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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 September 30, 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 November 1, 2023, there were 17,604,527 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)
  
       
   
5
       
   
6
       
    Consolidated Statements of Income for the nine months ended September 30, 2023 and 2022 7
       
   
8
       
    Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2023 and 2022
 8
       
   
9
       
   
10
       
    11
       
   
12
       
 
ITEM 2
37
       
 
ITEM 3
 49
       
 
ITEM 4
 49
       
PART II—OTHER INFORMATION
  
   
 
ITEM 1
 50
       
 
ITEM 1A
 50
       
 
ITEM 2
 50
       
 
ITEM 3
 50
       
 
ITEM 4
 50
       
 
ITEM 5
 51
       
 
ITEM 6
 52
       
  53
 
2
Table of Contents
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;

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

●
an 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
Table of Contents

 ●
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
Table of Contents
PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Turning Point Brands, Inc.
Consolidated Balance Sheets
(dollars in thousands except share data)

   
(unaudited)
        
    September 30,     December 31,  
ASSETS
  
2023
    
2022
  
Current assets:
            
Cash
  
$
96,071
    
$
106,403
  
Accounts receivable, net of allowances of $59 in 2023 and $114 in 2022
    
10,493
      
8,377
  
Inventories, net
    
116,926
      
119,915
  
Other current assets
    
23,322
      
22,959
  
Total current assets
    
246,812
      
257,654
  
Property, plant, and equipment, net
    
24,613
      
22,788
  
Deferred income taxes
    
8,190
      
8,443
  
Right of use assets
    
12,060
      
12,465
  
Deferred financing costs, net
    
203
      
282
  
Goodwill
    
136,280
      
136,253
  
Other intangible assets, net
    
81,725
      
83,592
  
Master Settlement Agreement (MSA) escrow deposits
    
27,534
      
27,980
  
Other assets
    
16,526
      
22,649
  
Total assets
  
$
553,943
    
$
572,106
  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
Current liabilities:
                
Accounts payable
  
$
11,237
    
$
8,355
  
Accrued liabilities
    
27,227
      
33,001
  
Current portion of long-term debt
     48,248       –  
Other current liabilities
    
6
      
20
  
Total current liabilities
    
86,718
      
41,376
  
Notes payable and long-term debt
    
316,573
      
406,757
  
Lease liabilities
    
10,433
      
10,593
  
Total liabilities
    
413,724
      
458,726
  
                 
Commitments and contingencies
            
                 
Stockholders’ equity:
                
Preferred stock; $0.01 par value; authorized shares 40,000,000; issued and outstanding shares -0-
    
–
      
–
  
Common stock, voting, $0.01 par value; authorized shares, 190,000,000; 19,912,882 issued shares and 17,596,422 outstanding shares at September 30, 2023, and 19,801,623 issued shares and 17,485,163 outstanding shares at December 31, 2022
    
199
      
198
  
Common stock, nonvoting, $0.01 par value; authorized shares, 10,000,000; issued and outstanding shares -0-
    
–
      
–
  
Additional paid-in capital
    
117,143
      
113,242
  
Cost of repurchased common stock (2,316,460 shares at September 30, 2023 and December 31, 2022)
    
(78,093
)
    
(78,093
)
Accumulated other comprehensive loss
    
(3,855
)
    
(2,393
)
Accumulated earnings
    
103,517
      
78,691
  
Non-controlling interest
    
1,308
      
1,735
  
Total stockholders’ equity
    
140,219
      
113,380
  
Total liabilities and stockholders’ equity
  
$
553,943
    
$
572,106
  

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

5
Table of Contents
Turning Point Brands, Inc.
Consolidated Statements of Income
(dollars in thousands except share data)
(unaudited)


  
Three Months Ended
September 30,
  
   
2023
    
2022
  
Net sales
  
$
101,722
    
$
107,802
  
Cost of sales
    
50,100
      
55,090
  
Gross profit
    
51,622
      
52,712
  
Selling, general, and administrative expenses
    
31,385
      
32,891
  
Operating income
    
20,237
      
19,821
  
Interest expense, net
    
3,984
      
4,802
  
Investment loss (gain)
    
2,101
      
(75
)
Gain on extinguishment of debt
     (481 )     –  
Income before income taxes
    
14,633
      
15,094
  
Income tax expense
    
3,767
      
3,797
  
Consolidated net income
    
10,866
      
11,297
  
Net gain (loss) attributable to non-controlling interest
    
35
      
(239
)
Net income attributable to Turning Point Brands, Inc.
  
$
10,831
    
$
11,536
  
                 
Basic income per common share:
                
Net income attributable to Turning Point Brands, Inc.
  
$
0.62
    
$
0.65
  
Diluted income per common share:
                
Net income attributable to Turning Point Brands, Inc.
  
$
0.58
    
$
0.60
  
Weighted average common shares outstanding:
                
Basic
    
17,595,980
      
17,749,294
  
Diluted
    
20,098,450
      
21,102,006
  

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

6
Table of Contents
Turning Point Brands, Inc.
Consolidated Statements of Income
(dollars in thousands except share data)
(unaudited)


  
Nine Months Ended
September 30,
  
   
2023
    
2022
  
Net sales
  
$
308,273
    
$
311,621
  
Cost of sales
    
155,556
      
155,646
  
Gross profit
    
152,717
      
155,975
  
Selling, general, and administrative expenses
    
94,093
      
98,779
  
Operating income
    
58,624
      
57,196
  
Interest expense, net
    
12,013
      
15,142
  
Investment loss
    
10,980
      
6,074
  
Gain on extinguishment of debt
    
(1,858
)
    
–
  
Income before income taxes
    
37,489
      
35,980
  
Income tax expense
    
9,573
      
8,706
  
Consolidated net income
    
27,916
      
27,274
  
Net loss attributable to non-controlling interest
    
(437
)
    
(684
)
Net income attributable to Turning Point Brands, Inc.
  
$
28,353
    
$
27,958
  
                 
Basic income per common share:
                
Net income attributable to Turning Point Brands, Inc.
  
$
1.61
    
$
1.55
  
Diluted income per common share:
                
Net income attributable to Turning Point Brands, Inc.
  
$
1.51
    
$
1.45
  
Weighted average common shares outstanding:
                
Basic
    
17,569,493
      
18,021,554
  
Diluted
    
20,415,786
      
21,401,485
  

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

7
Table of Contents
Turning Point Brands, Inc.
Consolidated Statements of Comprehensive Income
(dollars in thousands)
(unaudited)


  
Three Months Ended
September 30,
  
   
2023
    
2022
  
Consolidated net income
  
$
10,866
    
$
11,297
  
                 
Other comprehensive income (loss), net of tax
                
Unrealized loss on MSA investments, net of tax of $168 in 2023 and $333 in 2022
    
(527
)
    
(1,046
)
Foreign currency translation, net of tax of $0 in 2023 and 2022
    
270
      
(160
)
Unrealized loss on derivative instruments, net of tax of $102 in 2023 and $67 in 2022
    
(320
)
    
(210
)
     
(577
)
    
(1,416
)
Consolidated comprehensive income
    
10,289
      
9,881
  
Comprehensive gain (loss) attributable to non-controlling interest
    
35
      
(295
)
Comprehensive income attributable to Turning Point Brands, Inc.
  
$
10,254
    
$
10,176
  


 
Nine Months Ended
September 30,
  
   
2023
    
2022
  
Consolidated net income
  
$
27,916
    
$
27,274
  
                 
Other comprehensive income (loss), net of tax
                
Unrealized loss on MSA investments, net of tax of $108 in 2023 and $934 in 2022
    
(339
)
    
(2,940
)
Foreign currency translation, net of tax of $0 in 2023 and 2022
    
23
      
(122
)
Unrealized loss on derivative instruments, net of tax of $361 in 2023 and $67 in 2022
    
(1,136
)
    
(210
)
     
(1,452
)
    
(3,272
)
Consolidated comprehensive income
    
26,464
      
24,002
  
Comprehensive loss attributable to non-controlling interest
    
(437
)
    
(727
)
Comprehensive income attributable to Turning Point Brands, Inc.
  
$
26,901
    
$
24,729
  

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

8
Table of Contents
Turning Point Brands, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)


  
Nine Months Ended
September 30,
  
   
2023
    
2022
  
Cash flows from operating activities:
            
Consolidated net income
  
$
27,916
    
$
27,274
  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Gain on extinguishment of debt
    
(1,858
)
    
–
  
Loss (gain) on sale of property, plant, and equipment
    
34
      
(8
)
Depreciation and other amortization expense
    
2,388
      
2,611
  
Amortization of other intangible assets
    
2,315
      
1,373
  
Amortization of deferred financing costs
    
1,795
      
1,936
  
Deferred income tax expense (benefit)
    
694
      
(431
)
Stock compensation expense
    
4,660
      
4,103
  
Noncash lease income
    
(48
)
    
–
  
Loss on investments
    
11,162
      
6,244
  
Changes in operating assets and liabilities:
                
Accounts receivable
    
(2,112
)
    
(5,030
)
Inventories
    
3,036
      
(26,467
)
Other current assets
    
(1,384
)
    
1,891
  
Other assets
    
(5,110
)
    
1,211
  
Accounts payable
    
2,865
      
2,074
  
Accrued liabilities and other
    
(6,348
)
    
(392
)
Net cash provided by operating activities
  
$
40,005
    
$
16,389
  
                 
Cash flows from investing activities:
                
Capital expenditures
  
$
(4,206
)
  
$
(6,662
)
Payments for investments
     (200 )     (1,000
 )
Restricted cash, MSA escrow deposits
  

–
    

(10,169
)
Proceeds on the sale of property, plant and equipment
    
3
      
63
  
Net cash used in investing activities
  
$
(4,403
)
  
$
(17,768
)
                 
Cash flows from financing activities:
                
 Convertible Senior Notes repurchased
   $ (41,794 )   $ –  
 Proceeds from call options
     114       –  
Payment of dividends
    
(3,354
)
    
(3,259
)
Exercise of options
    
419
      
504
  
Redemption of options
     (346 )     (155 )
Redemption of performance restricted stock units
     (995 )     (1,228 )
Common stock repurchased
    
–
      
(27,032
)
Net cash used in financing activities
  
$
(45,956
)
  
$
(31,170
)
                 
Net decrease in cash
  
$
(10,354
)
  
$
(32,549
)
Effect of foreign currency translation on cash
  
$
22
    
$
(324
)
                 
Cash, beginning of period:
                
Unrestricted
   $
106,403
     $
128,320
  
Restricted
    
4,929
      
15,155
  
Total cash at beginning of period
   $
111,332
     $
143,475
  
                 
Cash, end of period:
                
Unrestricted
   $
96,071
     $
105,672
  
Restricted
    
4,929
      
4,930
  
Total cash at end of period
  
$
101,000
    
$
110,602
  
                 
Supplemental schedule of noncash investing activities:
                
Accrued capital expenditures
  
$
66
    
$
57
  
Accrued consideration for acquisition of investments
   $
 250     $
 –  
                 
Supplemental schedule of noncash financing activities:
                
Dividends declared not paid
  
$
1,187
    
$
1,089
  

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

9
Table of Contents
Turning Point Brands, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
For the Three Months Ended September 30, 2023 and 2022
(dollars in thousands except share data)
(unaudited)

                      Cost of
    Accumulated                    
          Common     Additional     Repurchased     Other           Non-        
    Voting     Stock,     Paid-In     Common     Comprehensive     Accumulated     Controlling        

 
Shares
    
Voting
    
Capital
    
 Stock
    
Income (Loss)
    
Earnings
    
Interest
    
Total
  
Beginning balance July 1, 2023
    
17,595,579
    
$
199
    
$
115,272
    
$
(78,093
)
  
$
(3,181
)
  
$
93,873
    
$
1,176
    
$
129,246
  
                                                                 
Unrealized loss on MSA investments, net of tax of $168
    
–
      
–
      
–
      
–
      
(527
)
    
–
      
–
      
(527
)
Unrealized loss on derivative instruments, net of tax of $102     –       –       –       –       (320 )     –       –       (320 )
Foreign currency translation, net of tax of $0
    
–
      
–
      
–
      
–
      
173
      
–
      
97
      
270
  
Stock compensation expense
    
–
      
–
      
1,824
      
–
      
–
      
–
      
–
      
1,824
  
Exercise of options
    
843
      
–
      
13
      
–
      
–
      
–
      
–
      
13
  
Settlement of call options, net of tax of $11
     –       –       34       –       –       –       –       34  
Dividends
    
–
      
–
      
–
      
–
      
–
      
(1,187
)
    
–
      
(1,187
)
Net income
    
–
      
–
      
–
      
–
      
–
      
10,831
      
35
      
10,866
  
Ending balance September 30, 2023
    
17,596,422
    
$
199
    
$
117,143
    
$
(78,093
)
  
$
(3,855
)
  
$
103,517
    
$
1,308
    
$
140,219
  
                                                                 
                                                                 
Beginning balance July 1, 2022
    
17,890,441
    
$
198
    
$
110,563
    
$
(68,287
)
  
$
(2,064
)
  
$
85,641
    
$
1,880
    
$
127,931
  
                                                                 
Unrealized loss on MSA investments, net of tax of $333
     –       –       –       –       (1,046 )     –       –       (1,046 )
Unrealized loss on derivative instruments, net of tax of $67
     –       –       –       –       (210 )     –       –       (210 )
Foreign currency translation, net of tax of $0
     –       –       –       –       (104 )     –       (56 )     (160 )
Stock compensation expense
    
–
      
–
      
1,442
      
–
      
–
      
–
      
–
      
1,442
  
Exercise of options
    
3,053
      
–
      
29
      
–
      
–
      
–
      
–
      
29
  
Performance restricted stock units issuance
    835       –       –       –       –       –       –       –  
Cost of repurchased common stock
    
(307,207
)
    
–
      
–
      
(7,614
)
    
–
      
–
      
–
      
(7,614
)
Dividends
    
–
      
–
      
–
      
–
      
–
      
(1,089
)
    
–
      
(1,089
)
Net income
    
–
      
–
      
–
      
–
      
–
      
11,536
      
(239
)
    
11,297
  
Ending balance September 30, 2022
    
17,587,122
    
$
198
    
$
112,034
    
$
(75,901
)
  
$
(3,424
)
  
$
96,088
    
$
1,585
    
$
130,580
  

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

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Turning Point Brands, Inc.
Consolidated Statements of Changes in Stockholders’ Equity  
For the Nine Months Ended September 30, 2023 and 2022
(dollars in thousands except share data)  
(unaudited)

                            Accumulated                    
          Common     Additional
    Cost of
     Other           Non-        
    Voting     Stock,     Paid-In     Repurchased
     Comprehensive     Accumulated     Controlling        

 
Shares
    
Voting
    
Capital
    
Common Stock
    
Income (Loss)
    
Earnings
    
Interest
    
Total
  
Beginning balance January 1, 2023
    
17,485,163
    
$
198
    
$
113,242
    
$
(78,093
)
  
$
(2,393
)
  
$
78,691
    
$
1,735
    
$
113,380
  
                                                                 
Unrealized gain on MSA investments, net of tax of $108
    
–
       –       –       –      
(339
)
    
–
      
–
      
(339
)
Unrealized loss on derivative instruments, net of tax of $361
     –       –       –       –       (1,136 )     –       –       (1,136 )
Foreign currency translation, net of tax of $0
    
–
      
–
      
–
      
–
      
13
      
–
      
10
      
23
  
Stock compensation expense
    
–
      
–
      
4,660
      
–
      
–
      
–
      
–
      
4,660
  
Exercise of options
    
30,214
      
–
      
419
      
–
      
–
      
–
      
–
      
419
  
Redemption of options
     (15,985 )     –       (346 )     –       –       –       –       (346 )
Performance restricted stock units issuance
   
140,324
       1       77       –       –       –       –       78  
Performance restricted stock units redeemed
    (43,294 )     –       (995 )     –       –       –       –       (995 )
Settlement of call options, net of tax of $28
     –       –       86       –       –       –       –       86  
Dividends
    
–
      
–
      
–
      
–
      
–
      
(3,527
)
    
–
      
(3,527
)
Net income
    
–
      
–
      
–
      
–
      
–
      
28,353
      
(437
)
    
27,916
  
Ending balance September 30, 2023
    
17,596,422
    
$
199
    
$
117,143
    
$
(78,093
)
  
$
(3,855
)
  
$
103,517
    
$
1,308
    
$
140,219
  
                                                                 
                                                                 
Beginning balance January 1, 2022
    
18,395,476
    
$
197
    
$
108,811
    
$
(48,869
)
  
$
(195
)
  
$
71,460
    
$
2,312
    
$
133,716
  
                                                                 
Unrealized loss on MSA investments, net of tax of $934
     –       –       –       –       (2,940 )     –       –       (2,940 )
Unrealized loss on derivative instruments, net of tax of $67
     –       –       –       –       (210 )     –       –       (210 )
Foreign currency translation, net of tax of $0
     –       –       –       –       (79 )     –       (43)       (122 )
Stock compensation expense
    
–
      
–
      
4,103
      
–
      
–
      
–
      
–
      
4,103
  
Exercise of options
    
35,394
      
–
      
504
      
–
      
–
      
–
      
–
      
504
  
Redemption of options
    –       –       (155 )     –       –       –       –       (155 )
Performance restricted stock units issuance
     75,345       1       (1 )     –       –       –       –       –  
Performance restricted stock units redeemed
     –       –       (1,141 )     –       –       –       –       (1,141 )
Redemption of restricted stock units
    –       –       (87 )     –       –       –       –       (87 )
Cost of repurchased common stock
    
(919,093
)
    
–
      
–
      
(27,032
)
    
–
      
–
      
–
      
(27,032
)
Dividends
    
–
      
–
      
–
      
–
      
–
      
(3,330
)
    
–
      
(3,330
)
Net income
    
–
      
–
      
–
      
–
      
–
      
27,958
      
(684
)
    
27,274
  
Ending balance September 30, 2022
    
17,587,122
    
$
198
    
$
112,034
    
$
(75,901
)
  
$
(3,424
)
  
$
96,088
    
$
1,585
    
$
130,580
  

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

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Table of Contents
Turning Point Brands, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except where designated and per share data)

Note 1. Description of Business and Basis of Presentation

Description of Business

Turning Point Brands, Inc. and its subsidiaries (collectively referred to herein as the “Company,” “we,” “our,” or “us”) is a leading manufacturer, marketer and distributor of branded consumer products. The Company sells a wide range of products to adult consumers consisting of staple products with its iconic brands Zig-Zag® and Stoker’s® and its next generation products to fulfill evolving consumer preferences. Its segments are led by its core, proprietary brands: Zig-Zag® and CLIPPER® in the Zig-Zag Products segment and Stoker’s® along with Beech-Nut® and Trophy® in the Stoker’s Products segment. The Company’s products are available in more than 217,000 retail outlets in North America. The Company operates in three segments: (i) Zig-Zag Products, (ii) Stoker’s Products, and (iii) Creative Distribution Solutions (formerly known as NewGen).

Basis of Presentation

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

Note 2. Summary of Significant Accounting Policies

Consolidation

The consolidated financial statements include the accounts of the Company, its subsidiaries, all of which are wholly-owned, and variable interest entities (“VIEs”) for which the Company is considered the primary beneficiary. All significant intercompany transactions have been eliminated.

Revenue Recognition

The Company recognizes revenues in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (Topic 606), which includes excise taxes and shipping and handling charges billed to customers, net of cash discounts for prompt payment, sales returns and incentives, upon delivery of goods to the customer – at which time the Company’s performance obligation is satisfied - at an amount that the Company expects to be entitled to in exchange for those goods in accordance with the five-step analysis outlined in Topic 606: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied. The Company excludes from the transaction price, sales taxes and value-added taxes imposed at the time of sale (which do not include excise taxes on smokeless tobacco, cigars or vaping products billed to customers).

The Company records an allowance for sales returns, based principally on historical volume and return rates, which is included in accrued liabilities on the consolidated balance sheets. The Company records sales incentives, which consist of consumer incentives and trade promotion activities, as a reduction in revenues (a portion of which is based on amounts estimated to be due to wholesalers, retailers and consumers at the end of the period) based principally on historical volume and utilization rates. Expected payments for sales incentives are included in accrued liabilities on the consolidated balance sheets.

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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 $5.1 million and $5.8 million for the three months ending September 30, 2023 and 2022, respectively. Shipping costs incurred were approximately $17.0 million and $17.9 million for the nine months ending September 30, 2023 and 2022, respectively.

Inventories

Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method. Leaf tobacco is presented in current assets in accordance with standard industry practice, notwithstanding the fact that such tobaccos are carried longer than one year for the purpose of curing.

Fair Value

GAAP establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

The three levels of the fair value hierarchy under GAAP are described below:


 ●
Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date.

●
Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

●
Level 3 – Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

Derivative Instruments

The 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 (e.g. production equipment) in the denominated invoice currency. Forward contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by market prices on the measurement date, except any hedge ineffectiveness which is recognized currently in income. Gains and losses on these forward contracts are reclassified from other comprehensive income into inventory as the related inventories are received and are transferred to net income as inventory is sold. Changes in fair value of any contracts that do not qualify for hedge accounting or are not designated as hedges are recognized currently in income.

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Table of Contents
Risks and Uncertainties

Manufacturers and sellers of tobacco products are subject to regulation at the federal, state, and local levels. Such regulations include, among others, labeling requirements, limitations on advertising, and prohibition of sales to minors. The tobacco industry is likely to continue to be heavily regulated. There can be no assurance as to the ultimate content, timing, or effect of any regulation of tobacco products by any federal, state, or local legislative or regulatory body, nor can there be any assurance that any such legislation or regulation would not have a material adverse effect on the Company’s financial position, results of operations, or cash flows. In a number of states, targeted flavor bans have been proposed or enacted legislatively or by the administrative process. Depending on the number and location of such bans, that legislation or regulation could have a material adverse effect on the Company’s financial position, results of operations or cash flows. The U.S. Food and Drug Administration (“FDA”) continues to consider various restrictive regulations around our products, including targeted flavor bans; however, the details, timing, and ultimate implementation of such measures remain unclear.

The tobacco industry has experienced, and is experiencing, significant product liability litigation. Most tobacco liability lawsuits have been brought against manufacturers and sellers of cigarettes for injuries allegedly caused by smoking or exposure to smoke. However, several lawsuits have been brought against manufacturers and sellers of smokeless products for injuries to health allegedly caused by use of smokeless products. Typically, such claims assert that use of smokeless products is addictive and causes oral cancer. Additionally, several lawsuits have been brought against manufacturers and distributors of Creative Distribution Solutions products due to malfunctioning devices. There can be no assurance the Company will not sustain losses in connection with such lawsuits and that such losses will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

Master Settlement Agreement (MSA):  Pursuant to the Master Settlement Agreement (the “MSA”) entered into in November 1998 by most states (represented by their attorneys general acting through the National Association of Attorneys General) and subsequent states’ statutes, a “cigarette manufacturer” (which is defined to include a manufacturer of make-your-own (“MYO”) cigarette tobacco) has the option of either becoming a signatory to the MSA or opening, funding, and maintaining an escrow account to have funds available for certain potential tobacco-related liabilities with sub-accounts on behalf of each settling state. Such companies are entitled to direct the investment of the escrowed funds and withdraw any appreciation but cannot withdraw the principal for twenty-five years from the year of each annual deposit, except to withdraw funds deposited pursuant to an individual state’s escrow statute to pay a final judgement to that state’s plaintiffs in the event of such a final judgement against the Company. The Company chose to open and fund an escrow account as its method of compliance. It is the Company’s policy to record amounts on deposit in the escrow account for prior years as a non-current asset. As of September 30, 2023, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $27.5 million. At December 31, 2022, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $28.0 million. The Company discontinued its generic category of MYO in 2019 and its Zig-Zag branded MYO cigarette smoking tobacco in 2017. Thus, pending a change in MSA legislation, the Company has no remaining product lines covered by the MSA and will not be required to make future escrow deposits. We expect to begin withdrawal of the funds deposited beginning in 2024 so long as these deposits do not become subject to litigation under the MSA-related statutes.

The Company has chosen to invest a portion of the MSA escrow, from time to time, in U.S. Government securities including TIPS, Treasury Notes, and Treasury Bonds. These investments are classified as available-for-sale and carried at fair value. Realized losses are prohibited under the MSA; any investment in an unrealized loss position will be held until the value is recovered, or until maturity.

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Table of Contents

Fair values for the U.S. Governmental agency obligations are Level 2 in the fair value hierarchy. The following tables show cost and estimated fair value of the assets held in the MSA account, respectively, as well as the maturities of the U.S. Governmental agency obligations held in such account for the periods indicated.


    As of September 30, 2023     As of December 31, 2022  
         
Gross
    
Estimated
          
Gross
    
Estimated
  
         
Unrealized
    
Fair
          
Unrealized
    
Fair
  
   
Cost
    
Losses
    
Value
    
Cost
    
Losses
    
Value
  
Cash and cash equivalents
  
$
1,929
    
$
–
    
$
1,929
    
$
1,929
    
$
–
    
$
1,929
  
U.S. Governmental agency obligations (unrealized position < 12 months)
    
–
      
–
   
–
      
10,226
      
(1,251
)
    
8,975
  
U.S. Governmental agency obligations (unrealized position > 12 months)
    
30,144
      
(4,539
)
    
25,605
      
19,918
      
(2,842
)
    
17,076
  
   
$
32,073
    
$
(4,539
)
  
$
27,534
    
$
32,073
    
$
(4,093
)
  
$
27,980
  

   
As of
  
   
September 30, 2023
  
Less than one year
  
$
2,200
  
One to five years
    
10,238
  
Five to ten years
    
15,751
  
Greater than ten years
    
1,955
  
Total
  
$
30,144
  

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


  
Deposits as of
  
Sales
Year
  
September 30,
2023
    
December 31,
2022
  
1999
  
$
211
    
$
211
  
2000
    
1,017
      
1,017
  
2001
    
1,673
      
1,673
  
2002
    
2,271
      
2,271
  
2003
    
4,249
      
4,249
  
2004
    
3,714
      
3,714
  
2005
    
4,553
      
4,553
  
2006
    
3,847
      
3,847
  
2007
    
4,167
      
4,167
  
2008
    
3,364
      
3,364
  
2009
    
1,619
      
1,619
  
2010
    
406
      
406
  
2011
    
193
      
193
  
2012
    
199
      
199
  
2013
    
173
      
173
  
2014
    
143
      
143
  
2015
    
101
      
101
  
2016
    
91
      
91
  
2017
    
82
      
82
  
                 
 Total   $
32,073
    $
32,073
 

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

In August 2016, the FDA’s regulatory authority under the Tobacco Control Act was extended to all tobacco products not previously covered, including: (i) certain Creative Distribution Solutions products (such as electronic cigarettes, vaporizers and e-liquids) and their components or parts (such as tanks, coils and batteries); (ii) cigars and their components or parts (such as cigar tobacco and wraps); (iii) pipe tobacco; (iv) hookah products; and (v) any other tobacco product “newly deemed” by the FDA. These “deeming regulations” apply to all products made or derived from tobacco intended for human consumption, but excluding accessories of tobacco products (such as lighters). Accordingly, the FDA has since regulated our cigar and cigar wrap products as well as our vapor products containing tobacco-derived nicotine and products intended or reasonably expected to be used to consume such e-liquids.

Subsequently, on April 14, 2022, the FDA Center for Tobacco Products also obtained jurisdiction over non-tobacco nicotine products (“NTN Products”), including synthetic nicotine. That law subjects NTN Products to the same requirements as tobacco-derived products, including not selling these products to persons under 21 years of age, not marketing these products as modified risk tobacco products without authorization, and not distributing free samples of these products. Additionally, NTN Products became subject to premarket filing requirements. Under the new law, manufacturers were required to file a Premarket Tobacco Application (“PMTA”) by May 14, 2022, in order to continue selling products currently on the market. NTN Products subject of a timely-filed PMTA, and not in receipt of a negative action, were allowed to remain on the market until July 13, 2022, at which time these products became subject to enforcement, similar to tobacco-derived products remaining under review.

A successful PMTA must demonstrate that the subject product is “appropriate for the protection of public health,” taking into account the effect of the marketing of the product on all sub-populations while a Substantial Equivalence Report must demonstrate that a new product either has the same characteristics as its predicate product or different characteristics but does not raise different questions of public health. We submitted premarket filings for certain of our regulated products in order to continue selling these products while they remain under review. We have continued to supplement these applications with additional information and have responded to information requests from the FDA; however, there can be no guarantee that the FDA will accept such amendments and responses or that the applications will meet the standard of “appropriate for the protection of public health” or “substantially equivalent,” as appropriate. The FDA has indicated its enforcement priority is those applicants who have received negative action on their application, such as a Marketing Denial Order or Refuse to File notification and who continue to illegally sell those unauthorized products, as well as products for which manufacturers failed to submit a marketing application. Despite these stated enforcement priorities, given the FDA’s limited resources we expect that for a period of time there may be a lack of enforcement, which may adversely impact our ability to compete in the marketplace against those who continue to sell unauthorized products. There can be no guarantee that the FDA will not shift its enforcement priorities or that it will increase in ability to enforce against unauthorized products over time.

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

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

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

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

Note 3. Derivative Instruments

Foreign Currency

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

At September 30, 2023, the Company had foreign currency contracts outstanding for the purchase of €17.1 million and sale of €15.2 million. The foreign currency contracts’ fair value at September 30, 2023, resulted in an asset of $0.1 million included in Other current assets and a liability of $0.5 million included in Accrued liabilities. At December 31, 2022, the Company had foreign currency contracts for the purchase of €18.5 million and sale of €18.5 million. The foreign currency contracts’ fair value at December 31, 2022, resulted in an asset of $1.2 million included in Other current assets and a liability of $0.0 million included in Accrued liabilities.

Note 4. Fair Value of Financial Instruments

The estimated fair value amounts have been determined by the Company using the methods and assumptions described below. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Cash and Cash Equivalents

Cash and cash equivalents are, by definition, short-term. Thus, the carrying amount is a reasonable estimate of fair value.

Accounts Receivable

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

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Long-Term Debt

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

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

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

Note 5. Inventories

The components of inventories are as follows:

    September 30,     December 31,  

 
2023
    
2022
  
Raw materials and work in process
  
$
5,512
    
$
7,283
  
Leaf tobacco
    
53,018
      
43,468
  
Finished goods - Zig-Zag Products
    
40,988
      
42,279
  
Finished goods - Stoker’s Products
    
8,729
      
9,667
  
Finished goods - Creative Distribution Solutions
    
7,059
      
15,431
  
Other
    
1,620
      
1,787
  
Inventories
  
$
116,926
    
$
119,915
  

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

Note 6. Other Current Assets

Other current assets consist of:

    September 30,     December 31,  

 
2023
    
2022
  
Inventory deposits
  
$
5,357
    
$
6,395
  
Insurance deposit
    
3,000
      
3,000
  
Prepaid taxes
     1,675
       448
  
Other
    
13,290
      
13,116
  
Total
  
$
23,322
    
$
22,959
  

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Note 7. Property, Plant, and Equipment

Property, plant, and equipment consists of:

    September 30,     December 31,  

 
2023
    
2022
  
Land
  
$
22
    
$
22
  
Buildings and improvements
    
3,940
      
3,096
  
Leasehold improvements
    
5,252
      
5,404
  
Machinery and equipment
    
28,837
      
25,832
  
Furniture and fixtures
    
8,138
      
9,264
  
Gross property, plant and equipment
    
46,189
      
43,618
  
Accumulated depreciation
    
(21,576
)
    
(20,830
)
Net property, plant and equipment
  
$
24,613
    
$
22,788
  

Note 8. Other Assets

Other assets consist of:

    September 30,     December 31,  

 
2023
    
2022
  
Equity investments
  
$
2,421
    
$
13,376
  
Debt security investment  
7,765    
7,820
  
Other
    
6,340
      
1,453
  
Total
  
$
16,526
    
$
22,649
  

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

In July 2021, the Company invested $8.0 million in Old Pal Holding Company LLC (“Old Pal”). In July 2022, the Company invested an additional $1.0 million in Old Pal.  The Company invested in the form of a convertible note which includes additional follow-on investment rights. The accrued interest of $0.2 million from July 2021 to July 2022 was rolled into the convertible note in July 2022 resulting in a total investment of $9.2 million. Old Pal is a leading brand in the cannabis lifestyle space that operates a non-plant touching licensing model. The convertible note bears an interest rate of 3.0% per year and matures July 31, 2026.Interest and principal not paid to date are receivable at maturity. Old Pal has the option to extend the maturity date in one-year increments. The interest rate is subject to change based on Old Pal reaching certain sales thresholds. The weighted average interest rate on the convertible note was 3.0% for the three and nine months ended September 30, 2023. Old Pal has the option to convert the note into shares once sales reach a certain threshold. The conditions required to allow Old Pal to convert the note were not met as of September 30, 2023. Additionally, the Company has the right to convert the note into shares at any time after January 1, 2022. The Company has classified the debt security with Old Pal as available for sale. The Company reports interest income on available for sale debt securities in interest income in our Consolidated Statements of Income. Quarterly, we perform a qualitative assessment to determine if the fair value of the investment could be less than the amortized cost basis.  The fourth quarter 2022 qualitative assessment determined that the fair value of the investment could be less than the amortized cost basis and therefore the Company performed a quantitative assessment of the fair value of the investment.  The fair value as of December 31, 2022 was determined to be $7.9 million based on a Monte Carlo simulation (Level 3).  The Company determined that the impairment was a result of credit related factors and, as such, recorded an allowance for credit losses of $1.4 million which is included in investment loss for the year ended December 31, 2022. In the second quarter of 2023, based on a subsequent quantitative assessment of the fair value using a Monte Carlo simulation, the Company determined the fair value to be $7.7 million and recorded an additional allowance for credit losses of $0.3 million which is included in investment loss for the nine months ended September 30, 2023. The Company has recorded accrued interest receivable of $0.1 million and $0.1 million at September 30, 2023 and December 31, 2022, respectively, in other current assets on our Consolidated Balance Sheets.
 
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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 for the three months ended March 31, 2023. In the second quarter of 2023, based on a significant change in Docklight’s business model, the Company deemed its investment in Docklight fully impaired resulting in an additional loss of $3.8 million bringing the fair value of the Company’s investment in Docklight to zero. Impairment losses for the Company’s investment in Docklight are recorded in Investment loss on our Consolidated Statements of Income.  Fair value for both periods was determined using a valuation derived from relevant revenue multiples (Level 3).

In October 2020, the Company invested $2.5 million to acquire a 20% stake in Wild Hempettes, LLC, a manufacturer of natural CBD cigarettes designed as the first cigarette-styled CBD pre-roll in the world. The Company has options to increase its stake to a 100% ownership position based on certain milestones. As part of the transaction, the Wild Hempettes joint venture was spun off from Crown Distributing LLC and formed as a vehicle for the Company to be the exclusive distributor of Hempettes™ cigarettes to U.S. bricks and mortar retailers under a profit-sharing arrangement. Effective January 2023, the Company terminated its distribution agreement. The Company accounts for its 20% share of Wild Hempettes profit or loss using the equity method of accounting. In the third quarter of 2023, based on Wild Hempettes financial results, the Company deemed its investment in Wild Hempettes to be other-than-temporarily impaired resulting in a $2.2 million impairment charge included in investment loss for the three and nine months ended September 30, 2023. Fair value for its share of investment in Wild Hempettes was determined using a valuation derived from relevant revenue multiples (Level 3).  As a result of the analysis, the Company’s 20% stake represents a fair value of $0.3 million.

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

Note 9. Accrued Liabilities

Accrued liabilities consist of:

    September 30,     December 31,  

 
2023
    
2022
  
Accrued payroll and related items
  
$
6,299
    
$
7,685
  
Customer returns and allowances
    
6,384
      
7,291
  
Taxes payable
    
1,259
      
1,867
  
Lease liabilities
    
2,809
      
3,102
  
Accrued interest
    
2,507
      
7,277
  
Other
    
7,969
      
5,779
  
Total
  
$
27,227
    
$
33,001
  

Note 10. Notes Payable and Long-Term Debt

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

    September 30,     December 31,  

 
2023
    
2022
  
Senior Secured Notes
  
$
250,000
    
$
250,000
  
Convertible Senior Notes
    
118,541
      
162,500
  
Gross notes payable and long-term debt
    
368,541
      
412,500
  
Less deferred finance charges
    
(3,720
)
    
(5,743
)
Less current maturities
     (48,248 )     –  
Notes payable and long-term debt
  
$
316,573
    
$
406,757
  

Senior Secured Notes

On February 11, 2021, the Company closed a private offering (the “Offering”) of $250.0 million aggregate principal amount of its 5.625% senior secured notes due 2026 (the “Senior Secured Notes” or the “Notes”). The Senior Secured Notes bear interest at a rate of 5.625% and will mature on February 15, 2026. Interest on the Senior Secured Notes is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on August 15, 2021.The Company used the proceeds from the Offering (i) to repay all obligations under and terminate the 2018 First Lien Credit Facility, (ii) to pay related fees, costs, and expenses and (iii) for general corporate purposes.

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Obligations under the Senior Secured Notes are guaranteed by the Company’s existing and future wholly-owned domestic subsidiaries (the “Guarantors”) that guarantee any credit facility (as defined in the indenture governing the Senior Secured Notes or the “Senior Secured Notes Indenture”) or capital markets debt securities of the Company or Guarantors in excess of $15.0 million. The Senior Secured Notes and the related guarantees are secured by first-priority liens on substantially all of the assets of the Company and the Guarantors, subject to certain exceptions.

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

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

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

The Senior Secured Notes Indenture contains covenants that, among other things, restrict the ability of the Company and its restricted subsidiaries to: (i) grant or incur liens; (ii) incur, assume or guarantee additional indebtedness; (iii) sell or otherwise dispose of assets, including capital stock of subsidiaries; (iv) make certain investments; (v) pay dividends, make distributions or redeem or repurchase capital stock; (vi) engage in certain transactions with affiliates; and (vii) consolidate or merge with or into, or sell substantially all of our assets to another entity. These covenants are subject to a number of limitations and exceptions set forth in the Senior Secured Notes Indenture. The Senior Secured Notes Indenture provides for customary events of default. The Company was in compliance with all covenants as of September 30, 2023.

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

2021 Revolving Credit Facility

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

Letters of credit are limited to $10.0 million (and are a part of, and not in addition to, the revolving line of credit). The Company has not drawn any borrowings under the Amended Revolving Credit Facility but does have letters of credit of approximately $1.4 million outstanding under the facility as of September 30, 2023. The Amended Revolving Credit Facility will mature on August 11, 2025, if none of the Company’s Convertible Senior Notes are outstanding, and if any Convertible Senior Notes are outstanding, the date which is 91 days prior to the maturity date of July 15, 2024, for such Convertible Senior Notes.

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

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

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The Amended Revolving Credit Agreement contains covenants that are substantially the same as the covenants in the Senior Secured Notes Indenture. The Amended Revolving Credit Facility also requires the maintenance of a Consolidated Leverage Ratio (as defined in the Amended Revolving Credit Agreement) of 5.50 to 1.00 (with a step down to 5.25 to 1.00 beginning with the fiscal quarter ending March 31, 2023) at the end of each fiscal quarter when extensions of credit under the Amended Revolving Credit Facility and certain drawn and undrawn letters of credit (excluding (a) letters of credit that have been cash collateralized and (b) letters of credit having an aggregate face amount less than $5.0 million) in the aggregate outstanding exceeds 35% of the total commitments under the Amended Revolving Credit Facility. The Amended Revolving Credit Agreement provides for customary events of default. The Company was in compliance with all covenants as of September 30, 2023.

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

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

2023 ABL Facility

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

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

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

Level
Historical Excess Availability
Applicable Margin
for SOFR Loans
Applicable Margin
for Base Rate Loans
I
Greater than or equal to 66.66%
1.75%
0.75%
II
Less than 66.66%, but greater than or equal to 33.33%
2.00%
1.00%
III
Less than 33.33%
2.25%
1.25%

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

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

Convertible Senior Notes

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

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

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

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

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

In connection with the Convertible Senior Notes offering, the Company entered into privately negotiated capped call transactions with certain financial institutions. The capped call transactions have a strike price of $53.49 per and a cap price of $82.86 per share, and are exercisable when, and if, the Convertible Senior Notes are converted. The Company paid $20.53 million for these capped calls at the time they were entered into and charged that amount to additional paid-in capital.

Note 11. Leases

The Company’s leases consist primarily of leased property for manufacturing, warehouse, corporate offices and retail space as well as vehicle leases. At lease inception, the Company recognizes a lease right of use asset and lease liability calculated as the present value of future minimum lease payments. In general, the Company does not recognize any renewal periods within the lease terms as there are no significant barriers to ending the lease at the initial term. Lease and non-lease components are accounted for as a single lease component.

Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for these leases is recognized on a straight-line basis over the lease term.

The components of lease expense consisted of the following:


  
Three Months Ended
September 30,
  

  2023
     2022
  
Operating lease cost
            
Cost of sales
  
$
125
    
$
240
  
Selling, general and administrative
     496
       348
  
Variable lease cost (1)
     301
       235
  
Short-term lease cost
     7
       6
  
Total
  
$
929
    
$
829
  

(1)
Variable lease cost includes elements of a contract that do not represent a good or service but for which the lessee is responsible for paying.

   
Three Months Ended
September 30,
  
   
2023
    
2022
  
Financing lease cost
            
Selling, general and administrative
  
$
397
    
$
332
  
Total
  
$
397
    
$
332
  


 
Nine Months Ended
September 30,
  
   
2023

2022
  
Operating lease cost
            
Cost of sales
  
$
382
    
$
700
  
Selling, general and administrative     1,520
       1,133
  
Variable lease cost (1)     933
       558
  
Short-term lease cost     20
       31
  
Total    $ 2,855
      $ 2,422
  

   
Nine Months Ended
September 30,
  
   
2023
    
2022
  
Financing lease cost
            
Selling, general and administrative
  
$
1,083
    
$
920
  
Total
  
$
1,083

$
920
  

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    September 30,     December 31,  
   
2023
    
2022
  
Assets:
            
Right of use assets - Operating
  
$
10,332
    
$
10,967
  
Right of use assets - Financing
  
1,728    
1,498  
Total lease assets
  
$
12,060
    
$
12,465
  
                 
Liabilities:
                
Current lease liabilities - Operating (2)
  
$
1,717
    
$
2,007
  
Current lease liabilities - Financing (2)
  
1,092    
1,095  
Long-term lease liabilities - Operating
  
9,854    
10,243  
Long-term lease liabilities - Financing
     579       350  
Total lease liabilities
  
$
13,242
    
$
13,695
  

(2)
Reported within accrued liabilities on the balance sheets.

Note 12. Income Taxes

The Company’s effective income tax rate for the three and nine months ended September 30, 2023 was 25.7% and 25.5%, respectively. The Company’s effective income tax rate for the three and nine months ended September 30, 2022 was 25.2% and 24.2%, respectively, which includes a discrete tax deduction of $0.0 million and $0.7 million, respectively, relating to stock option 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 September 30, 2023, net of forfeitures, there were 276,484 Restricted Stock Units (“RSUs”), 118,519 options and 29,172 Performance-Based Restricted Stock Units (“PRSUs”) granted under the 2021 Plan. There are 965,877 shares available for grant under the 2021 Plan.

On April 28, 2016, the Board of Directors of the Company adopted the 2015 Plan, pursuant to which awards could have been granted to employees, non-employee directors, and consultants. In addition, the 2015 Plan provided for the granting of nonqualified stock options to employees of the Company or any subsidiary of the Company. Pursuant to the 2015 Plan, 1,400,000 shares of TPB Common Stock were reserved for issuance as awards to employees, non-employee directors, and consultants as compensation for past or future services or the attainment of certain performance goals. The 2015 Plan was scheduled to terminate on April 27, 2026. Upon adoption of the 2021 Plan, the 2015 Plan was terminated, and the Company determined no additional grants would be made under the 2015 Plan. However, all awards issued under the 2015 Plan that have not been previously terminated or forfeited remain outstanding and continue unaffected. There are no shares available for grant under the 2015 Plan. The 2015 Plan was administrated by the Committee.

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

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

   
    Weighted     Weighted  
    Stock     Average     Average  
    Option     Exercise    
Grant Date
  

 
Shares
    
Price
    
Fair Value
  
Outstanding, December 31, 2021
    
619,835
    
$
28.51
    
$
8.70
  
                         
Granted
    
114,827
      
30.58
      
10.34
  
Exercised
    
(40,331
)
    
12.49
      
4.08
  
Forfeited
    
(11,117
)
    
32.60
      
9.35
  
Outstanding, December 31, 2022
    
683,214
     $
29.74
     $
9.24
  
                         
Granted
     77,519       20.71       6.45  
Exercised
    
(30,214
)
    
13.87
      
4.37
  
Forfeited
    
(65,214
)
    
27.38
      
9.11
  
Outstanding, September 30, 2023
    
665,305
    
$
29.67
    
$
9.14
  

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

At September 30, 2023, under the 2006 Plan, the exercise price for the 46,824 outstanding options is $3.83 per share, all of which are exercisable. The weighted average of the remaining lives of the outstanding stock options with an exercise price of $3.83 is approximately .85 years. The Company estimates the expected life of these stock options is ten years from the date of grant. For the $3.83 per share options, the weighted average fair value of options at the date of grant was determined using the Black-Scholes model with the following assumptions: a ten-year life from grant date, a current share price and exercise price of $3.83, a risk-free interest rate of 3.57%, volatility of 40%, and no assumed dividend yield. Based on these assumptions, the fair value of these options is approximately $2.17 per share option granted.

At September 30, 2023, under the 2015 and 2021 Plans, the risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. The expected volatility is based on the average long-term historical volatilities of peer companies. We intend to continue to consistently use the same group of publicly traded peer companies to determine expected volatility until sufficient information regarding volatility of our share price becomes available or until the selected companies are no longer suitable for this purpose. Due to our limited trading history, we are using the simplified method presented by SEC Staff Accounting Bulletin No. 107 to calculate expected holding periods, which represent the periods of time for which options granted are expected to be outstanding. We will continue to use this method until we have sufficient historical exercise experience to give us confidence in the reliability of our calculations. The fair values of these options were determined using the Black-Scholes option pricing model.

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

   
February 10,
    
May 17,
    
March 7,
    
March 20,
    
October 24,
    
March 18,
    
  February 18,
    
May 3,
  

 
2017
    
2017
    
2018
    
2019
    
2019
    
2020
    
2021
    
2021
  
Number of options granted
    
40,000
      
93,819
      
98,100
      
155,780
      
25,000
      
155,000
      
100,000
      
12,000
  
Options outstanding at September 30, 2023
    
20,000
      
39,983
      
51,567
      
125,834
      
25,000
      
80,975
      
90,253
      
12,000
  
Number exercisable at September 30, 2023
    
20,000
      
39,983
      
51,567
      
125,834
      
25,000
      
80,975
      
63,727
      
8,040
  
Exercise price
  
$
13.00
    
$
15.41
    
$
21.21
    
$
47.58
    
$
20.89
    
$
14.85
    
$
51.75
    
$
47.76
  
Remaining lives
    
3.37
      
3.63
      
4.44
      
5.47
      
6.07
      
6.47
      
7.39
      
7.59
  
Risk free interest rate
    
1.89
%
    
1.76
%
    
2.65
%
    
2.34
%
    
1.58
%
    
0.79
%
    
0.56
%
    
0.84
%
Expected volatility
    
27.44
%
    
26.92
%
    
28.76
%
    
30.95
%
    
31.93
%
    
35.72
%
    
28.69
%
    
29.03
%
Expected life
    
6.000
      
6.000
      
6.000
      
6.000
      
6.000
      
6.000
      
6.000
      
6.000
  
Dividend yield
    
–
      
–
      
0.83
%
    
0.42
%
    
0.95
%
    
1.49
%
    
0.55
%
    
0.59
%
Fair value at grant date
  
$
3.98
    
$
4.60
    
$
6.37
    
$
15.63
    
$
6.27
    
$
4.41
    
$
13.77
    
$
13.06
  

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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,
     May 12,  
 
  
2021
    
2022
    
2022
     2023  
Number of options granted
    
7,500
       100,000       14,827       77,519  
Options outstanding at September 30, 2023
    
7,500
       73,023       14,827       77,519  
Number exercisable at September 30, 2023
    
5,100
       24,995       5,042       58,139  
Exercise price
  
$
45.05
     $ 30.46     $ 31.39     $ 20.71  
Remaining lives
    
7.63
       8.46       8.59       9.62  
Risk free interest rate
    
0.84
%
     2.10 %     2.92 %     3.41 %
Expected volatility
    
31.50
%
     35.33 %     35.33 %     34.51 %
Expected life
    
6.000
       6.000       6.000       5.186  
Dividend yield
    
0.63
%
     1.01 %     0.98 %     1.61 %
Fair value at grant date
  
$
13.23
     $ 10.23     $ 11.07     $
6.45  

The Company has recorded compensation expense related to the options based on the provisions of ASC 718 under which the fixed portion of such expense is determined as the fair value of the options on the date of grant and amortized over the vesting period. The Company recorded compensation expense related to the options of approximately $0.2 million and $0.3 million for the three months ended September 30, 2023 and 2022, respectively. The Company recorded compensation expense related to the options of approximately $0.6 million and $0.8 million for the nine months ended September 30, 2023 and 2022, respectively. Total unrecognized compensation expense related to options at September 30, 2023, is $0.3 million, which will be expensed over 0.94 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 September 30, 2023, there are 456,922 PRSUs outstanding. The following table outlines the PRSUs granted and outstanding as of September 30, 2023.

   
March 20,
    
March 18,
    
December 28,
    
February 18,
    
March 14,
     May 4,
  
   
2019
    
2020
    
2020
    
2021
    
2022
     2023  
Number of PRSUs granted
    
92,500
      
94,000
      
88,169
      
100,000
       49,996       133,577  
PRSUs outstanding at September 30, 2023
    
77,080
      
84,360
      
31,040
      
87,340
       43,525       133,577  
Fair value as of grant date
  
$
47.58
    
$
14.85
    
$
46.42
    
$
51.75
     $ 30.46     $ 22.25  
Remaining lives
    
0.25
      
1.25
      
0.25
      
2.25
       3.25       2.50  

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

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Table of Contents

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


   
March 14,
    
March 14,
    
April 29,
    
May 5,
      May 5,      May 8,  
   
2022
    
2022
    
2022
    
2023
      2023      2023  
Number of RSUs granted
    
50,004
      
28,726
      
4,522
       130,873    
22,472    
20,101  
RSUs outstanding at September 30, 2023
    
42,947
      
18,961
      
4,522
       130,873       11,236       20,101  
Fair value as of grant date
  
$
30.46
    
$
30.46
    
$
31.39
     $ 22.25  
$
22.25     $
21.77  
Remaining lives
    
3.25
      
1.25
      
3.25
       2.50       0.25       0.60  



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

Note 14. Contingencies

On October 9, 2020, a purported stockholder of Turning Point Brands, Inc. (“TPB” or the “Company”), Paul-Emile Berteau (the “Plaintiff”), filed a complaint in the Delaware Court of Chancery (the “Court”) relating to the merger of Standard Diversified, Inc. (“SDI”) with a TPB subsidiary (“Merger Sub”)pursuant to the Agreement and Plan of Merger and Reorganization, dated as of April 7, 2020, by and among TPB, SDI and Merger Sub (the “Action”). The complaint purports to assert two derivative counts for breach of fiduciary duty on TPB’s behalf and against the TPB Board of Directors and certain SDI affiliates (collectively, the “Defendants”). The third count also purports to assert a direct claim against TPB and its Board of Directors based on allegations that TPB’s Amended and Restated Bylaws are inconsistent with TPB’s certificate of incorporation. On October 26, 2020, the TPB Board of Directors adopted Amendment No. 1 to TPB’s Amended and Restated Bylaws, which amended the challenged section of the bylaws. On June 30, 2021, the Court granted in part and denied in part the Defendants’ motions to dismiss. Among other things, the Court dismissed TPB director H.C. Charles Diao as a defendant in the action and dismissed the third count of the Plaintiff’s complaint as moot.

The Defendants and the Company deny any wrongdoing but following a mediation in November 2022, the Defendants agreed to settle with the Plaintiff to eliminate the distraction, burden, expense, risks and potential delay of further litigation involving the asserted claims. The parties entered into a Stipulation and Agreement of Compromise, Settlement and Release, dated and filed with the Court on June 27, 2023 (together with the exhibits thereto, the “Settlement Stipulation”).  The material terms of the proposed settlement of the Action include, among other things, that the Defendants’ insurers will pay or cause to be paid an aggregate of $5,000,000 into an escrow account (the “Settlement Payment”) in exchange for a release of all claims.  Plaintiff also intends to seek an award of attorneys’ fees and expenses to Plaintiff’s counsel of up to $1,000,000 that will be paid out of the Settlement Payment with the remaining funds paid to the Company, and an additional mootness fee to Plaintiff’s counsel of up to $400,000 in connection with the third count of the complaint. The proposed settlement is subject to, and conditioned on approval by the Court, and no assurances can be given that such Court approval will be obtained. The impact to the Company is not expected to be material. 

Other major tobacco companies are defendants in product liability claims. In a number of these cases, the amounts of punitive and compensatory damages sought are significant and, if such a claim were brought against the Company, could have a material adverse effect on our business and results of operations. The Company is subject to several lawsuits alleging personal injuries resulting from malfunctioning vaporizer devices or batteries and may be subject to claims in the future relating to other Creative Distribution Solutions products. The Company is still evaluating these claims and the potential defenses to them and may from time to time settle some such suits in order to eliminate distraction, burden, expense, risks and potential delay of further litigation involving the asserted claims. For example, the Company did not design or manufacture the products at issue; rather, the Company was merely the distributor. Nonetheless, there can be no assurance that the Company will prevail in these cases, and they could have a material adverse effect on the financial position, results of operations, or cash flows of the Company.

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Table of Contents
We have several subsidiaries engaged in making, distributing, and selling vapor products. As a result of the overall publicity and controversy surrounding the vapor industry generally, many companies have received informational subpoenas from various regulatory bodies and in some jurisdictions regulatory lawsuits have been filed regarding marketing practices and possible underage sales. While we have received some such investigative requests with regard to the marketing of our vapor products, no regulatory bodies have taken action against us with regard to our marketing practices. To the extent that litigation becomes necessary, we believe that the subsidiaries have strong factual and legal defenses against claims that they unfairly marketed vapor products.

We have two franchisor subsidiaries. Like many franchise businesses, in the ordinary course of their business, these subsidiaries are from time-to-time responding parties to arbitration demands brought by franchisees. We recently won a dispositive motion in an arbitration brought by a former franchisee. We have one remaining former franchisee arbitration relating to claims of breach of contract and negligence allegations, among others. We believe we have good and valid substantive defenses against these claims and intend on vigorously defending our interests in this matter.

Note 15. Income Per Share

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


  
Three Months Ended September 30,
  
   
2023
    
2022
  
                Per                 Per  
   
Income
    
Shares
    
Share
    
Income
    
Shares
    
Share
  
Basic EPS:
                                    
Numerator
                                    
Net income attributable to Turning Point Brands, Inc.
  
$
10,831
                
$
11,536
              
                                         
Denominator
                                        
Weighted average
            
17,595,980
    
$
0.62
              
17,749,294
    
$
0.65
  
                                                 
Diluted EPS:
                                                
Numerator
                                                
Net income attributable to Turning Point Brands, Inc.
  
$
10,831
                    
$
11,536
                  
Interest expense related to Convertible Senior Notes, net of tax
    
743
                      
1,054
                  
Diluted net income attributable to Turning Point Brands. Inc.
  
$
11,574
                    
$
12,590
                  
                                                 
Denominator
                                                
Basic weighted average
            
17,595,980
                      
17,749,294
          
Convertible Senior Notes
            
2,311,086
                      
3,213,589
          
Stock options and restricted stock units
            
191,384
                      
139,123
          
             
20,098,450
    
$
0.58
              
21,102,006
    
$
0.60
  

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Table of Contents

  
Nine Months Ended September 30,
  
   
2023
    
2022
  
                Per
                 Per  
   
Income
    
Shares
    
Share
    
Income
    
Shares
    
Share
  
Basic EPS:
                                    
Numerator
                                    
Net income attributable to Turning Point Brands, Inc.
  
$
28,353
                
$
27,958
              
                                         
Denominator
                                        
Weighted average
            
17,569,493
    
$
1.61
              
18,021,554
    
$
1.55
  
                                                 
Diluted EPS:
                                                
Numerator
                                                
Net income attributable to Turning Point Brands, Inc.
  
$
28,353
                    
$
27,958
                  
Interest expense related to Convertible Senior Notes
    
2,546
                      
3,162
                  
Diluted net income attributable to Turning Point Brands. Inc.
  
$
30,899
                    
$
31,120
                  
                                                 
Denominator
                                                
Basic weighted average
            
17,569,493
                      
18,021,554
          
Convertible Senior Notes
            
2,637,252
                      
3,213,589
          
Stock options and restricted stock units
            
209,041
                      
166,342
          
             
20,415,786
    
$
1.51
              
21,401,485
    
$
1.45
  

Note 16. Segment Information

In accordance with ASC 280, Segment Reporting, the Company has three reportable segments: (1) Zig-Zag Products; (2) Stoker’s Products; and (3) Creative Distribution Solutions. The Zig-Zag Products segment markets and distributes (a) rolling papers, tubes, and related products; and (b) finished cigars and MYO cigar wraps and (c) CLIPPER reusable lighters and other accessories. The Stoker’s Products segment (a) manufactures and markets moist snuff and (b) contracts for and markets loose leaf chewing tobacco products. The Creative Distribution Solutions segment (a) markets and distributes liquid vapor products and certain other products without tobacco and/or nicotine; (b) distributes a wide assortment of products to non-traditional retail outlets via VaporBeast; and (c) markets and distributes a wide assortment of products to individual consumers via the VaporFi B2C online platform. Products in the Zig-Zag Products and Stoker’s Products segments are distributed primarily through wholesale distributors in the U.S. and Canada while products in the Creative Distribution Solutions segment are distributed primarily through e-commerce to non-traditional retail outlets and direct to consumers in the U.S. Corporate unallocated includes the costs and assets of the Company not assigned to one of the three reportable segments such as intercompany transfers, deferred taxes, deferred financing fees, and investments in subsidiaries.

The accounting policies of these segments are the same as those of the Company. Corporate costs are not directly charged to the three reportable segments in the ordinary course of operations. The Company evaluates the performance of its segments and allocates resources to them based on operating income.

29
Table of Contents
The tables below present financial information about reported segments:


  
Three Months Ended
September 30,
  
   
2023
    
2022
  
             
Net sales
            
Zig-Zag products
  
$
46,754
    
$
52,061
  
Stoker’s products
    
36,916
      
33,525
  
Total Zig-Zag and Stoker’s products
   $ 83,670     $ 85,586  
Creative Distribution Solutions
    
18,052
      
22,216
  
Total
  
$
101,722
    
$
107,802
  
                 
Gross profit
                
Zig-Zag products
  
$
26,745
    
$
28,035
  
Stoker’s products
    
20,572
      
18,279
  
Total Zig-Zag and Stoker’s products
   $ 47,317     $ 46,314  
Creative Distribution Solutions
    
4,305
      
6,398
  
Total
  
$
51,622
    
$
52,712
  
                 
Operating income (loss)
                
Zig-Zag products
  
$
16,672
    
$
18,740
  
Stoker’s products
    
15,703
      
13,653
  
 Corporate unallocated (1)(2)
     (11,678 )     (12,714 )
Total Zig-Zag and Stoker’s products
  
$
20,697
    
$
19,679
  
Creative Distribution Solutions
     (460 )     142  
Total
  
$
20,237
    
$
19,821
  
                 
Interest expense, net
    
3,984
      
4,802
  
Investment loss
     2,101       (75 )
Gain on extinguishment of debt     (481 )     –  
                 
Income before income taxes
  
$
14,633
    
$
15,094
  
                 
Capital expenditures
                
Zig-Zag products
  
$
3
    
$
29
  
Stoker’s products
    
1,211
      
940
  
Total Zig-Zag and Stoker’s products
   $ 1,214     $ 969  
Creative Distribution Solutions
    
–
      
–
  
Total
  
$
1,214
    
$
969
  
                 
Depreciation and amortization
                
Zig-Zag products
  
$
269
    
$
124
  
Stoker’s products
    
795
      
738
  
Total Zig-Zag and Stoker’s products
   $ 1,064     $ 862  
Creative Distribution Solutions
    
562
      
453
  
Total
  
$
1,626
    
$
1,315
  

(1)
Includes corporate costs that are not allocated to any of the three reportable segments.
(2)
Includes costs related to PMTA of $0.3 million in 2023 and $1.2 million in 2022.

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Table of Contents

  
Nine Months Ended
September 30,
  
   
2023
    
2022
  
             
Net sales
            
Zig-Zag products
  
$
135,363
    
$
143,959
  
Stoker’s products
    
106,634
      
98,816
  
Total Zig-Zag and Stoker’s products
   $
241,997     $
 242,775  
Creative Distribution Solutions
    
66,276
      
68,846
  
Total
  
$
308,273
    
$
311,621
  
                 
Gross profit
                
Zig-Zag products
  
$
75,557
    
$
80,808
  
Stoker’s products
    
60,005
      
54,044
  
Total Zig-Zag and Stoker’s products
   $
135,562     $
 134,852  
Creative Distribution Solutions
    
17,155
      
21,123
  
Total
  
$
152,717
    
$
155,975
  
                 
Operating income (loss)
                
Zig-Zag products
  
$
47,313
    
$
55,980
  
Stoker’s products
    
45,375
      
40,536
  
Corporate unallocated (1)(2)
    
(34,325
)
    
(40,692
)
Total Zig-Zag and Stoker’s products
   $
58,363     $
55,824  
Creative Distribution Solutions
     261       1,372  
Total
  
$
58,624
    
$
57,196
  
                 
Interest expense, net
    
12,013
      
15,142
  
Investment loss
    
10,980
      
6,074
  
Gain on extinguishment of debt
    
(1,858
)
    
–
  
                 
Income before income taxes
  
$
37,489
    
$
35,980
  
                 
Capital expenditures
                
Zig-Zag products
  
$
1,088
    
$
4,588
  
Stoker’s products
    
3,118
      
2,074
  
Total Zig-Zag and Stoker’s products
   $
4,206
     $
6,662
  
Creative Distribution Solutions
     –       –  
Total
  
$
4,206
    
$
6,662
  
                 
Depreciation and amortization
                
Zig-Zag products
  
$
803
    
$
309
  
Stoker’s products
    
2,210
      
2,275
  
Total Zig-Zag and Stoker’s products
   $
3,013     $
2,584  
Creative Distribution Solutions
    
1,690
      
1,400
  
Total
  
$
4,703
    
$
3,984
  

(1)
Includes corporate costs that are not allocated to any of the three reportable segments.
(2)
Includes costs related to PMTA of $1.1 million in 2023 and $4.3 million in 2022.

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Table of Contents
    September 30,     December 31,  
   
2023
    
2022
  
Assets
            
Zig-Zag products
  
$
176,975
    
$
225,893
  
Stoker’s products
    
175,566
      
151,241
  
Corporate unallocated (1)
    
172,294
      
155,348
  
 Total Zig-Zag and Stoker’s products   $
 524,835     $
532,482  
 Creative Distribution Solutions
     29,108       39,624  
Total
  
$
553,943
    
$
572,106
  

(1)
Includes assets not assigned to the three reportable segments. All goodwill has been allocated to the reportable segments.

Revenue Disaggregation—Sales Channel

Revenues of the Zig-Zag Products and Stoker’s Products segments are primarily comprised of sales made to wholesalers while Creative Distribution Solutions sales are made business to business and business to consumer, both online and through our corporate retail stores. Creative Distribution Solutions net sales are broken out by sales channel below.


  
Creative Distribution
Solutions Segment
  
    Three Months Ended  
   
September 30,
  
   
2023
    
2022
  
Business to Business
  
$
16,089
    
$
18,226
  
Business to Consumer - Online
    
1,912
      
3,884
  
Other
    
51
      
106
  
Total
  
$
18,052
    
$
22,216
  


 
Creative Distribution
Solutions Segment
  
    Nine Months Ended  
   
September 30,
  
   
2023
    
2022
  
Business to Business
  
$
58,620
    
$
55,024
  
Business to Consumer - Online
    
7,247
      
13,453
  
Other
    
409
      
369
  
Total
  
$
66,276
    
$
68,846
  

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Table of Contents
Net Sales—Domestic vs. Foreign

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

    Three Months Ended  

 
September 30,
  
   
2023
    
2022
  
Domestic
  
$
93,533
    
$
98,173
  
Foreign
    
8,189
      
9,629
  
Total
  
$
101,722
    
$
107,802
  

    Nine Months Ended  

 
September 30,
  
   
2023
    
2022
  
Domestic
  
$
285,514
    
$
287,381
  
Foreign
    
22,759
      
24,240
  
Total
  
$
308,273
    
$
311,621
  

Note 17. Additional Information with Respect to Unrestricted Subsidiary

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

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

    Three Months Ended September 30  
    2023
     2022  
   
Company and
Restricted
Subsidiaries
    
Unrestricted
Subsidiaries
    
Consolidated
    
Company and
Restricted
Subsidiaries
    
Unrestricted
Subsidiaries
     Consolidated  
Net sales
  
$
83,670
    
$
18,052
    
$
101,722
     $ 85,586     $ 22,216     $ 107,802  
Cost of sales
    
36,353
      
13,747
      
50,100
       39,272       15,818       55,090  
Gross profit
    
47,317
      
4,305
      
51,622
       46,314       6,398       52,712  
Selling, general, and administrative expenses
    
26,620
      
4,765
      
31,385
       26,635       6,256       32,891  
Operating income
    
20,697
      
(460
)
    
20,237
       19,679       142       19,821  
Interest expense, net
    
3,984
      
–
      
3,984
       4,802       –       4,802  
Investment loss
    
2,101
      
–
      
2,101
       (75 )     –       (75 )
Gain on extinguishment of debt
    
(481
)
    
–
      
(481
)
     –       –       –  
Income before income taxes
    
15,093
      
(460
)
    
14,633
       14,952       142       15,094  
Income tax expense
    
3,885
      
(118
)
    
3,767
       3,761       36       3,797  
Consolidated net income
    
11,208
      
(342
)
    
10,866
       11,191       106       11,297  
Net loss attributable to non-controlling interest
    
35
      
–
      
35
       (239 )     –       (239 )
Net income attributable to Turning Point Brands, Inc.
  
$
11,173
    
$
(342
)
  
$
10,831
     $ 11,430     $ 106     $ 11,536  

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

   
Nine Months Ended September 30
  
    2023     2022  
   
Company and
Restricted
Subsidiaries
    
Unrestricted Subsidiaries
    
Consolidated
    
Company and
Restricted
Subsidiaries
    
Unrestricted Subsidiaries
    
Consolidated
  
Net sales
  
$
241,997
    
$
66,276
    
$
308,273
    
$
242,775
    
$
68,846
    
$
311,621
  
Cost of sales
    
106,435
      
49,121
      
155,556
      
107,923
      
47,723
      
155,646
  
Gross profit
    
135,562
      
17,155
      
152,717
      
134,852
      
21,123
      
155,975
  
Selling, general, and administrative expenses
    
77,199
      
16,894
      
94,093
      
79,028
      
19,751
      
98,779
  
Operating income
    
58,363
      
261
      
58,624
      
55,824
      
1,372
      
57,196
  
Interest expense, net
    
12,013
      
–
      
12,013
      
15,142
      
–
      
15,142
  
Investment loss
    
10,980
      
–
      
10,980
      
6,074
      
–
      
6,074
  
Gain on extinguishment of debt
    
(1,858
)
    
–
      
(1,858
)
    
–
      
–
      
–
  
Income before income taxes
    
37,228
      
261
      
37,489
      
34,608
      
1,372
      
35,980
  
Income tax expense
    
9,506
      
67
      
9,573
      
8,374
      
332
      
8,706
  
Consolidated net income
    
27,722
      
194
      
27,916
      
26,234
      
1,040
      
27,274
  
Net loss attributable to non-controlling interest
    
(437
)
    
–
      
(437
)
    
(684
)
    
–
      
(684
)
Net income attributable to Turning Point Brands, Inc.
  
$
28,159
    
$
194
    
$
28,353
    
$
26,918
    
$
1,040
    
$
27,958
  

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

ASSETS
  
Company and
Restricted
Subsidiaries
    
Unrestricted
Subsidiaries
    
Eliminations
    
Consolidated
  
Current assets:
                        
Cash
  
$
92,353
    
$
3,718
     $
 –    
$
96,071
  
Accounts receivable, net
    
10,363
      
130
       –      
10,493
  
Inventories
    
109,867
      
7,059
       –      
116,926
  
Other current assets
    
20,417
      
2,905
       –      
23,322
  
Total current assets
    
233,000
      
13,812
       –      
246,812
  
Property, plant, and equipment, net
    
24,382
      
231
       –      
24,613
  
Deferred income taxes
    
8,190
      
–
       –      
8,190
  
Right of use assets
    
11,922
      
138
       –      
12,060
  
Deferred financing costs, net
    
203
      
–
       –      
203
  
Goodwill
    
136,280
      
–
       –      
136,280
  
Other intangible assets, net
    
66,798
      
14,927
       –      
81,725
  
Master Settlement Agreement (MSA) escrow deposits
    
27,534
      
–
       –      
27,534
  
Other assets
    
16,526
      
–
       –      
16,526
  
Investment in unrestricted subsidiaries
     49,047
       –       (49,047 )     –  
Total assets
  
$
573,882
    
$
29,108
     $
(49,047 )  
$
553,943
  
                                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                
Current liabilities:
                                
Accounts payable
   $ 10,305     $ 932     $
 –     $ 11,237  
Accrued liabilities
    
25,243
      
1,984
       –      
27,227
  
Current portion of long-term debt
     48,248       –       –       48,248  
Other current liabilities
    
6
      
–
       –      
6
  
Total current liabilities
    
83,802
      
2,916
       –      
86,718
  
Notes payable and long-term debt
    
316,573
      
–
       –      
316,573
  
Lease liabilities
    
10,363
      
70
       –      
10,433
  
Total liabilities
    
410,738
      
2,986
       –      
413,724
  
                                 
Commitments and contingencies
                        
                                 
Stockholders’ equity:
                                
Total Turning Point Brands Inc. Stockholders’ Equity/Net parent investment in unrestricted subsidiaries
    
161,836
      
26,122
       (49,047 )    
138,911
  
Non-controlling interest
    
1,308
      
–
       –      
1,308
  
Total stockholders’ equity
    
163,144
      
26,122
       (49,047 )    
140,219
  
Total liabilities and stockholders’ equity
  
$
573,882
    
$
29,108
     $
 (49,047 )  
$
553,943
  

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Table of Contents
Balance Sheet as of December 31, 2022:

ASSETS
  
Company and
Restricted
Subsidiaries
    
Unrestricted
Subsidiaries
    
Eliminations
    
Consolidated
  
Current assets:
                        
Cash
  
$
103,990
    
$
2,413
     $
–    
$
106,403
  
Accounts receivable, net
    
7,374
      
1,003
       –      
8,377
  
Inventories
    
104,883
      
15,032
       –      
119,915
  
Other current assets
    
18,828
      
4,131
       –      
22,959
  
Total current assets
    
235,075
      
22,579
       –      
257,654
  
Property, plant, and equipment, net
    
22,261
      
527
       –      
22,788
  
Deferred income taxes
    
8,443
      
–
       –      
8,443
  
Right of use assets
    
12,328
      
137
       –      
12,465
  
Deferred financing costs, net
    
282
      
–
       –      
282
  
Goodwill
    
136,253
      
–
       –      
136,253
  
Other intangible assets, net
    
67,241
      
16,351
       –      
83,592
  
Master Settlement Agreement (MSA) escrow deposits
    
27,980
      
–
       –      
27,980
  
Other assets
    
22,619
      
30
       –      
22,649
  
Investment in unrestricted subsidiaries
     60,120       –       (60,120 )     –  
Total assets
  
$
592,602
    
$
39,624
  $
 (60,120 )  
$
572,106
  
                                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                                
Current liabilities:
                                
Accounts payable
  
$
7,628
    
$
727
     $
 –    
$
8,355
  
Accrued liabilities
    
31,118
      
1,883
       –      
33,001
  
Other current liabilities
    
20
      
–
       –      
20
  
Total current liabilities
    
38,766
      
2,610
       –      
41,376
  
Notes payable and long-term debt
    
406,757
      
–
       –      
406,757
  
Lease liabilities
    
10,593
      
–
       –      
10,593
  
Total liabilities
    
456,116
      
2,610
       –      
458,726
  
                                 
Commitments and contingencies
                        
                                 
Stockholders’ equity:
                                
Total Turning Point Brands Inc. Stockholders’ Equity/Net parent investment in unrestricted subsidiaries
    
134,751
      
37,014
    (60,120 )    
111,645
  
Non-controlling interest
    
1,735
      
–
       –      
1,735
  
Total stockholders’ equity
    
136,486
      
37,014
    (60,120 )    
113,380
  
Total liabilities and stockholders’ equity
  
$
592,602
    
$
39,624
  $
 (60,120 )  
$
572,106
 

Note 18. Dividends and Share Repurchases

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

The Company currently pays a quarterly cash dividend. Dividends are considered restricted payments under the Senior Secured Notes Indenture and 2021 Revolving Credit Facility. The Company is generally permitted to make restricted payments provided that, at the time of payment, or as a result of payment, the Company is not in default on its debt covenants. Additional earnings and market capitalization restrictions limit the aggregate amount of restricted, quarterly dividends during a fiscal year.

On February 25, 2020, the Company’s Board of Directors approved a $50.0 million share repurchase program which is intended for opportunistic execution based upon a variety of factors including market dynamics. The program is subject to the ongoing discretion of the Board of Directors. On October 25, 2021, the Board of Directors increased the approved share repurchase program by $30.7 million and by an additional $24.6 million on February 24, 2022, in each case bringing the aggregate approval back to $50.0 million. $27.2 million remains available for share repurchases under the program at September 30, 2023.

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

You should read the following discussion of the historical financial conditions and results of operations in conjunction with our 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 which are 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 enable the reader to understand the Company’s financial condition and results of operations, including any material changes in the Company’s financial condition and results of operations since December 31, 2022, and as compared with the three and nine months ended September 30, 2022.  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 this Quarterly report on Form 10-Q, as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

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. 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., 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 and 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. Our products are currently 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. We also have a growing e-commerce business.

In the fourth 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 its own Board of Directors. During the first quarter of 2023, the business was designated an unrestricted subsidiary under the Senior Secured Notes (the “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.

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 B2C online platform.

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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;

●
Cost and increasing regulation of promotional and advertising activities;

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

●
Labor and production costs;

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

●
Increasing and unpredictable regulation and/or marketing order decisions impacting 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.

Recent Developments

On November 7, 2023, a wholly-owned subsidiary of the Company (the “ABL Borrower”) entered into a new $75.0 million asset-backed revolving credit facility (the “2023 ABL Facility”). The Company intends to use borrowings distributed to it by ABL Borrower  under the 2023 ABL Facility to refinance a portion of the Convertible Senior Notes at maturity.  In connection with entry into the 2023 ABL Facility, the Company terminated the Amended Revolving Credit Agreement originally entered into in 2021.  See Part II Other Information --Item 5. Other Information.

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Results of Operations

Comparison of the Three Months Ended September 30, 2023, to the Three Months Ended September 30, 2022

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

   
Three Months Ended September 30,
  
   
2023
    
2022
    
% Change
  
Consolidated Results of Operations Data:
                  
Net sales
                  
Zig-Zag products
  
$
46,754
    
$
52,061
      
-10.2
%
Stoker’s products
    
36,916
      
33,525
      
10.1
%
Total Zig-Zag and Stoker’s products
    
83,670
      
85,586
      
-2.2
%
Creative Distribution Solutions
    
18,052
      
22,216
      
-18.7
%
Total net sales
    
101,722
      
107,802
      
-5.6
%
Cost of sales
    
50,100
      
55,090
      
-9.1
%
Gross profit
                        
Zig-Zag products
    
26,745
      
28,035
      
-4.6
%
Stoker’s products
    
20,572
      
18,279
      
12.5
%
Total Zig-Zag and Stoker’s products
    
47,317
      
46,314
      
2.2
%
Creative Distribution Solutions
    
4,305
      
6,398
      
-32.7
%
Total gross profit
    
51,622
      
52,712
      
-2.1
%
                         
Selling, general, and administrative expenses
    
31,385
      
32,891
      
-4.6
%
Operating income
    
20,237
      
19,821
      
2.1
%
Interest expense, net
    
3,984
      
4,802
      
-17.0
%
Investment loss (gain)
    
2,101
      
(75
)
    
-2,901.3
%
Gain on extinguishment of debt
    
(481
)
    
–
    
NM
  
Income before income taxes
    
14,633
      
15,094
      
-3.1
%
Income tax expense
    
3,767
      
3,797
      
-0.8
%
Consolidated net income
    
10,866
      
11,297
      
-3.8
%
Net gain (loss) attributable to non-controlling interest
    
35
      
(239
)
    
-114.6
%
Net income attributable to Turning Point Brands, Inc.
  
$
10,831
    
$
11,536
      
-6.1
%

Net Sales:  For the three months ended September 30, 2023, consolidated net sales decreased to $101.7 million from $107.8 million for the three months ended September 30, 2022, a decrease of $6.1 million or 5.6%.

For the three months ended September 30, 2023, net sales in the Zig-Zag Products segment decreased to $46.8 million from $52.1 million for the three months ended September 30, 2022, a decrease of $5.3 million or 10.2%. The decrease in net sales was driven by the benefits in the third quarter of 2022 from the initial load-in of CLIPPER lighters and approximately $5 million of sales that were pulled forward from the fourth quarter of last year due to the timing of promotional activities and Canadian deliveries. Additionally, a discontinuation of an unprofitable product line impacted Canadian sales by $1.8 million.

For the three months ended September 30, 2023, net sales in the Stoker’s Products segment increased to $36.9 million from $33.5 million for the three months ended September 30, 2022, an increase of $3.4 million or 10.1%. For the three months ended September 30, 2023, volume increased 2.2% and price/product mix increased 7.9%. The increase in net sales was driven by double-digit growth of Stoker’s® MST and single-digit growth in loose-leaf chewing tobacco.

For the three months ended September 30, 2023, net sales in the Creative Distribution Solutions segment decreased to $18.1 million from $22.2 million for the three months ended September 30, 2022, a decrease of $4.1 million or 18.7%. The decrease in net sales was primarily the result of lower volumes in the vape distribution businesses.

Gross Profit:  For the three months ended September 30, 2023, consolidated gross profit decreased to $51.6 million from $52.7 million for the three months ended September 30, 2022, a decrease of $1.1 million or 2.1%. Gross profit as a percentage of net sales increased to 50.7% for the three months ended September 30, 2023, compared to 48.9% for the three months ended September 30, 2022 driven by decreased margin in Creative Distribution Solutions partially offset by increased margins in the Stoker’s Products and Zig-Zag Products segments.

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For the three months ended September 30, 2023, gross profit in the Zig-Zag Products segment decreased to $26.7 million from $28.0 million for the three months ended September 30, 2022, a decrease of $1.3 million or 4.6% . Gross profit as a percentage of net sales increased to 57.2% of net sales for the three months ended September 30, 2023, from 53.9% of net sales for the three months ended September 30, 2022, driven primarily by product mix.

For the three months ended September 30, 2023, gross profit in the Stoker’s Products segment increased to $20.6 million from $18.3 million for the three months ended September 30, 2022, an increase of $2.3 million or 12.5%. Gross profit as a percentage of net sales increased to 55.7% of net sales for the three months ended September 30, 2023, from 54.5% of net sales for the three months ended September 30, 2022, primarily as a result of strong market share gains in MST and loose-leaf chewing tobacco and pricing gains in MST.

For the three months ended September 30, 2023, gross profit in the Creative Distribution Solutions segment decreased to $4.3 million from $6.4 million for the three months ended September 30, 2022, a decrease of $2.1 million or 32.7%. Gross profit as a percentage of net sales decreased to 23.8% of net sales for the three months ended September 30, 2023, from 28.8% of net sales for the three months ended September 30, 2022, primarily as a result of channel mix.

Selling, General, and Administrative Expenses:  For the three months ended September 30, 2023, selling, general, and administrative expenses decreased to $31.4 million from $32.9 million for the three months ended September 30, 2022, a decrease of $1.5 million or 4.6%. Selling, general and administrative expenses in the three months ended September 30, 2023, included $1.8 million of stock options, restricted stock and incentives expense, $0.3 million of expense related to PMTA, $0.2 million of expense related to corporate restructuring, $0.1 million of transaction costs and $0.1 million of expense related to the new ERP and CRM systems. Selling, general and administrative expenses in the three months ended September 30, 2022, included $1.4 million of stock option, restricted stock and incentives expense, $1.2 million of expense related to PMTA and $0.4 million of consulting expense related to the scoping and mobilization of the new ERP and CRM systems.

Interest Expense, net:  For the three months ended September 30, 2023, interest expense, net decreased to $4.0 million from $4.8 million for the three months ended September 30, 2022 as a result of the repurchase of $54.0 million total of Convertible Senior Notes as of September 30, 2023, and increased interest income on cash as a result of rising interest rates.

Investment Loss (Gain):  For the three months ended September 30, 2023, investment loss increased to $2.1 million compared to a $0.1 million gain for the three months ended September 30, 2022. The change is a result of an impairment charge recognized on our investment in Wild Hemp for $2.2 million in the third quarter of 2023.

Gain on Extinguishment of Debt: There was a gain on extinguishment of debt of $0.5 million for the three months ended September 30, 2023 as a result of repurchasing $15.0 million of Convertible Senior Notes compared to no gain on extinguishment of debt for the three months ended September 30, 2022.

Income Tax Expense:  Our income tax expense of $3.8 million was 25.7% of income before income taxes for the three months ended September 30, 2023. Our effective income tax rate was 25.2% for the three months ended September 30, 2022.

Net Gain (Loss) Attributable to Non-Controlling Interest:  Net gain attributable to non-controlling interest was $0.0 million for the three months ended September 30, 2023 compared to $0.2 million net loss for the three months ended September 30, 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 September 30, 2023 and 2022, was $10.8 million and $11.5 million, respectively.

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Comparison of the Nine Months Ended September 30, 2023, to the Six Months Ended September 30, 2022

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

   
Nine Months Ended September 30,
  
   
2023
    
2022
    
% Change
  
Consolidated Results of Operations Data:
                  
Net sales
                  
Zig-Zag products
  
$
135,363
    
$
143,959
      
-6.0
%
Stoker’s products
    
106,634
      
98,816
      
7.9
%
Total Zig-Zag and Stoker’s products
    
241,997
      
242,775
      
-0.3
%
Creative Distribution Solutions
    
66,276
      
68,846
      
-3.7
%
Total net sales
    
308,273
      
311,621
      
-1.1
%
Cost of sales
    
155,556
      
155,646
      
-0.1
%
Gross profit
                        
Zig-Zag products
    
75,557
      
80,808
      
-6.5
%
Stoker’s products
    
60,005
      
54,044
      
11.0
%
Total Zig-Zag and Stoker’s products
    
135,562
      
134,852
      
0.5
%
Creative Distribution Solutions
    
17,155
      
21,123
      
-18.8
%
Total gross profit
    
152,717
      
155,975
      
-2.1
%
                         
Selling, general, and administrative expenses
    
94,093
      
98,779
      
-4.7
%
Operating income
    
58,624
      
57,196
      
2.5
%
Interest expense, net
    
12,013
      
15,142
      
-20.7
%
Investment loss
    
10,980
      
6,074
      
80.8
%
Gain on extinguishment of debt
    
(1,858
)
    
–
    
NM
  
Income before income taxes
    
37,489
      
35,980
      
4.2
%
Income tax expense
    
9,573
      
8,706
      
10.0
%
Consolidated net income
    
27,916
      
27,274
      
2.4
%
Net loss attributable to non-controlling interest
    
(437
)
    
(684
)
    
-36.1
%
Net income attributable to Turning Point Brands, Inc.
  
$
28,353
    
$
27,958
      
1.4
%

Net Sales:  For the nine months ended September 30, 2023, consolidated net sales decreased to $308.3 million from $311.6 million for the nine months ended September 30, 2022, a decrease of $3.3 million or 1.1%.

For the nine months ended September 30, 2023, net sales in the Zig-Zag Products segment decreased to $135.4 million from $144.0 million for the nine months ended September 30, 2022, a decrease of $8.6 million or 6.0%. The decrease in net sales was driven by anticipated declines in the U.S. rolling papers and wraps businesses which were impacted by a reduction of trade inventory, offset by growth in our Clipper business. Additionally, a discontinuation of an unprofitable product line negatively impacted Canadian sales by $3.6 million against the previous year.

For the nine months ended September 30, 2023, net sales in the Stoker’s Products segment increased to $106.6 million from $98.8 million for the nine months ended September 30, 2022, an increase of $7.8 million or 7.9%. For the nine months ended September 30, 2023, volume increased 1.0% and price/product mix increased 6.9%. The increase in net sales was driven primarily by double-digit growth of Stoker’s® MST.

For the nine months ended September 30, 2023, net sales in the Creative Distribution Solutions segment decreased to $66.3 million from $68.8 million for the nine months ended September 30, 2022, a decrease of $2.5 million or 3.7%. The decrease in net sales was primarily the result of reduced volumes in the vape distribution business.

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Gross Profit:  For the nine months ended September 30, 2023, consolidated gross profit decreased to $152.7 million from $156.0 million for the nine months ended September 30, 2022, a decrease of $3.3 million or 2.1%. Gross profit as a percentage of net sales decreased to 49.5% for the nine months ended September 30, 2023, compared to 50.1% for the nine months ended September 30, 2022 driven by decreased margin in the Zig-Zag Products and Creative Distribution Solutions segments partially offset by increased margin in the Stoker’s Products segment.

For the nine months ended September 30, 2023, gross profit in the Zig-Zag Products segment decreased to $75.6 million from $80.8 million for the nine months ended September 30, 2022, a decrease of $5.2 million or 6.5%. Gross profit as a percentage of net sales decreased to 55.8% of net sales for the nine months ended September 30, 2023, from 56.1% of net sales for the nine months ended September 30, 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, as a result of the exclusive distribution deal entered into in February 2022, which operates at lower gross profit margins.

For the nine months ended September 30, 2023, gross profit in the Stoker’s Products segment increased to $60.0 million from $54.0 million for the nine months ended September 30, 2022, an increase of $6.0 million or 11.0%. Gross profit as a percentage of net sales increased to 56.3% of net sales for the nine months ended September 30, 2023, from 54.7% of net sales for the nine months ended September 30, 2022, primarily as a result of the strong incremental margin contribution of MST.

For the nine months ended September 30, 2023, gross profit in the Creative Distribution Solutions segment decreased to $17.2 million from $21.1 million for the nine months ended September 30, 2022, a decrease of $3.9 million or 18.8%. Gross profit as a percentage of net sales decreased to 25.9% of net sales for the nine months ended September 30, 2023, from 30.7% of net sales for the nine months ended September 30, 2022, primarily as a result of channel mix.

Selling, General, and Administrative Expenses:  For the nine months ended September 30, 2023, selling, general, and administrative expenses decreased to $94.1 million from $98.8 million for the nine months ended September 30, 2022, a decrease of $4.7 million or 4.7%. Selling, general and administrative expenses in the nine months ended September 30, 2023, included $4.7 million of stock options, restricted stock and incentives expense, $1.1 million of expense related to PMTA, $0.2 million of expense related to corporate restructuring, $0.4 million of expense related to the new ERP and CRM systems and $0.2 million related to transaction costs. Selling, general and administrative expenses in the nine months ended September 30, 2022, included $4.1 million of stock option, restricted stock and incentives expense, $0.8 million of transaction costs, $4.3 million of expense related to PMTA, $1.6 million of expense related to corporate restructuring and $1.6 million of consulting expense related to the scoping of the new ERP and CRM systems.

Interest Expense, net:  For the nine months ended September 30, 2023, interest expense, net decreased to $12.0 million, from $15.1 million for the nine months ended September 30, 2022 as a result of the repurchases of $44.0 million of Convertible Senior Notes through the third quarter of 2023, and increased interest income on cash as a result of rising interest rates.

Investment Loss:  For the nine months ended September 30, 2023, investment loss increased to $10.9 million compared to $6.1 million for the nine months ended September 30, 2022.  The change is a result of the year-to-date impairment charges recognized on our investments in Docklight and Wild Hemp for $6.5 million and $2.2 million, respectively, compared to an impairment charge of $6.3 million in the second quarter of 2022 related to our investment in Dosist.

Gain on Extinguishment of Debt: There was a gain on extinguishment of debt of $1.9 million for the nine months ended September 30, 2023 as a result of repurchasing $44.0 million of Convertible Senior Notes through the third quarter of 2023 compared to no gain on extinguishment of debt for the nine months ended September 30, 2022.

Income Tax Expense:  Our income tax expense of $9.6 million was 25.5% of income before income taxes for the nine months ended September 30, 2023. Our effective income tax rate was 24.2% for the nine months ended September 30, 2022 and included a discrete tax benefit $0.7 million relating to stock option exercises.

Net Loss Attributable to Non-Controlling Interest:  Net loss attributable to non-controlling interest was $0.4 million for the nine months ended September 30, 2023 compared to $0.7 million for the nine months ended September 30, 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 nine months ended September 30, 2023 and 2022, was $28.4 million and $28.0 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 the 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.

(in thousands)
  
Three Months Ended
September 30,
  
   
2023
    
2022
  
Net income attributable to Turning Point Brands, Inc.
  
$
10,831
    
$
11,536
  
Add:
                
Interest expense, net
    
3,984
      
4,802
  
Gain on extinguishment of debt
    
(481
)
    
–
  
Income tax expense
    
3,767
      
3,797
  
Depreciation expense
    
782
      
861
  
Amortization expense
    
844
      
454
  
EBITDA
  
$
19,727
    
$
21,450
  
Components of Adjusted EBITDA
                
Corporate restructuring (a)
    
190
      
17
  
ERP/CRM (b)
    
138
      
435
  
Stock options, restricted stock, and incentives expense (c)
    
1,824
      
1,442
  
Transactional expenses (d)
    
76
      
–
  
FDA PMTA (e)
    
275
      
1,169
  
Non-cash asset impairment (f)
    
2,173
      
–
  
Adjusted EBITDA
  
$
24,403
    
$
24,513
  

(a)
Represents costs associated with corporate restructuring, including severance.
(b)
Represents cost associated 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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(in thousands)
  
Nine Months Ended
September 30,
  
   
2023
    
2022
  
Net income attributable to Turning Point Brands, Inc.
  
$
28,353
    
$
27,958
  
Add:
                
Interest expense, net
    
12,013
      
15,142
  
Gain on extinguishment of debt
    
(1,858
)
    
–
  
Income tax expense
    
9,573
      
8,706
  
Depreciation expense
    
2,317
      
2,611
  
Amortization expense
    
2,386
      
1,373
  
EBITDA
  
$
52,784
    
$
55,790
  
Components of Adjusted EBITDA
                
Corporate restructuring (a)
    
190
      
1,619
  
ERP/CRM (b)
    
414
      
1,626
  
Stock options, restricted stock, and incentives expense (c)
    
4,660
      
4,103
  
Transactional expenses (d)
    
162
      
789
  
FDA PMTA (e)
    
1,095
      
4,265
  
Non-cash asset impairment (f)
    
11,162
      
6,300
  
Adjusted EBITDA
  
$
70,467
    
$
74,492
  

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

Liquidity and Capital Resources

As of September 30, 2023, we had $96.1 million of cash on hand and have $23.6 million of availability under the 2021 Amended Revolving Credit Facility. Our principal uses for cash are working capital, debt service, and capital expenditures.

Our Convertible Senior Notes, with an outstanding balance of $118.5 million as of September 30, 2023, mature in July of 2024. On November 7, 2023, one of our wholly-owned subsidiaries entered into a new 2023 ABL Facility to refinance up to $75.0 million of the Convertible Senior Notes at maturity. As a result, we reclassified $70.0 million related to the Convertible Senior Notes from short-term to long-term liabilities on our September 30, 2023 Balance Sheet. With our strong cash balance, free cash flow generation and borrowing availability under the 2023 ABL Facility, we expect to have ample liquidity to address the remaining balance of the Convertible Senior Notes maturing next year, and to satisfy our operating cash requirements for the foreseeable future.

Our working capital, which we define as current assets less cash and current liabilities, decreased to $64.0 million at September 30, 2023, compared with $109.9 million at December 31, 2022 as a result of a portion of the Convertible Senior Notes becoming current during the quarter.

   
As of
  
(in thousands)
  
September 30,
2023
    
December 31,
2022
  
             
Current assets
  
$
150,741
    
$
151,251
  
Current liabilities
    
86,718
      
41,376
  
Working capital
  
$
64,023
    
$
109,875
  

Cash Flows from Operating Activities

For the nine months ended September 30, 2023, net cash provided by operating activities was $40.0 million compared to net cash provided by operating activities of $16.4 million for the nine months ended September 30, 2022, an increase of $23.6 million, primarily due to the timing of changes of inventory and other working capital.

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Cash Flows from Investing Activities

For the nine months ended September 30, 2023, net cash used in investing activities was $4.4 million compared to net cash used in investing activities of $17.8 million for the nine months ended September 30, 2022, a reduction in cash used in investing activities of $13.4 million, primarily due to a decrease in purchases of investments in our MSA escrow account.

Cash Flows from Financing Activities

For the nine months ended September 30, 2023, net cash used in financing activities was $46.0 million compared to net cash used in financing activities of $31.2 million for the nine months ended September 30, 2022, an increase of $14.8 million, primarily due to $41.8 million in repurchases of Convertible Senior Notes during the period, offset by a decrease in repurchases of common stock of $27.0 million during 2023.

Dividends and Share Repurchase

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

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 of Directors. On October 25, 2021, the Board of Directors increased the approved share repurchase program by $30.7 million and by an additional $24.6 million on February 24, 2022. $27.2 million remains available for share repurchases under the program as of September 30, 2023.

Long-Term Debt

As of September 30, 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.

   
September 30,
2023
    
December 31,
2022
  
Senior Secured Notes
  
$
250,000
    
$
250,000
  
Convertible Senior Notes
    
118,541
      
162,500
  
Gross notes payable and long-term debt
    
368,541
      
412,500
  
Less deferred finance charges
    
(3,720
)
    
(5,743
)
Less current maturities
    
(48,248
)
    
-
  
Notes payable and long-term debt
  
$
316,573
    
$
406,757
  

Senior Secured Notes

On February 11, 2021, 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.

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

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

If 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 Senior Secured Notes Indenture contains covenants that, among other things, restrict the ability of the Company and its restricted subsidiaries to: (i) grant or incur liens; (ii) incur, assume or guarantee additional indebtedness; (iii) sell or otherwise dispose of assets, including capital stock of subsidiaries; (iv) make certain investments; (v) pay dividends, make distributions or redeem or repurchase capital stock; (vi) engage in certain transactions with affiliates; and (vii) consolidate or merge with or into, or sell substantially all of our assets to another entity. These covenants are subject to a number of limitations and exceptions set forth in the Senior Secured Notes Indenture. The Senior Secured Notes Indenture provides for customary events of default. We were in compliance with all covenants as of September 30, 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.

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

Letters of credit are limited to $10.0 million (and are a part of, and not in addition to, the revolving line of credit). We have not drawn any borrowings under the Amended Revolving Credit Facility but do have letters of credit of approximately $1.4 million outstanding under the facility as of March 31, 2023. The Amended 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 Amended 2021 Revolving Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate of Term SOFR rate, as applicable, 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 Amended Revolving Credit Agreement are guaranteed on a joint and several basis by the Guarantors. The Company’s and Guarantors’ obligations under the Amended Revolving Credit Facility are secured on a pari passu basis with the Senior Secured Notes.

The Amended Revolving Credit Agreement contains covenants that are substantially the same as the covenants in the Senior Secured Notes Indenture. The Amended Revolving Credit Facility also requires the maintenance of a Consolidated Leverage Ratio of 5.50 to 1.00 (with a step down to 5.25 to 1.00 beginning with the fiscal quarter ending March 31, 2023) at the end of each fiscal quarter when extensions of credit under the Amended Revolving Credit Facility and certain drawn and undrawn letters of credit (excluding (a) letters of credit that have been cash collateralized and (b) letters of credit having an aggregate face amount less than $5.0 million) in the aggregate outstanding exceeds 35% of the total commitments under the Amended Revolving Credit Facility. The Amended Revolving Credit Agreement provides for customary events of default. We were in compliance with all covenants as of September 30, 2023.

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

On November 7, 2023, the Company terminated the Amended Revolving Credit Agreement in connection with entry into the new 2023 ABL Facility by one of its subsidiaries.

2023 ABL Facility

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

The 2023 ABL Facility contains customary borrowing conditions including a borrowing base equal to the sum of (a) the lesser of (1) 85% of the lower of (A) the market value (on a first in first out basis) of the sum of eligible inventory, plus eligible in-transit inventory of the ABL Borrower and (B) 85% of the cost of the sum of eligible inventory, plus eligible in-transit inventory of the ABL Borrower and (2) 85% of the net orderly liquidation value (“NOLV”) percentage of the lower of (1)(A) or (1)(B); plus (b) 85% of the face value of all eligible accounts of the ABL Borrower minus (c) the amount of all eligible reserves.  The 2023 ABL Facility also includes a “last in last out” (“LILO”) borrowing base equal to the sum of (a) the lesser of: (1) 10% of the lower of (A) the market value (on a first in first out basis) of the sum of eligible inventory, plus eligible in-transit inventory of the ABL Borrower and (B) the cost of the sum of eligible inventory, plus eligible in-transit inventory and (2) 10% of the NOLV percentage of the lower of  (1)(A) or (1)(B); plus (b) 10% of the face amount of eligible account; minus (c) the amount of all eligible reserves.
Amounts borrowed under the 2023 ABL Facility are subject to an interest rate margin per annum equal to (a) from and after the closing date until the last day of the first full fiscal quarter ended after the closing date, (i) 1.25% per annum, in the case base rate loans, and (ii) 2.25% per annum, in the case of revolving credit loans that are SOFR Loans, (b)(i) 2.25% per annum, in the case of LILO loans that are base rate loans, and (ii) 3.25% per annum, in the case of LILO loans that are SOFR loans, (c) on the first day of each fiscal quarter, the applicable interest rate margins will be determined from the pricing grid below based upon the historical excess availability for the most recent fiscal quarter ended immediately prior to the relevant date, as calculated by the Administrative Agent.
Level
Historical Excess Availability
Applicable Margin
for SOFR Loans
Applicable Margin
for Base Rate Loans
I
Greater than or equal to 66.66%
1.75%
0.75%
II
Less than 66.66%, but greater than or equal to 33.33%
2.00%
1.00%
III
Less than 33.33%
2.25%
1.25%

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

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

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

The Convertible Senior Notes held by third parties are convertible into approximately 2,216,029 shares of TPB Common Stock under certain circumstances prior to maturity at a conversion rate of 18.6942 shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.49 per share, subject to adjustment under certain conditions, but will not be adjusted for any accrued and unpaid interest. The conversion price is adjusted periodically as a result of dividends paid by the Company in excess of pre-determined thresholds of $0.04 per share. Upon conversion, the Company may pay cash, shares of common stock or a combination of cash and stock, as determined by the Company at its discretion. The conditions required to allow the holders to convert their Convertible Senior Notes were not met as of 2023.

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 $53.49 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 nine months ended September 30, 2023, we executed various foreign exchange contracts for the purchase of €20.1 million and sale of €15.2 million with maturity dates ranging from October 2023 to September 2024. At September 30, 2023, we had foreign currency contracts outstanding for the purchase of €17.1 million and sale of €15.2 million. The fair value of the foreign currency contracts were based on quoted market prices and resulted in an asset of $0.1 million included in Other current assets and a liability of $0.5 million included in Accrued liabilities at September 30, 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, doing so would be difficult in the current inflationary environment. However, we have implemented price increases in areas where doing so has been 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 regarding our tobacco products and, in part, to our existing contractual agreement for the purchase of our premium cigarette papers.

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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 quarter ended September 30, 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.

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 nine months ended September 30, 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 instrument is a revolving credit facility, which has no borrowing outstanding.

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 as of September 30, 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 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 our 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.

During the nine months ended September 30, 2023, we have continued to make progress on our remediation plans to address the material weaknesses in the Company’s internal controls over financial reporting. These remediation efforts include hiring additional experienced accounting and internal control specialists and external consultants. In addition, the Company is in process of redesigning key controls for both business processes and information technology controls along with implementing a new enterprise resource planning system.

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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 of Directors 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 of Directors’ previous authorization). On February 24, 2022, the Board of Directors 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 of Directors. 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.

For the quarter ended September 30, 2023, the Company made no purchases of its common stock in connection with the repurchase program described above.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures Disclosure Pursuant to Item 1.01 of Current Report on Form 8-K - Entry into a Material Definitive Agreement.

Not applicable.

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Item 5. Other Information


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

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

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

Level
Historical Excess Availability
Applicable Margin
for SOFR Loans
Applicable Margin
 for Base Rate Loans
I
Greater than or equal to 66.66%
1.75%
0.75%
II
Less than 66.66%, but greater than or equal to 33.33%
2.00%
1.00%
III
Less than 33.33%
2.25%
1.25%

The 2023 ABL Facility also requires the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 as of the end of any four consecutive fiscal quarters on or after the closing date if excess availability shall be less than the greater of (a) 12.5% of the line cap and (b) $9.375 million, at any time and continuing until excess availability is equal to or exceeds the greater of (i) 12.5% of the line and (ii) $9.375 million for thirty (30) consecutive calendar days; provided that such $9.375 million level shall automatically increase in proportion to the amount of any increase in the aggregate revolving credit commitments thereunder in connection with any incremental facility.

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

Disclosure Pursuant to Item 1.02 of Current Report on Form 8-K – Termination of a Material Definitive Agreement.

On November 7, 2023, the Company terminated the 2021 Amended Revolving Credit Agreement in connection with the entry by one of its subsidiaries into the new 2023 ABL Facility.

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Item 6. Exhibits

Exhibit No.
Description
Amendment No 1. Dated as of May 10, 2023, to the Credit Agreement, dated as of February 11, 2021, by and among Turning Point Brands, Inc., the obligors party thereto, Barclays Bank PLC, as administrative agent, and the lenders party thereto (incorporated herein by reference to Exhibit 10.1 of Turning Point Brand, Inc’s Current Report on Form 8-K filed with the Commission on May 16, 2023 (File No. 001-37763).
   
Rule 13a-14(a)/15d-14(a) Certification of Graham Purdy.*
   
Rule 13a-14(a)/15d-14(a) Certification of Luis Reformina.*
   
Rule 13a-14(a)/15d-14(a) Certification of Brian Wigginton.*
   
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 September 30, 2023, filed on November 8, 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:  November 8, 2023
    

53
EX-31.1 2 ef20012475_ex31-1.htm EXHIBIT 31.1
Exhibit 31.1

CERTIFICATIONS

I, Graham Purdy, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Turning Point Brands, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2023
By:
/s/ Graham Purdy
   
Graham Purdy
   
President and Chief Executive Officer
   
(Principal Executive Officer)


EX-31.2 3 ef20012475_ex31-2.htm EXHIBIT 31.2
Exhibit 31.2

CERTIFICATIONS

I, Luis Reformina, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Turning Point Brands, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2023
By:
/s/ Luis Reformina
   
Luis Reformina
   
Chief Financial Officer
   
(Principal Financial Officer)



EX-31.3 4 ef20012475_ex31-3.htm EXHIBIT 31.3
Exhibit 31.3

CERTIFICATIONS

I, Brian Wigginton, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Turning Point Brands, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 8, 2023
By:
/s/ Brian Wigginton
   
Brian Wigginton
   
Chief Accounting Officer


EX-32.1 5 ef20012475_ex32-1.htm EXHIBIT 32.1
Exhibit 32.1

CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Turning Point Brands, Inc. (the "Company") for the quarterly period ended September 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Graham Purdy, President and Chief Executive Officer, Luis Reformina, Chief Financial Officer, and Brian Wigginton, Chief Accounting Officer, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein.

Date: November 8, 2023
By:
/s/ Graham Purdy
   
Graham Purdy
   
President and Chief Executive Officer
   
(Principal Executive Officer)

Date: November 8, 2023
By:
/s/ Luis Reformina
   
Luis Reformina
   
Chief Financial Officer
   
(Principal Financial Officer)

Date: November 8, 2023
By:
/s/ Brian Wigginton
   
Brian Wigginton
   
Chief Accounting Officer