UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2023

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission file number: 001-37763

TURNING POINT BRANDS, INC.

(Exact name of registrant as specified in its charter)

Delaware	20-0709285
(State or other jurisdiction of Incorporation or organization)	(I.R.S. Employer Identification No.)

5201 Interchange Way, Louisville, KY	40229
(Address of principal executive offices)	(Zip Code)

(502) 778-4421

(Registrant’s telephone number, including area code)

Former name, former address and former fiscal year, if changed since last report: not applicable

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value	TPB	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☑    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  ☑    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☑
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐    No  ☑

At April 24, 2023, there were 17,585,529 shares outstanding of the registrant’s voting common stock, par value $0.01 per share.

TURNING POINT BRANDS, INC.

TABLE OF CONTENTS

			Page No.
PART I—FINANCIAL INFORMATION
	ITEM 1	Financial Statements (Unaudited)
		Consolidated Balance Sheets as of March 31, 2023, and December 31, 2022	5
		Consolidated Statements of Income for the three months ended March 31, 2023 and 2022	6
		Consolidated Statements of Comprehensive Income for the three months ended March 31, 2023 and 2022	7
		Consolidated Statements of Cash Flows for the three months ended March 31, 2023 and 2022	8
		Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2023 and 2022	9
		Notes to Consolidated Financial Statements	10
	ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
	ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	40
	ITEM 4	Controls and Procedures	41
PART II—OTHER INFORMATION
	ITEM 1	Legal Proceedings	42
	ITEM 1A	Risk Factors	42
	ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	42
	ITEM 3	Defaults Upon Senior Securities	42
	ITEM 4	Mine Safety Disclosures	42
	ITEM 5	Other Information	42
	ITEM 6	Exhibits	43
	Signatures		44

2

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements may generally be identified by the use of words such as “anticipate,” “believe,” “expect,” “intend,” “plan,” and “will” or, in each case, their negative, or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. By their nature, forward-looking statements involve risks and uncertainties because they relate to events, and depend on circumstances, that may or may not occur in the future. As a result, actual events may differ materially from those expressed in, or suggested by, the forward-looking statements. Any forward-looking statement made by Turning Point Brands, Inc. (“TPB”), in this Quarterly Report on Form 10-Q speaks only as of the date hereof. New risks and uncertainties come up from time to time, and it is impossible for TPB to predict these events or how they may affect it. TPB has no obligation, and does not intend, to update any forward-looking statements after the date hereof, except as required by federal securities laws. Factors that could cause these differences include, but are not limited to:

● declining sales of tobacco products, and expected continuing decline of sales, in the tobacco industry overall;

● our dependence on a small number of third-party suppliers and producers;

● the possibility that we will be unable to identify or contract with new suppliers or producers in the event of a supply or product disruption, as well as other supply chain concerns, including delays in product shipments and increases in freight cost;

● the possibility that our licenses to use certain brands or trademarks will be terminated, challenged or restricted;

● failure to maintain consumer brand recognition and loyalty of our customers;

● our reliance on relationships with several large retailers and national chains for distribution of our products;

● intense competition and our ability to compete effectively;

● competition from illicit sources and the damage caused by illicit products to brand equity;

● contamination of our tobacco supply or products;

● uncertainty and continued evolution of the markets for our Creative Distribution Solutions products;

● complications with the design or implementation of our new enterprise resource planning system could adversely impact our business and operations;

● substantial and increasing U.S. regulation;

● regulation or marketing denials of our products by the U.S. Food and Drug Administration, which has broad regulatory powers;

● many of our products contain nicotine, which is considered to be a highly addictive substance;

● requirement to maintain compliance with master settlement agreement escrow account;

● possible significant increases in federal, state and local municipal tobacco- and vapor-related taxes;

● our products are subject to developing and unpredictable regulation, such as court actions that impact obligations;

● increase in state and local regulation of our Creative Distribution Solutions products has been proposed or enacted;

● increase in tax of our Creative Distribution Solutions products could adversely affect our business;

● sensitivity of end-customers to increased sales taxes and economic conditions including significant increases in the rate of inflation and other declines in purchasing power;

● uncertainty surrounding FDA compliance policy;

● possible increasing international control and regulation;

● failure to comply with environmental, health and safety regulations;

● imposition of significant tariffs on imports into the U.S.;

● the scientific community’s lack of information regarding the long-term health effects of certain substances contained in some of our products;

● significant product liability litigation;

● our amount of indebtedness;

● the terms of our indebtedness, which may restrict our current and future operations;

● our ability to comply with required disclosure requirements;

● identification of material weaknesses in our internal control over financial reporting, which, if not remediated appropriately or timely, could result in loss of investor confidence and adversely impact our stock price;

● our certificate of incorporation and bylaws, as well as Delaware law and certain regulations, could discourage or prohibit acquisition bids or merger proposals, which may adversely affect the market price of our common stock;

● our certificate of incorporation limits the ownership of our common stock by individuals and entities that are Restricted Investors. These restrictions may affect the liquidity of our common stock and may result in Restricted Investors (as defined in our Certificate of Incorporation) being required to sell or redeem their shares at a loss or relinquish their voting, dividend and distribution rights;

● future sales of our common stock in the public market could reduce our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us;

3

● we may issue preferred stock whose terms could adversely affect the voting power or value of our common stock;

● our business may be damaged by events outside of our suppliers’ control, such as the impact of epidemics (e.g., coronavirus), political upheavals, or natural disasters;

● adverse impact of climate change;

● our reliance on information technology;

● cybersecurity and privacy breaches;

● failure to manage our growth;

● failure to successfully integrate our acquisitions or otherwise be unable to benefit from pursuing acquisitions;

● fluctuations in our results;

● exchange rate fluctuations;

● adverse U.S. and global economic conditions;

● departure of key management personnel or our inability to attract and retain talent;

● infringement on or misappropriation of our intellectual property;

● third-party claims that we infringe on their intellectual property; and

● failure to meet expectations relating to environmental, social and governance factors.

4

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Turning Point Brands, Inc.

Consolidated Balance Sheets

(dollars in thousands except share data)

	(unaudited)
	March 31,			December 31,
ASSETS	2023			2022
Current assets:
Cash	$	104,801		$	106,403
Accounts receivable, net of allowances of $101 in 2023 and $114 in 2022		8,584			8,377
Inventories		113,738			119,915
Other current assets		19,961			22,959
Total current assets		247,084			257,654
Property, plant, and equipment, net		24,364			22,788
Deferred income taxes		8,069			8,443
Right of use assets		11,722			12,465
Deferred financing costs, net		256			282
Goodwill		136,253			136,253
Other intangible assets, net		82,821			83,592
Master Settlement Agreement (MSA) escrow deposits		28,710			27,980
Other assets		20,647			22,649
Total assets	$	559,926		$	572,106
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	10,390		$	8,355
Accrued liabilities		25,932			33,001
Other current liabilities		20			20
Total current liabilities		36,342			41,376
Notes payable and long-term debt		393,578			406,757
Lease liabilities		10,072			10,593
Total liabilities		439,992			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; 19,901,989 issued shares and 17,585,529 outstanding shares at March 31, 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		113,477			113,242
Cost of repurchased common stock (2,316,460 shares at March 31, 2023 and December 31, 2022)		(78,093	)		(78,093	)
Accumulated other comprehensive loss		(2,234	)		(2,393	)
Accumulated earnings		85,133			78,691
Non-controlling interest		1,452			1,735
Total stockholders’ equity		119,934			113,380
Total liabilities and stockholders’ equity	$	559,926		$	572,106

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

5

Turning Point Brands, Inc.

Consolidated Statements of Income

(dollars in thousands except share data)

(unaudited)

	Three Months Ended March 31,
	2023			2022
Net sales	$	100,956		$	100,894
Cost of sales		52,339			49,100
Gross profit		48,617			51,794
Selling, general, and administrative expenses		30,775			32,565
Operating income		17,842			19,229
Interest expense, net		4,010			5,196
Investment loss (gain)		4,799			(78	)
Gain on extinguishment of debt		(777	)		-
Income before income taxes		9,810			14,111
Income tax expense		2,468			3,340
Consolidated net income		7,342			10,771
Net loss attributable to non-controlling interest		(255	)		(227	)
Net income attributable to Turning Point Brands, Inc.	$	7,597		$	10,998
Basic income per common share:
Net income attributable to Turning Point Brands, Inc.	$	0.43		$	0.60
Diluted income per common share:
Net income attributable to Turning Point Brands, Inc.	$	0.41		$	0.55
Weighted average common shares outstanding:
Basic		17,531,414			18,257,695
Diluted		20,669,152			21,749,510

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

6

Turning Point Brands, Inc.

Consolidated Statements of Comprehensive Income

(dollars in thousands)

(unaudited)

	Three Months Ended March 31,
	2023			2022
Consolidated net income	$	7,342		$	10,771
Other comprehensive income (loss), net of tax
Unrealized gain (loss) on MSA investments, net of tax of $176 in 2023 and $357 in 2022		553			(1,126	)
Foreign currency translation, net of tax of $0 in 2023 and 2022		(78	)		(7	)
Unrealized loss on derivative instruments, net of tax of $109 in 2023 and $0 in 2022		(344	)		-
		131			(1,133	)
Consolidated comprehensive income		7,473			9,638
Comprehensive loss attributable to non-controlling interest		(255	)		(229	)
Comprehensive income attributable to Turning Point Brands, Inc.	$	7,728		$	9,867

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

7

Turning Point Brands, Inc.

Consolidated Statements of Cash Flows

(dollars in thousands)

(unaudited)

	Three Months Ended March 31,
	2023			2022
Cash flows from operating activities:
Consolidated net income	$	7,342		$	10,771
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on extinguishment of debt		(777	)		-
(Gain) loss on sale of property, plant, and equipment		(6	)		1
Depreciation expense		776			871
Amortization of other intangible assets		771			463
Amortization of deferred financing costs		626			645
Deferred income tax expense (benefit)		299			(34	)
Stock compensation expense		743			1,159
Noncash lease income		(14	)		(5	)
Loss (gain) on investments		4,897			(14	)
Changes in operating assets and liabilities:
Accounts receivable		(216	)		(2,958	)
Inventories		6,173			(18,258	)
Other current assets		2,639			1,081
Other assets		(2,895	)		382
Accounts payable		2,051			22,101
Accrued liabilities and other		(7,025	)		(3,165	)
Net cash provided by operating activities	$	15,384		$	13,040
Cash flows from investing activities:
Capital expenditures	$	(2,435	)	$	(2,787	)
Restricted cash, MSA escrow deposits		-			(8,468	)
Proceeds on the sale of property, plant and equipment		3			1
Net cash used in investing activities	$	(2,432	)	$	(11,254	)
Cash flows from financing activities:
Repurchased Convertible Senior Notes		(13,002	)		-
Proceeds from call options		33			-
Payment of dividends		(1,052	)		(1,022	)
Exercise of options		357			245
Redemption of performance restricted stock units		(889	)		(1,141	)
Common stock repurchased		-			(10,622	)
Net cash used in financing activities	$	(14,553	)	$	(12,540	)
Net decrease in cash	$	(1,601	)	$	(10,754	)
Effect of foreign currency translation on cash	$	(1	)	$	(3	)
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		104,801			126,045
Restricted		4,929			6,673
Total cash at end of period	$	109,730		$	132,718
Supplemental schedule of noncash investing activities:
Accrued capital expenditures	$	7		$	187
Supplemental schedule of noncash financing activities:
Dividends declared not paid	$	1,155		$	1,131

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

8

Turning Point Brands, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

For the Three Months Ended March 31, 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 loss on MSA investments, net of tax of $176		-			-		-			-			553			-			-			553
Unrealized loss on derivative instruments, net of tax of $109		-			-		-			-			(344	)		-			-			(344	)
Foreign currency translation, net of tax of $0		-			-		-			-			(50	)		-			(28	)		(78	)
Stock compensation expense		-			-		743			-			-			-			-			743
Exercise of options		24,955			-		357			-			-			-			-			357
Performance restricted stock units issuance		114,274			1		(1	)		-			-			-			-			-
Performance restricted stock units redeemed		(38,863	)		-		(889	)		-			-			-			-			(889	)
Cost of repurchased common stock		-			-		-			-			-			-			-			-
Settlement of call options, net of tax of $ 8		-			-		25			-			-			-			-			25
Dividends		-			-		-			-			-			(1,155	)		-			(1,155	)
Net income		-			-		-			-			-			7,597			(255	)		7,342
Ending balance March 31, 2023		17,585,529		$	199	$	113,477		$	(78,093	)	$	(2,234	)	$	85,133		$	1,452		$	119,934
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 $357		-			-		-			-			(1,126	)		-			-			(1,126	)
Foreign currency translation, net of tax of $0		-			-		-			-			(5	)		-			(2	)		(7	)
Stock compensation expense		-			-		1,159			-			-			-			-			1,159
Exercise of options		25,166			-		245			-			-			-			-			245
Performance restricted stock units issuance		103,843			1		(1	)		-			-			-			-			-
Performance restricted stock units redeemed		(34,087	)		-		(1,141	)		-			-			-			-			(1,141	)
Cost of repurchased common stock		(310,224	)		-		-			(10,622	)		-			-			-			(10,622	)
Dividends		-			-		-			-			-			(1,131	)		-			(1,131	)
Net income		-			-		-			-			-			10,998			(227	)		10,771
Ending balance March 31, 2022		18,180,174		$	198	$	109,073		$	(59,491	)	$	(1,326	)	$	81,327		$	2,083		$	131,864

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

9

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; 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 indicated. 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.

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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 $6.2 million and $6.1 million for the three months ending March 31, 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

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

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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 March 31, 2023, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $28.7 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.

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.

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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 March 31, 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)		2,736		(185	)		2,551		10,226		(1,251	)		8,975
U.S. Governmental agency obligations (unrealized position > 12 months)		27,408		(3,178	)		24,230		19,918		(2,842	)		17,076
	$	32,073	$	(3,363	)	$	28,710	$	32,073	$	(4,093	)	$	27,980

	As of
	March 31, 2023
Less than one year	$	200
One to five years		11,241
Five to ten years		16,748
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	March 31, 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

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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 assesses tobacco product user fees on six classes of regulated tobacco products and computes user fees using a methodology similar to the methodology used by the U.S Department of Agriculture to compute the Tobacco Transition Payment Program (“TTPP,” also known as the “Tobacco Buyout”) assessment. First, the total, annual, congressionally established user fee assessment is allocated among the various classes of tobacco products using the federal excise tax weighted market share of tobacco products subject to regulation. Then, the assessment for each class of tobacco products is divided among individual manufacturers and importers.

In August 2016, the FDA’s regulatory authority under the Tobacco Control Act (the “TCA”) was extended to all tobacco products not previously covered, including: (i) certain 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 prior to the September 9, 2020 deadline for certain of our tobacco and tobacco-derived products, all of which remain under review. We likewise filed premarket submissions for certain of our NTN Products ahead of the May 14, 2022 deadline. We have continued to supplement these applications with additional information; however, there can be no guarantee that the FDA will accept such amendments or that the applications will meet the standard of “appropriate for the protection of public health.” The FDA has indicated its enforcement priority is those applicants who have received negative action on their application, such as a Marketing Denial Order or Refuse to File notification and who continue to illegally sell those unauthorized products, as well as products for which manufacturers failed to submit a marketing application. Despite these stated enforcement priorities, given the FDA’s limited resources we expect that for a period of time there may be a lack of enforcement, which may adversely impact our ability to compete in the marketplace against those who continue to sell unauthorized products. There can be no guarantee that the FDA will not shift its enforcement priorities or that it will increase in ability to enforce against unauthorized products over time.

The FDA has issued a number of rules related to premarket filings; however, those rules were not finalized prior to the September 9, 2020, deadline. On October 5, 2021, the FDA finalized two rules related to the Substantial Equivalence process and the Premarket Tobacco Product Application process, respectively, which both became effective November 4, 2021. Both final rules (collectively, the “Rules”) indicate that any new or additional requirements will not retroactively apply to currently pending PMTAs for tobacco and tobacco-derived products; however, the information outlined in the rule remains important to the FDA’s substantive review of an application. The FDA has yet to indicate how it might apply these Rules to NTN Product filings. We believe we have products that meet the Rules and have filed premarket filings supporting a showing of the respective required standards. However, there is no assurance that the FDA’s guidance or regulations will not change, or that the FDA will not prioritize its enforcement in a manner that negatively affects our pending applications, or that unforeseen circumstances will not arise that prevent us from sufficiently supplementing or completing our applications or otherwise increases the amount of time and money we are required to spend to receive all necessary marketing orders. Although we filed many premarket applications in a timely manner, no assurance can be given that the applications will ultimately be successful. This may result in the prioritization of supplementing or completing applications for high priority SKUs in our inventory position, which could adversely impact future revenues generated by lower priority SKUs.

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In addition, we currently distribute many third-party manufactured vapor products for which we are completely dependent on the manufacturer complying with the premarket filing requirements. There can be no assurance that these third-party products will receive a marketing order or otherwise remain in compliance with relevant legal requirements. While we will take measures to pursue regulatory compliance for our own privately-branded or proprietary vape products that compete with these third-party products, there is no assurance that such proprietary products would be as successful in the marketplace or can fully displace third-party products that are currently being distributed by us, which could adversely affect our results of operations and liquidity. For a period of time after the filing deadline, we expect there to be a lack of enforcement, which may adversely affect our ability to compete in the marketplace against those who continue to sell unauthorized products.

On May 4, 2022, the FDA proposed two tobacco product standards related to combusted tobacco products: (1) a ban on menthol as a characterizing flavor in cigarettes; and (2) a ban on all characterizing flavors (including menthol) in cigars. On June 21, 2022, the FDA also issued a proposed product standard related to restricting the level of nicotine in traditional cigarettes. These product standards are required to go through the formal rulemaking process where we have the opportunity to comment on the proposed rule with regard to the impact such standards would have on our products. The FDA’s policy on these and other regulated products may change or expand over time in ways not yet known and may significantly impact our products or our premarket filings.

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

Note 3. Derivative Instruments

Foreign Currency

The Company’s policy is to manage the risks associated with foreign exchange rate movements. The policy allows hedging of up to 100% of its anticipated purchases of inventory over a forward period that will not exceed 12 rolling and consecutive months. The Company may, from time to time, hedge currency for non-inventory purchases, e.g., production equipment, up to 100% of the purchase price.  During the three months ended March 31, 2023, the Company executed various foreign exchange contracts, which met hedge accounting requirements for the purchase of €4.9 million. The Company did not execute any foreign exchange contracts during three months ended March 31, 2022.

At March 31, 2023, the Company had foreign currency contracts for the purchase of €15.3 million and sale of €10.4 million. The foreign currency contracts’ fair value at March 31, 2023, resulted in an asset of $0.7 million included in Other current assets and a liability of $0.0 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.

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Accounts Receivable

The fair value of accounts receivable approximates their carrying value due to their short-term nature.

Long-Term Debt

The Company’s Senior Secured Notes (as defined below) bear interest at a rate of 5.625% per year. As of March 31, 2023, the fair value approximated $227.5 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 due.

The Convertible Senior Notes (as defined) bear interest at a rate of 2.50% per year, and the fair value of the Convertible Senior Notes without the conversion feature approximated $136.7 million, with a carrying value of $148.6 million as of March 31, 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:

	March 31,		December 31,
	2023		2022
Raw materials and work in process	$	6,292	$	7,283
Leaf tobacco		40,131		43,468
Finished goods - Zig-Zag Products		43,640		42,279
Finished goods - Stoker’s Products		11,067		9,667
Finished goods - Creative Distribution Solutions		10,942		15,431
Other		1,666		1,787
Inventories	$	113,738	$	119,915

The inventory valuation allowance was $4.8 million and $4.5 million as of March 31, 2023, and December 31, 2022, respectively.

Note 6. Other Current Assets

Other current assets consist of:

	March 31,		December 31,
	2023		2022
Inventory deposits	$	5,280	$	6,395
Insurance deposit		3,000		3,000
Prepaid taxes		223		448
Other		11,458		13,116
Total	$	19,961	$	22,959

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Note 7. Property, Plant, and Equipment

Property, plant, and equipment consists of:

	March 31,			December 31,
	2023			2022
Land	$	22		$	22
Buildings and improvements		3,096			3,096
Leasehold improvements		5,404			5,404
Machinery and equipment		28,082			25,832
Furniture and fixtures		9,317			9,264
Gross property, plant and equipment		45,921			43,618
Accumulated depreciation		(21,557	)		(20,830	)
Net property, plant and equipment	$	24,364		$	22,788

Note 8. Other Assets

Other assets consist of:

	March 31,		December 31,
	2023		2022
Equity investments	$	8,479	$	13,376
Debt security investment		7,820		7,820
Other		4,348		1,453
Total	$	20,647	$	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 Old Pal reaching certain sales thresholds. The weighted average interest rate on the convertible note was 3.0% for the three months ended March 31, 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 March 31, 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 records the debt security at fair value and includes unrealized gains and losses recorded in stockholders’ equity as a component of accumulated other comprehensive income on our Consolidated Balance Sheets. The Company reports interest income on available for sale debt securities, in interest income in our Consolidated Statements of Income. Quarterly, we perform a qualitative assessment to determine if the fair value of the investment could be less than the amortized cost basis.  The fourth quarter 2022 qualitative assessment determined that the fair value of the investment could be less than the amortized cost basis and therefore the Company performed a quantitative assessment of the fair value of the investment.  The fair value as of December 31, 2022 was determined to be $7.9 million based on a Monte Carlo simulation (Level 3).  The Company determined that the impairment was a result of credit related factors and, as such, recorded an allowance for credit losses of $1.4 million which is included in investment loss for the year ended December 31, 2022.  The first quarter 2023 qualitative assessment determined no change in the fair value. The Company has recorded accrued interest receivable of $0.2 million at March 31, 2023, in other current assets on our Consolidated Balance Sheets.

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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 in Investment loss (gain) for the three months ended March 31, 2023.  Fair value was determined using a valuation derived from relevant revenue multiples (Level 3). There could be additional impairment if future revenues continue to decline or if market conditions result in decreased revenue multiples which are used to estimate fair value.

Note 9. Accrued Liabilities

Accrued liabilities consist of:

	March 31,		December 31,
	2023		2022
Accrued payroll and related items	$	4,437	$	7,685
Customer returns and allowances		5,883		7,291
Taxes payable		2,215		1,867
Lease liabilities		2,866		3,102
Accrued interest		2,683		7,277
Other		7,848		5,779
Total	$	25,932	$	33,001

Note 10. Notes Payable and Long-Term Debt

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

	March 31,			December 31,
	2023			2022
Senior Secured Notes	$	250,000		$	250,000
Convertible Senior Notes		148,600			162,500
Gross notes payable and long-term debt		398,600			412,500
Less deferred finance charges		(5,022	)		(5,743	)
Notes payable and long-term debt	$	393,578		$	406,757

Senior Secured Notes

On February 11, 2021, the Company closed a private offering (the “Offering”) of $250 million aggregate principal amount of its 5.625% senior secured notes due 2026 (the “Senior Secured Notes”). The Senior Secured Notes bear interest at a rate of 5.625% and will mature on February 15, 2026. Interest on the Senior Secured Notes is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on August 15, 2021.The Company used the proceeds from the Offering (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.

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.

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The Company may redeem the Senior Secured Notes, in whole or in part, at any time prior to February 15, 2023, at the redemption prices (expressed as a percentage of the principal amount to be redeemed) set forth below, plus accrued and unpaid interest, if any, on the Senior Secured Notes to be redeemed to (but not including) the applicable redemption date if redeemed during the period indicated below:

On or after February 15, 2023	102.813	%
On or after February 15, 2024	101.406	%
On or after February 15, 2025 and thereafter	100.000	%

If the Company experiences a change of control (as defined in the Senior Secured Notes Indenture), the Company must offer to repurchase the Senior Secured Notes at a repurchase price equal to 101% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest.

The Indenture contains covenants that, among other things, 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 Indenture. The Indenture provides for customary events of default. The Company was in compliance with all covenants as of March 31, 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 (the “Lenders”) and Barclays Bank PLC, as administrative agent and collateral agent (in such capacity, the “Agent”). Letters of credit are limited to $10 million (and are a part of, and not in addition to, the revolving line of credit). The Company has not drawn any borrowings under the 2021 Revolving Credit Facility but does have letters of credit of approximately $1.4 million outstanding under the facility as of March 31, 2023. The 2021 Revolving Credit Facility will mature on August 11, 2025, if none of the Company’s Convertible Senior Notes are outstanding, and if any Convertible Senior Notes are outstanding, the date which is 91 days prior to the maturity date of July 15, 2024, for such Convertible Senior Notes.

Interest is payable on the 2021 Revolving Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate plus an applicable margin of 3.50% (with step-downs upon de-leveraging). The Company also has the option to borrow at a rate determined by reference to the base rate.

The obligations under the 2021 Revolving Credit Agreement are guaranteed on a joint and several basis by the Guarantors. The Company’s and Guarantors’ obligations under the 2021 Revolving Credit Facility are secured on a pari passu basis with the Senior Secured Notes.

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The 2021 Revolving Credit Agreement contains covenants that are substantially the same as the covenants in the Senior Secured Notes Indenture. The 2021 Revolving Credit Facility also requires the maintenance of a Consolidated Leverage Ratio (as defined in the 2021 Revolving Credit Agreement) of 5.50 to 1.00 (with a step down to 5.25 to 1.00 beginning with the fiscal quarter ending March 31, 2023) at the end of each fiscal quarter when extensions of credit under the 2021 Revolving Credit Facility and certain drawn and undrawn letters of credit (excluding (a) letters of credit that have been cash collateralized and (b) letters of credit having an aggregate face amount less than $5.0 million) in the aggregate outstanding exceeds 35% of the total commitments under the 2021 Revolving Credit Facility. The 2021 Revolving Credit Agreement provides for customary events of default. The Company was in compliance with all covenants as of March 31, 2023.

The Company incurred debt issuance costs attributable to the issuance of the 2021 Revolving Credit Facility of $0.5 million which are amortized to interest expense using the effective interest method over the expected life of the 2021 Revolving Credit Facility.

Convertible Senior Notes

In July 2019, the Company closed an offering of $172.5 million in aggregate principal amount of its 2.50% Convertible Senior Notes due July 15, 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes bear interest at a rate of 2.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. The Convertible Senior Notes will mature on July 15, 2024, unless earlier repurchased, redeemed or converted. The Convertible Senior Notes are senior unsecured obligations of the Company.

In the first quarter of 2023, a wholly owned subsidiary of the Company purchased $13.9 million in aggregate principal amount of the Convertible Senior Notes on the open market for $13.0 million resulting in a $0.7 million gain on extinguishment of debt.  In the fourth quarter of 2022 a wholly owned subsidiary of the Company purchased $10.0 million in aggregate principal amount of the Convertible Senior Notes on the open market for $9.0 million resulting in a $0.9 million gain on extinguishment of debt. The repurchased notes continue to be held by our subsidiary and may be resold subject to compliance with applicable securities law. As of March 31, 2023, $148.6 million aggregate principal remains outstanding and held by third parties.

The Convertible Senior Notes held by third parties are convertible into approximately 3,007,462 shares of TPB Common Stock under certain circumstances prior to maturity at a conversion rate of 18.6625 shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.58 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 March 31, 2023.

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 $53.58 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.

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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 March 31,
	2023		2022
Operating lease cost
Cost of sales	$	128	$	227
Selling, general and administrative		521		399
Variable lease cost (1)		225		112
Short-term lease cost		6		14
Total	$	880	$	752

(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 March 31,
	2023		2022
Financing lease cost
Selling, general and administrative	$	338	$	291
Total	$	338	$	291

	March 31,		December 31,
	2023		2022
Assets:
Right of use assets - Operating	$	10,477	$	10,967
Right of use assets - Financing	$	1,245	$	1,498
Total lease assets	$	11,722	$	12,465
Liabilities:
Current lease liabilities - Operating (2)	$	1,976	$	2,007
Current lease liabilities - Financing (2)	$	890	$	1,095
Long-term lease liabilities - Operating	$	9,762	$	10,243
Long-term lease liabilities - Financing		310		350
Total lease liabilities	$	12,938	$	13,695

(2) Reported within accrued liabilities on the balance sheet

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Note 12. Income Taxes

The Company’s effective income tax rate for the three months ended March 31, 2023, was 25.2%. The Company’s effective income tax rate for the three months ended March 31, 2022, was 23.7% which includes a discrete tax deduction of $0.4 million for the three months ended March 31, 2022 relating to stock option exercises.

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 March 31, 2023, net of forfeitures, there were 104,375 Restricted Stock Units (“RSUs”), 81,176 options and (99,701) Performance-Based Restricted Stock Units (“PRSUs”) granted under the 2021 Plan. There are 1,304,202 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.

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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
Exercised		(24,955	)		14.30		4.48
Forfeited		(40,838	)		37.83		12.44
Outstanding, March 31, 2023		617,421		$	29.82	$	9.22

Under the 2006, 2015 and 2021 Plans, the total intrinsic value of options exercised during the three months ended March 31, 2023 and 2022, was $0.2 million, and $0.4 million, respectively.

At March 31, 2023, under the 2006 Plan, the exercise price for the 69,163 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 1.32 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, 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 March 31, 2023		20,000			40,733			51,567			125,984			25,000			84,259			91,850			12,000
Number exercisable at March 31, 2023		20,000			40,733			51,567			125,984			25,000			84,259			64,664			8,040
Exercise price	$	13.00		$	15.41		$	21.21		$	47.58		$	20.89		$	14.85		$	51.75		$	47.76
Remaining lives		3.87			4.13			4.94			5.98			6.57			6.97			7.89			8.10
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

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

	May 17,			March 14,			April 29,
	2021			2022			2022
Number of options granted		7,500			100,000			14,827
Options outstanding at March 31, 2023		7,500			74,538			14,827
Number exercisable at March 31, 2023		5,100			25,343			5,042
Exercise price	$	45.05		$	30.46		$	31.39
Remaining lives		8.13			8.96			9.09
Risk free interest rate		0.84	%		2.10	%		2.92	%
Expected volatility		31.50	%		35.33	%		35.33	%
Expected life		6.000			6.000			6.000
Dividend yield		0.63	%		1.01	%		0.98	%
Fair value at grant date	$	13.23		$	10.23		$	11.07

The Company has recorded compensation expense related to the options based on the provisions of ASC 718 under which the fixed portion of such expense is determined as the fair value of the options on the date of grant and amortized over the vesting period. The Company recorded compensation income related to the options of approximately $0.0 million and expense of approximately $0.2 million for the three months ended March 31, 2023 and 2022, respectively. Total unrecognized compensation expense related to options at March 31, 2023, is $0.7 million, which will be expensed over 1.6 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, 2023, there are 378,483 PRSUs outstanding, all of which are unvested. The following table outlines the PRSUs granted and outstanding as of March 31, 2023.

	March 20,		March 18,		December 28,		February 18,		March 14,
	2019		2020		2020		2021		2022
Number of PRSUs granted		92,500		94,000		88,169		100,000		49,996
PRSUs outstanding at March 31, 2023		77,380		85,810		58,779		90,190		44,982
Fair value as of grant date	$	47.58	$	14.85	$	46.42	$	51.75	$	30.46
Remaining lives		0.75		1.75		0.75		2.75		3.75

The Company recorded compensation expense related to the PRSUs of approximately $0.5 million and $0.8 million in the consolidated statements of income for the three months ended March 31, 2023 and 2022, respectively, based on the probability of achieving the performance condition. Total unrecognized compensation expense related to these awards at March 31, 2023, is $2.2 million which will be expensed over the service periods based on the probability of achieving the performance condition.

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The Company has granted 89,696 RSUs which vest over one to five years. The following table outlines the RSUs granted and outstanding as of March 31, 2023.

	March 14,		March 14,		April 29,		April 29,
	2022		2022		2022		2022
Number of RSUs granted		50,004		28,726		11,393		4,522
RSUs outstanding at March 31, 2023		44,405		18,961		11,393		4,522
Fair value as of grant date	$	30.46	$	30.46	$	31.39	$	31.39
Remaining lives		3.75		1.75		0.07		3.75

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 $0.3 million and $0.2 million for the three months ended March 31, 2023 and 2022. Total unrecognized compensation expense related to RSUs at March 31, 2023, is $1.4 million, which will be expensed over 3.32 years.

Note 14. Contingencies

On October 9, 2020, a purported stockholder of Turning Point Brands, Inc., Paul-Emile Berteau, filed a complaint in the Delaware Court of Chancery relating to the merger of SDI with a TPB subsidiary pursuant to the Agreement and Plan of Merger and Reorganization, dated as of April 7, 2020, by and among TPB, SDI and Merger Sub. The complaint purports to assert two derivative counts for breach of fiduciary duty on TPB’s behalf and against the TPB Board of Directors and certain SDI affiliates. The third count purports to assert a direct claim against TPB and its Board of Directors based on allegations that TPB’s Amended and Restated Bylaws are inconsistent with TPB’s certificate of incorporation. On October 26, 2020, the TPB Board of Directors adopted Amendment No. 1 to TPB’s Amended and Restated Bylaws, which amended the challenged section of the bylaws. On June 30, 2021, the court granted in part and denied in part the defendants’ motions to dismiss. Among other things, the court dismissed TPB director H.C. Charles Diao as a defendant in the action and dismissed the third count of the plaintiff’s complaint as moot. The remaining defendants attended a mediation in late November 2022 where a tentative settlement was reached which, if consummated as expected, will result in a benefit to the Company. 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. For example, the Company did not design or manufacture the products at issue; rather, the Company was merely the distributor. Nonetheless, there can be no assurance that the Company will prevail in these cases, and they could have a material adverse effect on the financial position, results of operations, or cash flows of the Company.

We have several subsidiaries engaged in making, distributing, and selling vapor products. As a result of the overall publicity and controversy surrounding the vapor industry generally, many companies have received informational subpoenas from various regulatory bodies and in some jurisdictions regulatory lawsuits have been filed regarding marketing practices and possible underage sales. We expect that our subsidiaries will be subject to some such cases and investigative requests. In the acquisition of the vapor businesses, we negotiated financial “hold-backs”,  which we expect to be able to use to defray expenses associated with the information production and the cost of defending any such lawsuits as well as the franchisee matter. To the extent that litigation becomes necessary, we believe that the subsidiaries have strong factual and legal defenses against claims that they unfairly marketed vapor products.

We have two franchisor subsidiaries. Like many franchise businesses, in the ordinary course of their business, these subsidiaries are from time-to-time responding parties to arbitration demands brought by franchisees. We have reached an agreement to arbitrate a claim brought by a former franchisee. This matter relates to the termination of the franchise agreement by the franchisor for failure to pay franchising fees and our subsequent demand that the franchisee cease using our marks and de-image locations formerly housing the franchises. The franchisee is claiming tortious interference and conversion. We believe the franchisor’s ultimate termination of the franchise agreement for multiple uncured material defaults by the franchisee was proper. We are party to another franchise arbitration with breach of contract and negligence allegations, among others. We believe we have good and valid substantive defenses against the claims and intend on vigorously defending our interests in these matters.

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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 March 31,
	2023						2022
					Per						Per
	Income		Shares		Share		Income		Shares		Share
Basic EPS:
Numerator
Net income attributable to Turning Point Brands, Inc.	$	7,597					$	10,998
Denominator
Weighted average				17,531,414	$	0.43				18,257,695	$	0.60
Diluted EPS:
Numerator
Net income attributable to Turning Point Brands, Inc.	$	7,597					$	10,998
Interest expense related to Convertible Senior Notes, net of tax		954						1,054
Diluted net income attributable to Turning Point Brands. Inc.	$	8,551					$	12,052
Denominator
Basic weighted average				17,531,414						18,257,695
Convertible Senior Notes				3,029,699						3,209,690
Stock options				108,039						282,125
				20,669,152	$	0.41				21,749,510	$	0.55

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. 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.

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The tables below present financial information about reported segments:

	Three Months Ended March 31,
	2023			2022
Net sales
Zig-Zag products	$	41,887		$	45,672
Stoker’s products		33,662			31,703
Total Zig-Zag and Stoker’s products	$	75,549		$	77,375
Creative Distribution Solutions		25,407			23,519
Total	$	100,956		$	100,894
Gross profit
Zig-Zag products	$	22,390		$	26,343
Stoker’s products		19,465			17,686
Total Zig-Zag and Stoker’s products	$	41,855		$	44,029
Creative Distribution Solutions		6,762			7,765
Total	$	48,617		$	51,794
Operating income (loss)
Zig-Zag products	$	13,641		$	18,737
Stoker’s products		14,563			13,506
Corporate unallocated (1)(2)		(10,623	)		(13,692	)
Total Zig-Zag and Stoker’s products	$	17,581		$	18,551
Creative Distribution Solutions		261			678
Total	$	17,842		$	19,229
Interest expense, net		4,010			5,196
Investment income		4,799			(78	)
Gain on extinguishment of debt		(777	)		-
Income before income taxes	$	9,810		$	14,111
Capital expenditures
Zig-Zag products	$	973		$	2,323
Stoker’s products		1,462			464
Total Zig-Zag and Stoker’s products	$	2,435		$	2,787
Creative Distribution Solutions		-			-
Total	$	2,435		$	2,787
Depreciation and amortization
Zig-Zag products	$	267		$	92
Stoker’s products		706			767
Total Zig-Zag and Stoker’s products	$	973		$	859
Creative Distribution Solutions		574			475
Total	$	1,547		$	1,334

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

(2) Includes costs related to PMTA of $0.1 million in 2023 and $1.1 million in 2022.

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	March 31,		December 31,
	2023		2022
Assets
Zig-Zag products	$	207,653	$	225,893
Stoker’s products		153,647		151,241
Corporate unallocated (1)		165,643		155,348
Total Zig-Zag and Stoker’s products	$	526,943	$	532,482
Creative Distribution Solutions		32,983		39,624
Total	$	559,926	$	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
	March 31,
	2023		2022
Business to Business	$	22,493	$	19,124
Business to Consumer - Online		2,810		4,233
Other		104		162
Total	$	25,407	$	23,519

Net Sales—Domestic vs. Foreign

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

	Three Months Ended
	March 31,
	2023		2022
Domestic	$	93,860	$	93,766
Foreign		7,096		7,128
Total	$	100,956	$	100,894

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Note 17. Additional Information with Respect to Unrestricted Subsidiaries

Under the terms of the Indenture and Senior Secured Notes, the Company has designated its subsidiaries, South Beach Brands LLC, TPB Beast LLC and Intrepid Brands, LLC as an “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 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 March 31, 2023 (unaudited):

	Company and Restricted Subsidiaries			Unrestricted Subsidiaries		Consolidated
Net sales	$	75,549		$	25,407	$	100,956
Cost of sales		33,694			18,645		52,339
Gross profit		41,855			6,762		48,617
Selling, general, and administrative expenses		24,274			6,501		30,775
Operating income		17,581			261		17,842
Interest expense, net		4,010			-		4,010
Investment loss		4,799			-		4,799
Gain on extinguishment of debt		(777	)		-		(777	)
Income before income taxes		9,549			261		9,810
Income tax expense		2,402			66		2,468
Consolidated net income		7,147			195		7,342
Net loss attributable to non-controlling interest		(255	)		-		(255	)
Net income attributable to Turning Point Brands, Inc.	$	7,402		$	195	$	7,597

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Balance Sheet as of March 31, 2023 (unaudited):

ASSETS	Company and Restricted Subsidiaries		Unrestricted Subsidiaries		Eliminations			Consolidated
Current assets:
Cash	$	103,257	$	1,544		-		$	104,801
Accounts receivable, net		7,888		696		-			8,584
Inventories		103,166		10,572		-			113,738
Other current assets		16,210		3,751		-			19,961
Total current assets		230,521		16,563		-			247,084
Property, plant, and equipment, net		23,937		427		-			24,364
Deferred income taxes		8,069		-		-			8,069
Right of use assets		11,636		86		-			11,722
Deferred financing costs, net		256		-		-			256
Goodwill		136,253		-		-			136,253
Other intangible assets, net		66,944		15,877		-			82,821
Master Settlement Agreement (MSA) escrow deposits		28,710		-		-			28,710
Other assets		20,617		30		-			20,647
Investment in unrestricted subsidiaries		52,238		-		(52,238	)		-
Total assets	$	579,181	$	32,983		(52,238	)	$	559,926
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,258	$	1,132		-		$	10,390
Accrued liabilities		23,407		2,525		-			25,932
Other current liabilities		20		-		-			20
Total current liabilities		32,685		3,657		-			36,342
Notes payable and long-term debt		393,578		-		-			393,578
Lease liabilities		10,072		-		-			10,072
Total liabilities		436,335		3,657		-			439,992
Commitments and contingencies
Stockholders’ equity:
Total Turning Point Brands Inc. Stockholders’ Equity/Net parent investment in unrestricted subsidiaries		141,394		29,326		(52,238	)		118,482
Non-controlling interest		1,452		-		-			1,452
Total stockholders’ equity		142,846		29,326		(52,238	)		119,934
Total liabilities and stockholders’ equity	$	579,181	$	32,983		(52,238	)	$	559,926

Income Statement for the Three Months Ended March 31, 2022 (unaudited):

	Company and Restricted Subsidiaries			Unrestricted Subsidiaries		Consolidated
Net sales	$	77,375		$	23,519	$	100,894
Cost of sales		33,346			15,754		49,100
Gross profit		44,029			7,765		51,794
Selling, general, and administrative expenses		25,478			7,087		32,565
Operating income		18,551			678		19,229
Interest expense, net		5,196			-		5,196
Investment loss		(78	)		-		(78	)
Income before income taxes		13,433			678		14,111
Income tax expense		3,180			160		3,340
Consolidated net income		10,253			518		10,771
Net loss attributable to non-controlling interest		(227	)		-		(227	)
Net income attributable to Turning Point Brands, Inc.	$	10,480		$	518	$	10,998

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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 Repurchase

The most recent dividend of $0.065 per common share was paid on April 7, 2023, to shareholders of record at the close of business on March 17, 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. On October 25, 2021, the Board increased the approved share repurchase program by $30.7 million and by an additional $24.6 million on February 24, 2022. $27.2 million remains available for share repurchases under the program at March 31, 2023.

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of the historical financial condition and results of operations in conjunction with our historical consolidated financial statements and accompanying notes, which are included elsewhere in this Quarterly Report on Form 10-Q. In addition, this discussion includes forward-looking statements subject to risks and uncertainties that may result in actual results differing from statements we make. See “Cautionary Note Regarding Forward-Looking Statements.” Factors that could cause actual results to differ include those risks and uncertainties discussed in “Risk Factors.”

The following Management’s Discussion and Analysis (“MD&A”) relates to the unaudited financial statements of Turning Point Brands, Inc., included elsewhere in this Quarterly Report on Form 10-Q. The MD&A is intended to help the reader understand the Company’s financial condition and results of operations.  The MD&A is provided as a supplement to and should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in the Quarterly report on Form 10-Q, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in the 2022 Annual Report.

In this MD&A, unless the context requires otherwise, references to “our Company” “we,” “our,” or “us” refer to Turning Point Brands, Inc., and its consolidated subsidiaries. References to “TPB” refer to Turning Point Brands, Inc., without any of its subsidiaries. We were incorporated in 2004 under the name North Atlantic Holding Company, Inc. On November 4, 2015, we changed our name to Turning Point Brands, Inc. Many of the amounts and percentages in this discussion have been rounded for convenience of presentation.

Overview

Turning Point Brands, Inc. (the “Company,” “we,” “our,” or “us”) is a leading manufacturer, marketer and distributor of branded consumer products. We sell a wide range of products to adult consumers consisting of staple products with our iconic brands Zig-Zag^® and Stoker’s^® and our next generation products to fulfill evolving consumer preferences. Among other markets, we compete in the alternative smoking accessories and Other Tobacco Products (“OTP”) industries. The alternative smoking accessories market is a dynamic market experiencing robust secular growth driven by cannabinoid legalization in the U.S. and Canada, and positively evolving consumer perception and acceptance in North America. The OTP industry, which consists of non-cigarette tobacco products, exhibited mid-single-digit consumer unit annualized growth over the three-year period ended 2022 as reported by Management Science Associates, Inc. (“MSAi”), a third-party analytics and information company. Our segments are led by our core, proprietary brands: Zig-Zag^® and CLIPPER^® in the Zig-Zag Products segment; Stoker’s^® along with Beech-Nut^® and Trophy^® in the Stoker’s Products segment. Our businesses generate solid cash flows which we use to invest in our business, finance acquisitions, increase brand support, expand our distribution infrastructure, and strengthen our capital position. We currently ship to approximately 800 distributors with an additional 200 secondary, indirect wholesalers in the U.S. that carry and sell our products. Under the leadership of a senior management team with extensive experience in the consumer products, alternative smoking accessories and tobacco industries, we have grown and diversified our business through new product launches, category expansions, and acquisitions while concurrently improving operational efficiency.

We believe there are meaningful opportunities to grow through acquisitions and joint ventures across all product categories. As of December 31, 2022, our products are available in approximately 197,000 U.S. retail locations which, with the addition of retail stores in Canada, brings our total North American retail presence to an estimated 217,000 points of distribution. Our sales team targets widespread distribution to all traditional retail channels, including convenience stores, and we have a growing e-commerce business.

In the further quarter of 2022, we contributed our NewGen Products business to South Beach Holdings LLC doing business as Creative Distribution Solutions (“CDS”), a newly-formed wholly-owned subsidiary. CDS is separately operated and reports to it’s own Board of Directors. During the first quarter of 2023, the business was deemed an unrestricted subsidiary under the Senior Secured Notes and concurrently we renamed what we previously referred to as our NewGen Products segment as our Creative Distribution Solutions segment as we believe this name better aligns with the goals and strategies of the segment.

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Products

We operate in three segments: Zig-Zag Products, Stoker’s Products and Creative Distribution Solutions. In our Zig-Zag Products segment, we principally market and distribute (i) rolling papers, tubes, and related products; and (ii) finished cigars and make-your-own (“MYO”) cigar wraps and (iii) lighters and other accessories.  In addition, we have a majority stake in Turning Point Brands Canada which markets and distributes cannabis accessories and tobacco products throughout Canada. In our Stoker’s Products segment, we (i) manufacture and market moist snuff tobacco (“MST”) and (ii) contract for and market loose leaf chewing tobacco products. In our Creative Distribution Solutions segment, we (i) market and distribute liquid vapor products and certain other products without tobacco and/or nicotine; (ii) distribute a wide assortment of products to non-traditional retail via VaporBeast; and (iii) market and distribute a wide assortment of products to individual consumers via the VaporFi and Direct Vapor B2C online platform.

Operations

Our core Zig-Zag Products and Stoker’s Products segments primarily generate revenues from the sale of our products to wholesale distributors who, in turn, resell the products to retail operations. Our net sales, which include federal excise taxes, consist of gross sales net of cash discounts, returns, and selling and marketing allowances.

We rely on long-standing relationships with high-quality, established manufacturers to provide the majority of our produced products. More than 75% of our production, as measured by net sales, is outsourced to suppliers. The remaining production consists primarily of our moist snuff tobacco operations located in Dresden, Tennessee, and Louisville, Kentucky. Our principal operating expenses include the cost of raw materials used to manufacture the limited number of our products which we produce in-house; the cost of finished products, which are generally purchased goods; federal excise taxes; legal expenses; and compensation expenses, including benefits and costs of salaried personnel. Our other principal expenses include interest expense and other expenses.

Key Factors Affecting Our Results of Operations

We consider the following to be the key factors affecting our results of operations:

• Our ability to further penetrate markets with our existing products;

• Our ability to introduce new products and product lines that complement our core business;

• Decreasing interest in some tobacco products among consumers;

• Price sensitivity in our end-markets;

• Marketing and promotional initiatives, which cause variability in our results;

• General economic conditions, including consumer access to disposable income and other conditions affecting purchasing power such as inflation;

• Labor and production costs;

• Cost and increasing regulation of promotional and advertising activities;

• Cost of complying with regulation, including the “deeming regulation”;

• Increasing and unpredictable regulation of Creative Distribution Solutions products;

• Counterfeit and other illegal products in our end-markets;

• Currency fluctuations;

• Our ability to identify attractive acquisition opportunities; and

• Our ability to successfully integrate acquisitions.

Critical Accounting Policies and Uses of Estimates

There have been no material changes to our critical accounting policies and estimates from the information provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our 2022 Annual Report on Form 10-K.

Recent Accounting Pronouncements

There are no recent accounting pronouncements that impact the Company.

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Results of Operations

Comparison of the Three Months Ended March 31, 2023, to the Three Months Ended March 31, 2022

The table and discussion set forth below displays our consolidated results of operations (in thousands):

	Three Months Ended March 31,
	2023			2022			% Change
Consolidated Results of Operations Data:
Net sales
Zig-Zag products	$	41,887		$	45,672			-8.3	%
Stoker’s products		33,662			31,703			6.2	%
Total Zig-Zag and Stoker’s products		75,549			77,375			-2.4	%
Creative Distribution Solutions		25,407			23,519			8.0	%
Total net sales		100,956			100,894			0.1	%
Cost of sales		52,339			49,100			6.6	%
Gross profit
Zig-Zag products		22,390			26,343			-15.0	%
Stoker’s products		19,465			17,686			10.1	%
Total Zig-Zag and Stoker’s products		41,855			44,029			-4.9	%
Creative Distribution Solutions		6,762			7,765			-12.9	%
Total gross profit		48,617			51,794			-6.1	%
Selling, general, and administrative expenses		30,775			32,565			-5.5	%
Operating income		17,842			19,229			-7.2	%
Interest expense, net		4,010			5,196			-22.8	%
Investment loss (gain)		4,799			(78	)		-6252.6	%
Gain on extinguishment of debt		(777	)		-		NM
Income before income taxes		9,810			14,111			-30.5	%
Income tax expense		2,468			3,340			-26.1	%
Consolidated net income		7,342			10,771			-31.8	%
Net loss attributable to non-controlling interest		(255	)		(227	)		12.3	%
Net income attributable to Turning Point Brands, Inc.	$	7,597		$	10,998			-30.9	%

Net Sales:  For the three months ended March 31, 2023, consolidated net sales increased to $101.0 million from $100.9 million for the three months ended March 31, 2022, an increase of $0.1 million or 0.1%.

For the three months ended March 31, 2023, net sales in the Zig-Zag Products segment decreased to $41.9 million from $45.7 million for the three months ended March 31, 2022, a decrease of $3.8 million or 8.3%. For the three months ended March 31, 2023, volume decreased 8.6% and price/mix increased 0.3%. The decrease in net sales was driven by growth in our Canadian and other smoking accessories businesses offset by anticipated declines in the U.S. rolling papers and wraps businesses which were impacted by reduction of trade inventory during the quarter.

For the three months ended March 31, 2023, net sales in the Stoker’s Products segment increased to $33.7 million from $31.7 million for the three months ended March 31, 2022, an increase of $2.0 million or 6.2%. For the three months ended March 31, 2023, volume increased 0.3% and price/mix increased 5.9%. The increase in net sales was driven by high single-digit growth of Stoker’s^® MST and low single-digit growth of loose-leaf chewing tobacco.

For the three months ended March 31, 2023, net sales in the Creative Distribution Solutions segment increased to $25.4 million from $23.5 million for the three months ended March 31, 2022, an increase of $1.9 million or 8.0%. The increase in net sales was primarily the result of improved volumes in the vape distribution businesses.

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Gross Profit:  For the three months ended March 31, 2023, consolidated gross profit decreased to $48.6 million from $51.8 million for the three months ended March 31, 2022, a decrease of $3.2 million or 6.1%. Gross profit as a percentage of net sales decreased to 48.2% for the three months ended March 31, 2023, compared to 51.3% for the three months ended March 31, 2022 driven by increased margin in the Stoker’s Products segment offset by decreased margin in the Zig-Zag Products and Creative Distribution Solutions segments as a result of mix.

For the three months ended March 31, 2023, gross profit in the Zig-Zag Products segment decreased to $22.4 million from $26.3 million for the three months ended March 31, 2022, a decrease of $4.0 million or 15.0%. Gross profit as a percentage of net sales decreased to 53.5% of net sales for the three months ended March 31, 2023, from 57.7% of net sales for the three months ended March 31, 2022, as a result of product mix including the decline in net sales of higher margin U.S. rolling paper and wraps products and contribution of CLIPPER lighters which operates at lower gross profit margins.

For the three months ended March 31, 2023, gross profit in the Stoker’s Products segment increased to $19.5 million from $17.7 million for the three months ended March 31, 2022, an increase of $1.8 million or 10.1%. Gross profit as a percentage of net sales increased to 57.8% of net sales for the three months ended March 31, 2023, from 55.8% of net sales for the three months ended March 31, 2022, primarily as a result of the strong incremental margin contribution of MST.

For the three months ended March 31, 2023, gross profit in the Creative Distribution Solutions segment decreased to $6.8 million from $7.8 million for the three months ended March 31, 2022, a decrease of $1.0 million or 12.9%. Gross profit as a percentage of net sales decreased to 26.6% of net sales for the three months ended March 31, 2023, from 33.0% of net sales for the three months ended March 31, 2022, primarily as a result of product mix.

Selling, General, and Administrative Expenses:  For the three months ended March 31, 2023, selling, general, and administrative expenses decreased to $30.8 million from $32.6 million for the three months ended March 31, 2022, a decrease of $1.8 million or 5.5%. Selling, general and administrative expenses in the three months ended March 31, 2023, included $0.7 million of stock options, restricted stock and incentives expense, $0.2 million of expense related to PMTA and $0.1 million of expense related to the new ERP and CRM systems. Selling, general and administrative expenses in the three months ended March 31, 2022, included $1.2 million of stock option, restricted stock and incentives expense, $0.4 million of transaction costs, $1.1 million of expense related to PMTA, $1.3 million of expense related to corporate restructuring and $0.3 million of expense related to the new ERP and CRM systems

Interest Expense, net:  For the three months ended March 31, 2023, interest expense, net decreased to $4.0 million, from $5.2 million for the three months ended March 31, 2022 as a result of the repurchase of $23.9 million of Convertible Senior Notes in the fourth quarter of 2022 and the first quarter of 2023 and increased interest income on cash as a result of rising interest rates.

Investment Loss (Gain):  For the three months ended March 31, 2023, investment loss of $4.8 million compared to investment gain of $0.1 million for the three months ended March 31, 2022.  The change is a result of the impairment charge recognized on our investment in Docklight for $4.9 million in the first quarter 2023.

Gain on Extinguishment of Debt: There was a gain on extinguishment of debt of $0.8 million for the three months ended March 31, 2023 as a result of repurchasing $13.9 million of Convertible Senior Notes compared to no gain on extinguishment of debt for the three months ended March 31, 2022.

Income Tax Expense:  Our income tax expense of $2.5 million was 25.2% of income before income taxes for the three months ended March 31, 2023. Our effective income tax rate was 23.7% for the three months ended March 31, 2022 and included a discrete tax benefit $0.4 million relating to stock option exercises.

Net Loss Attributable to Non-Controlling Interest:  Net loss attributable to non-controlling interest was $0.3 million for the three months ended March 31, 2023 compared to $0.2 million for the three months ended March 31, 2022.

Net Income Attributable to Turning Point Brands, Inc.:  Due to the factors described above, net income attributable to Turning Point Brands, Inc. for the three months ended March 31, 2023 and 2022, was $7.6 million and $11.0 million, respectively.

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EBITDA and Adjusted EBITDA

To supplement our financial information presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, we use non-U.S. GAAP financial measures including EBITDA and Adjusted EBITDA. We believe Adjusted EBITDA provides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Adjusted EBITDA is used by management to compare our performance to that of prior periods for trend analyses and planning purposes and is presented to our Board of Directors. We believe that EBITDA and Adjusted EBITDA are appropriate measures of operating performance because they eliminate the impact of expenses that do not relate to operating performance. In addition, our debt instruments contain covenants which use Adjusted EBITDA calculations.

We define “EBITDA” as net income before interest expense, gain (loss) on extinguishment of debt, provision for income taxes, depreciation, and amortization. We define “Adjusted EBITDA” as net income before interest expense, gain (loss) on extinguishment of debt, provision for income taxes, depreciation, amortization, other non-cash items, and other items we do not consider ordinary course in our evaluation of ongoing operating performance noted in the reconciliation below.

Non-U.S. GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with U.S. GAAP. Adjusted EBITDA excludes significant expenses required to be recorded in our financial statements by U.S. GAAP and is subject to inherent limitations. Other companies in our industry may calculate this non-U.S. GAAP measure differently than we do or may not calculate it at all, limiting its usefulness as a comparative measure. The tables below provide reconciliations between net income and Adjusted EBITDA.

	Three Months Ended
(in thousands)	March 31,
	2023			2022
Net income attributable to Turning Point Brands, Inc.	$	7,597		$	10,998
Add:
Interest expense, net		4,010			5,196
Gain on extinguishment of debt		(777	)		-
Income tax expense		2,468			3,340
Depreciation expense		776			871
Amortization expense		771			463
EBITDA	$	14,845		$	20,868
Components of Adjusted EBITDA
Corporate restructuring (a)		-			1,332
ERP/CRM (b)		138			330
Stock options, restricted stock, and incentives expense (c)		743			1,159
Transactional expenses (d)		4			425
FDA PMTA (e)		158			1,139
Non-cash asset impairment (f)		4,897			-
Adjusted EBITDA	$	20,785		$	25,253

(a) Represents costs associated with corporate restructuring, including severance.

(b) Represents cost assosicated with scoping and mobilization of new ERP and CRM systems and cost of duplicative ERP licenses.

(c) Represents non-cash stock options, restricted stock, incentives expense and Solace performance stock units.

(d) Represents the fees incurred for transaction expenses.

(e) Represents costs associated with applications related to FDA premarket tobacco product application (“PMTA”).

(f) Represents impairment of investment assets.

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Liquidity and Capital Reserves

Our principal uses for cash are working capital, debt service, and capital expenditures. We believe our cash on hand, cash flows from operations and borrowing availability under our 2021 Revolving Credit Facility are adequate to satisfy our operating cash requirements for the foreseeable future. As of March 31, 2023, we had $104.8 million of cash on hand and have $23.6 million of availability under the 2021 Revolving Credit Facility.

Our working capital, which we define as current assets less cash and current liabilities, decreased $3.9 million to $105.9 million at March 31, 2023, compared with $109.9 million at December 31, 2022.

	As of
(in thousands)	March 31, 2023		December 31, 2022
Current assets	$	142,283	$	151,251
Current liabilities		36,342		41,376
Working capital	$	105,941	$	109,875

Cash Flows from Operating Activities

For the three months ended March 31, 2023, net cash provided by operating activities was $15.4 million compared to net cash provided by operating activities of $13.0 million for the three months ended March 31, 2022, an increase of $2.3 million, primarily due to the timing of changes to working capital.

Cash Flows from Investing Activities

For the three months ended March 31, 2023, net cash used in investing activities was $2.4 million compared to net cash used in investing activities of $11.3 million for the three months ended March 31, 2022, a decrease of $8.8 million, primarily due to the a decrease in purchases of investments in our MSA escrow account.

Cash Flows from Financing Activities

For the three months ended March 31, 2023, net cash used in financing activities was $14.6 million compared to net cash  used in financing activities of $12.5 million for the three months ended March 31, 2022, a decrease in cash flow of $2.0 million, primarily due to the decrease in repurchases of common stock during 2023 offset by repurchases of Convertible Senior Notes.

Dividends and Share Repurchase

The most recent dividend of $0.065 per common share was paid on April 7, 2023, to shareholders of record at the close of business on March 17, 2023.

On February 25, 2020, our 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. On October 25, 2021, the Board increased the approved share repurchase program by $30.7 million and by an additional $24.6 million on February 24, 2022. $27.2 million remains available for share repurchases under the program at March 31, 2023.

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Long-Term Debt

As of March 31, 2023, we were in compliance with the financial and restrictive covenants of the Senior Secured Notes and 2021 Revolving Credit Facility. The following table provides outstanding balances of our debt instruments.

	March 31, 2023			December 31, 2022
Senior Secured Notes	$	250,000		$	250,000
Convertible Senior Notes		148,600			162,500
Gross notes payable and long-term debt		398,600			412,500
Less deferred finance charges		(5,022	)		(5,743	)
Notes payable and long-term debt	$	393,578		$	406,757

Senior Secured Notes

On February 11, 2021, we closed a private offering (the “Offering”) of $250 million aggregate principal amount of our 5.625% senior secured notes due 2026 (the “Senior Secured Notes”). The Senior Secured Notes bear interest at a rate of 5.625% and will mature on February 15, 2026. Interest on the Senior Secured Notes is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on August 15, 2021.We 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.

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 prior to February 15, 2023, at the redemption prices (expressed as a percentage of the principal amount to be redeemed) set forth below, plus accrued and unpaid interest, if any, on the Senior Secured Notes to be redeemed to (but not including) the applicable redemption date if redeemed during the period indicated below:

On or after February 15, 2023	102.813%
On or after February 15, 2024	101.406%
On or after February 15, 2025 and thereafter	100.000%

If we experience a change of control (as defined in the Senior Secured Notes Indenture), we must offer to repurchase the Senior Secured Notes at a repurchase price equal to 101% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest.

The Indenture contains covenants that, among other things, 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 Indenture. The Indenture provides for customary events of default. We were in compliance with all covenants as of March 31, 2023.

We 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.

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2021 Revolving Credit Facility

In connection with the Offering, we also entered into a new $25.0 million senior secured revolving credit facility (the “2021 Revolving Credit Facility”) with the lenders party thereto (the “Lenders”) and Barclays Bank PLC, as administrative agent and collateral agent (in such capacity, the “Agent”). Letters of credit are limited to $10 million (and are a part of, and not in addition to, the revolving line of credit). We have not drawn any borrowings under the 2021 Revolving Credit Facility but do have letters of credit of approximately $1.4 million outstanding under the facility as of March 31, 2023. The 2021 Revolving Credit Facility will mature on August 11, 2025 if none of our Convertible Senior Notes are outstanding, and if any Convertible Senior Notes are outstanding, the date which is 91 days prior to the maturity date of July 15, 2024, for such Convertible Senior Notes.

Interest is payable on the 2021 Revolving Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate plus an applicable margin of 3.50% (with step-downs upon de-leveraging). We also have the option to borrow at a rate determined by reference to the base rate.

The obligations under the 2021 Revolving Credit Agreement are guaranteed on a joint and several basis by the Guarantors. The Company’s and Guarantors’ obligations under the 2021 Revolving Credit Facility are secured on a pari passu basis with the Senior Secured Notes.

The 2021 Revolving Credit Agreement contains covenants that are substantially the same as the covenants in the Senior Secured Notes Indenture. The 2021 Revolving Credit Facility also requires the maintenance of a Consolidated Leverage Ratio (as defined in the 2021 Revolving Credit Agreement) of 5.50 to 1.00 (with a step down to 5.25 to 1.00 beginning with the fiscal quarter ending March 31, 2023) at the end of each fiscal quarter when extensions of credit under the 2021 Revolving Credit Facility and certain drawn and undrawn letters of credit (excluding (a) letters of credit that have been cash collateralized and (b) letters of credit having an aggregate face amount less than $5,000,000) in the aggregate outstanding exceeds 35% of the total commitments under the 2021 Revolving Credit Facility. The 2021 Revolving Credit Agreement provides for customary events of default. We were in compliance with all covenants as of March 31, 2023.

We incurred debt issuance costs attributable to the issuance of the 2021 Revolving Credit Facility of $0.5 million which are amortized to interest expense using the effective interest method over the expected life of the 2021 Revolving Credit Facility.

Convertible Senior Notes

In July 2019 we closed an offering of $172.5 million in aggregate principal amount of our 2.50% Convertible Senior Notes due July 15, 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes bear interest at a rate of 2.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. The Convertible Senior Notes will mature on July 15, 2024, unless earlier repurchased, redeemed or converted. The Convertible Senior Notes are senior unsecured obligations.

In the first quarter of 2023, a wholly owned subsidiary purchased $13.9 million in aggregate principal amount of our Convertible Senior Notes on the open market for $13.0 million resulting in a $0.7 million gain on extinguishment of debt.  In the fourth quarter of 2022 a wholly owned subsidiary purchased $10.0 million in aggregate principal amount of our Convertible Senior Notes on the open market for $9.0 million resulting in a $0.9 million gain on extinguishment of debt. The repurchased notes continue to be held by our subsidiary and may be resold subject to compliance with applicable securities law. As of March 31, 2023, $148.6 million aggregate principal remains outstanding and held by third parties.

The Convertible Senior Notes held by third parties are convertible into approximately 3,007,462 shares of our voting common stock under certain circumstances prior to maturity at a conversion rate of 18.6625 shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.58 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 us in excess of pre-determined thresholds of $0.04 per share. Upon conversion, we may pay cash, shares of our common stock or a combination of cash and stock, as determined by us at our discretion. The conditions required to allow the holders to convert their Convertible Senior Notes were not met as of March 31, 2023.

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We incurred debt issuance costs attributable to the Convertible Senior Notes of $5.9 million which are amortized to the interest expense using the effective interest method over the expected life of the Convertible Senior Notes.

In connection with the Convertible Senior Notes offering, we entered into privately negotiated capped call transactions with certain financial institutions. The capped call transactions have a strike price of $53.58 per and a cap price of $82.86 per share, and are exercisable when, and if, the Convertible Senior Notes are converted. We paid $20.53 million for these capped calls at the time they were entered into and charged that amount to additional paid-in capital.

Off-balance Sheet Arrangements

During the three months ended March 31, 2023, we executed various foreign exchange contracts for the purchase of €4.9 million with maturity dates ranging from August 2023 to October 2023.  At March 31, 2023, we had foreign currency contracts for the purchase of €15.3 million and sale of €10.4 million. The fair value of the foreign currency contracts were based on quoted market prices and resulted in an asset of $0.7 million included in Other current assets and a liability of $0.0 million included in Accrued liabilities at March 31, 2023. During 2022, we executed various foreign currency contracts for the purchase of €28.9 million and sale of €28.9 million. At December 31, 2022, we had foreign currency contracts for the purchase of €18.5 million and sale of €18.5 million. The fair value of the foreign currency contracts resulted in an asset of $1.2 million included in Other current assets and a liability of $0.0 million included in Accrued liabilities at December 31, 2022.

Inflation

Inflation in general and the recent rapid increases in gas prices have had a substantial negative effect on the purchasing power of consumers. While historically, we have been able to increase prices at a rate equal to or greater than that of inflation, that would be difficult to do in the current environment. We have implemented price increases in areas where that was feasible. In addition, we have been able to maintain a relatively stable variable cost structure for our products due, in part, to our successful procurement with regard to our tobacco products and, in part, to our existing contractual agreement for the purchase of our premium cigarette papers.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Sensitivity

There have been no material changes in our exposure to exchange rate fluctuation risk, as reported within our 2022 Annual Report on Form 10-K, during the period. Please refer to our ‘Quantitative and Qualitative Disclosures about Market Risk’ included in our 2022 Annual Report on Form 10-K filed with the SEC.

Credit Risk

There have been no material changes in our exposure to credit risk, as reported within our 2022 Annual Report on Form 10-K, during the three months ended March 31, 2023. Please refer to our ‘Quantitative and Qualitative Disclosures about Market Risk’ included in our 2022 Annual Report on Form 10-K filed with the SEC.

Interest Rate Sensitivity

In February 2021, we issued the Senior Secured Notes in an aggregate principal amount of $250 million. In July 2019, we issued Convertible Senior Notes in an aggregate principal amount of $172.5 million. We carry the Senior Secured Notes and Convertible Senior Notes at face value. Since the Senior Secured Notes and Convertible Senior Notes bear interest at a fixed rate, we have no financial statement risk associated with changes in interest rates. However, the fair value of the Convertible Senior Notes changes when the market price of our stock fluctuates, or interest rates change. Our remaining debt instruments bear interest at fixed rates and are not subject to interest rate volatility.

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Item 4. Controls and Procedures

We have carried out an evaluation under the supervision, and with the participation of, our management including our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and Chief Accounting Officer (“CAO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the “Act”)) as of March 31, 2023. Based upon the evaluation, our CEO, CFO, and CAO concluded our disclosure controls and procedures are not effective as of such date solely due to material weaknesses in internal controls over financial reporting that were disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

As previously described in Part II, Item 9A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, during our evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022, we concluded that our internal control over financial reporting was not effective  solely due to the existence of the following material weaknesses: we did not design and maintain effective internal controls related to our information technology general controls (“ITGCs”) in the areas of user access and program change-management over certain information technology (“IT”) systems that support the Company’s financial reporting processes. Our business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted.

We also did not appropriately design and operate controls associated with the risk assessment component of the internal control framework, specifically as it relates to identifying risks around segregation of duties within the financial reporting function, and the identification of all risks relating to the financial statements and controls that would address such risks. This impacts business process controls (automated and manual) throughout financial reporting and the business transaction cycles.

The material weaknesses did not result in any identified misstatements to the financial statements, and there were no changes to previously released financial results. The material weaknesses will not be considered remediated until the applicable controls operate for a sufficient period of time, and management has concluded through testing that these controls are operating effectively.

There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended March 31, 2023 which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings

For a description of our material pending legal proceedings, please see Contingencies in Note 14 to the Notes to the Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report.

See ‘Risk Factors—We may become subject to significant product liability litigation’ within our 2022 Annual Report on Form 10-K for additional details.

Item 1A. Risk Factors

In addition to the other information set forth in this report, carefully consider the factors discussed in the ‘Risk Factors’ section contained in our 2022 Annual Report on Form 10-K. There have been no material changes to the Risk Factors set forth in the 2022 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

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. On October 25, 2021, the Board increased the approved share repurchase program by $30.7 million bringing the authority at the time back to $50.0 million (including approximately $19.3 million available for repurchases under the Board’s previous authorization). On February 24, 2022, the Board increased the approved share repurchase program by $24.6 million bringing total authority at that time to $50.0 million. This share repurchase program has no expiration date and is subject to the ongoing discretion of the Board. All repurchases to date under our stock repurchase programs have been made through open market transactions, but in the future, we may also purchase shares through privately negotiated transactions or 10b5-1 repurchase plans.

The following table includes information regarding purchases of our common stock made by us during the quarter ended March 31, 2023 in connection with the repurchase program described above:

Period	Total Number of Shares Purchased (1)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 to January 31		3,125	$	21.63		-	$	27,197,886
February 1 to February 28		35,738	$	22.99		-	$	27,197,886
March 1 to March 31		-	$	-		-	$	27,197,886
Total		38,863				-

⁽¹⁾ The total number of shares purchased includes shares withheld by the Company in an amount equal to the statutory withholding taxes for holders who vested in stock-based awards (which totaled 3,125 shares in January and 35,738 shares in February). Shares withheld by the Company to cover statutory withholdings taxes are repurchased pursuant to the applicable plan and not the authorization under the share repurchase program.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None

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Item 6. Exhibits

Exhibit No.	Description
31.1	Rule 13a-14(a)/15d-14(a) Certification of Graham Purdy.*
31.2	Rule 13a-14(a)/15d-14(a) Certification of Luis Reformina.*
31.3	Rule 13a-14(a)/15d-14(a) Certification of Brian Wigginton.*
32.1	Section 1350 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101	XBRL (eXtensible Business Reporting Language). The following materials from Turning Point Brands, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, filed on May 4, 2023, formatted in Inline XBRL (iXBRL): (i) consolidated balance sheets, (ii) consolidated statements of income, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of cash flows, and (v) the notes to consolidated financial statements.*
104	Cover Page Interactive Data File (formatted in iXBRL and included in Exhibit 101).*

*  Filed or furnished herewith

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

TURNING POINT BRANDS, INC.

By: /s/ Graham Purdy

Name: Graham Purdy

Title:  President and Chief Executive Officer

By: /s/ Luis Reformina

Name: Luis Reformina

Title: Chief Financial Officer

By: /s/ Brian Wigginton

Name: Brian Wigginton

Title: Chief Accounting Officer

Date: May 4, 2023

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