPPER ® in the Zig-Zag Products segment and Stoker’s ® along with Beech-Nut ® and Trophy ® in the Stoker’s Products segment. The

 Company’s products are available in more than 217 ,000 retail outlets in
 North America. The Company operates in three segments: (i) Zig-Zag
 Products, (ii) Stoker’s Products, and (iii) Creative Distribution Solutions (formerly known as NewGen).

 Basis of Presentation

 The accompanying
 unaudited, interim, consolidated financial statements have been prepared in accordance with the accounting practices described in the Company’s audited, consolidated financial statements as of and for the year ended December 31, 2022. In the opinion
 of management, the unaudited, interim, consolidated financial statements included herein contain all adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company for the periods presented. Such
 adjustments, other than nonrecurring adjustments separately disclosed, are of a normal and recurring nature. The operating results for interim periods are not necessarily indicative of results to be expected for a full year or future interim periods.
 The unaudited, interim, consolidated financial statements should be read in conjunction with the Company’s audited, consolidated financial statements and accompanying notes as of and for the year ended December 31, 2022. The accompanying interim,
 consolidated financial statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, accordingly, do not include all the disclosures required by generally accepted accounting
 principles in the United States (“GAAP”) with respect to annual financial statements.

 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 . 

 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 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 to be 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.

 12 

 Table of Contents 

 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. The Company’s 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 16, “Segment Information”. An additional disaggregation of contract revenue by sales
 channel can be found within Note 16 as well. 

 Shipping Costs

 The Company records shipping costs incurred as a component of
 selling, general, and administrative expenses. Shipping costs incurred were approximately $ 5.1 million and $ 5.8 million for the three months
 ending September 30 , 2023 and 2022, respectively. Shipping costs incurred were approximately $ 17.0 million and $ 17.9 million for the nine months ending September 30, 2023 and 2022, respectively. 

 Inventories

 Inventories are stated at the lower of cost or net realizable value 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. 

 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.

 Derivative Instruments

 The Compan y enters into foreign currency forwar d contracts to hedge a portion of its exposure to changes in foreign currency exchange rates on inventory
 purchase commitments. The Company accounts for its forward contracts under the provisions of ASC
 815, Derivatives and Hedging. Under the Company’s policy, the Company may hedge up to 100 % of its
 anticipated purchases of inventory in the denominated invoice currency over a forwa rd period not to exceed twelve months . The
 Company may also, from time to time, hedge up to 100 % of its non-inventory purchases (e.g. production equipment) in the denominated
 invoice currency. Forward contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by market prices on the measurement date, except any hedge ineffectiveness which is recognized currently in
 income. Gains and losses on these forward contracts are reclassified 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. 

 13 

 Table of Contents 

 Risks and Uncertainties

 Manufacturers and sellers of tobacco products are subject to regulation at the federal, state, and local levels. Such regulations include, among
 others, labeling requirements, limitations on advertising, and prohibition of sales to minors. The tobacco industry is likely to continue to be heavily regulated. There can be no assurance as to the ultimate content, timing, or effect of any
 regulation of tobacco products by any federal, state, or local legislative or regulatory body, nor can there be any assurance that any such legislation or regulation would not have a material adverse effect on the Company’s financial position,
 results of operations, or cash flows. In a number of states, targeted flavor bans have been proposed or enacted legislatively or by the administrative process. Depending on the number and location of such bans, that legislation or regulation could
 have a material adverse effect on the Company’s financial position, results of operations or cash flows. 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.

 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 Creative Distribution Solutions 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): Pursuant to the Master Settlement Agreement (the “MSA”) entered into in November 1998 by most states (represented by their attorneys general acting through the National Association of
 Attorneys General) and subsequent states’ statutes, a “cigarette manufacturer” (which is defined to include a manufacturer of make-your-own (“MYO”) cigarette tobacco) has the option of either becoming a signatory to the MSA or opening, funding, and
 maintaining an escrow account to have funds available for certain potential tobacco-related liabilities with sub-accounts on behalf of each settling state. 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 judgement to that state’s plaintiffs in the event of such a final judgement
 against the Company. The Company chose to open and fund an escrow account as its method of compliance. It is the Company’s policy to record amounts on deposit in the escrow account for prior years as a non-current asset. As of September 30, 2023, the Company had on deposit approximately $ 32.1 million, the fair value of which was approximately $ 27.5 
 million. At December 31, 2022, the Company had on deposit approximately $ 32.1 million, the fair value of which was approximately $ 28.0 million. 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. We expect to begin withdrawal of the funds deposited
 beginning in 2024 so long as these deposits do not become subject to litigation under the MSA-related statutes.

 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; any investment in an unrealized loss position will be held until the value is recovered, or until
 maturity.

 14 

 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 September 30, 2023 

 As of December 31, 2022 

 Gross

 Estimated

 Gross

 Estimated

 Unrealized

 Fair

 Unrealized

 Fair

 Cost

 Losses

 Value

 Cost

 Losses

 Value

 Cash and cash equivalents

 $

 1,929 

 $

 – 

 $

 1,929 

 $

 1,929 

 $

 – 

 $

 1,929 

 U.S. Governmental agency obligations (unrealized position < 12 months)

 – 

 – 

 – 

 10,226 

 ( 1,251 

 )

 8,975 

 U.S. Governmental agency obligations (unrealized position > 12 months)

 30,144 

 ( 4,539 

 )

 25,605 

 19,918 

 ( 2,842 

 )

 17,076 

 $

 32,073 

 $

 ( 4,539 

 )

 $

 27,534 

 $

 32,073 

 $

 ( 4,093 

 )

 $

 27,980 

 As of

 September 30,
 2023 

 Less than one year

 $

 2,200 

 One to five years

 10,238 

 Five to ten years

 15,751 

 Greater than ten years

 1,955 

 Total

 $

 30,144 

 The following shows the amount of deposits by sales year for the MSA escrow account:

 Deposits as of

 Sales

 Year 

 September 30,

 2023 

 December 31,

 2022

 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 

 15 

 Table of Contents 

 FDA: On June 22, 2009, the Family Smoking Prevention and
 Tobacco Control Act (the “FSPTCA”) authorized the FDA to immediately regulate the manufacturing, sale, and marketing of four categories
 of tobacco products – cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless tobacco. On August 8, 2016, the FDA deeming regulation became effective. The deeming regulation gave the FDA the authority to also regulate cigars, pipe
 tobacco, e-cigarettes, vaporizers, and e-liquids as “deemed” tobacco products under the FSPTCA. 

 The FDA currently 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 Creative Distribution Solutions 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 and wraps); (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 Premarket Tobacco Application (“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 for certain of our regulated products
 in order to continue selling these products while they remain under review. We have continued to supplement these applications with additional information and have responded to information requests from the FDA; however, there can be no guarantee
 that the FDA will accept such amendments and responses or that the applications will meet the standard of “appropriate for the protection of public health” or “substantially equivalent,” as appropriate. 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. 

 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. 

 16 

 Table of Contents 

 In addition, we currently distribute many third-party manufactured vapor products for which we are completely dependent on the manufacturer
 complying with the premarket filing requirements. There can be no assurance that these third-party products will receive a marketing order or otherwise remain in compliance with relevant legal requirements. While we will take measures to pursue
 regulatory compliance for our own privately-branded or proprietary vape products that compete with these third-party products, there is no assurance that such proprietary products would be as successful in the marketplace or can fully displace
 third-party products that are currently being distributed by us, which could adversely affect our results of operations and liquidity. Additionally, FDA has limited resources,
 which may impact its ability to meaningfully enforce these provisions. This may adversely affect our ability to compete in the marketplace against those who continue to sell unauthorized products; however, regulatory uncertainty in the FDA’s
 enforcement policies may likewise affect operations or sales of our proprietary products if the FDA’s policies or priorities shift . 

 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 had the opportunity to provide comments with regard to the impact such standards would have on our products. These proposed rules remain pending. The FDA’s policy on these and other regulated products may change or expand over time in ways not yet known and may significantly impact our products or our premarket
 filings.

 Prevent All Cigarette Trafficking Act (“PACT Act”):
 On December 27, 2020, President
 Trump signed the Further Consolidated Appropriations Act, 2021, into law. This law included an amendment to the Jenkins Act expanding the definition of “cigarette” to include “electronic nicotine delivery systems,” or ENDS, and required that the
 United States Postal Service (“USPS”) promulgate regulations clarifying the applicability of the prohibition on delivery sales of cigarettes to ENDS. USPS issued its final rule on October 21, 2021. We have received appropriate shipping exemptions
 from carrier services we use to carry the affected freight. Failure to comply with the PACT Act could result in significant financial or criminal penalties. To the extent we are unable to respond to, or comply with, these new requirements, we
 could lose our shipping exemptions, be subject to civil or criminal penalties, or there could be a material adverse effect on our business, results of operations and financial condition. 

 Note 3. Derivative Instruments

 Foreign Currency

 During the nine months ended September 30, 2023 , the Company executed various foreign exchange contracts, which met hedge accounting requirements for the purchase of € 20.1 million and the sale of € 15.2 
 million. 

 At September 30, 2023 , the Company had foreign currency contracts outstanding for the purchase of € 17.1 million and sale of € 15.2 million.
 The foreign currency contracts’ fair value at September 30, 2023 , resulted in an asset of $ 0.1 million included in Other current assets and a liability of $ 0.5 million included in Accrued
 liabilities. 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. 

 Note 4. 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.

 17 

 Table of Contents 

 Long-Term Debt

 The Company’s Senior Secured Notes (as defined in Note 10) bear interest at a rate of 5.625 % per year. As of September 30, 2023 , the fair value approximated $ 226.7 million, with a carrying value of $ 250 million. As of December 31, 2022, the fair value of the Senior Secured
 Notes approximated $ 226.4 million, with a carrying value of $ 250 
 million.

 The Convertible Senior Notes (as defined in Note 10) bear interest at a rate of 2.50 % per year, and the fair value of the Convertible Senior
 Notes without the conversion feature approximated $ 112.4 million, with a carrying value of $ 118.5 million as of September 30,
 2023 . As of December 31, 2022, the fair value of the Convertible Senior Notes without the conversion feature approximated $ 139.2 million, with a carrying value of $ 162.5 million. 

 See Note 10, “Notes Payable and Long-Term Debt”, for further information regarding the Company’s long-term debt.

 Note 5. Inventories

 The components of inventories are as follows:

 September 30, 

 December 31, 

 2023

 2022

 Raw materials and work in process

 $

 5,512 

 $

 7,283 

 Leaf tobacco

 53,018 

 43,468 

 Finished goods - Zig-Zag Products

 40,988 

 42,279 

 Finished goods - Stoker’s Products

 8,729 

 9,667 

 Finished goods - Creative Distribution Solutions

 7,059 

 15,431 

 Other

 1,620 

 1,787 

 Inventories

 $

 116,926 

 $

 119,915 

 The inventory valuation allowance was $ 4.1 
 million and $ 4.5 million as of September 30, 2023 , and December 31, 2022, respectively. 

 Note 6. Other Current Assets

 Other current assets consist of:

 September 30, 

 December 31, 

 2023

 2022

 Inventory deposits

 $

 5,357 

 $

 6,395 

 Insurance deposit

 3,000 

 3,000 

 Prepaid taxes

 1,675 

 448 

 Other

 13,290 

 13,116 

 Total

 $

 23,322 

 $

 22,959 

 18 

 Table of Contents 

 Note 7. Property, Plant, and Equipment

 Property, plant, and equipment consists of:

 September 30, 

 December 31, 

 2023

 2022

 Land

 $

 22 

 $

 22 

 Buildings and improvements

 3,940 

 3,096 

 Leasehold improvements

 5,252 

 5,404 

 Machinery and equipment

 28,837 

 25,832 

 Furniture and fixtures

 8,138 

 9,264 

 Gross property, plant and equipment

 46,189 

 43,618 

 Accumulated depreciation

 ( 21,576 

 )

 ( 20,830 

 )

 Net property, plant and equipment

 $

 24,613 

 $

 22,788 

 Note 8. Other Assets

 Other assets consist of:

 September 30, 

 December 31, 

 2023

 2022

 Equity investments

 $

 2,421 

 $

 13,376 

 Debt security investment 

 7,765 

 7,820 

 Other

 6,340 

 1,453 

 Total

 $

 16,526 

 $

 22,649 

 The Company records its equity investments without a readily determinable fair value, that are not accounted for under the equity method, at cost, with adjustments
 for impairment and observable price changes.

 In July 2021, the Company invested $ 8.0 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 from July 2021 to July 2022 was rolled into the convertible 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 not paid to date 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 Old Pal reaching certain sales thresholds. The weighted average interest rate on the convertible note was 3.0 % for the three and nine months ended September 30, 2023. 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 September 30, 2023. 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 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. In the
 second quarter of 2023, based on a subsequent quantitative assessment of the fair value using a Monte Carlo simulation, the Company determined the fair value to be $ 7.7 million and recorded an additional allowance for credit losses of $ 0.3 
 million which is included in investment loss for the nine months ended September 30, 2023. The Company has recorded accrued interest receivable of $ 0.1 
 million and $ 0.1 million at September 30, 2023 and December 31, 2022, respectively, in other current assets on our Consolidated
 Balance Sheets. 
 
 19 

 Table of Contents 

 In April 2021, the Company invested $ 8.7 million in Docklight Brands, Inc., a
 pioneering consumer products company with celebrated brands including Marley Natural ® cannabis and Marley ™ CBD. The Company has additional follow-on
 investment rights. As part of the investment, the Company has obtained exclusive U.S. distribution rights for Docklight’s Marley ™ CBD topical products. In the first quarter of 2023, based on
 Docklight’s financial results and other operating difficulties, and the decline in the revenue multiples for public companies comparable to Docklight, the Company deemed the investment in Docklight was impaired resulting in the fair value of the Company’s investment decreasing
 to $ 3.8 million resulting in a loss of $ 4.9 million which was recorded for the three months ended March 31, 2023. In the second quarter of 2023, based on a significant change in Docklight’s business model, the
 Company deemed its investment in Docklight fully impaired resulting in an additional loss of $ 3.8 million bringing the fair value of
 the Company’s investment in Docklight to zero . Impairment losses for the Company’s investment in Docklight are recorded in
 Investment loss on our Consolidated Statements of Income. Fair value for both periods was determined using a valuation derived from relevant revenue multiples (Level 3). 
 
 In October 2020, the Company invested $ 2.5 million to acquire a 20 % sta ke in Wild Hempettes, LLC, a
 manufacturer of natural CBD cigarettes designed as the first cigarette-styled CBD pre-roll in the world. 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™ cigarettes to U.S. bricks and mortar retailers under a profit-sharing arrangement. Effective January 2023, the Company terminated its distribution agreement. The Company accounts for its 20 % share of Wild Hempettes profit or loss using the equity method of accounting. In the third quarter of 2023, based on Wild Hempettes
 financial results, the Company deemed its investment in Wild Hempettes to be other-than-temporarily impaired resulting in a $ 2.2 
 million impairment charge included in investment loss for the three and nine months ended September 30, 2023. Fair value for its share of investment in Wild Hempettes was determined using a valuation derived from relevant revenue multiples
 (Level 3). As a result of the analysis, th e Company’s 20 % stake represents a fair value of $ 0.3 million. 

 In October 2020, the Company invested $ 15.0 
 million in dosist ™ (“Dosist”), a global cannabinoid company, with an option to invest an additional $ 15.0 million on pre-determined terms over the twelve month period ending
 October 2021. The Company received a warrant exercisable for preferred shares of Dosist that would automatically be exercised upon the changing of certain federal cannabis laws in the United States, rescheduling cannabis and/or permitting the
 general cultivation, distribution and possession of cannabis. In the fourth quarter 2021, based on the financial results of Dosist and the overall cannabinoid market, the Company deemed its investment was impaired resulting in the fair value
 decreasing to $ 7.9 million. In the second quarter of 2022, based on a contemplated sale of the assets of Dosist, the Company deemed
 its investment was impaired resulting in a further decrease in fair value of the investment to $ 1.6 million. Fair value was
 determined using a valuation derived from the contemplated purchase price (Level 3). This resulted in a loss of $ 6.3 million which
 is recorded in investment loss for the nine months ended September 30, 2022. Subsequent to the second quarter of 2022 impairment, the contemplated sale of assets did not occur and Dosist entered into a new agreement with a new buyer receiving
 the assets of Dosist for the assumption of its liabilities. As such, the Company considered its $ 1.6 million remaining investment
 to be fully impaired as of December 31, 2022 . 

 Note 9. Accrued Liabilities

 Accrued liabilities consist of:

 September 30, 

 December 31, 

 2023

 2022

 Accrued payroll and related items

 $

 6,299 

 $

 7,685 

 Customer returns and allowances

 6,384 

 7,291 

 Taxes payable

 1,259 

 1,867 

 Lease liabilities

 2,809 

 3,102 

 Accrued interest

 2,507 

 7,277 

 Other

 7,969 

 5,779 

 Total

 $

 27,227 

 $

 33,001 

 Note 10. Notes Payable and Long-Term Debt

 Notes payable and long-term debt consists of the following in order of preference:

 September 30, 

 December 31, 

 2023

 2022

 Senior Secured Notes

 $

 250,000 

 $

 250,000 

 Convertible Senior Notes

 118,541 

 162,500 

 Gross notes payable and long-term debt

 368,541 

 412,500 

 Less deferred finance charges

 ( 3,720 

 )

 ( 5,743 

 )

 Less current maturities

 ( 48,248 

 ) 

 – 

 Notes payable and long-term debt

 $

 316,573 

 $

 406,757 

 Senior Secured Notes

 On February 11, 2021, the Company closed a private offering (the “Offering”) of $ 250.0 million aggregate principal amount of its 5.625 % senior secured notes due
 2026 (the “Senior Secured Notes” or the “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 (i) to repay all obligations under and terminate the 2018 First Lien Credit Facility, (ii) to pay related fees, costs, and expenses and (iii) for general corporate purposes.

 20 

 Table of Contents 

 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”) 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 on or after 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 Senior Secured Notes Indenture contains covenants that, among other things, restrict 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 Senior Secured Notes Indenture. The Senior Secured Notes Indenture provides for customary events of default . The Company was in compliance with all covenants as of September 30, 2023.

 The Company incurred debt issuance costs attributable to the issuance of the Senior Secured Notes of $ 6.4 million which are amortized to interest expense using the effective interest method over the expected life of the Senior Secured Notes.

 2021 Revolving Credit Facility

 In connection with the Offering, the Company also entered into a new $ 25.0 
 million senior secured revolving credit facility (the “ 2021 Revolving Credit Facility”) with the lenders party thereto and Barclays Bank PLC, as administrative agent and collateral agent (in such
 capacity, the “Agent”). On May 10, 2023, the Company and certain of its subsidiaries, as guarantors, entered into an amendment (the “Amendment”) to the 2021 Revolving Credit Facility (as amended, the “Amended Revolving Credit Facility”). 
 The Amendment includes certain modifications to the 2021 Revolving Credit Facility relating to the replacement of the London Inter-Bank Offered Rate with a Secured Overnight Financing Rate (“SOFR”) as the interest rate benchmark under the 2021
 Revolving Credit Facility and adjusts certain other provisions to reflect current documentation standards and other agreed modifications.

 Letters of credit are limited to $ 10.0 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 Amended Revolving Credit Facility but does have letters of credit
 of approximately $ 1.4 million outstanding under the facility as of September
 30, 2023. The Amended 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 Amended Revolving Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate or the
 Term SOFR rate, as applicable, 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 Amended Revolving Credit Agreement are guaranteed on a joint and several basis by the Guarantors. The Company’s and
 Guarantors’ obligations under the Amended Revolving Credit Facility are secured on a pari passu basis with the Senior Secured Notes.

 21 

 Table of Contents 

 The Amended Revolving Credit Agreement contains covenants that are substantially the same as the covenants in the Senior Secured Notes Indenture.
 The Amended Revolving Credit Facility also requires the maintenance of a Consolidated Leverage Ratio (as defined in the Amended 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 Amended 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 $ 5.0 million) in the aggregate outstanding exceeds 35 % of the total commitments under the Amended Revolving Credit Facility. The Amended Revolving Credit Agreement provides for customary events of default.
 The Company was in compliance with all covenants as of September 30, 2023 .

 The Company incurred debt issuance costs attributable to the issuance of the Amended
 Revolving Credit Facility of $ 0.5 million which are
 amortized to interest expense using the effective interest method over the expected life of the Amended Revolving Credit Facility. 

 On November 7, 2023, in connection with the entry by a subsidiary of the Company in a new asset-backed revolving credit facility, the Company
 terminated the Amended Revolving Credit Agreement.

 2023 ABL Facility

 On November 7, 2023, TPB Specialty Finance, LLC, a
 wholly-owned subsidiary of the Company (the “ABL Borrower”), entered into a new $ 75.0 million asset-backed revolving credit facility
 (the “2023 ABL Facility”), with the several lenders thereunder, and Barclays Bank Plc, as administrative agent (the “Administrative Agent”) and as collateral agent (the “Collateral Agent”) and First-Citizens Bank & Trust Company as additional
 collateral agent (the “Additional Collateral Agent”). Under the 2023 ABL Facility, the ABL Borrower may draw up to $ 75.0 million under
 Revolving Credit Loans and LILO Loans. The 2023 ABL Facility includes a $ 40.0 million accordion feature. In connection with the 2023 ABL
 Facility, Turning Point Brands contributed certain existing inventory to the ABL Borrower. The 2023 ABL Facility is secured on a first priority basis (subject to customary exceptions) by all assets of the ABL Borrower.

 The 2023 ABL Facility contains customary borrowing
 conditions including a borrowing base equal to the sum of (a) the lesser of (1) 85 % of the lower of (A) the market value (on a
 first in first out basis) of the sum of eligible inventory, plus eligible in-transit inventory of the ABL Borrower and (B) 85 % of the
 cost of the sum of eligible inventory, plus eligible in-transit inventory of the ABL Borrower and (2) 85 % of the net orderly liquidation
 value (“NOLV”) percentage of the lower of (1)(A) or (1)(B); plus (b) 85 % of the face value of all eligible accounts of the ABL Borrower
 minus (c) the amount of all eligible reserves. The 2023 ABL Facility also includes a “last in last out” (“LILO”) borrowing base equal to the sum of (a) the lesser of: (1) 10 % of the lower of (A) the market value (on a first in first out basis) of the sum of eligible inventory, plus eligible in-transit inventory of the ABL Borrower and (B) the cost of the sum
 of eligible inventory, plus eligible in-transit inventory and (2) 10 % of the NOLV percentage of the lower of (1)(A) or (1)(B); plus (b)
 10 % of the face amount of eligible account; minus (c) the amount of all eligible reserves.

 Amounts borrowed under the 2023 ABL Facility are subject to
 an interest rate margin per annum equal to (a) from and after the closing date until the last day of the first full fiscal quarter ended
 after the closing date, (i) 1.25 % per annum, in the case base rate loans, and (ii) 2.25 % per annum, in the case of revolving credit loans that are SOFR Loans, (b)(i) 2.25 %
 per annum, in the case of LILO loans that are base rate loans, and (ii) 3.25 % per annum, in the case of LILO loans that are SOFR loans,
 (c) on the first day of each fiscal quarter, the applicable interest rate margins will be determined from the pricing grid below based upon the historical excess availability for the most recent fiscal quarter ended immediately prior to the
 relevant date, as calculated by the Administrative Agent.

 Level

 Historical Excess Availability

 Applicable Margin

 for SOFR Loans

 Applicable Margin

 for Base Rate Loans

 I

 Greater than or equal to 66.66 %

 1.75 %

 0.75 %

 II

 Less than 66.66 %, but greater than
 or equal to 33.33 %

 2.00 %

 1.00 %

 III

 Less than 33.33 %

 2.25 %

 1.25 %

 The 2023 ABL Facility also requires the Company and its
 restricted subsidiaries to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 as of the end of any four consecutive fiscal quarters on or after the closing date if excess availability shall be less than the greater of (a) 12.5 % of the line cap and (b) $ 9.4 million, at any time and continuing until excess availability is equal to or exceeds the greater of (i) 12.5 % of the line and (ii) $ 9.4 million for thirty ( 30 ) consecutive calendar days; provided that such $ 9.4 
 million level shall automatically increase in proportion to the amount of any increase in the aggregate revolving credit commitments thereunder in connection with any incremental facility.

 The 2023 ABL Facility shall mature on the earlier of (x) November 7, 2027 and (y) the date that is 91 days prior to the maturity date of any material debt of the ABL Borrower or the Company or any of its restricted subsidiaries (subject to customary
 extensions agreed by the lenders thereunder); provided that clause (y) shall not apply to the extent that on any applicable date of determination (on any date prior to the date set forth in clause (y)), (A) the sum of (x) cash that is held in
 escrow for the repayment of such material debt pursuant to arrangements satisfactory to the Administrative Agent, (y) cash that is held in accounts with the Administrative Agent and/or the Additional Collateral Agent, plus (z) excess
 availability, is sufficient to repay such material debt and (B) the ABL Borrower has excess availability of at least $ 15.0 million
 after giving effect to such repayment of material debt, including any borrowings under the commitments in connection therewith.

 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 are senior unsecured obligations of the
 Company.

 In the fourth quarter of 2022, a wholly owned subsidiary of the Company repurchased $ 10.0 million in aggregate principal amount of the Convertible Senior Notes on the open market resulting in a $ 0.9 million gain on extinguishment of debt. Subsequent principal repurchases occurred in the first, second and third quarters of 2023 for $ 13.9 million, $ 15.1 million and $ 15.0 million, respectively, in aggregate principal amounts resulting in gains on extinguishment of debt of $ 0.7 million, $ 0.6 million and $ 0.6 million, respectively. The repurchased notes continue to be held by our subsidiary and may be resold subject to compliance with applicable
 securities law. As of September 30, 2023, $ 118.5 million aggregate principal remains outstanding and held by third parties.

 22 

 Table of Contents 

 The Convertible Senior Notes held by third parties are convertible into approximately 2,216,029 shares of TPB Common Stock under certain circumstances prior to maturity at a conversion rate of 18.6942 shares per $ 1,000 principal amount of the Convertible Senior Notes, which
 represents a conversion price of approximately $ 53.49 per share, subject to adjustment under certain conditions, but will not be adjusted for
 any accrued and unpaid interest. The conversion price is adjusted periodically as a result of dividends paid by the Company in excess of pre-determined thresholds of $ 0.04 per share. 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 September 30, 2023 . 

 The Convertible Senior Notes of $ 118.5 
 million as of September 30, 2023, became current in the third quarter of 2023. As discussed above, on November 7 , 
 2023, a wholly-owned subsidiary of the Company entered into the new 2023 ABL Facility to refinance up to $ 75.0 million of the Convertible Senior notes at maturity . As a result, the Company reclassified $ 70.0 million related to the Convertible Senior
 Notes from Current portion of long-term debt to Notes payable 
 and long-term debt on the Company’s September 30,
 2023 Balance Sheet. Based on current liquidity, free cash flow generation and availability under the 2023 ABL Facility, the Company believes it will have sufficient liquidity to address the maturity of the remaining Convertible Senior Notes. 

 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 $ 53.49 per and a cap price of $ 82.86 per share, and are exercisable when, and if, the Convertible Senior Notes are converted. The Company paid $ 20.53 million for these capped calls at the time they were entered into and charged that amount to additional paid-in capital.

 Note 11. Leases

 The Company’s leases consist primarily of leased property for manufacturing, warehouse, corporate offices and retail space as well as vehicle
 leases. At lease inception, the Company recognizes a lease right of use asset and lease liability calculated as the present value of future minimum lease payments. In general, the Company does not recognize any
 renewal periods within the lease terms as there are no 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 consisted of the following:

 Three Months Ended

 September 30,

 2023

 2022

 Operating lease cost

 Cost of sales

 $

 125 

 $

 240 

 Selling, general and administrative

 496 

 348 

 Variable lease cost (1)

 301 

 235 

 Short-term lease cost

 7 

 6 

 Total

 $

 929 

 $

 829 

 (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. 

 Three Months Ended 

 September 30,

 2023

 2022

 Financing lease cost

 Selling, general and administrative

 $

 397 

 $

 332 

 Total

 $

 397 

 $

 332 

 Nine Months Ended

 September 30,

 2023

 2022

 Operating lease cost

 Cost of sales

 $

 382 

 $

 700 

 Selling, general and administrative 

 1,520 

 1,133 

 Variable lease cost (1) 

 933 

 558 

 Short-term lease cost 

 20 

 31 

 Total 

 $ 

 2,855 

 $ 

 2,422 

 Nine Months Ended

 September 30,

 2023

 2022

 Financing lease cost

 Selling, general and administrative

 $

 1,083 

 $

 920 

 Total

 $

 1,083 

 $

 920 

 23 

 Table of Contents 

 September 30, 

 December 31, 

 2023

 2022

 Assets:

 Right of use assets - Operating 

 $

 10,332 

 $

 10,967 

 Right of use assets - Financing 

 1,728 

 1,498 

 Total lease assets

 $

 12,060 

 $

 12,465 

 Liabilities:

 Current lease liabilities - Operating (2)

 $

 1,717 

 $

 2,007 

 Current lease liabilities - Financing (2)

 1,092 

 1,095 

 Long-term lease liabilities - Operating 

 9,854 

 10,243 

 Long-term lease liabilities - Financing 

 579 

 350 

 Total lease liabilities

 $

 13,242 

 $

 13,695 

 (2) 

 Reported within accrued liabilities on the balance sheets. 

 Note 12. Income Taxes

 The Company’s effective income tax rate for the three and nine months ended September 30, 2023 was 25.7 % and 25.5 %, respectively. The Company’s effective income tax
 rate for the three and nine months ended September 30, 2022 was 25.2 % and 24.2 %, respectively, which includes a discrete tax deduction of $ 0.0 million and
 $ 0.7 million, respectively, relating to stock option exercise s . 

 The Company follows the provisions of ASC 740-10-25, which 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 the Company did not have any uncertain tax positions requiring recognition
 under the provisions of ASC 740-10-25. The Company’s policy is to recognize interest and penalties accrued on uncertain tax positions, if any, as part of interest expense. 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.

 Note 13. 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 September 30, 2023, net of forfeitures, there were 276,484 Restricted Stock Units (“RSUs”), 118,519 options and 29,172 Performance-Based Restricted Stock Units (“PRSUs”) granted under the 2021 Plan. There are 965,877 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 TPB 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.

 24 

 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, 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 

 Granted

 77,519 

 20.71 

 6.45 

 Exercised

 ( 30,214 

 )

 13.87 

 4.37 

 Forfeited

 ( 65,214 

 )

 27.38 

 9.11 

 Outstanding, September 30 , 2023 

 665,305 

 $

 29.67 

 $

 9.14 

 Under the 2006, 2015 and 2021 Plans, the total intrinsic value of options exercised during the nine months ended September 30, 2023 and 2022, was $ 0.2 million, and $ 0.7 million,
 respectively.

 At September 30, 2023, under the 2006 Plan, the exercise price for the 46,824 outstanding options is $ 3.83 per share, all of which are exercisable. The
 weighted average of the remaining lives of the outstanding stock options with an exercise price of $ 3.83 is approximately .85 years. 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 at the date of grant was determined using the Black-Scholes model with the following assumptions: 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 %, 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 September 30, 2023, 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 based on the number of 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 September 30 , 2023 

 20,000 

 39,983 

 51,567 

 125,834 

 25,000 

 80,975 

 90,253 

 12,000 

 Number exercisable at September 30 , 2023 

 20,000 

 39,983 

 51,567 

 125,834 

 25,000 

 80,975 

 63,727 

 8,040 

 Exercise price

 $

 13.00 

 $

 15.41 

 $

 21.21 

 $

 47.58 

 $

 20.89 

 $

 14.85 

 $

 51.75 

 $

 47.76 

 Remaining lives

 3.37 

 3.63 

 4.44 

 5.47 

 6.07 

 6.47 

 7.39 

 7.59 

 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 

 25 

 Table of Contents 

 The following table outlines the assumptions based on the number of options granted under the 2021 Plan.

 May 17,

 March 14,

 April 29,

 May 12 , 

 2021

 2022

 2022

 2023 

 Number of options granted

 7,500 

 100,000 

 14,827 

 77,519 

 Options outstanding at September 30 , 2023 

 7,500 

 73,023 

 14,827 

 77,519 

 Number exercisable at September 30 , 2023 

 5,100 

 24,995 

 5,042 

 58,139 

 Exercise price

 $

 45.05 

 $ 

 30.46 

 $ 

 31.39 

 $ 

 20.71 

 Remaining lives

 7.63 

 8.46 

 8.59 

 9.62 

 Risk free interest rate

 0.84 

 %

 2.10 

 % 

 2.92 

 % 

 3.41 

 % 

 Expected volatility

 31.50 

 %

 35.33 

 % 

 35.33 

 % 

 34.51 

 % 

 Expected life

 6.000 

 6.000 

 6.000 

 5.186 

 Dividend yield

 0.63 

 %

 1.01 

 % 

 0.98 

 % 

 1.61 

 % 

 Fair value at grant date

 $

 13.23 

 $ 

 10.23 

 $ 

 11.07 

 $ 

 6.45 

 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 $ 0.2 million and $ 0.3 
 million for the three months ended September 30, 2023 and 2022, respectively. The Company recorded compensation expense related to the options of approximately $ 0.6 million and $ 0.8 million for the nine months ended September 30, 2023 and
 2022, respectively. Total unrecognized compensation expense related to options at September 30, 2023, is $ 0.3 million, which will be
 expensed over 0.94 year s. 

 PRSUs are restricted stock units subject to both performance-based and service-based
 vesting conditions. The number of shares of TPB 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 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. As of September 30, 2023 , there are 456,922 PRSUs outstanding. The following table outlines the PRSUs granted and outstanding as of September 30, 2023 . 

 March 20,

 March 18,

 December 28,

 February 18,

 March 14,

 May 4, 

 2019

 2020

 2020

 2021

 2022

 2023 

 Number of PRSUs granted

 92,500 

 94,000 

 88,169 

 100,000 

 49,996 

 133,577 

 PRSUs outstanding at September 30 , 2023 

 77,080 

 84,360 

 31,040 

 87,340 

 43,525 

 133,577 

 Fair value as of grant date

 $

 47.58 

 $

 14.85 

 $

 46.42 

 $

 51.75 

 $ 

 30.46 

 $ 

 22.25 

 Remaining lives

 0.25 

 1.25 

 0.25 

 2.25 

 3.25 

 2.50 

 The Company recorded compensation expense related to the PRSUs of approximately $ 0.8 million and $ 0.8 million in the
 consolidated statements of income for the three months ended September 30, 2023 and 2022, respectively, based on the probability of achieving the performance condition. The Company recorded compensation expense related to the PRSUs of approximately
 $ 1.9 million and $ 2.4 
 million in the consolidated statements of income for the nine months ended September 30, 2023 and 2022, respectively, based on the probability of achieving the performance condition. Total unrecognized compensation expense related to these awards
 at September 30, 2023, is $ 4.4 million which will be expensed over the service periods based on the probability of achieving the
 performance conditio n. 

 26 

 Table of Contents 

 The
 Company has granted 228,640 RSUs which are outstanding and vest over one to five years . The following table outlines the RSUs granted and
 outstanding as of September 30, 2023 .

 March 14,

 March 14,

 April 29,

 May 5,

 May 5, 

 May 8, 

 2022

 2022

 2022

 2023

 2023 

 2023 

 Number of RSUs granted

 50,004 

 28,726 

 4,522 

 130,873 

 22,472 

 20,101 

 RSUs outstanding at September 30, 2023

 42,947 

 18,961 

 4,522 

 130,873 

 11,236 

 20,101 

 Fair value as of grant date

 $

 30.46 

 $

 30.46 

 $

 31.39 

 $ 

 22.25 

 $ 

 22.25 

 $ 

 21.77 

 Remaining lives

 3.25 

 1.25 

 3.25 

 2.50 

 0.25 

 0.60 

 The Company has recorded compensation expense related to the RSUs based on the
 provisions of ASC 718 under which the fixed portion of such expense is determined as the fair value of the RSUs on the date of grant and amortized over the vesting period. The Company recorded compensation expense related to the RSUs of
 approximately $ 0.8 million and $ 0.4 
 million for the three months ended September 30, 2023 and 2022. The Company recorded compensation expense related to the RSUs of approximately $ 2.2 
 million and $ 0.9 million for the nine months ended September 30, 2023 and 2022, respectively. Total unrecognized compensation expense
 related to RSUs at September 30, 2023, is $ 3.3 million, which will be expensed over 2.44 years.

 Note 14. Contingencies

 On October 9, 2020, a purported stockholder of Turning Point Brands, Inc. (“TPB” or the “Company”), Paul-Emile Berteau (the “Plaintiff”), filed a complaint in the
 Delaware Court of Chancery (the “Court”) relating to the merger of Standard Diversified, Inc. (“SDI”) with a TPB subsidiary (“Merger Sub”)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 “Action”). 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 (collectively, the “Defendants”). The third count also purports to assert a direct claim against TPB and its Board of Directors based on allegations that TPB’s Amended and Restated
 Bylaws are inconsistent with TPB’s certificate of incorporation. On October 26, 2020, the TPB Board of Directors adopted Amendment No. 1 to TPB’s Amended and Restated Bylaws, which amended the challenged section of the bylaws. On June 30, 2021, the
 Court granted in part and denied in part the Defendants’ motions to dismiss. Among other things, the Court dismissed TPB director H.C. Charles Diao as a defendant in the action and dismissed the third count of the Plaintiff’s complaint as moot.

 The
 Defendants and the Company deny any wrongdoing but following a mediation in November 2022, the Defendants agreed to settle with the Plaintiff to eliminate the distraction, burden, expense, risks and potential delay of further litigation
 involving the asserted claims. The parties entered into a Stipulation and Agreement of Compromise, Settlement and Release, dated and filed with the Court on June 27, 2023 (together with the exhibits thereto, the “Settlement Stipulation”). The
 material terms of the proposed settlement of the Action include, among other things, that the Defendants’ insurers will pay or cause to be paid an aggregate of $ 5,000,000 into an escrow account (the “Settlement Payment”) in exchange for a release of all claims. Plaintiff also intends to seek an award of attorneys’ fees and expenses to
 Plaintiff’s counsel of up to $ 1,000,000 that will be paid out of the Settlement Payment with the remaining funds paid to the Company, and an additional mootness fee to Plaintiff’s counsel of up to $ 400,000 in connection with the third count of the complaint. The proposed settlement is subject to, and conditioned on approval by the Court, and no
 assurances can be given that such Court approval will be obtained. 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 or batteries and may be subject to claims in the future relating to other Creative Distribution Solutions products. The Company is still evaluating these claims and the potential defenses to them and may from time to time settle some such suits in order to
 eliminate distraction, burden, expense, risks and potential delay of further litigation involving the asserted claims. 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.

 27 

 Table of Contents 

 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. While we
 have received some such investigative requests with regard to the marketing of our vapor products, no regulatory bodies have taken action against us with regard to our marketing
 practices . 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 recently won a dispositive motion in an arbitration brought by a former franchisee. We ha ve one remaining former franchisee arbitration relating to claims of breach of contract and negligence allegations, among others. We believe we have good and
 valid substantive defenses against these claims and intend on vigorously defending our interests in this matter. 

 Note 15. Income Per Share

 The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations of net income:

 Three Months Ended September 30,

 2023

 2022

 Per 

 Per 

 Income

 Shares

 Share

 Income

 Shares

 Share

 Basic EPS:

 Numerator

 Net income attributable to Turning Point Brands, Inc.

 $

 10,831 

 $

 11,536 

 Denominator

 Weighted average

 17,595,980 

 $

 0.62 

 17,749,294 

 $

 0.65 

 Diluted EPS:

 Numerator

 Net income attributable to Turning Point Brands, Inc.

 $

 10,831 

 $

 11,536 

 Interest expense related to Convertible Senior Notes, net of tax

 743 

 1,054 

 Diluted net income attributable to Turning Point Brands. Inc.

 $

 11,574 

 $

 12,590 

 Denominator

 Basic weighted average

 17,595,980 

 17,749,294 

 Convertible Senior Notes

 2,311,086 

 3,213,589 

 Stock options and restricted stock units

 191,384 

 139,123 

 20,098,450 

 $

 0.58 

 21,102,006 

 $

 0.60 

 28 

 Table of Contents 

 Nine
 Months Ended September 30,

 2023

 2022

 Per 

 Per 

 Income

 Shares

 Share

 Income

 Shares

 Share

 Basic EPS:

 Numerator

 Net income attributable to Turning Point Brands, Inc.

 $

 28,353 

 $

 27,958 

 Denominator

 Weighted average

 17,569,493 

 $

 1.61 

 18,021,554 

 $

 1.55 

 Diluted EPS:

 Numerator

 Net income attributable to Turning Point Brands, Inc.

 $

 28,353 

 $

 27,958 

 Interest expense related to Convertible Senior Notes

 2,546 

 3,162 

 Diluted net income attributable to Turning Point Brands. Inc.

 $

 30,899 

 $

 31,120 

 Denominator

 Basic weighted average

 17,569,493 

 18,021,554 

 Convertible Senior Notes

 2,637,252 

 3,213,589 

 Stock options and restricted stock units

 209,041 

 166,342 

 20,415,786 

 $

 1.51 

 21,401,485 

 $

 1.45 

 Note 16. 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)
 Creative Distribution Solutions. 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 and other accessories. The Stoker’s
 Products segment (a) manufactures and markets moist snuff and (b) contracts for and markets loose leaf chewing tobacco products. The Creative Distribution Solutions segment (a) markets and distributes liquid vapor products and certain other
 products without tobacco and/or nicotine; (b) distributes a wide assortment of products to non-traditional retail outlets via VaporBeast; and (c) markets and distributes a wide assortment of products to individual consumers via the VaporFi B2C
 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 Creative Distribution Solutions segment are distributed primarily
 through e-commerce to non-traditional retail outlets and direct to consumers in the U.S. Corporate unallocated 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 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.

 29 

 Table of Contents 

 The tables below present financial information about reported segments:

 Three Months Ended

 September 30,

 2023

 2022

 Net sales

 Zig-Zag products

 $

 46,754 

 $

 52,061 

 Stoker’s products

 36,916 

 33,525 

 Total Zig-Zag and Stoker’s products

 $ 

 83,670 

 $ 

 85,586 

 Creative Distribution Solutions

 18,052 

 22,216 

 Total

 $

 101,722 

 $

 107,802 

 Gross profit

 Zig-Zag products

 $

 26,745 

 $

 28,035 

 Stoker’s products

 20,572 

 18,279 

 Total Zig-Zag and Stoker’s products

 $ 

 47,317 

 $ 

 46,314 

 Creative Distribution Solutions

 4,305 

 6,398 

 Total

 $

 51,622 

 $

 52,712 

 Operating income (loss)

 Zig-Zag products

 $

 16,672 

 $

 18,740 

 Stoker’s products

 15,703 

 13,653 

 Corporate unallocated (1)(2) 

 ( 11,678 

 ) 

 ( 12,714 

 ) 

 Total Zig-Zag and Stoker’s products

 $

 20,697 

 $

 19,679 

 Creative Distribution Solutions

 ( 460 

 ) 

 142 

 Total

 $

 20,237 

 $

 19,821 

 Interest expense, net

 3,984 

 4,802 

 Investment loss

 2,101 

 ( 75 

 ) 

 Gain on extinguishment of debt 

 ( 481 

 ) 

 – 

 Income before income taxes

 $

 14,633 

 $

 15,094 

 Capital expenditures

 Zig-Zag products

 $

 3 

 $

 29 

 Stoker’s products

 1,211 

 940 

 Total Zig-Zag and Stoker’s products

 $ 

 1,214 

 $ 

 969 

 Creative Distribution Solutions

 – 

 – 

 Total

 $

 1,214 

 $

 969 

 Depreciation and amortization

 Zig-Zag products

 $

 269 

 $

 124 

 Stoker’s products

 795 

 738 

 Total Zig-Zag and Stoker’s products

 $ 

 1,064 

 $ 

 862 

 Creative Distribution Solutions

 562 

 453 

 Total

 $

 1,626 

 $

 1,315 

 (1) 

 Includes
 corporate costs that are not allocated to any of the three 
 reportable segments. 

 (2) 

 Includes costs related to PMTA of $ 0.3 million in 2023 and $ 1.2 
 million in 2022. 

 30 

 Table of Contents 

 Nine
 Months Ended

 September 30,

 2023

 2022

 Net sales

 Zig-Zag products

 $

 135,363 

 $

 143,959 

 Stoker’s products

 106,634 

 98,816 

 Total Zig-Zag and Stoker’s products

 $ 

 241,997 

 $

 242,775 

 Creative Distribution Solutions

 66,276 

 68,846 

 Total

 $

 308,273 

 $

 311,621 

 Gross profit

 Zig-Zag products

 $

 75,557 

 $

 80,808 

 Stoker’s products

 60,005 

 54,044 

 Total Zig-Zag and Stoker’s products

 $ 

 135,562 

 $

 134,852 

 Creative Distribution Solutions

 17,155 

 21,123 

 Total

 $

 152,717 

 $

 155,975 

 Operating income (loss)

 Zig-Zag products

 $

 47,313 

 $

 55,980 

 Stoker’s products

 45,375 

 40,536 

 Corporate unallocated (1)(2) 

 ( 34,325 

 )

 ( 40,692 

 )

 Total Zig-Zag and Stoker’s products

 $ 

 58,363 

 $ 

 55,824 

 Creative Distribution Solutions

 261 

 1,372 

 Total

 $

 58,624 

 $

 57,196 

 Interest expense, net

 12,013 

 15,142 

 Investment loss

 10,980 

 6,074 

 Gain on extinguishment of debt

 ( 1,858 

 )

 – 

 Income before income taxes

 $

 37,489 

 $

 35,980 

 Capital expenditures

 Zig-Zag products

 $

 1,088 

 $

 4,588 

 Stoker’s products

 3,118 

 2,074 

 Total Zig-Zag and Stoker’s products

 $

 4,206 

 $

 6,662 

 Creative Distribution Solutions

 – 

 – 

 Total

 $

 4,206 

 $

 6,662 

 Depreciation and amortization

 Zig-Zag products

 $

 803 

 $

 309 

 Stoker’s products

 2,210 

 2,275 

 Total Zig-Zag and Stoker’s products

 $ 

 3,013 

 $ 

 2,584 

 Creative Distribution Solutions

 1,690 

 1,400 

 Total

 $

 4,703 

 $

 3,984 

 (1) 

 Includes corporate costs that are not allocated to any of the three reportable segments. 

 (2) 

 Includes costs related to PMTA of $ 1.1 million in 2023 and $ 4.3 million in 2022. 

 31 

 Table of Contents 

 September 30, 

 December 31, 

 2023

 2022

 Assets

 Zig-Zag products

 $

 176,975 

 $

 225,893 

 Stoker’s products

 175,566 

 151,241 

 Corporate unallocated (1) 

 172,294 

 155,348 

 Total Zig-Zag and Stoker’s products 

 $

 524,835 

 $ 

 532,482 

 Creative Distribution Solutions

 29,108 

 39,624 

 Total

 $

 553,943 

 $

 572,106 

 (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 Creative Distribution
 Solutions sales are made business to business and business to consumer, both online and through our corporate retail stores. Creative Distribution Solutions net sales are broken out by sales channel below.

 Creative Distribution 

 Solutions Segment

 Three Months Ended 

 September 30,

 2023

 2022

 Business to Business

 $

 16,089 

 $

 18,226 

 Business to Consumer - Online

 1,912 

 3,884 

 Other

 51 

 106 

 Total

 $

 18,052 

 $

 22,216 

 Creative Distribution 

 Solutions Segment

 Nine
 Months Ended 

 September 30,

 2023

 2022

 Business to Business

 $

 58,620 

 $

 55,024 

 Business to Consumer - Online

 7,247 

 13,453 

 Other

 409 

 369 

 Total

 $

 66,276 

 $

 68,846 

 32 

 Table of Contents 

 Net Sales—Domestic vs. Foreign

 The following table shows a breakdown of consolidated net sales between domestic and foreign customers.

 Three Months Ended 

 September 30,

 2023

 2022

 Domestic

 $

 93,533 

 $

 98,173 

 Foreign

 8,189 

 9,629 

 Total

 $

 101,722 

 $

 107,802 

 Nine
 Months Ended 

 September 30,

 2023

 2022

 Domestic

 $

 285,514 

 $

 287,381 

 Foreign

 22,759 

 24,240 

 Total

 $

 308,273 

 $

 311,621 

 Note 17. Additional Information with Respect to Unrestricted Subsidiary

 Under the terms of the Senior Secured Notes Indenture and Senior Secured Notes, the Company has designated its subsidiaries, South Beach Brands LLC, TPB Beast LLC
 and Intrepid Brands, LLC as “Unrestricted Subsidiaries”. South Beach Brands LLC is a holding company under which our vape business TPB Beast LLC operating as Creative Distribution Solutions sits. The Company is required under the terms of the
 Senior Secured Notes Indenture and the Senior Secured Notes to present additional information that reflects the financial condition and results of operations of the Company and its Restricted Subsidiaries separate from the financial condition and
 results of operations of the Company’s Unrestricted Subsidiaries as of and for the periods presented. This additional information is below.

 Income Statement for the Three Months Ended September 30, 2023 and 2022 (unaudited):

 Three Months Ended September 30 

 2023 

 2022 

 Company and

 Restricted

 Subsidiaries

 Unrestricted

 Subsidiaries

 Consolidated

 Company and

 Restricted

 Subsidiaries

 Unrestricted

 Subsidiaries

 Consolidated 

 Net sales

 $

 83,670 

 $

 18,052 

 $

 101,722 

 $ 

 85,586 

 $ 

 22,216 

 $ 

 107,802 

 Cost of sales

 36,353 

 13,747 

 50,100 

 39,272 

 15,818 

 55,090 

 Gross profit

 47,317 

 4,305 

 51,622 

 46,314 

 6,398 

 52,712 

 Selling, general, and administrative expenses

 26,620 

 4,765 

 31,385 

 26,635 

 6,256 

 32,891 

 Operating income

 20,697 

 ( 460 

 )

 20,237 

 19,679 

 142 

 19,821 

 Interest expense, net

 3,984 

 – 

 3,984 

 4,802 

 – 

 4,802 

 Investment loss

 2,101 

 – 

 2,101 

 ( 75 

 ) 

 – 

 ( 75 

 ) 

 Gain on extinguishment of debt

 ( 481 

 )

 – 

 ( 481 

 )

 – 

 – 

 – 

 Income before income taxes

 15,093 

 ( 460 

 )

 14,633 

 14,952 

 142 

 15,094 

 Income tax expense

 3,885 

 ( 118 

 )

 3,767 

 3,761 

 36 

 3,797 

 Consolidated net income

 11,208 

 ( 342 

 )

 10,866 

 11,191 

 106 

 11,297 

 Net loss attributable to non-controlling interest

 35 

 – 

 35 

 ( 239 

 ) 

 – 

 ( 239 

 ) 

 Net income attributable to Turning Point Brands, Inc.

 $

 11,173 

 $

 ( 342 

 )

 $

 10,831 

 $ 

 11,430 

 $ 

 106 

 $ 

 11,536 

 33 

 Table of Contents 

 Income Statement for the Nine Months Ended September 30, 2023 and 2022 (unaudited):

 Nine Months Ended September 30

 2023 

 2022 

 Company and

 Restricted

 Subsidiaries

 Unrestricted Subsidiaries

 Consolidated

 Company and

 Restricted

 Subsidiaries

 Unrestricted Subsidiaries

 Consolidated

 Net sales

 $

 241,997 

 $

 66,276 

 $

 308,273 

 $

 242,775 

 $

 68,846 

 $

 311,621 

 Cost of sales

 106,435 

 49,121 

 155,556 

 107,923 

 47,723 

 155,646 

 Gross profit

 135,562 

 17,155 

 152,717 

 134,852 

 21,123 

 155,975 

 Selling, general, and administrative expenses

 77,199 

 16,894 

 94,093 

 79,028 

 19,751 

 98,779 

 Operating income

 58,363 

 261 

 58,624 

 55,824 

 1,372 

 57,196 

 Interest expense, net

 12,013 

 – 

 12,013 

 15,142 

 – 

 15,142 

 Investment loss

 10,980 

 – 

 10,980 

 6,074 

 – 

 6,074 

 Gain on extinguishment of debt

 ( 1,858 

 )

 – 

 ( 1,858 

 )

 – 

 – 

 – 

 Income before income taxes

 37,228 

 261 

 37,489 

 34,608 

 1,372 

 35,980 

 Income tax expense

 9,506 

 67 

 9,573 

 8,374 

 332 

 8,706 

 Consolidated net income

 27,722 

 194 

 27,916 

 26,234 

 1,040 

 27,274 

 Net loss attributable to non-controlling interest

 ( 437 

 )

 – 

 ( 437 

 )

 ( 684 

 )

 – 

 ( 684 

 )

 Net income attributable to Turning Point Brands, Inc.

 $

 28,159 

 $

 194 

 $

 28,353 

 $

 26,918 

 $

 1,040 

 $

 27,958 

 34 

 Table of Contents 

 Balance Sheet as of September 30, 2023 (unaudited):

 ASSETS

 Company and

 Restricted

 Subsidiaries

 Unrestricted

 Subsidiaries

 Eliminations

 Consolidated

 Current assets:

 Cash

 $

 92,353 

 $

 3,718 

 $

 – 

 $

 96,071 

 Accounts receivable, net

 10,363 

 130 

 – 

 10,493 

 Inventories

 109,867 

 7,059 

 – 

 116,926 

 Other current assets

 20,417 

 2,905 

 – 

 23,322 

 Total current assets

 233,000 

 13,812 

 – 

 246,812 

 Property, plant, and equipment, net

 24,382 

 231 

 – 

 24,613 

 Deferred income taxes

 8,190 

 – 

 – 

 8,190 

 Right of use assets

 11,922 

 138 

 – 

 12,060 

 Deferred financing costs, net

 203 

 – 

 – 

 203 

 Goodwill

 136,280 

 – 

 – 

 136,280 

 Other intangible assets, net

 66,798 

 14,927 

 – 

 81,725 

 Master Settlement Agreement (MSA) escrow deposits

 27,534 

 – 

 – 

 27,534 

 Other assets

 16,526 

 – 

 – 

 16,526 

 Investment in unrestricted subsidiaries

 49,047 

 – 

 ( 49,047 

 ) 

 – 

 Total assets

 $

 573,882 

 $

 29,108 

 $ 

 ( 49,047 

 ) 

 $

 553,943 

 LIABILITIES AND STOCKHOLDERS’ EQUITY

 Current liabilities:

 Accounts payable

 $ 

 10,305 

 $ 

 932 

 $

 – 

 $ 

 11,237 

 Accrued liabilities

 25,243 

 1,984 

 – 

 27,227 

 Current portion of long-term debt

 48,248 

 – 

 – 

 48,248 

 Other current liabilities

 6 

 – 

 – 

 6 

 Total current liabilities

 83,802 

 2,916 

 – 

 86,718 

 Notes payable and long-term debt

 316,573 

 – 

 – 

 316,573 

 Lease liabilities

 10,363 

 70 

 – 

 10,433 

 Total liabilities

 410,738 

 2,986 

 – 

 413,724 

 Commitments and contingencies

 Stockholders’ equity:

 Total Turning Point Brands Inc. Stockholders’ Equity/Net parent investment in unrestricted subsidiaries

 161,836 

 26,122 

 ( 49,047 

 ) 

 138,911 

 Non-controlling interest

 1,308 

 – 

 – 

 1,308 

 Total stockholders’ equity

 163,144 

 26,122 

 ( 49,047 

 ) 

 140,219 

 Total liabilities and stockholders’ equity

 $

 573,882 

 $

 29,108 

 $

 ( 49,047 

 ) 

 $

 553,943 

 35 

 Table of Contents 

 Balance Sheet as of December 31, 2022:

 ASSETS

 Company and

 Restricted

 Subsidiaries

 Unrestricted

 Subsidiaries

 Eliminations

 Consolidated

 Current assets:

 Cash

 $

 103,990 

 $

 2,413 

 $ 

 – 

 $

 106,403 

 Accounts receivable, net

 7,374 

 1,003 

 – 

 8,377 

 Inventories

 104,883 

 15,032 

 – 

 119,915 

 Other current assets

 18,828 

 4,131 

 – 

 22,959 

 Total current assets

 235,075 

 22,579 

 – 

 257,654 

 Property, plant, and equipment, net

 22,261 

 527 

 – 

 22,788 

 Deferred income taxes

 8,443 

 – 

 – 

 8,443 

 Right of use assets

 12,328 

 137 

 – 

 12,465 

 Deferred financing costs, net

 282 

 – 

 – 

 282 

 Goodwill

 136,253 

 – 

 – 

 136,253 

 Other intangible assets, net

 67,241 

 16,351 

 – 

 83,592 

 Master Settlement Agreement (MSA) escrow deposits

 27,980 

 – 

 – 

 27,980 

 Other assets

 22,619 

 30 

 – 

 22,649 

 Investment in unrestricted subsidiaries

 60,120 

 – 

 ( 60,120 

 ) 

 – 

 Total assets

 $

 592,602 

 $

 39,624 

 $

 ( 60,120 

 ) 

 $

 572,106 

 LIABILITIES AND STOCKHOLDERS’ EQUITY

 Current liabilities:

 Accounts payable

 $

 7,628 

 $

 727 

 $

 – 

 $

 8,355 

 Accrued liabilities

 31,118 

 1,883 

 – 

 33,001 

 Other current liabilities

 20 

 – 

 – 

 20 

 Total current liabilities

 38,766 

 2,610 

 – 

 41,376 

 Notes payable and long-term debt

 406,757 

 – 

 – 

 406,757 

 Lease liabilities

 10,593 

 – 

 – 

 10,593 

 Total liabilities

 456,116 

 2,610 

 – 

 458,726 

 Commitments and contingencies

 Stockholders’ equity:

 Total Turning Point Brands Inc. Stockholders’ Equity/Net parent investment in unrestricted subsidiaries

 134,751 

 37,014 

 ( 60,120 

 ) 

 111,645 

 Non-controlling interest

 1,735 

 – 

 – 

 1,735 

 Total stockholders’ equity

 136,486 

 37,014 

 ( 60,120 

 ) 

 113,380 

 Total liabilities and stockholders’ equity

 $

 592,602 

 $

 39,624 

 $

 ( 60,120 

 ) 

 $

 572,106 

 Note 18. Dividends and Share Repurchases

 A dividend of $ 0.065 per common share
 was paid on October 6, 2023 , to shareholders of record at the close of business on September 15, 2023 .

 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 earnings 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 of Directors. On October 25, 2021, the Board of Directors increased the approved share repurchase
 program by $ 30.7 million and by an additional $ 24.6 
 million on February 24, 2022 , in each case bringing the aggregate approval back to $ 50.0 
 million. $ 27.2 million remains available for share repurchases under the program at September 30, 2023.

 36 

 Table of Contents
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.
Turning Point Brands, Inc. 10-Q

Item 1. Financial Statements
