Share Incentive Plans

3 Months Ended

Mar. 31, 2022

Note 14. 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 March 31, 2022, net of forfeitures, there were 87,367 Restricted Stock Units (“RSUs”), 95,229 options and 18,229 Performance-Based Restricted Stock Units (“PRSUs”) granted under the 2021 Plan. There are 1,189,227 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.

On February 8, 2006, the Board of Directors of the Company adopted the 2006 Equity Incentive Plan (the “2006 Plan”) of North Atlantic Holding Company, Inc., pursuant to which awards may be granted to employees. The 2006 Plan provides for the granting of nonqualified stock options and restricted stock awards to employees. Upon the adoption of the Company’s 2015 Equity Incentive Plan in connection with its IPO, the Company determined no additional grants would be made under the 2006 Plan. However, all awards issued under the 2006 Plan that have not been previously terminated or forfeited remain outstanding and continue unaffected. There are no shares available for grant under the 2006 Plan.

Stock option activity for the 2006, 2015 and 2021 Plans is summarized below:

	Stock Option Shares			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value
Outstanding, December 31, 2020		711,060		$	19.58	$	6.42

Granted		119,500			50.93		13.58
Exercised		(202,768	)		10.22		6.35
Forfeited		(7,957	)		33.22		9.63
Outstanding, December 31, 2021		619,835			28.51		8.70

Granted		100,000			30.46		10.23
Exercised		(25,166	)		16.14		4.89
Forfeited		(7,217	)		29.53		8.13
Outstanding, March 31, 2022		687,452		$	29.23	$	9.07

Under the 2006, 2015 and 2021 Plans, the total intrinsic value of options exercised during the three months ended March 31, 2022 and 2021, was $0.4 million, and $3.3 million, respectively.

At March 31, 2022, under the 2006 Plan, the exercise price for the 86,377 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 2.19 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 March 31, 2022, under the 2015 and 2021 Plans, the risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. The expected volatility is based on the average long-term historical volatilities of peer companies. We intend to continue to consistently use the same group of publicly traded peer companies to determine expected volatility until sufficient information regarding volatility of our share price becomes available or until the selected companies are no longer suitable for this purpose. Due to our limited trading history, we are using the simplified method presented by SEC Staff Accounting Bulletin No. 107 to calculate expected holding periods, which represent the periods of time for which options granted are expected to be outstanding. We will continue to use this method until we have sufficient historical exercise experience to give us confidence in the reliability of our calculations. The fair values of these options were determined using the Black-Scholes option pricing model.

The following table outlines the assumptions based on the number of options granted under the 2015 Plan.

	February 10, 2017			May 17, 2017			March 7, 2018			March 20, 2019			October 24, 2019			March 18, 2020			February 18, 2021			May 3, 2021
Number of options granted		40,000			93,819			98,100			155,780			25,000			155,000			100,000			12,000
Options outstanding at March 31, 2022		20,000			46,483			58,667			142,284			25,000			94,612			94,529			12,000
Number exercisable at March 31, 2022		20,000			46,483			58,667			142,284			25,000			62,148			39,386			4,080
Exercise price	$	13.00		$	15.41		$	21.21		$	47.58		$	20.89		$	14.85		$	51.75		$	47.76
Remaining lives		4.87			5.13			5.94			6.98			7.57			7.97			8.89			9.10
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

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

	May 17, 2021			March 14, 2022
Number of options granted		7,500			100,000
Options outstanding at March 31, 2022		7,500			100,000
Number exercisable at March 31, 2022		2,550			-
Exercise price	$	45.05		$	30.46
Remaining lives		9.13			9.96
Risk free interest rate		0.84	%		2.10	%
Expected volatility		31.50	%		35.33	%
Expected life		6.000			6.000
Dividend yield		0.63	%		1.01	%
Fair value at grant date	$	13.23		$	10.23

The Company has recorded compensation expense related to the options based on the provisions of ASC 718 under which the fixed portion of such expense is determined as the fair value of the options on the date of grant and amortized over the vesting period. The Company recorded compensation expense related to the options of approximately $0.2 million and $0.3 million for the three months ended March 31, 2022 and 2021, respectively. Total unrecognized compensation expense related to options at March 31, 2022, is $1.5 million, which will be expensed over 2.38 years.

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 March 31, 2022, there are 477,547 PRSUs outstanding, all of which are unvested. The following table outlines the PRSUs granted and outstanding as of March 31, 2022.

	March 7, 2018		March 20, 2019		July 19, 2019		March 18, 2020		December 28, 2020		February 18, 2021		March 14, 2022
Number of PRSUs granted		96,000		92,500		88,582		94,000		88,169		100,000		49,996
PRSUs outstanding at March 31, 2022		89,600		77,380		21,342		86,610		58,779		93,840		49,996
Fair value as of grant date	$	21.21	$	47.58	$	52.15	$	14.85	$	46.42	$	51.75	$	30.46
Remaining lives		0.75		1.75		0.75		2.75		1.75		3.75		4.75

The Company recorded compensation expense related to the PRSUs of approximately $0.8 million and $1.2 million in the consolidated statements of income for the three months ended March 31, 2022 and 2021, respectively, based on the probability of achieving the performance condition. Total unrecognized compensation expense related to these awards at March 31, 2022, is $6.2 million which will be expensed over the service periods based on the probability of achieving the performance condition.

The Company has granted 87,367 RSUs which vest over one to five years. The following table outlines the RSUs granted and outstanding as of March 31, 2022.

	May 4, 2021		July 23, 2021		March 14, 2022		March 14, 2022
Number of RSUs granted		7,478		1,159		50,004		28,726
RSUs outstanding at March 31, 2022		7,478		1,159		50,004		28,726
Fair value as of grant date	$	47.86	$	51.81	$	30.46	$	30.46
Remaining lives		0.09		0.31		4.75		2.75

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 $0.2 million for the three months ended March 31, 2022. Total unrecognized compensation expense related to RSUs at March 31, 2022, is $2.4 million, which will be expensed over 3.96 years.