Turning Point Brands
Annual Report 2021

Plain-text annual report

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549FORM 10-K(Mark One)☑ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2021OR☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from_______________ to ________________Commission file number: 001-37763TURNING POINT BRANDS, INC.(Exact name of registrant as specified in its charter)Delaware20-0709285(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.) 5201 Interchange Way, Louisville, KY40229(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 applicableSecurities registered pursuant to Section 12(b) of the Act:Title of each classTrading Symbol(s)Name of each exchange on which registeredCommon Stock, $0.01 par value TPBNew York Stock ExchangeSecurities registered pursuant to Section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☑ NoIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ☐ Yes ☑ NoIndicate 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 shorterperiod that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes  ☐ NoIndicate 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 thepreceding 12 months (or for such shorter period that the registrant was required to submit such files). ☑ Yes ☐ NoIndicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 standardsprovided pursuant to Section 13(a) of the Exchange Act ☐Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) ofthe Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  ☐ Yes ☑ NoAs of June 30, 2021, the aggregate market value of the registrant’s voting common stock held by non-affiliates of the registrant was approximately $693 million based on such closing sale price of thecommon stock as reported on the New York Stock Exchange.At March 4, 2022, there were 18,268,940 shares outstanding of the registrant’s voting common stock, par value $0.01 per share.DOCUMENTS INCORPORATED BY REFERENCEPortions of the registrant’s definitive proxy statement for use in connection with its annual meeting of stockholders to be held on April 27, 2022, expected to be filed with the Securities and ExchangeCommission on or about March 15, 2022, are incorporated by reference into Part III hereof.TURNING POINT BRANDS, INC.TABLE OF CONTENTS Page No.PART I ITEM 1.Business4 ITEM 1A.Risk Factors17 ITEM 1B.Unresolved Staff Comments37 ITEM 2.Properties37 ITEM 3.Legal Proceedings37 ITEM 4.Mine Safety Disclosures37 PART II ITEM 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities39 ITEM 6.Selected Financial Data40 ITEM 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations41 ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk56 ITEM 8.Financial Statements and Supplementary Data57 ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure100 ITEM 9A.Controls and Procedures100 ITEM 9B.Other Information101 PART III ITEM 10.Directors, Executive Officers and Corporate Governance102 ITEM 11.Executive Compensation102 ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters102 ITEM 13.Certain Relationships and Related Transactions, and Director Independence102 ITEM 14.Principal Accountant Fees and Services102 PART IV ITEM 15.Exhibits and Financial Statement Schedules103 ITEM 16.Form 10-K Summary107 Signatures 1082Table of ContentsCautionary Note Regarding Forward-Looking StatementsThis annual report on Form 10-K contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements may generally be identified using 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 nothistorical 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. Some, butnot all, of these risks are described under Item 1A “Risk Factors” and elsewhere throughout this Annual Report. As a result, actual events may differ materially from those expressed in or suggested by theforward-looking statements. Any forward-looking statement made by us in this annual report on Form 10-K speaks only as of the date hereof. New risks and uncertainties come up from time to time, and itis impossible for us to predict these events or how they may affect it. We have no obligation, and does not intend, to update any forward-looking statements after the date hereof, except as required byfederal securities laws.3Table of ContentsPART IItem 1. BusinessTurning Point Brands, Inc., OverviewTurning Point Brands, Inc. (the “Company,” “we,” “our,” or “us”) is a leading manufacturer, marketer and distributor of branded consumer products. We sell a wide range of products to adult consumersconsisting of staple products with our iconic brands Zig-Zag® and Stoker’s® to our next generation products to fulfill evolving consumer preferences. Among other markets, we compete in the alternativesmoking accessories and Other Tobacco Products (“OTP”) industries. The alternative smoking accessories market is a dynamic market experiencing robust secular growth driven by cannabinoidlegalization 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 ending 2021 as reported by Management Science Associates, Inc. (“MSAi”), a third-party analytics and information company. Ourthree focus segments are led by our proprietary brands: Zig-Zag® in the Zig-Zag Products segment; Stoker’s® along with Beech-Nut® and Trophy® in the Stoker’s Products segment; and our distributionplatforms (Vapor Beast®, VaporFi® and Direct Vapor®) along with Solace® in the NewGen Products segment. Our businesses generate solid cash flow which we use to invest in our business, financeacquisitions, 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 andtobacco 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 investing in organic growth, acquisitions and joint ventures across all product categories. As of December 31, 2021, our products areavailable in approximately 195,000 U.S. retail locations which, with the addition of retail stores in Canada, brings our total North American retail presence to an estimated 215,000 points of distribution. Oursales team targets widespread distribution to all traditional retail channels, including convenience stores, and we have a growing e-commerce business.Zig-Zag ProductsOur Zig-Zag Products (“Zig-Zag”) segment principally includes rolling papers and MYO cigar wraps used as smoking accessories. The strength of the Zig-Zag® brand drives our leadership position inboth the rolling papers and MYO cigar wrap markets. Zig-Zag® is the #1 premium and overall rolling paper in the U.S. with approximately 34% total market share. Management estimates also indicate thatZig-Zag® is the #1 brand in the promising Canadian market. Rolling paper operations are aided by our sourcing relationship with Republic Technology International SAS (“RTI”). See “Distribution andSupply Agreements” for our discussion of the Zig-Zag® distribution agreement.1In MYO cigar wraps, the Zig-Zag® brand commands a majority of the market and continues to innovate in novel ways through further product introductions including our introduction of Zig-Zag® ‘Rillosized wraps, which are similar in size to cigarillos, the most popular and fastest growing type of machine-made cigars. In June 2020, we purchased certain assets from our long-term commercial partnerDurfort Holdings S.R.L (‘‘Durfort’’) which included the co-ownership in the intellectual property rights for all of our MYO Homogenized Tobacco Leaf (“HTL”) cigar wraps products. Along with thetransaction, we entered into an exclusive Master Distribution Agreement to market and sell the original Blunt Wrap® cigar wraps within the USA which was effective October 9, 2020. In late 2021, weextended our MYO cigar wraps offering with entries into the growing hemp wraps and natural leaf wraps markets.In July 2019, to extend our reach in Canada, we made a minority investment in Turning Point Brands Canada (formerly ReCreation Marketing) that was built up to a 65% ownership stake by July 2021.Turning Point Brands Canada is a specialty marketing and distribution firm focused on building brands in the Canadian cannabis accessories, tobacco and alternative products categories. Our majorityownership stake leverages Turning Point Brands Canada’s significant expertise in marketing and distributing cannabis accessories and tobacco products throughout Canada. The remainder of TurningPoint Brands Canada is owned by its management.In July 2021, we acquired certain assets of Unitabac, a marketer of mass-market cigars. In the acquisition, we acquired a robust portfolio of cigarillo products and all related intellectual property, includingCigarillo Non-Tip (NT) HTL products and Rolled Leaf and Natural Leaf Cigarillo Products that we can leverage to re-introduce the Zig-Zag® brand into a large and growing cigarillo market.In February 2022, we announced an agreement with Flamagas, a renowned lighter manufacturer, for exclusive distribution of CLIPPER® lighters in the United States and Canada. CLIPPER is the numberone reusable lighter in the world and the number two overall world lighter brand. We aim to use our existing distribution infrastructure to expand access of CLIPPER lighters to more retailers andconsumers.1 Brand ranking and market share percentages obtained from MSAi for the 52-week period ended December 25, 2021.4Table of ContentsSince mid-2019, we have been repositioning the business with growth initiatives focused on new product introductions and new channel expansions that are better aligned with the growing market trends.As a result of those initiatives, we have been successful in changing the growth profile of our Zig-Zag Products segment. The Zig-Zag Products segment accounts for the majority of our operating profitand is now our fastest growing segment.Stoker’s ProductsOur Stoker’s Products (“Stoker’s”) segment includes both moist snuff tobacco (“MST”) and loose leaf chewing tobacco. Stoker’s® is our focus brand in both MST and chewing tobacco. In MST,Stoker’s® remains among the fastest growing brands and holds an 8.4% share in the stores with distribution and a 5.6% share of the total U.S. MST non-pouch market. Stoker’s® pioneered the large 12 oz.tub packaging format and is manufactured using a proprietary process that we believe results in a superior product. Starting in 2015, we extended the Stoker’s® MST franchise to include traditional 1.2 oz.cans to broaden retail availability. Our proprietary manufacturing process is conducted at our Dresden, Tennessee, plant and packaged in both our Dresden, Tennessee, and Louisville, Kentucky,facilities.1Stoker’s® chewing tobacco has grown its market share considerably over the last several years and is presently the #1 discount and overall brand in the industry, with approximately a 26% market share.Our status in the chew market is further strengthened by Beech-Nut®, the #3 premium brand and #7 overall, as well as Trophy®, Durango®, and the five Wind River Brands. Collectively, the Company isthe #2 marketer of chewing tobacco with approximately 33% market share. Our chewing tobacco operations are facilitated through our long-standing relationship with Swedish Match, the manufacturer ofour loose-leaf chewing tobaccos.1NewGen ProductsOur NewGen Products (“NewGen”) segment includes our vape distribution business that was built through acquisitions as well as a new product development arm dedicated to the development,production and sale of alternative products.Within our vape distribution business, Vapor Beast® is a leading distributor of vapor products servicing the non-traditional retail channel. International Vapor Group (“IVG”) operates a B2C e-commercebusiness with direct sales to consumers nationwide and abroad through the Direct Vapor® and VaporFi® brands. We are leveraging our vape distribution business to increase sales of our proprietarybrands. As part of this strategy to leverage our distribution infrastructure, we acquired Solace in July 2019. Solace is an innovative product development company which built one of the top e-liquid brandsinto a leader in alternative products.We have also made minority investments to gain exposure to the large and growing cannabinoid market including in Wild Hempettes, dosist™, Docklight Brands, Inc. and Old Pal Holding Company LLC.Competitive StrengthsWe believe our competitive strengths include the following:Large, Leading Brands with Significant ScaleWe have built a portfolio of leading brands with significant scale that are well recognized by consumers, retailers, and wholesalers. Our Zig-Zag® and Stoker’s® brands are each well established and dateback 122 and 82 years, respectively. The NewGen Products segment has been built primarily through the acquisitions of VaporBeast, IVG and Solace, leading sellers of e-liquids, devices, and accessories. •Zig-Zag® is the #1 premium and overall rolling paper brand in the U.S., with significant distribution in Canada as well. Zig-Zag® is also the #1 MYO cigar wrap brand in the U.S., as measured byMSAi. We acquired North American rolling papers distribution rights for Zig-Zag® in 1997. More importantly, we own the Zig-Zag® tobacco trademark in the U.S. which we leverage for our MYOcigar wraps product. Approximately 50% of our total 2021 Zig-Zag® branded net sales are under our own Zig-Zag® marks rather than those we license from under the Distribution and LicensingAgreements described below. •Stoker’s® is among the fastest growing MST brands in the industry and is the #1 loose leaf chewing tobacco brand. We manufacture Stoker’s® MST using only 100% American Leaf, utilizing aproprietary process to produce what we believe is a superior product.21 Brand rankings and market share percentages obtained from MSAi for the 52-week period ended December 25, 2021.2 Brand ranking and market share percentages obtained from MSAi for the 52-week period ended December 25, 2021.5Table of ContentsZig-Zag® is an iconic brand and has strong, enduring brand recognition among a wide audience of consumers. We believe the Stoker’s® brand is seen as an innovator in both the moist snuff and loose-leaf chewing tobacco markets. VaporBeast is a powerful distribution engine that allows us to further penetrate non-traditional retail outlets. IVG provides us direct access to the highly attractive, highmargin B2C segment via the flagship Direct Vapor® and VaporFi® brands. The Solace acquisition provides us with a proven line of e-liquid and a strong new product development platform to launchadditional novel products.Exposure to Growing Cannabinoid Consumption TrendsWe believe that the cannabinoid market will expand over the coming years as it becomes increasingly accepted by the public in the U.S. Our product offerings, particularly those in our Zig-Zag Productsand NewGen Products segments, are ideally positioned to benefit from continued growth in consumer consumption.The legal cannabis market in the U.S. is projected to grow from $25 billion in 2021 to $48 billion by 2026, representing a 13% compounded annual growth rate, according to a September 2021 report of BDSAnalytics, Inc., providing us with significant opportunity. A recent Gallup poll showed nearly seven in ten Americans now support legalizing cannabis nationwide, approximately twice the amount astwenty years ago. As of the end of 2021, 18 U.S. states and the District of Columbia had legalized cannabis for adult recreational use and a majority of states now allow for comprehensive public medicalcannabis programs.Successful Track Record of New Product Launches and Category ExpansionsWe have successfully launched new products and entered new product categories by leveraging the strength of our brands and methodically targeting markets which we believe have significant growthpotential: •In 2009, we extended the Zig-Zag® tobacco brand into the MYO cigar wraps market and captured a 50% market share within the first two years. We are now the market share leader for MYO cigarwraps with approximately a 56% share of the cigar wraps category and 78% of the share of the HTL cigar wraps sub-category. 1 We believe our success was driven by the Zig-Zag® tobaccobranding, which we feel is widely understood by consumers to represent a favorable, customizable experience ideally suited to MYO products. In late 2021, we extended our Zig-Zag® MYO cigarwraps offering with entries into the growing hemp wraps and natural leaf wraps markets. •We extended the Zig-Zag® brand into hemp rolling papers in 2018 and followed that with the launch of paper cones in 2019 with both products quickly establishing leading positions in theirrespective categories. •We leveraged the proud legacy and value of the Stoker’s® brand to introduce a 12 oz. MST tub, a size that was not offered by any other market participant at the time of introduction. Stoker’s®MST has been among the fastest growing moist snuff brands in the industry in terms of pounds sold. While competitors have since introduced larger format tub packaging, the early entry anddifferentiation of the Stoker’s® product have firmly established us as the market leader with over 50% of the Tub market as of 2021. In 2015, we introduced Stoker’s® MST in 1.2 oz. cans to furtherexpand retail penetration, particularly in convenience stores. •VaporBeast quickly established itself as a leading marketer and distributor of liquid vapor products to the non-traditional retail universe. With its national footprint, VaporBeast is leveraging itsregional consumer preference insights to further accelerate sales advances. •In 2019, the IVG acquisition, and specifically the VaporFi B2C marketing engine, offered us the opportunity to leverage the marketing competencies and processes to sell novel proprietaryproducts across multiple channels and platforms. •In 2019, the Solace acquisition provided us with a leading line of liquids and a powerful new product development platform. •In 2019, we introduced Zig-Zag® paper cones into the market and have grown it into one of the top brands in the category. •In 2021, the acquisition of the Unitabac assets provided a platform to re-introduce the Zig-Zag® brand into a large and growing cigarillo market. •In 2022, we will be entering the lighter market through an exclusive distribution agreement for CLIPPER® lighters in the United States and Canada.We strategically target product categories that we believe demonstrate significant growth potential and for which the value of our brands is likely to have a meaningful impact. We believe that our trackrecord and existing portfolio of brands provide growth advantages as we continue to evaluate opportunities to extend our product lines and expand into new categories.E-Commerce CapabilitiesWith the acquisition of VaporBeast and IVG, we established scaled B2B and B2C e-commerce presence to service the vape market. Our e-commerce capabilities were enhanced by the acquisition andintegration of Solace in 2019. We leveraged those capabilities to build a meaningful B2B and B2C e-commerce business for Zig-Zag®.6Table of ContentsExtensive Distribution Network and Data Driven Sales OrganizationWe have taken important steps to enhance our selling and distribution network and consumer marketing capabilities that allow us to grow our business while keeping our capital expenditure requirementsrelatively low. We have long-standing relationships in the core convenience store channel and wholesale distribution network with access to more than 215,000 retail outlets in North America. Our NewGenProducts B2B business reaches thousands of vape stores and our B2C business has approximately 1.6 million unique customers. We are also increasing brand presence through non-traditional channelsincluding headshops, dispensaries, and B2B e-commerce and are expanding our sales team dedicated to these channels. We have added brand dedicated platforms including ZigZag.com andSolaceVapor.com to facilitate our e-commerce brand presence as well as sell on Amazon.We service our traditional tobacco and vapor customer bases with an experienced sales and marketing organization of approximately 180 professionals who possess in-depth knowledge of the OTP market.We extensively use data supported by leading technology to enable our salesforce to analyze changing trends and effectively identify evolving consumer preferences at the store level. Our marketanalytics allow us to efficiently and effectively address evolving consumer and market demands. We subscribe to a sales tracking system provided by MSAi that measures all OTP product shipments by allmarket participants, on a weekly basis, from approximately 600 wholesalers to over 250,000 traditional retail stores in the U.S. This system enables us to understand share and volume trends across multiplecategories at the individual store level, allowing us to allocate field salesforce coverage to the highest opportunity stores, thereby enhancing the value of new store placements and sales activity. Withinour Stoker’s segment product categories, we have seen a positive correlation between the frequency of store calls by our salesforce and our retail market share.Asset-light Business Model that Generates Resilient Free Cash FlowWe have a lean, asset-light manufacturing and sourcing model which leverages outsourced supplier relationships and requires low capital expenditures. We believe our asset-light model providesmarketplace flexibility, allows us to achieve favorable margins and generates high free cash flow conversion.As part of our asset-light operating model, we built long-standing and extensive relationships with leading, high-quality producers from whom we source products including loose-leaf chewing tobaccoand cigarette paper, among others. We do not outsource our MST production as a result of our proprietary manufacturing processes which are substantively different than those of our competitors.By outsourcing the production of certain products to a select group of suppliers with whom we have strong relationships, we are able to maintain low overhead costs and minimal capital expenditures. Oursupplier relationships allow us to increase the breadth of our product offerings and quickly enter new markets as management is able to focus on brand building and innovation. In 2021, over 80% of ournet sales were derived from outsourced production operations and our capital expenditures have ranged between $2.0 million and $6.2 million per year over the previous 5 years. The stability of our cash flows is enhanced by the resilience of our Zig-Zag Products and Stoker’s Products business segments which we believe have recession-resistant end-markets. These products areprimarily staples that are small ticket purchases for repeat consumers. In addition, we believe the secular shift to the value category in the Stoker’s Products segment will benefit the long-term resilience ofour brands. Expertise to Succeed in Dynamic Regulatory EnvironmentsWe operate in a highly regulated environment involving many different government agencies. In 2009, the FDA was given jurisdiction over cigarettes and smokeless tobacco, which expanded in 2016 toinclude all other tobacco products including vaping and cigars. We believe we have a competitive advantage due to our management team’s experience navigating the regulatory environment. We haveincreased our investments in teams of professionals including regulatory lawyers, scientists, and quality assurance processes to ensure we maintain a competitive advantage in this area.The FDA is currently implementing a premarket review process, sometimes referred to as the PMTA, or the Pre-market Tobacco Application, process, which required all vape products introduced since2007 to submit an application to the FDA by September 2020. The PMTA process is a very expensive and resource-intensive process and there are currently hundreds of competitors in the market but veryfew have the capability and or the resources to get their products successfully through this process.We spent approximately $17 million in order to file applications covering 250 products, and we believe our application was one of the most extensive portfolios for open tank vaping products that wassubmitted to the FDA. By developing and submitting for FDA marketing authorization a deep suite of products in the space and leveraging our distribution platform, we believe that we have theopportunity to grow substantial market share with our proprietary products as our competitors navigate this process. We believe this is a transformational event for the industry with potential for us torealize substantial benefits over time as the FDA accelerates enforcement thereby, creating significant barriers for new entrants as well as significant difficulties for existing companies who may not havethe ability to comply with these regulatory requirements. See “Risks Related to Legal, Tax and Regulatory Matters” under Item 1A “Risk Factors” of this Annual Report on Form 10-K.7Table of ContentsIn addition, we have been building an alternative logistics infrastructure across the U.S. to comply with the Prevent All Cigarette Trafficking Act (“PACT Act”) which was recently extended to prohibit theuse of the U.S. Postal Service to mail e-cigarette and related products and requires adult signature on delivery.Experienced Management TeamWith extensive experience in consumer products, alternative smoking accessories and tobacco markets, our senior management team has enabled us to grow and diversify our business while improvingoperational efficiency. Members of management have previous experience at other leading tobacco companies. Given the professional experience of the senior management team we are able to analyze risksand opportunities from a variety of perspectives. Our senior leadership has embraced a collaborative culture in which the combined experience, analytical rigor, and creativity are leveraged to assessopportunities and deliver products that satisfy consumers’ demands. Our management team also brings a proven track record of patient and selective capital deployment into value enhancing transactions.Growth StrategiesWe are focused on building sustainable margins, expanding the availability of our products, developing innovative new products, and enhancing overall operating efficiencies with the goal of improvingmargins and cash flow. We adopted the following strategies to drive growth in our business and build stockholder value:Grow Share of Existing Product Lines, Domestically and InternationallyWe intend to remain a consumer centric organization with an innovative view and understanding of the alternative smoking accessories and OTP markets. We believe we have strong tailwinds for growthwithin our existing product lines. Within our Zig-Zag Products segment, we are benefitting from secular growth trends in the industry, driving market share gains in our traditional convenience storechannel and expanding our presence into non-traditional channels including headshops, dispensaries and e-commerce to drive growth. Within our Stoker’s Products segment, there is ample runway forgrowth driven by same store sales growth and further distribution gains as Stoker’s® MST continues to be one of the fastest growing brands in the category.In 2021, less than 10% of our revenues were generated outside of the U.S. Having established a strong infrastructure and negotiated relationships across multiple segments and products, we are pursuingan international growth strategy to broaden sales and strengthen margins. We believe international sales represent a meaningful growth opportunity. In 2021, we increased our ownership in Turning PointBrands Canada to 65%. Our goals include expanding our presence in the worldwide OTP industry on a targeted basis. For example, we are expanding Zig-Zag®’s retail penetration and product assortmentin Canada, and selling our Stoker’s® MST products in South America, Europe, Asia and Africa.Expand into Adjacent Categories through Innovation and New PartnershipsWe continually evaluate opportunities to expand into adjacent product categories by leveraging our current portfolio and through new partnerships. We believe there are meaningful opportunities forgrowth within the alternative smoking accessories and OTP markets. We maintain a robust product pipeline and plan to strategically introduce new products in attractive, growing markets, bothdomestically and internationally, with specific focus on our papers and MYO wraps businesses. In particular, the strength of the Zig-Zag® brand provides a great platform to introduce a suite ofcomplementary products similar to our launch and expansion of hemp papers, paper cones, hemp wraps and natural leaf wraps. We have an exciting pipeline of new products and SKUs we plan onintroducing over the coming years in both our papers and MYO wraps businesses. In 2022, we will be entering the lighter market through an exclusive distribution agreement for CLIPPER® lighters in theUnited States and Canada. As we have done successfully in the past, we will leverage our existing sales infrastructure to drive distribution of these new products and are investing to expand our e-commerce distribution capabilities.We have identified a number of new adjacencies and we intend to leverage our existing brands and partnerships to continue the process of commercializing winning products that satisfy consumer needs.8Table of ContentsIncrease our Mix of Proprietary Products in Vape DistributionOur vape distribution business comprises a majority of our revenue with the NewGen Products segment. The NewGen Products segment generates a significant share of our revenue mix but the lowestshare of profits with a sales mix of mostly lower gross margin third-party products. We aim to improve the profitability of the segment by generating increased sales from higher gross margin proprietaryproducts within our vape distribution platform.Accelerate Growth Through National Distribution NetworkOur business is built around a powerful sales and distribution infrastructure that currently reaches over 215,000 retail outlets in North America. We have strong presence in independent conveniencestores and now service most of the leading chain accounts. Through our e-commerce platforms and our B2B and B2C vape distribution platforms we have alternative avenues through which to sell third-party products and an increasing mix of our proprietary products. This strategy allows new products to be tested with lower risk before we incorporate them into our wider brick and mortar distributionsystem.Combining our different platforms, we have an expansive multi-channel distribution infrastructure that gives us a big competitive advantage when we introduce new products or acquire companies that wecan integrate into our network. We believe our experienced salesforce, expansive distribution network, and leading market analytics put us in a strong position to swiftly execute new product launches inresponse to evolving consumer and market preferences.Strategically Pursue AcquisitionsWe believe there are meaningful acquisition opportunities in our fragmented markets. We regularly evaluate acquisition opportunities across our industries. In evaluating acquisition opportunities, ourfocus is on identifying acquisitions that would leverage our distribution platform and product offerings or enable category expansion in areas with high growth potential.The vast majority of our 2021 U.S. gross profit was derived from sales of products currently regulated by FDA Center for Tobacco Products. We have significant experience in complying with the FDAregulatory regime with a compliance infrastructure composed of legal and scientific professionals. We believe many smaller OTP manufacturers currently lack this infrastructure, which we believe isnecessary to comply with the broad scope of FDA regulations. We believe our regulatory compliance infrastructure, combined with our skilled management and strong distribution platform, position us toact as a consolidator within the OTP industry.We have a strong track record of enhancing our OTP business with strategic and accretive acquisitions. The Company itself was built through acquisitions that were subsequently grown throughdistribution gains, market share growth and brand extensions into new product categories. This is a playbook that we have drawn on over time with a consistent track record of success. We acquired theU.S. and Canadian rolling papers distribution rights for Zig-Zag® in 1997 and extended our product offerings including our entry into the MYO cigar wraps category in 2009. Today, Zig-Zag® is the #1premium and overall rolling paper and MYO cigar wrap brand in the U.S., as measured by MSAi. In 2003, we acquired the Stoker’s® brand. We have since built the brand to a strong #1 position in thechewing tobacco industry while successfully leveraging the brand’s value through our MST expansion where it remains among the fastest growing MST brands in the industry. Subsequent to our initialpublic offering (“IPO”) in 2016, we completed a series of acquisitions that built the foundation of our NewGen Products segment through (i) VaporBeast, (ii) IVG, and (iii) Solace. Our investment in TurningPoint Brands Canada in 2019 is accelerating Zig-Zag®’s growth through alternative channel penetration and introducing our proprietary NewGen products into Canada. In 2020, we acquired certain assetsfrom Durfort including co-ownership of the intellectual property rights for our MYO cigar wraps products. The transaction increased our share of the economics in a MYO cigar wraps business that wasbenefitting from secular growth tailwinds and gave us access to a complimentary product in Blunt Wrap® through an exclusive distribution agreement. Our investments in Wild Hempettes, dosist™,Docklight and Old Pal give us increased exposure to the large and growing cannabinoid market. In 2021, we acquired certain assets from Unitabac, providing a platform to re-enter the large and growingcigarillo category.Raw Materials, Product Supply, and Inventory ManagementWe source our products through a series of longstanding, highly valued relationships which allow us to conduct our business on an asset-light, distribution-focused basis.The components of inventories were as follows (in thousands):9Table of Contents December 31,2021 December 31,2020 Raw materials and work in process $6,936 $8,137 Leaf tobacco 35,900 32,948 Finished goods - Zig-Zag Products 25,663 14,903 Finished goods - Stoker’s Products 8,959 9,727 Finished goods - NewGen Products 8,591 18,916 Other 1,558 1,225 Inventories $87,607 $85,856 Zig-Zag ProductsPursuant to the Zig-Zag® distribution agreements, we are required to purchase from RTI all cigarette papers, cigarette tubes, and cigarette injecting machines that we sell, subject to RTI fulfilling itsobligations under the Zig-Zag® distribution agreements. See “Distribution and Supply Agreements” for a discussion of the Zig-Zag® distribution agreements. If RTI is unable or unwilling to perform itsobligations or ceases its cigarette paper manufacturing operations, in each case, as set forth in the Distribution Agreements, we may seek third-party suppliers and continue the use of the Zig-Zag®trademark to market these products. To ensure we have a steady supply of premium cigarette paper products, as well as cigarette tubes and injectors, RTI is required to maintain, at its expense, a two-monthsupply of inventory in a bonded, public warehouse in the U.S.We obtain our MYO cigar wraps from our supplier in the Dominican Republic. We also obtain our Zig-Zag® branded cigar products from the Dominican Republic.Stoker’s ProductsOur moist snuff and loose-leaf chewing tobaccos are produced from air-cured and fire-cured leaf tobacco, respectively. We utilize recognized suppliers that generally maintain 12- to 24-month supplies ofour various types of tobacco at their facilities. We do not believe we are dependent on any single country or supplier source for tobacco. We generally maintain up to a two-month supply of finished, moistsnuff and loose leaf chewing tobacco on hand. This supply is maintained at our Louisville, Kentucky, facility and in two regional public warehouses to facilitate distribution.We also utilize a variety of suppliers for the sourcing of additives used in our smokeless products and for the supply of our packaging materials. Thus, we believe we are not dependent on a single supplierfor these products. There are no current U.S. federal regulations that restrict tobacco flavor additives in smokeless products. The additives that we use are food-grade, generally accepted ingredients.All of our moist snuff products are manufactured at our facility in Dresden, Tennessee. Packaging occurs at the Dresden, Tennessee, location in addition to the facility in Louisville, Kentucky. All of ourloose-leaf chewing tobacco production is fulfilled through our agreement with Swedish Match. See “Distribution and Supply Agreements” for our discussion of the Swedish Match ManufacturingAgreement.NewGen ProductsWe have sourcing relationships that are capable of providing liquid vapor products for other companies’ brands and for producing our own branded product lines in the category. Our acquisitions ofVaporBeast, IVG and Solace have (i) accelerated our entry into the non-traditional retail channel, where we believe a significant portion of liquid vapor products are sold; (ii) provided enhanced distributionof products; and (iii) established best-in-class distribution and B2C platforms combining e-commerce selling skills with a national retail salesforce. We believe the VaporBeast B2B competency coupled withthe IVG B2C selling strengths and our national retail salesforce is a genuine competitive advantage and one that we intend to leverage on behalf of our actives products. Furthermore, we have establisheda sourcing group in Asia to ensure timely and cost-effective access to marketplace winners and new product launches, while also maximizing margin through thoughtful logistics strategies.Distribution and Supply AgreementsThe Zig-Zag Distribution and License AgreementsIn 1992, we entered into two long-term exclusive distribution agreements with respect to sales of Zig-Zag® cigarette papers, cigarette tubes, and cigarette injector machines in the U.S. and Canada(collectively, the “Distribution Agreements”). The Distribution Agreements had an initial twenty-year term, which automatically renews for successive twenty-year terms unless terminated in accordancewith the terms of the Distribution Agreements. The Distribution Agreements renewed for their second twenty-year term in November 2012.10Table of ContentsUnder the Distribution Agreements, we are required to purchase cigarette papers, cigarette tubes, and cigarette injector machines from the licensor; however, our licensor must provide us with sufficientquantities consistent with specific order-to-delivery timelines outlined in the Distribution Agreements. Our product supply is further protected by additional safeguards, including the right to seek third-party suppliers in certain circumstances and a two-month safety stock inventory to be kept in the U.S. at the licensor’s expense. The Distribution Agreements also provide shared responsibility for duties,insurance, shipping, and taxes. The import duties and taxes in the U.S. and Canada are our responsibility, while the licensor is responsible for insurance, export duties, and shipping costs.Each of the Distribution Agreements contains customary termination provisions, including failure to meet performance obligations, the assignment of the agreement or the consummation of a change ofcontrol, in each case, without consent of the licensor, upon certain material breaches, including our agreement not to promote, directly or indirectly, cigarette paper or cigarette paper booklets of acompetitor, or upon our bankruptcy, insolvency, liquidation, or other similar event. The licensor also may terminate the Distribution Agreements if a competitor acquires a significant amount of our commonstock or if one of our significant stockholders acquires a significant amount of one of our competitors. In the event of a termination, we have agreed that for a period of five years after the termination wewill not engage, directly or indirectly, in the manufacturing, selling, distributing, marketing, or otherwise promoting, in the U.S. and Canada, of cigarette paper or cigarette paper booklets of a competitorwithout consent. There are certain de minimis exceptions to these provisions. For further details, see ‘‘Risk Factors – We depend on a small number of key third-party suppliers and producers for ourproducts’’.In subsequent years, we entered into two licensing agreements, giving us the exclusive use of the Zig-Zag® brand name for e-cigarettes and related accessories in the U.S. and for paper cone products inthe U.S. and Canada (collectively, the “License Agreements”). Each of the License Agreements terminates if the Distribution Agreements are terminated.The Distribution Agreements and the License Agreements were initially entered into with Bolloré. In November 2020, Bolloré assigned the Distribution Agreements and the License Agreements to RTI. Fora number of years, RTI has been the outsourced manufacturer of cigarette papers, cigarette tubes, cigarette injector machines and certain other products bearing the Zig-Zag® name.Swedish Match Manufacturing AgreementIn 2008, we entered into a manufacturing and distribution agreement with Swedish Match whereby Swedish Match became the exclusive manufacturer of our loose-leaf chewing tobacco. Under theagreement, production of our loose-leaf chewing tobacco products was completely transitioned to Swedish Match’s plant located in Owensboro, Kentucky, in 2009. We source all of the tobacco SwedishMatch uses to manufacture our products along with certain proprietary flavorings and retain all marketing, design, formula, and trademark rights over our loose-leaf products. We also have the right toapprove all product modifications and are solely responsible for decisions related to package design and branding of the loose-leaf tobacco produced for us. Responsibilities related to process control,manufacturing activities, and inventory management with respect to our loose-leaf products are allocated between us and Swedish Match as specified in the agreement. We also have rights to monitorproduction and quality control processes on an ongoing basis.The agreement had an initial ten-year term and will automatically be renewed for five successive ten-year terms unless either party provides at least 180 days’ notice prior to a renewal term of its intent toterminate the agreement, or unless otherwise terminated by mutual agreement of the parties in accordance with the provisions of the agreement. If a notice of non-renewal is delivered, the contract willexpire two years after the date on which the agreement would have otherwise been renewed. The terms allow the agreement to be assumed by a buyer, terminated for uncured material breach, or terminatedby us subject to a buyout. We also hold a right of first refusal to acquire the manufacturing plant as well as Swedish Match’s chewing tobacco unit. The agreement was automatically renewed for the firstof five 10-year renewal periods in September 2018.Production and Quality ControlWe primarily outsource our manufacturing and production processes and focus on packaging, marketing, and distribution. We currently manufacture less than 20% of our products as measured by netsales. Our in-house manufacturing operations are principally limited to (i) the manufacturing of our moist snuff products, which occurs at our facility in Dresden, Tennessee; and (ii) the packaging of ourmoist snuff products at our facilities in Dresden, Tennessee, and Louisville, Kentucky. Our MST products are processed in-house, rather than outsourced, as a result of our proprietary manufacturingprocesses which are substantively different than those of our competitors.We use proprietary production processes and techniques, including strict quality controls. Our quality control group routinely tests the quality of the tobacco, flavorings, application of flavorings,premium cigarette papers, tubes and injectors, cigars, MYO cigar wraps, liquid vapor products, and packaging materials. We utilize sophisticated quality controls to test and closely monitor the quality ofour products. The high quality of our tobacco products is largely the result of using high-grade tobacco leaf and food-grade flavorings and, on an ongoing basis, analyzing the tobacco cut, flavorings, andmoisture content together with strict specifications for sourced products.11Table of ContentsGiven the importance of contract manufacturing to our business, our quality control group ensures that established, written procedures and standards are adhered to by each of our contractmanufacturers. Responsibilities related to process control, manufacturing activities, quality control, and inventory management with respect to our loose leaf are allocated between us and Swedish Matchunder the manufacturing agreement.Sales and MarketingWe have grown the size and capacity of our salesforce and intend to continue strengthening the organization to advance our ability to deepen and broaden the retail availability of our products andbrands.As of December 31, 2021, we had a nationwide sales and marketing organization of approximately 180 professionals. Our sales and marketing group focuses on priority markets and sales channels andseeks to operate with a high level of efficiency. In 2021, our Zig-Zag and Stoker’s Products sales and marketing efforts enabled our products to reach an estimated 215,000 retail outlets in North Americaand over 800 direct wholesale customers with an additional 200 secondary, indirect wholesalers in the U.S.Our Zig-Zag and Stoker’s Products sales efforts are focused on wholesale distributors and retail merchants in the independent and chain convenience store, tobacco outlet, food store, massmerchandising, drug store, and non-traditional retail channels. For Zig-Zag Products, we have also developed a growing e-commerce business. Our NewGen sales efforts are focused on alternativechannels and winning new stores, increasing store share of requirements and growing the B2C engine to capture a greater share of online sales direct to the consumer. We have expanded, and intend tocontinue to expand, the sales of our products into previously underdeveloped geographic markets and retail channels. In 2021, we derived more than 90% of our net sales from sales in the U.S., with theremainder primarily from sales in Canada.We subscribe to a sales tracking system from MSAi that records all traditional OTP product shipments (ours as well as those of our competitors) from approximately 600 wholesalers to over 250,000traditional retail stores in the U.S. This system enables us to understand individual product share and volume trends across multiple categories down to the individual retail store level, allowing us toallocate field salesforce coverage to the highest opportunity stores. Additionally, the ability to select from a range of parameters and to achieve this level of granularity means we can analyze marketplacetrends in a timely manner and swiftly evolve our business planning to meet market opportunities.We employ marketing activities to grow awareness, trial, and sales including selective trade advertising to expand wholesale availability, point-of-sale advertising and merchandising and permanent andtemporary displays to improve consumer visibility, and social media. We comply with all regulations relating to the marketing of tobacco products, such as directing marketing efforts to adult consumers,and are committed to full legal compliance in the sales and marketing of our products. To date, we have neither relied upon, nor conducted, any substantial advertising in the consumer media for ourtobacco products.For the years ended December 31, 2021, 2020, and 2019, we did not have any customer that accounted for 10% or more of our net sales. Our customers use an open purchase order system to buy ourproducts and are not obligated to do so pursuant to ongoing contractual obligations. We perform periodic credit evaluations of our customers and generally do not require collateral on trade receivables.Historically, we have not experienced material credit losses. Sales to customers within our NewGen segment are generally prepaid.CompetitionMany of our competitors are better capitalized than we are and have greater resources, financial and otherwise. We believe our ability to effectively compete and strong market positions in our principalproduct lines are due to the high recognition of our brand names, the perceived quality of each of our products, and the efforts of our sales, marketing, and distribution teams. We compete against “bigtobacco,” including Altria Group, Inc. (formerly Philip Morris International); British American Tobacco p.l.c. (formerly R.J. Reynolds Tobacco Company); Swedish Match; Swisher International, Inc.; andmanufacturers including U.K. based Imperial Brands, PLC, across our segments. “Big tobacco” has substantial resources and a customer base that has historically demonstrated loyalty to their brands.Competition in the OTP market is based upon not only brand quality and positioning but also on price, packaging, promotion, and retail availability and visibility. Given the decreasing prevalence ofcigarette consumption, the “big tobacco” companies continue to demonstrate an increased interest and participation in a number of OTP markets.12Table of ContentsZig-Zag ProductsOur principal competitors for premium rolling paper sales are Republic Tobacco, L.P. and HBI International. Our major competitors in MYO cigar wraps are Good Times USA, LLC and New Image Global, Inc.We believe MYO cigar wrap products are used interchangeably with both rolling papers and finished cigar products by many consumers.Stoker’s ProductsOur four principal competitors in the moist snuff category are Swedish Match, the American Snuff Company, LLC (a unit of British American Tobacco p.l.c.), Swisher International Group, Inc. and U.S.Smokeless Tobacco Company (a division of Altria Group, Inc.). In the loose-leaf chewing tobacco market, our three principal competitors are Swedish Match, the American Snuff Company, LLC (a unit ofBritish American Tobacco p.l.c.), and Swisher International Group, Inc. We believe moist snuff products are used interchangeably with loose leaf products by many consumers.NewGen ProductsIn the NewGen products segment, our competitors are varied as the market is relatively new and highly fragmented. Our direct competitors sell products that are substantially similar to our productsthrough the same channels in which we sell our liquid vapor products. We compete with these direct competitors for sales through wholesalers and retailers including, but not limited to, vapor stores,national chain stores, tobacco shops, and convenience stores and in the online direct to consumer environment. Through our acquisitions we now also compete directly with other non-traditionaldistributors and retailers.Patents, Trademarks, and Trade SecretsWe have numerous registered trademarks relating to our products, including: Beech-Nut®, Trophy®, Havana Blossom®, Durango®, Stoker’s®, Tequila Sunrise®, Fred’s Choice®, Old Hillside®, OurPride®, Red Cap®, Tennessee Chew®, Big Mountain®, Springfield Standard®, Snake River®, Vapor Beast®, Vapor Shark®, DirectVapor®, VaporFi® and South Beach Smoke®. The registeredtrademarks, which are significant to our business, expire periodically and are renewable for additional 10-year terms upon expiration. Flavor and blend formula trade secrets relating to our tobacco products,which are key assets of our businesses, are maintained under strict secrecy.The Zig-Zag® trade dress trademark for premium cigarette papers and related products are owned by RTI and have been exclusively licensed to us in the U.S. and Canada. The Zig-Zag® trademark for e-cigarettes is also owned by RTI and has been exclusively licensed to us in the U.S. We own the Zig-Zag® trademark with respect to its use in connection with products made with tobacco including,without limitation, cigarettes, cigars, and MYO cigar wraps in the U.S.Research and Development and Quality AssuranceWe have a research and development and quality assurance function that tests raw materials and finished products in order to maintain a high level of product quality and consistency. Research anddevelopment largely bases its new product development efforts on our high-tech data systems. We spent approximately $1.1 million, $1.3 million, and $2.5 million dollars on research and development andquality control efforts for the years ended December 31, 2021, 2020, and 2019, respectively.Human CapitalAs of March 4, 2022, we employed 426 full-time and part-time employees. None of our employees are represented by unions. We believe we have a positive relationship with our employees.We believe that our success is driven by our employees. Our human capital strategy, which is developed and overseen by our COO, focuses on the health and safety of our employees, developmentand retention of current employees, and talent attraction. Our COO is also responsible for our diversity, equity and inclusion (“DE&I”) strategies. The CEO, CFO and COO regularly update the board ofdirectors and its committees on the human capital management, as well as the implementation of new initiatives. Health and Safety: Our health and safety programs are designed to address applicable regulations as well as the specific hazards and work environments of each of our facilities. We regularlyconduct safety reviews at each of our locations to ensure compliance with applicable regulations and all policies and procedures. We maintain safety committees that meet regularly to discuss and addressany potential issues in our warehouse and manufacturing facilities. In addition, we conduct quarterly Motor Vehicle Safety trainings and annual Motor Vehicle Records checks for those assigned tocompany vehicles or who are daily drivers. We utilize a number of metrics to assess the performance of our health and safety policies, procedures and initiatives, including lost workdays and anyrecordable or reportable incidents. Also in 2021, we continued to implement strategies to mitigate the risk of COVID-19 in the workplace. 13Table of ContentsTPB Culture Committee: We implemented a Culture Committee in 2021 as a platform to discuss and implement ideas for Turning Point Brands to be the employer of choice. The committee is comprised ofdiverse individuals from different departments and geographic locations. The committee’s focus is to recommend and implement best practices in the areas of health and safety, DE&I, employeeengagement, talent development and retention, and community engagement.Employee Engagement: To assess and improve employee retention and engagement, we implemented a new software system which can frequently survey our workforce and focus our efforts onmaximizing employee engagement and retention. The system is configured to use text messaging, in addition to email notifications, to increase participation with our distributed workforce.Diversity, Equity and Inclusion: We place a high value on DE&I. As of December 31, 2021, approximately 33% of our workforce was female and 24% of our employees in managerial roles were female. Asof the same date, underrepresented minorities made up approximately 27% of our workforce, with 19% of our managerial roles held by underrepresented minorities. Training and Talent Development: We provide technical and leadership training to employees at both the officer and non-officer levels. In 2020, the Company developed Turning Point University, anonline training and development tool used by management and employees. We believe that encouraging continual development for our employees is essential for us to maintain the strength and profitability of the Company, generally, and brands, specifically. The Company postsits openings internally to allow current employees to apply. In 2021, we had 20 internal promotions within the organization. Retaining Talent: During the year ended December 31, 2021, our employee turnover rate was 16.5%. To retain our employees, we believe it is critical to continually focus on ensuring employees are highlyengaged and feel valued. We address these retention efforts in a number of ways, from formal surveys and quarterly business updates, to regular informal discussions with employees that enable us tolisten to, understand and address their concerns. Employee Benefits: We offer comprehensive benefit programs to our employees that provides them with, among other things, medical, dental, and vision healthcare; 401(k) matching contributions; paidparental leave; tuition assistance; paid holidays; and paid vacation time.Environmental, Social and Governance (“ESG”)We believe that focusing on our consumers and customers, while proactively and productively addressing the environment, our employees, our community, and society at large, is the key to driving valuefor all stakeholders. We recognize that incorporating ESG into our business strategy enhances our operating principles of winning with accountability, integrity, and responsibility, and will position ourcompany for greater success in the future. We believe that our Company will maximize its return to shareholders by implementing strategies and establishing goals to address public health, mitigatingenvironmental risks, seeking and integrating a diverse range of viewpoints, and displaying responsible behaviors to suppliers, customers, members of the organization and most of all to its consumers.The Company’s Board of Directors voted on March 22, 2021, to add Environmental, Social, and Governance oversight to the Nominating and Governance Committee portfolio. In recognition of thecommittee’s expanded role, the Nominating and Governance Committee was renamed the Nominating and ESG Committee.The Company engaged Nasdaq Corporate Solutions (NCS) to provide a comprehensive review of the Company’s ESG program and to provide recommendations based on best practices. The results of thereview were favorable and the Company is currently implementing action plans to address gaps that were identified by NCS.Public HealthOne key aspect of our ESG program, is our distinct focus on TPB’s role in public health. We market and sell products intended for adult use only, many containing nicotine. As a result, public health playsa central role in all of our product initiatives. We believe in, and work diligently to apply, harm reduction principles to all of our products, from development through distribution and marketing. TurningPoint Brands’ vision is built upon the idea that adult consumers, when presented with responsibly marketed and high-quality options, will, in large part, prefer products with a lower risk profile than others.This idea of moving adult consumers down the continuum of risk is a key driver of our Company’s future for sustainable growth. We intend to accomplish this by developing low-risk alternativesaccording to good product stewardship and manufacturing principles in order to increase adult consumer availability of and access to high-quality products that deliver satisfaction but at a lower risk tothe user. We will continue to focus our R&D, scientific, policy, and product resources to increase the number of consumers choosing products that are lower risk.14Table of ContentsIn September 2020, we submitted to the U.S. Food and Drug Administration Premarket Tobacco Applications (“PMTAs”) covering 250 products. This is an important and necessary step to allow us to offeradult consumers an extensive portfolio of products that serve as alternatives to combustible cigarettes and satisfy a wide variety of consumer preferences. The filings provide detailed scientific data thatwe believe demonstrates that the products are “appropriate for the protection of public health,” as required by law. Studies to support the applications were performed and included pharmacokineticsstudies, a likelihood of use study, and a patterns of use study, in addition to a toxicological review. We also provided a detailed marketing plan to illustrate how it will continue to prevent youth exposure tothe products. See “Risks Related to Legal, Tax and Regulatory Matters” under Item 1A “Risk Factors” of this Annual Report on Form 10-K.Prevention of Youth AccessOur vision is a world where only adult consumers purchase and use products that are not intended for youth. As a seller of products intended for adult-use only, society demands a higher burden ofresponsibility from us, and we are committed to proactively preventing the underage appeal and access to those products. We are dedicated to the responsible marketing of our adult use products and arefully committed to complying with all applicable laws and regulations governing them. We target marketing activities to both male and female current nicotine, cannabinoid, and other active consumers thatare 21 years of age and older. The marketing of our adult use products does not include content directed toward minors, including child-oriented images or other themes where such imagery is reasonablyunderstood to resonate with minors. The Company plans to continue to engage in appropriately targeted marketing activity, consistent with all legal requirements, industry standards, and best practices.Preventing youth access and use of our adult-use products is a key to our continued success. All of our adult-use products are intended to be sold to and used by adults 21 years of age and older, and weare proactive in implementing programs to prevent youth access. For TPB’s own online retail (B2C) sales, TPB utilizes a robust third-party age verification process for all online purchases by consumers.On its business-to-business (B2B) website section, TPB offers suggestions of resources for its downstream customers related to prevention of youth access. These resources include information relatedto retailer-focused FDA guidance, third-party age verification software available to both brick-and-mortar and online sellers, and helpful websites that offer compliance tools, e.g., WeCard.Environmental StewardshipBeing good stewards of the planet will support our business success. We will achieve this by transitioning our fleet to lower emissions vehicles, implementing energy saving initiatives in all of ourlocations, using renewable energy, and investing in Renewable Energy Credits (RECs) and Verified Emissions Reductions (VERs). We are also focused on reducing our water consumption and lowering ourwaste streams with increased recycling efforts. Within each of these categories we will continue to define and update our metrics to measure our environmental impact based on Sustainability AccountingStandards Board (SASB), Carbon Disclosure Project (CDP), Task Force on Climate-related Financial Disclosures (TCFD), and the United Nations Sustainable Development Goals (SDGs).Social ImpactIn 2021, we continued to mobilize our internal resources during the COVID-19 crisis to ensure the continuity of supply of our products to our customers and consumers while devoting company resourcesto assist the community at large, including: •Implementing processes to keep our team members safe with plantwide safety and cleanliness protocols, split shifts for fulfillment personnel, isolating work units where possible, and providingwork from home opportunities. •Leveraging our IT strength and implementing videoconferencing to minimize contact and travel. •Communicating regularly with our customers and suppliers to understand their challenges and ways to assist them. •Providing lunches for our employees from local restaurants that were impacted by the pandemic. •Recognizing the commitment of our employees by providing worker incentives for our team members who could not work remotely.Our Social program focuses on the safety of our people and the diversity of our workforce. Our goals are to provide an injury-free and diverse workforce in order to provide a winning culture and be theemployer of choice. We actively monitor and train against our safety program and have safety committees dedicated to implementing best practices and improving our safe working environment. We haveestablished meaningful measures for our Social program and our targets and actions will allow us to achieve our goals in this area.15Table of ContentsCorporate GovernanceGood corporate governance is critical to our operating principles of winning with accountability, integrity, and responsibility. Acting with accountability, integrity and responsibility is at the core of ourbusiness conduct policy. We train all employees on our business conduct policies. In addition, our Governance program measures the diversity of our Board. We believe that Board diversity is critical tohaving a winning culture and strategy. We have established meaningful measures for our Governance program and our targets and actions will allow us to achieve our goals in this area.2021 HighlightsIn 2021, we implemented several ESG committees to integrate ESG principles into our business practices. The committees are comprised of diverse individuals from different departments and geographiclocations. The committees report to the ESG Executive Committee, comprised of the President and CEO, COO, CFO, General Counsel, and Senior Vice-President of Sustainability. The following committeeswere formed and are actively working: •The Public Health, Responsible Marketing, and Youth Access Prevention Committee, provides a platform to enhance our business practices in these areas. The committee is charged withrecommending and implementing best practices in the areas of Public Health, Responsible Marketing, and Youth Access Prevention. •The Environmental Committee provides a platform to enhance our environmental practices within our business units. The committee is charged with recommending and implementing bestpractices in the areas of carbon emissions, waste, water, and biodiversity within our business units. •The Supplier Committee provides a platform to assure our supply chain aligns with our Environmental, Social, and Governance practices. The committee charged with recommending andimplementing best practices in the areas of supplier environmental, social, and governance processes. •The Culture Committee provides a platform to achieve the objective of being the employer of choice. The committee is charged with recommending and implementing best practices in the areas ofhealth and safety, DE&I, Talent Development and Retention, and Community Engagement. •The Governance Committee as a platform to assure our governance practices are best in class. The committee is charged to recommending and implementing best practices in the areas of businessethics, political engagement, and cybersecurity.Further information related to our ESG program can be found on our website.Internet Address and Company SEC FilingsOur primary Internet address is www.turningpointbrands.com. The SEC maintains a website at https://www.sec.gov that contains reports, proxy and information statements, and other information regardingissuers that file electronically with the SEC. On the investor relations portion of our website, www.turningpointbrands.com/investor-relations, we provide a link to our electronic filings with the U.S.Securities and Exchange Commission (the “SEC”), including our annual report on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to these reports. Wemake all such filings available free of charge as soon as reasonably practicable after filing. The information found on our website is not part of this or any other report we file with or furnish to the SEC.16Table of ContentsItem 1A. Risk FactorsThe risk factors summarized and detailed below could materially harm our business, operating results and/or financial condition, impair our future prospects and/or cause the price of our common stock todecline. These are not all of the risks we face and other factors not presently known to us or that we currently believe are immaterial may also affect our business if they occur. Material risks that may affectour business, operating results and financial condition include, but are not necessarily limited to, those relating to:Risks Related to Our Business and Industry •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, includingdelays 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 our brand equity; •contamination of our tobacco supply or products; •uncertainty and continued evolution of the markets for our NewGen and cigar products; •complications with the design or implementation of our new enterprise resource planning system could adversely impact our business and operations;Risks Related to Legal, Tax and Regulatory Matters •substantial and increasing U.S. regulation; •regulation or marketing denials of our products by the FDA, which has broad regulatory powers; •many of our products contain nicotine, which is considered to be a highly addictive substance; •requirement to maintain compliance with master settlement agreement escrow account; •possible significant increases in federal, state and local municipal tobacco- and vapor-related taxes; •our products are subject to developing and unpredictable regulation, such as court actions that impact obligations; •increase in state and local regulation of our NewGen products has been proposed or enacted; •increase in tax of our NewGen 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; •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; •the effect of the COVID-19 pandemic on our business;Risks Related to Financial Results, Finances and Capital Structure •our amount of indebtedness; •the terms of our indebtedness, which may restrict our current and future operations; •our loss of emerging growth status on December 31, 2021 and ability to comply with the additional disclosure requirements applicable to non-emerging growth companies; •identification a material weakness in our internal control related to ineffective information technology general controls which, if not remediated appropriately or timely, could result in loss ofinvestor confidence and adversely impact our stock price; •Changes in the method for determining LIBOR or the replacement of LIBOR with an alternative reference rate, may adversely affect interest expense related to outstanding debt;17Table of ContentsRisks Related to our Common Stock •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 themarket 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 stockand 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 distributionrights; •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 yourownership in us; •we may issue preferred stock whose terms could adversely affect the voting power or value of our common stock;General Risks •our business may be damaged by events outside of our or our suppliers’ control, such as the impact of epidemics (e.g., coronavirus), political upheavals, or natural disasters; •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 factorsRisks Related to Our Business and IndustrySales of tobacco products are generally expected to continue to decline.As a result of restrictions on advertising and promotions, increases in regulation and excise taxes, health concerns, a decline in the social acceptability of tobacco and tobacco-related products, increasedpressure from anti-tobacco groups, and other factors, the overall U.S. market for tobacco products has generally been declining in terms of volume of sales and is expected to continue to decline. Thegeneral climate of declining sales of tobacco products is principally driven by the long-standing declines in cigarettes. OTP, on the other hand, as measured by MSAi, have continued to generate modestconsumer unit volume gains. Additionally, cigarillo cigars and MYO cigar wraps have each demonstrated MSAi volume gains in recent years. Our tobacco products comprised approximately 68% of ourtotal 2021 net sales and, while some of our sales volume declines have been offset by higher prices or by increased sales in other product categories, there can be no assurance that these price increases orincreased sales can be sustained, especially in an environment of increased regulation, product characteristic restrictions, and taxation and changes in consumer spending habits.We depend on a small number of key third-party suppliers and producers for our products.Our operations are largely dependent on a small number of key suppliers and producers to supply or manufacture our products pursuant to long-term contracts. In 2021, our two most important suppliersand producers were: (i) Swedish Match, which produces all of our loose leaf chewing tobacco in the U.S.; and (ii) RTI, which provides us with exclusive access to the Zig-Zag® cigarette paper and relatedaccessories in the U.S. and Canada. See “Item 1 – Business – Distribution and Supply Agreements”All of our loose-leaf tobacco products are manufactured for us by Swedish Match pursuant to a ten-year renewable agreement, which we entered into in 2008. The agreement will automatically be renewedfor five successive ten-year terms unless either party provides at least 180 days’ notice prior to a renewal term of its intent to terminate the agreement or unless otherwise terminated in accordance with theprovisions of the agreement. If a notice of non-renewal is delivered, the contract will expire two years after the date on which the agreement would have otherwise been renewed. Under this agreement, weretain the rights to all marketing, distribution and trademarks over the loose-leaf brands that we own or license. The agreement renewed for an additional ten-year term in 2018. We share responsibilitieswith Swedish Match related to process control, manufacturing activities, quality control, and inventory management with respect to our loose-leaf products. We rely on the performance by Swedish Matchof its obligations under the agreement for the production of our loose-leaf tobacco products. Any significant disruption in Swedish Match’s manufacturing capabilities or our relationship with SwedishMatch, a deterioration in Swedish Match’s financial condition, or an industry-wide change in business practices with respect to loose leaf tobacco products could have a material adverse effect on ourbusiness, results of operations, and financial condition.18Table of ContentsAll of our Zig-Zag® premium cigarette papers, cigarette tubes, and injectors are sourced from RTI, pursuant to the Distribution Agreements. In November 2020, Bolloré sold its rights to its trademarks forthe Zig-Zag® brand name in the U.S. and Canada to RTI and, in connection with the sale, assigned the Distribution Agreements and the License Agreements to RTI. RTI is an affiliate of one of ourcompetitors. The Distribution Agreements were most recently renewed in 2012 and pursuant to such agreements, we renegotiate pricing terms every five years. The Distribution Agreements were initiallyentered into with Bolloré, the original holder of the cigarette paper-related trademarks for the Zig-Zag® brand name.Pursuant to agreements with certain suppliers, we have agreed to store tobacco inventory purchased on our behalf and generally maintain a 12- to 24-month supply of our various tobacco products at theirfacilities. We cannot guarantee our supply of these products will be adequate to meet the demands of our customers. Further, a major fire, violent weather conditions, or other disasters that affect us or anyof our key suppliers or producers, including RTI or Swedish Match, as well as those of our other suppliers and vendors, could have a material adverse effect on our operations. Although we haveinsurance coverage for some of these events, a prolonged interruption in our operations, as well as those of our producers, suppliers, or vendors, could have a material adverse effect on our business,results of operations, and financial condition. In addition, we do not know whether we will be able to renew any or all of our agreements on a timely basis, on terms satisfactory to us, or at all.Any disruptions in our relationships with RTI or Swedish Match or any other significant supplier, a failure to renew any of our agreements, an inability or unwillingness by any supplier to producesufficient quantities of our products in a timely manner or finding a new supplier would have a significant impact on our ability to continue distributing the same volume and quality of products andmaintain our market share, even during a temporary disruption, which could have a material adverse effect on our business, results of operations and financial condition.We may be unable to identify or contract with new suppliers or producers in the event of a disruption to our supply of products.In order to continue selling our products in the event of a disruption to our supply, we would have to identify new suppliers or producers that would be required to satisfy significant regulatoryrequirements. Only a limited number of suppliers or producers (if any) may have the ability to produce our products at the volumes we need, and it could be costly or time-consuming to locate and approvesuch alternative sources. Moreover, it may be difficult or costly to find suppliers to produce small volumes of our new products in the event we are looking only to supplement current supply as suppliersmay impose minimum order requirements. In addition, we may be unable to negotiate pricing or other terms with our existing or new suppliers as favorable as those we currently enjoy. Even if we were ableto successfully identify new suppliers and contract with them on favorable terms, these new suppliers would also be subject to stringent regulatory approval procedures that could result in prolongeddisruptions to our sourcing and distribution processes.Furthermore, there is no guarantee that a new third-party supplier could accurately replicate the production process and taste profile of our existing products. We cannot guarantee that a failure toadequately replace our existing suppliers would not have a material adverse effect on our business, results of operations, and financial condition.Our licenses to use certain brands and trademarks may be terminated or not renewed.We are reliant upon brand recognition in the OTP markets in which we compete as the OTP industry is characterized by a high degree of brand loyalty and a reluctance to switch to new or unrecognizablebrands on the part of consumers. Some of the brands and trademarks under which our products are sold are licensed to us for a fixed period of time in respect of specified markets, such as our Distributionand License Agreements for use of the Zig-Zag® name and associated trademarks in connection with certain of our cigarette papers and related products.We have a number of Licensing Agreements with RTI. The first of these governs licensing, sourcing and the use of the Zig-Zag® name with respect to cigarette papers, cigarette tubes, and cigaretteinjector machines, the second of which governs licensing, sourcing and the use of the Zig-Zag® name with respect to e-cigarettes, vaporizers, and e-liquids, and the third of which governs the licensing,sourcing and use of the Zig-Zag trademark on paper cones. In 2021, we generated approximately $163 million in net sales of Zig-Zag® products, of which approximately $79 million was generated fromproducts sold through the License Agreements. In the event that one or more of these Licensing Agreements are not renewed, the terms of the agreements bind us under a five-year non-compete clause,under which we cannot engage in direct or indirect manufacturing, selling, distributing or otherwise promoting of cigarette papers of a competitor to Zig-Zag® without RTI’s consent, except in limitedinstances. We do not know whether we will renew these agreements on a timely basis, on terms satisfactory to us, or at all. As a result of these restrictions, if our licensing agreements with respect to theZig-Zag® trademark are terminated, we may not be able to access the markets with recognizable brands that would be positioned to compete in these segments.19Table of ContentsIn the event that the licenses to use the brands and trademarks in our portfolio are terminated or are not renewed after the end of the term, there is no guarantee we will be able to find a suitablereplacement, or if a replacement is found, that it will be on favorable terms. Any loss in our brand-name appeal to our existing customers as a result of the lapse or termination of our licenses could have amaterial adverse effect on our business, results of operations, and financial condition.We may not be successful in maintaining the consumer brand recognition and loyalty of our products.We compete in a market that relies on innovation and the ability to react to evolving consumer preferences. The alternative smoking accessories and tobacco industries in general, and the OTP industry, inparticular, are subject to changing consumer trends, demands, and preferences. Therefore, products once favored may over time become disfavored by consumers or no longer perceived as the bestoption. Consumers in the OTP market have demonstrated a high degree of brand loyalty, but producers must continue to adapt their products in order to maintain their status among these customers as themarket evolves. The Zig-Zag® brand has strong brand recognition among smokers, and our continued success depends in part on our ability to continue to differentiate the brand names that we own orlicense and maintain similarly high levels of recognition with target consumers. Trends within the alternative smoking accessories and OTP industries change often. Our failure to anticipate, identify, orreact to changes in these trends could, among other things, lead to reduced demand for our products. Factors that may affect consumer perception of our products include health trends and attention tohealth concerns associated with tobacco, price-sensitivity in the presence of competitors’ products or substitute products, and trends in favor of new NewGen products that are currently being researchedand produced by participants in our industry. For example, in recent years, we have witnessed a shift in consumer purchases from chewing tobacco to moist snuff due to its increased affordability. Alongwith our biggest competitors in the chewing tobacco market, which also produce moist snuff, we have been able to shift priorities and adapt to this change. A failure to react to similar trends in the futurecould enable our competitors to grow or establish their brands’ market shares in these categories before we have a chance to respond.Consumer perceptions of tobacco-based products are likely to continue to shift, and our success depends, in part, on our ability to anticipate these shifting tastes and the rapidity with which the marketsin which we compete will evolve in response to these changes on a timely and affordable basis. If we are unable to respond effectively and efficiently to changing consumer preferences, the demand forour products may decline, which could have a material adverse effect on our business, results of operations, and financial condition.Regulations may be enacted in the future, particularly in light of increasing restrictions on the form and content of marketing of tobacco products, that would make it more difficult to appeal to ourconsumers or to leverage existing recognition of the brands that we own or license. Furthermore, even if we are able to continue to distinguish our products, there can be no assurance that the sales,marketing, and distribution efforts of our competitors will not be successful in persuading consumers of our products to switch to their products. Many of our competitors have greater access to resourcesthan we do, which better positions them to conduct market research in relation to branding strategies or costly marketing campaigns. Any loss of consumer brand loyalty to our products or reduction ofour ability to effectively brand our products in a recognizable way will have a material effect on our ability to continue to sell our products and maintain our market share, which could have a materialadverse effect on our business, results of operations, and financial condition.Our distribution efforts rely in part on our ability to leverage relationships with large retailers and national chains.Our distribution efforts rely in part on our ability to leverage relationships with large retailers and national chains to sell and promote our products, which is dependent upon the strength of the brandnames that we own or license and our salesforce effectiveness. In order to maintain these relationships, we must continue to supply products that will bring steady business to these retailers and nationalchains. We may not be able to sustain these relationships or establish other relationships with such entities, which could have a material adverse effect on our ability to execute our branding strategies, ourability to access the end-user markets with our products or our ability to maintain our relationships with the producers of our products. For example, if we are unable to meet benchmarking provisions incontracts or if we are unable to maintain and leverage our retail relationships on a scale sufficient to make us an attractive distributor, it would have a material adverse effect on our ability to sourceproducts, and on our business, results of operations and financial condition. In addition, there are factors beyond our control that may prevent us from leveraging existing relationships, such as industryconsolidation. If we are unable to develop and sustain relationships with large retailers and national chains, or we are unable to leverage those relationships due to factors such as a decline in the role ofbrick-and-mortar retailers in North America, our capacity to maintain and grow brand and product recognition and increase sales volume will be significantly undermined. In such an event, we mayultimately be forced to pursue and rely on local and more fragmented sales channels, which will have a material adverse effect on our business, results of operations and financial condition.20Table of ContentsWe face intense competition and may fail to compete effectively.We are subject to significant competition across our segments and compete against companies in all segments that have access to significant resources in terms of technology, relationships with suppliersand distributors and access to cash flow and financial markets.The OTP industry is characterized by brand recognition and loyalty, with product quality, price, marketing and packaging constituting the primary methods of competition. Substantial marketing support,merchandising display, competitive pricing and other financial incentives generally are required to introduce a new brand or to improve or maintain a brand’s market position. Our principal competitors are“big tobacco,” Altria Group, Inc. (formerly Phillip Morris) and British American Tobacco p.l.c. (formerly Reynolds) as well as Swedish Match, Swisher International and manufacturers of electroniccigarettes, including U.K.-based Imperial Brands PLC. These competitors are significantly larger than us and aggressively seek to limit the distribution or sale of other companies’ products, both at thewholesale and retail levels. For example, certain competitors have entered into agreements limiting retail-merchandising displays of other companies’ products or imposing minimum prices for OTPproducts, thereby limiting their competitors’ ability to offer discounted products. In addition, the tobacco industry is experiencing a trend toward industry consolidation, most recently evidenced by theDecember 2018 investment in Juul Labs by Altria, the July 2017 acquisition of Reynolds American, Inc., by British American Tobacco p.l.c., and the June 2015 acquisition of Lorillard, Inc., by ReynoldsAmerican, Inc. Additional industry consolidation could result in a more competitive environment if our competitors are able to increase their combined resources, enhance their access to nationaldistribution networks, or become acquired by established companies with greater resources than ours. Any inability to compete due to our smaller scale as the industry continues to consolidate and bedominated by “big tobacco” could have a material adverse effect on our business, results of operations and financial condition.“Big tobacco” has also established its presence in the NewGen products market and has begun to make investments in the alternative space. There can be no assurance that our products will be able tocompete successfully against these companies or any of our other competitors, some of which have far greater resources, capital, experience, market penetration, sales and distribution channels than us. Inaddition, there are currently relatively few U.S. restrictions on advertising electronic cigarettes and vaporizer products and competitors, including “big tobacco,” may have more resources than us foradvertising expenses, which could have a material adverse effect on our ability to build and maintain market share, and thus have a material adverse effect on our business, results of operations andfinancial condition.The competitive environment and our competitive position are also significantly influenced by economic conditions, the state of consumer confidence, competitors’ introduction of low-priced products orinnovative products, higher taxes, higher absolute prices and larger gaps between price categories and product regulation that diminishes the consumer’s ability to differentiate tobacco products. Due tothe impact of these factors, as well as higher state and local excise taxes and the market share of deep discount brands, the tobacco industry has become increasingly price competitive. As we seek toadapt to the price competitive environment, our competitors that are better capitalized may be able to sustain price discounts for long periods of time by spreading the loss across their expansiveportfolios, with which we are not positioned to compete.Competition from illicit sources may have an adverse effect on our overall sales volume, restricting the ability to increase selling prices and damaging brand equity.Illicit trade and tobacco trafficking in the form of counterfeit products, smuggled genuine products and locally manufactured products on which applicable taxes or regulatory requirements are evaded,represent a significant and growing threat to the legitimate tobacco industry. Factors such as increasing tax regimes, regulatory restrictions, and compliance requirements have resulted in more consumersswitching to illegal, cheaper tobacco products and providing greater rewards for smugglers. We expect that this trend will continue and even accelerate if additional regulatory requirements make it moredifficult or expensive to obtain genuine products. Illicit trade can have an adverse effect on our overall sales volume, restrict the ability to increase selling prices, damage brand equity and may lead tocommoditization of our products.Although we combat counterfeiting of our products by engaging in certain tactics, such as requiring all sales force personnel to randomly collect our products from retailers in order to be reviewed forauthenticity and using a private investigation firm to help perform surveillance of retailers we suspect are selling counterfeit products, no assurance can be given that we will be able to detect or stop salesof all counterfeit products. In addition, we have in the past and will continue to bring suits against retailers and distributors that sell certain counterfeit products. While we have been successful insecuring financial recoveries from and helping to obtain criminal convictions of counterfeiters in the past, no assurance can be given that we will be successful in any such suits or that such suits will besuccessful in stopping other retailers or distributors from selling counterfeit products. Even if we are successful, such suits could consume a significant amount of management’s time and could also resultin significant expenses to the company. Any failure to track and prevent counterfeiting of our products could have a material adverse on our ability to maintain or effectively compete for the products wedistribute under our brand names, which would have a material adverse effect on our business, results of operations and financial condition.21Table of ContentsContamination of, or damage to, our products could adversely impact sales volume, market share and profitability.Our market position may be affected through the contamination of our tobacco supply or products during the manufacturing process or at different points in the entire supply chain. We keep significantamounts of inventory of our products in warehouses and it is possible that this inventory could become contaminated during the storage period. In addition, our suppliers generally keep significantamounts of our inventory on hand and it is probable that such inventory could become contaminated even prior to arrival at our premises. If contamination of our inventory or packaged products occurs,whether as a result of a failure in quality control by us or by one of our suppliers, we may incur significant costs in replacing the inventory and recalling products. We may be unable to meet customerdemand and may lose customers who purchase alternative brands or products. In addition, consumers may lose confidence in the affected product.Under the terms of our contracts, we impose requirements on our major suppliers to maintain quality and comply with product specifications and requirements, and on our third-party co-manufacturer tocomply with all federal, state and local laws. These third-party suppliers, however, may not continue to produce products that are consistent with our standards or that are in compliance with applicablelaws, and we cannot guarantee that we will be able to identify instances in which our third-party suppliers fail to comply with our standards or applicable laws.A loss of sales volume from a contamination event may also affect our ability to supply our current customers and, in turn, recapture their business in the event they are forced to switch products orbrands, even if on a temporary basis. We may also be subject to legal action as a result of a contamination, which could result in negative publicity and affect our sales. During this time, our competitorsmay benefit from an increased market share that could be difficult and costly to regain. Such a contamination event could have a material adverse effect on our business, results of operations and financialcondition.The market for NewGen products is subject to a great deal of uncertainty and is still evolving.Vaporizer products and electronic cigarettes, having recently been introduced to market over the past ten years, are at a relatively early stage of development, and represent core components of a marketthat is evolving rapidly, highly regulated and characterized by a number of market participants. Rapid growth in the use of, and interest in, vaporizer products and electronic cigarettes is recent, and maynot continue on a lasting basis. The demand and market acceptance for these products is subject to a high level of uncertainty. Therefore, we are subject to all of the business risks associated with a newenterprise in an evolving market. Continued evolution, uncertainty and the resulting increased risk of failure of our new and existing product offerings in this market could have a material adverse effect onour ability to build and maintain market share and on our business, results of operations and financial condition. Further, there can be no assurance that we will be able to continue to effectively compete inthe NewGen products marketplace.Complications with the design or implementation of our new enterprise resource planning system could adversely impact our business and operations.We rely extensively on information systems and technology to manage our business and summarize operating results. We are beginning to engage in what we expect will be a multi-year implementation ofa new enterprise resource planning (“ERP”) system. This ERP system will replace our existing operating and financial systems. The ERP system is designed to accurately maintain the Company’s financialrecords, enhance operational functionality and provide timely information to the Company’s management team related to the operation of the business. The ERP system implementation process will requirethe investment of significant personnel and financial resources. We may not be able to successfully implement the ERP without experiencing delays, increased costs and other difficulties. If we are unableto successfully design and implement the new ERP system as planned, or successfully update or integrate our systems when necessary, our financial positions, results of operations and cash flows couldbe negatively impacted.Risks Related to Legal, Tax and Regulatory MattersWe are subject to substantial and increasing regulation.The tobacco industry has been under public scrutiny for over 50 years. Industry critics include special interest groups, the U.S. Surgeon General, and many legislators and regulators at the local, state andfederal levels. A wide variety of federal, state, and local laws limit the advertising, sale, and use of tobacco, and these laws have proliferated in recent years. For instance, on April 29, 2021, the FDAannounced plans to propose two tobacco products standards related to combusted tobacco products: (1) a ban on menthol as a characterizing flavor of cigarettes; and (2) a ban on all characterizingflavors (including menthol) in cigars. Together with changing public attitudes towards tobacco consumption, the constant expansion of regulations has been a major cause of the overall decline in theconsumption of tobacco products since the early 1970s. These regulations relate to, among other things, the importation of tobacco products and shipping throughout the U.S. market, increases in theminimum age to purchase tobacco products, imposition of taxes, sampling and advertising bans or restrictions, flavor bans or restrictions, ingredient and constituent disclosure requirements, and mediacampaigns and restrictions on where consumers may use tobacco products. Additional restrictions may be legislatively imposed or agreed to in the future. These limitations may make it difficult for us tomaintain the value of any brand.22Table of ContentsMoreover, the current trend is toward increasing regulation of the tobacco industry, which is likely to differ between the various U.S. states and Canadian provinces in which we currently conduct themajority of our business. Extensive and inconsistent regulation by multiple states and at different governmental levels could prove to be particularly disruptive to our business as we may be unable toaccommodate such regulations in a cost-effective manner that allows us to continue to compete in an economically viable way. Regulations are often introduced without the tobacco industry’s input andhave been a significant reason behind reduced industry sales volumes and increased illicit trade.In 1986, federal legislation was enacted regulating smokeless tobacco products (including dry and moist snuff and chewing tobacco) by, among other things, requiring health warnings on smokelesstobacco packages and prohibiting the advertising of smokeless tobacco products on media subject to the jurisdiction of the Federal Communications Commission (“FCC”). Since 1986, other proposalshave been made at the federal, state, and local levels for additional regulation of tobacco products. It is likely that additional proposals will be made in the coming years. For example, the Prevent AllCigarette Trafficking Act (“PACT Act”) initially prohibited the use of the U.S. Postal Service to mail cigarette and smokeless tobacco products and also amended the Jenkins Act, which establishedcigarette sales reporting requirements for state excise tax collection, to require individuals and businesses that make interstate sales of certain cigarette or smokeless tobacco comply with state tax laws.The PACT Act was recently extended to also cover e-cigarette and related products. The extension of the PACT Act has resulted in increased costs and disruption to our NewGen business, and thosecosts may continue to rise if we are unable to adjust our operations to respond relative to our competitors. See “—Many of our NewGen and cigar products have not obtained premarket authorization fromthe FDA and are currently marketed pursuant to a policy of FDA enforcement discretion, which could change. There could be a material adverse impact on our NewGen business development efforts if theFDA determines that our products are not subject to this compliance policy, or if our products become subject to increased regulatory compliance burdens imposed by the FDA and other regulatory orlegislative bodies.” for further details. Additional federal or state regulation relating to the manufacture, sale, distribution, advertising, labeling, mandatory ingredients disclosure and nicotine yieldinformation disclosure of tobacco products could reduce sales, increase costs, and have a material adverse effect on our business, results of operations, and financial condition.On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (the “Tobacco Control Act”) granted the FDA regulatory authority over tobacco products. The Act also amended the FederalCigarette Labeling and Advertising Act, which governs how cigarettes can be advertised and marketed, as well as the Comprehensive Smokeless Tobacco Health Education Act (“CSTHEA”), whichgoverns how smokeless tobacco can be advertised and marketed. In addition to the FDA and FCC, we are subject to regulation by numerous other federal agencies, including the Federal TradeCommission (“FTC”), the Department of Justice (“DOJ”), the Alcohol and Tobacco Tax and Trade Bureau (“TTB”), the U.S. Environmental Protection Agency (“EPA”), the U.S. Department of Agriculture(“USDA”), the Consumer Product Safety Commission (“CPSC”), the U.S. Customs and Border Protection (“CBP”) and the U.S. Center for Disease Control and Prevention’s (“CDC”) Office on Smoking andHealth. There have also been adverse legislative and political decisions and other unfavorable developments concerning cigarette smoking and the tobacco industry, which we believe have receivedwidespread public attention. The FDA has, and other governmental entities have, expressed concerns about the use of flavors in tobacco products and an interest in significant regulation of such use, upto and including bans in certain products. There can be no assurance as to the ultimate content, timing or effect of any regulation of tobacco products by governmental bodies, nor can there be anyassurance that potential corresponding declines in demand resulting from negative media attention would not have a material adverse effect on our business, results of operations and financial condition.Any such regulation has the potential to increase costs and have a material adverse effect on our business, results of operations, ability to compete, and financial condition.Our products are regulated by the FDA, which has broad regulatory powers.The vast majority of our 2021 U.S. net sales are derived from the sale of products that are currently regulated by the FDA. The Tobacco Control Act grants the FDA broad regulatory authority over thedesign, manufacture, sale, marketing and packaging of tobacco products. Among the regulatory powers conferred to the FDA under the Tobacco Control Act is the authority to impose tobacco productstandards that are appropriate for the protection of the public health, require manufacturers to obtain FDA review and authorization for the marketing of certain new or modified tobacco products andimpose various additional restrictions. Such restrictions may include requiring reduction or elimination of the use of particular constituents or components, requiring product testing, or addressing otheraspects of tobacco product construction, constituents, properties or labeling.Specifically, the Tobacco Control Act (i) increases the number of health warnings required on cigarette and smokeless tobacco products, increases the size of warnings on packaging and in advertising,requires the FDA to develop graphic warnings for cigarette packages, and grants the FDA authority to require new warnings, (ii) imposes restrictions on the sale and distribution of tobacco products,including significant restrictions on tobacco product advertising and promotion as well as the use of brand and trade names, (iii) bans the use of “light,” “mild,” “low” or similar descriptors on tobaccoproducts, (iv) bans the use of “characterizing flavors” in cigarettes other than tobacco or menthol, (v) requires manufacturers to report ingredients and harmful constituents and requires the FDA todisclose certain constituent information to the public, (vi) authorizes the FDA to require the reduction of nicotine and the potential reduction or elimination of other constituents or additives, includingmenthol, (vii) establishes resource-intensive pre-market and “substantial equivalence” review pathways for tobacco products that are considered new, (viii) gives the FDA broad authority to deny productapplications thereby preventing the sale or distribution of the product subject to the application (and requiring such product to be removed from the market, if applicable), and (ix) requires tobacco productmanufacturers (and certain other entities) to register with the FDA.23Table of ContentsThe FDA charges user fees based on the USDA unit calculations pro-rated to the annualized FDA congressionally allocated budget. These fees only apply to certain products currently regulated by theFDA, which include our core products (other than cigarette paper products), but we may in the future be required to pay such fees on more of our products, and we cannot accurately predict whichadditional products may be subject to such fees or the magnitude of such fees, which could become significant.Although the Tobacco Control Act prohibits the FDA from issuing regulations banning all cigarettes, all smokeless tobacco products, all little cigars, all cigars other than little cigars, all pipe tobacco, or allroll-your-own tobacco, or requiring the reduction of nicotine yields of a tobacco product to zero, it is likely that regulations with the FDA promulgated pursuant to the Tobacco Control Act couldnonetheless result in a decrease in sales of these products in the U.S. We believe that such regulation could adversely affect our ability to compete against our larger competitors, who may be able to morequickly and cost-effectively comply with these new rules and regulations. Our ability to gain efficient and timely market clearance for new tobacco products, or even to keep existing products on themarket, could also be affected by FDA rules, regulations and enforcement policies. Some of our currently marketed products that are subject to FDA regulation will require marketing authorizations from theFDA for us to continue marketing them (e.g., pre-market or substantial equivalence marketing authorizations, as applicable to the product), which we cannot guarantee we will be able to obtain. In addition,failure to comply with new or existing tobacco laws under which the FDA imposes regulatory requirements could result in significant financial penalties and government investigations of us. To the extentwe are unable to respond to, or comply with, new FDA regulations it could have a material adverse effect on our business, results of operations and financial condition.Many of our products contain nicotine, which is considered to be a highly addictive substance.Many of our products contain nicotine, a chemical that is considered to be highly addictive. The Tobacco Control Act empowers the FDA to regulate the amount of nicotine found in tobacco products, butnot to require the reduction of nicotine yields of a tobacco product to zero. Any FDA regulation, whether of nicotine levels or other product attributes, may require us to reformulate, recall and/ordiscontinue certain of the products we may sell from time to time, which may have a material adverse effect on our ability to market our products and have a material adverse effect on our business, resultsof operations and financial condition.We are required to maintain cash amounts within an escrow account in order to be compliant with a settlement agreement between us and certain U.S. states and territories.In November 1998, the major U.S. cigarette manufacturers entered into the Master Settlement Agreement (“MSA”) and the Smokeless Tobacco Master Settlement Agreement (“STMSA”) with 46 U.S.states and certain U.S. territories and possessions. Pursuant to the MSA and subsequent states’ statutes, a “cigarette manufacturer” (which is defined to also include a manufacturer of RYO/MYO cigarettetobacco) has the option of either becoming a signatory to the MSA, or, as we have elected, operating as a non-participating manufacturer (“NPM”) by funding and maintaining an escrow account, withsub-accounts on behalf of each settling state. These NPM escrow accounts are governed by states’ escrow and complementary statutes that are generally monitored by the Office of the State AttorneyGeneral. The statutes require NPM companies to deposit, on an annual basis, into qualified banks’ escrow funds based on the number of cigarettes or cigarette equivalents, which is measured by poundsof RYO/MYO tobacco sold. NPM companies are, within specified limits, entitled to direct the investment of the escrowed funds and withdraw any interest or appreciation, but cannot withdraw the principalfor twenty-five years from the year of each annual deposit, except to withdraw funds deposited pursuant to an individual state’s escrow statute to pay a final judgment to that state’s plaintiffs in the eventof such a final judgment. The investment vehicles available to us are specified in the state escrow agreements and are limited to low-risk government securities.Various states have enacted or proposed complementary legislation intended to curb the activity of certain manufacturers and importers of cigarettes or MYO tobacco that are selling into MSA stateswithout signing the MSA or who have failed to properly establish and fund a qualifying escrow account. We believe we have been fully compliant with all applicable laws, regulations, and statutes,although compliance-related issues may, from time to time, be disruptive to our business, any of which could have a material adverse effect on our business, results of operations, and financial condition.Although no such legislation has been proposed or enacted, future changes to the MSA, such as legislation that extends the MSA to products to which it does not currently apply or legislation that limitsthe ability of companies to receive unused escrow funds after 25 years, may have a material adverse effect on our business, results of operations and financial condition. Despite the amounts maintainedand funded to the escrow account, compliance with the funding requirements for the escrow account does not necessarily prevent future federal and/or state regulations with respect to the OTP industryfrom having a material adverse effect on our business, results of operations and financial condition.24Table of ContentsIncreases in tobacco-related taxes have been proposed or enacted and are likely to continue to be proposed or enacted in numerous jurisdictions.Tobacco products, premium cigarette papers and tubes have long been subject to substantial federal, state and local excise taxes. Such taxes have frequently been increased or proposed to be increased, insome cases significantly, to fund various legislative initiatives or further disincentivize tobacco usage. Since 1986, smokeless products have been subject to federal excise tax. Federally, smokelessproducts are taxed by weight (in pounds or fractional parts thereof) manufactured or imported.Since the State Children’s Health Insurance Program (“S-CHIP”) reauthorization in early 2009, which utilizes, among other things, taxes on tobacco products to fund health insurance coverage for children,the federal excise tax increases adopted have been substantial and have materially reduced sales in the “roll your own” (“RYO”) /MYO cigarette smoking products market, and also caused volume declinesin other markets. Although the RYO/MYO cigarette smoking tobacco and related products market had been one of the fastest growing markets in the tobacco industry in the five years prior to 2009, thereauthorization of S-CHIP increased the federal excise tax on RYO tobacco from $1.10 to $24.78 per pound, and materially reduced the MYO cigarette smoking tobacco market in the U.S. There have notbeen any increases announced since 2009, but we cannot guarantee that we will not be subject to further increases, nor whether any such increases will affect prices in a way that further deters consumersfrom purchasing our products and/or affects our net revenues in a way that renders us unable to compete effectively.In addition to federal excise taxes, every state and certain city and county governments have imposed substantial excise taxes on sales of tobacco products, and many have raised or proposed to raiseexcise taxes in recent years. Approximately one-half of the states tax MST on a weight-based versus ad valorem system of taxation. Additional states may consider adopting such revised tax structures aswell. Tax increases, depending on their parameters, may result in consumers switching between tobacco products or depress overall tobacco consumption, which is likely to result in declines in overallsales volumes.Any future enactment of increases in federal or state excise taxes on our tobacco products or rulings that certain of our products should be categorized differently for excise tax purposes could adverselyaffect demand for our products and may result in consumers switching between tobacco products or a depression in overall tobacco consumption, which would have a material adverse effect on ourbusiness, results of operations and financial condition.Many of our NewGen and cigar products have not obtained premarket authorization from the FDA and are currently marketed pursuant to a policy of FDA enforcement discretion, which could change.There could be a material adverse impact on our NewGen business development efforts if the FDA determines that our products are not subject to this compliance policy, of if our products becomesubject to increased regulatory compliance burdens imposed by the FDA and other regulatory or legislative bodies.Since their introduction, there has been significant uncertainty regarding whether, how and when tobacco regulations would apply to NewGen products, such as electronic cigarettes or other vaporizerproducts. Based on a decision in December 2010 by the U.S. Court of Appeals for the D.C. Circuit (the “Sottera decision”), the FDA is permitted to regulate electronic cigarettes containing tobacco-derivednicotine as “tobacco products” under the Tobacco Control Act.Effective August 8, 2016, FDA’s regulatory authority under the Tobacco Control Act was extended to all remaining tobacco products, including: (i) certain NewGen products (such as electronic cigarettes,vaporizers and e-liquids) and their components or parts (such as tanks, coils and batteries); (ii) cigars and their components or parts (such as cigar tobacco); (iii) pipe tobacco; (iv) hookah products; or (v)any other tobacco product “newly deemed” by FDA. These deeming regulations apply to all products made or derived from tobacco intended for human consumption, but excluding accessories oftobacco products (such as lighters).The deeming regulations require us to (i) register with the FDA and report product and ingredient listings; (ii) market newly deemed products only after FDA review and approval; (iii) only make direct andimplied claims of reduced risk if the FDA approves after finding that scientific evidence supports the claim and that marketing the product will benefit public health as a whole; (iv) refrain from distributingfree samples; (v) implement minimum age and identification restrictions to prevent sales to individuals under age 18; (vi) develop an approved warning plan and include prescribed health warnings onpackaging and advertisements; and (vii) refrain from selling the products in vending machines, unless the machine is located in a facility that never admits youth. Newly deemed tobacco products are alsosubject to the other requirements of the Tobacco Control Act, such as that they not be adulterated or misbranded. The FDA could in the future promulgate good manufacturing practice regulations forthese and our other products, and indeed has indicated it intends to do so, which could have a material adverse impact on our ability and the cost to manufacture our products.25Table of ContentsMarketing authorizations will be necessary in order for us to continue our distribution of certain of our NewGen and cigar products. The FDA has announced various compliance policies whereby it doesnot intend to prioritize enforcement for lack of premarket authorization against newly-deemed products, provided that such tobacco products were marketed as of August 8, 2016; are not marketed incertain manners likely to be attractive to youth; and for which premarket applications were timely submitted. As a result of recent litigation and subsequent FDA Guidance, marketing applications fornewly-deemed products were required to have been submitted no later than September 9, 2020, with the exception of our “grandfathered” products (products in commerce as of February 15, 2007) whichare already authorized. Under the FDA’s compliance policy, such products could remain on the market until September 9, 2021, unless the FDA makes an adverse determination prior to that date.Subsequent to September 9, 2021, the FDA indicated its enforcement priority is those applicants who have received negative action on their application, such as a Marketing Denial Order (“MDO”) orRefuse 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.In September 2020, we submitted applications on a timely basis for the appropriate authorizations for our products that are deemed products not otherwise grandfathered. We believe that these productssatisfy the criteria for current marketing pursuant to the FDA’s compliance policy. However, there can be no guarantee that the FDA will agree, and the FDA may bring an enforcement action against ourproducts for lack of premarket authorization and/or deny our premarket applications. We have no assurances that the outcome of such application review processes will result in our products receivingmarketing authorizations from the FDA. For instance, on September 14, 2021, the FDA issued a marketing denial order (“MDO”) for certain of the Company’s proprietary e-liquid products subject of thesePMTAs. The Company filed a Petition for Review in the Sixth Circuit Court of Appeals on September 23, 2021, followed by an Emergency Motion for a Stay Pending Review on September 30, 2021. OnOctober 7, 2021, we were informed that the FDA had rescinded its September 14, 2021, MDO. We therefore withdrew both the Petition and Emergency Stay on October 8, 2021. The Rescission Letterindicated that the FDA had found additional relevant information that was not adequately assessed. If the FDA were to issue additional MDOs that remained in effect it could have an adverse impact onour business.We also have certain previously regulated tobacco products which FDA removed from review but remain subject to “provisional” substantial equivalence submissions made on March 22, 2011; however,FDA has the discretion to reinitiate review of these products. If the FDA establishes regulatory processes that we are unable or unwilling to comply with, our business, results of operations, financialcondition and prospects could be adversely affected.The anticipated costs of complying with future FDA regulations will be dependent on the rules issued by the FDA, the timing and clarity of any new rules or guidance documents accompanying theserules, the reliability and simplicity (or complexity) of the electronic systems utilized by FDA for information and reports to be submitted, and the details required by FDA for such information and reportswith respect to each regulated product. Failure to comply with existing or new FDA regulatory requirements could result in significant financial penalties and could have a material adverse effect on ourbusiness, results of operations, financial condition and ability to market and sell our products. Compliance and related costs could be substantial and could significantly increase the costs of operating inour NewGen and cigar product markets.In addition, failure to comply with the Tobacco Control Act and with FDA regulatory requirements could result in litigation, criminal convictions or significant financial penalties and could impair our abilityto market and sell certain of our NewGen and cigar products. At present, we are not able to predict whether the Tobacco Control Act will impact our products to a greater degree than competitors in theindustry, thus affecting our competitive position.Furthermore, in addition to the FDA, there are restrictions being proposed or in effect at the federal, state, and local level related to NewGen products. For example, the PACT Act has now been amended toapply to certain NewGen products, which has impacts at the federal and state levels. These requirements are in addition to any increased regulation of internet sales that may be in effect or passedlegislatively at the federal, state, or local levels, or promulgated via rulemaking by a government agency. Additionally, state attorneys general have monitored, and in some cases, have issued investigativerequests and/or initiated litigation with regard to companies that sell these products related to online sales, marketing practices, and other aspects of the NewGen business. Increased regulation ofadditives in tobacco products through federal, state, or local governments may also adversely affect NewGen and cigar products. The application of these types of restrictions, and of any new laws orregulations which may be adopted in the future, to these products could result in additional expenses and require us to change our advertising and labeling, and methods of marketing and distribution ofour products, any of which could have a material adverse effect on our business, results of operations and financial condition.Some products we sell are subject to developing and unpredictable regulation.Some of the products sold through our NewGen distribution vehicles may be subject to uncertain and evolving federal, state and local regulations concerning hemp, CBD and other non-tobaccoconsumable products, such as synthetically-derived nicotine, which recently became subject of legislation that would require premarket application filings similar to those required for products currentlyregulated under the Tobacco Control Act and potentially negatively impact sales of these products in the near future. See “Many of our NewGen and cigar products have not obtained premarketauthorization from the FDA and are currently marketed pursuant to a policy of FDA enforcement discretion, which could change. There could be a material adverse impact on our NewGen businessdevelopment efforts if the FDA determines that our products are not subject to this compliance policy, of if our products become subject to increased regulatory compliance burdens imposed by the FDAand other regulatory or legislative bodies.” Regulatory and related enforcement initiatives by authorities related to such products are unpredictable and impossible to anticipate. We anticipate that alllevels of government, that have not already done so, are likely to seek in some way to regulate these products, but the type, timing, and impact of such regulations remains uncertain. These regulationsinclude or could include restrictions prohibiting certain form factors, such as smokable hemp products, or age restrictions. Accordingly, we cannot give any assurance that such actions would not have amaterial adverse effect on this emerging business and our NewGen strategy.26Table of ContentsFor instance, on October 21, 2021, the USPS published a Final Rule entitled “Treatment of E-Cigarettes in the Mail,” which followed its earlier publication of the Proposed Rule on February 19, 2021. ThisFinal Rule was required as a result of the inclusion of Preventing Online Sales of E-Cigarettes to Children (“POSECA”) in the Further Consolidated Appropriations Act, 2021. POSECA, among other things,expanded the definition of “cigarettes” in the Jenkins Act and PACT Act to expressly capture electronic nicotine delivery systems (“ENDS”). Consistent with the Proposed Rule, the Final Rule extends theexisting prohibition on and exceptions to the mailing of “cigarettes” via USPS to include ENDS products, other than the Consumer Testing and Public Health exceptions. POSECA’s definition of ENDS alsocaptures non-tobacco products, such as e-liquids that do not contain tobacco-derived nicotine.Significant increases in state and local regulation of our NewGen products have been proposed or enacted and are likely to continue to be proposed or enacted in numerous jurisdictions.There has been increasing activity on the state and local levels with respect to scrutiny of NewGen products. State and local governmental bodies across the U.S. have indicated NewGen products maybecome subject to new laws and regulations at the state and local levels. Further, some states and cities, have enacted regulations that require obtaining a tobacco retail license in order to sell electroniccigarettes and vaporizer products. If one or more states from which we generate or anticipate generating significant sales of NewGen products bring actions to prevent us from selling our NewGenproducts unless we obtain certain licenses, approvals or permits, and if we are not able to obtain the necessary licenses, approvals or permits for financial reasons or otherwise and/or any such license,approval or permit is determined to be overly burdensome to us, then we may be required to cease sales and distribution of our products to those states, which could have a material adverse effect on ourbusiness, results of operations and financial condition.Certain states and cities have already restricted the use of electronic cigarettes and vaporizer products in smoke-free venues, imposed excise taxes, or limited sales of flavored NewGen products. Additionalcity, state or federal regulators, municipalities, local governments and private industry may enact additional rules and regulations restricting electronic cigarettes and vaporizer products. Because of theserestrictions, our customers may reduce or otherwise cease using our NewGen products, which could have a material adverse effect on our business, results of operations and financial condition.Canada and some Canadian provinces have restricted or are contemplating restrictions on the sales and marketing of electronic cigarettes. Furthermore, some Canadian provinces have limited the use ofelectronic cigarettes and vaporizer products in public places. These measures, and any future measures taken to limit the marketing, sale and use of NewGen products may have a material adverse effect onour sales into Canada.If our NewGen products become subject to increased taxes it could adversely affect our business.Presently the federal government and many states do not tax the sale of NewGen products like they do the sale of conventional cigarettes or other tobacco products, all of which generally have high taxrates and have faced significant increases in the amount of taxes collected on their sales. In recent years, however, state and local governments have taken actions to move towards imposing excise taxeson NewGen products. As of December 31, 2021, over half of the states, as well as, certain localities impose excise taxes on electronic cigarettes and/or liquid vapor. These tax structures may benefit onetype of NewGen product over another, which may result in consumers switching between NewGen products, other traditional tobacco products, or depress overall consumption in general. Should federal,state and local governments and or other taxing authorities begin or continue to impose excise taxes similar to those levied against conventional cigarettes and tobacco products on NewGen products, itmay have a material adverse effect on the demand for these products, as consumers may be unwilling to pay the increased costs, which in turn could have a material adverse effect on our business, resultsof operations and financial condition.Our supply to our wholesalers and retailers is dependent on the demands of their customers who are sensitive to increased sales taxes and economic conditions affecting their disposable income.Consumer purchases of tobacco products are historically affected by economic conditions, such as changes in employment, salary and wage levels, the availability of consumer credit, inflation, interestrates, fuel prices, sales taxes, and the level of consumer confidence in prevailing and future economic conditions. Discretionary consumer purchases, such as of OTP, may decline during recessionaryperiods or at other times when disposable income is lower, and taxes may be higher.27Table of ContentsIn addition, some states have begun collecting taxes on internet sales where companies have used independent contractors in those states to solicit sales from residents of those states. These taxes applyto our online sales of NewGen products into those states and may result in reduced demand from the independent wholesalers who may not be able to absorb the increased taxes or successfully pass themonto the end-user without experiencing reduced demand. Further, as a result of recent court decisions related to the taxability of internet purchases, states are now able to impose sales tax on internetpurchases made from out-of-state sellers, even if the seller does not have a physical presence in the taxing state. Consequently, additional states are likely to seek or have begun to impose sales tax on ouronline sales. The requirement to collect, track and remit taxes may require us to increase our prices, which may affect demand for our products or conversely reduce our net profit margin, which could havea material adverse effect on our business, results of operations and financial condition.We may be subject to increasing international control and regulation.The World Health Organization’s Framework Convention on Tobacco Control (“FCTC”) is the first international public health treaty that establishes a global agenda to reduce initiation of tobacco use andregulate tobacco in an effort to encourage tobacco cessation. Over 170 governments worldwide have ratified the FCTC. The FCTC has led to increased efforts to reduce the supply and demand of tobaccoproducts and to encourage governments to further regulate the tobacco industry. The tobacco industry expects significant regulatory developments to take place over the next few years, driven principallyby the FCTC. Regulatory initiatives that have been proposed, introduced or enacted include: •the levying of substantial and increasing tax and duty charges; •restrictions or bans on advertising, marketing and sponsorship; •the display of larger health warnings, graphic health warnings and other labeling requirements; •restrictions on packaging design, including the use of colors and generic packaging; •restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines; •requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents levels; •requirements regarding testing, disclosure and use of tobacco product ingredients; •increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors; •elimination of duty-free allowances for travelers; and •encouraging litigation against tobacco companies.If the U.S. becomes a signatory to the FCTC and/or national laws are enacted in the U.S. that reflect the major elements of the FCTC, our business, results of operations and financial condition could bematerially and adversely affected. If NewGen products become subject to one or more of the significant regulatory initiatives proposed under the FCTC, our NewGen products segment may also bematerially adversely affected.As part of our strategy, we have begun to expand our business into key international locations, such as introducing our moist snuff tobacco products in South America. International expansion maysubject us to additional or increasing international regulation, either by the countries that are the object of the strategic expansion or through international regulatory regimes, such as the FCTC, to whichthose countries may be signatories.To the extent our existing or future products become subject to international regulatory regimes that we are unable to comply with or fail to comply with, they may have a material adverse effect on ourbusiness, results of operations and financial condition.Our failure to comply with certain environmental, health and safety regulations could adversely affect our business.The storage, distribution and transportation of some of the products that we sell are subject to a variety of federal and state environmental regulations. In addition, our manufacturing facilities are similarlysubject to federal, state and local environmental laws. We are also subject to operational, health and safety laws and regulations. Our failure to comply with these laws and regulations could cause adisruption in our business, an inability to maintain our manufacturing resources, and additional and potentially significant remedial costs and damages, fines, sanctions or other legal consequences thatcould have a material adverse effect on our business, results of operations and financial condition.Imposition of significant tariffs on imports into the U.S., could have a material and adverse effect on our business.We are required to purchase all our cigarette papers, cigarette tubes and cigarette injector machines under the Distribution Agreements from the supplier in France. Additionally, a substantial portion of ourNewGen products are sourced from China. In 2018, President Trump and his administration imposed significant additional tariffs on certain goods imported from outside the U.S., and future administrationscould impose additional tariffs in the future. These additional tariffs apply to a significant portion of our NewGen products and may result in increased prices for our customers. These increased prices mayreduce demand where customers are unable to absorb the increased prices or successfully pass them onto the end-user. If the U.S. were to impose additional tariffs on goods we import, it is likely to make itmore costly for us to import goods from other countries. While the current or future administrations may have a desire to repeal some or all of the tariffs imposed by the Trump administration, no assurancecan be given that they will do so. As a result, our business, financial condition and results of operations could be materially adversely affected. 28Table of ContentsThe scientific community has not yet studied extensively the long-term health effects of certain substances contained in some of our products.Electronic cigarettes, vaporizers and many of our NewGen products were recently developed and therefore the scientific community has not had a sufficient period of time to study the long-term healtheffects of their use. Currently, there is no way of knowing whether these products are safe for their intended use. If the scientific community were to determine conclusively that use of any or all of theseproducts poses long-term health risks, market demand for these products and their use could materially decline. Such a determination could also lead to litigation and significant regulation. Loss of demandfor our product, product liability claims and increased regulation stemming from unfavorable scientific studies on these products could have a material adverse effect on our business, results of operationsand financial condition.We are subject to significant product liability litigation.The tobacco industry has experienced, and continues to experience, significant product liability litigation. Most tobacco liability lawsuits have been brought against manufacturers and sellers of cigarettesby individual plaintiffs, often participating on a class-action basis, for injuries allegedly caused by cigarette smoking or by exposure to cigarette smoke. However, several lawsuits have also been broughtagainst manufacturers and sellers of smokeless products for injuries to health allegedly caused by use of smokeless products. In addition to the risks to our business, results of operations and financialcondition resulting from adverse results in any such action, ongoing litigation may divert management’s attention and resources, which could have an impact on our business and operations. There can beno assurance that we will not sustain losses in connection with such lawsuits and that such losses will not have a material adverse effect on our business, results of operations and financial condition.In addition to current and potential future claims related to our core tobacco products, we are subject to several lawsuits alleging personal injuries resulting from malfunctioning vaporizer devices and maybe subject to claims in the future relating to our other NewGen products. We are still evaluating these claims and the potential defenses to them. As a result of their relative novelty, electronic cigarette andvaporizer product manufacturers and sellers have only recently become subject to litigation. We may see increasing litigation over NewGen products or the regulation of our products, as the regulatoryregimes surrounding these products develop. For a description of current material litigation to which we or our subsidiaries are a party, see “Item 3. Legal Proceedings” and “Note 18 – Contingencies” inthe Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K, for additional information.As a result, we may face substantial costs due to increased product liability litigation relating to new regulations or other potential defects associated with NewGen products we ship, which could have amaterial adverse effect on our business, results of operations and financial condition.The COVID-19 pandemic and related economic repercussions may affect our business.The COVID-19 pandemic and related economic repercussions have created significant volatility, uncertainty, and turmoil in the business environment generally. While these events have not yet had amaterial adverse effect on our business and B2C platforms like ours have seen elevated sales levels from consumer shifts to online purchasing, we can offer no assurance that the COVID-19 pandemic willnot have an adverse effect in the future, particularly if the pandemic worsens or endures for an extended period of time.The COVID-19 pandemic may adversely impact our financial results. Our third-party cigar wrap manufacturer in the Dominican Republic was temporarily shut down for three months, as a result ofgovernment efforts to curb the spread of COVID-19. Since the temporary shutdown, the manufacturer has operated without COVID-19 related interruptions. While our supply chain has not experiencedother pandemic related interruptions, we have experienced some increase in costs. We can offer no assurance that the Company will not be adversely affected by the pandemic and related governmentalactions in the future, particularly if the COVID-19 pandemic continues and/or other variants emerge. Similarly, because we have more than 100 employees, should the federal government reintroduce testingmandates or other measures to combat COVID-19, our workforce and ultimately our results of operations may be impacted if we have a significant number of employees unwilling to comply with suchmeasures.If the COVID-19 pandemic continues for an extended period of time or worsens, it could have a material adverse effect on our supply chain or workforce, either of which could have a material adverse effecton our business, financial condition and liquidity. In addition, if the impact of the COVID-19 pandemic continues it may heighten other risks that could affect our business.29Table of ContentsRisks Related to Financial Results, Finances and Capital StructureWe have a substantial amount of indebtedness that could affect our financial condition.As of December 31, 2021, we had $250 million in aggregate principal amount of our 5.625% senior secured notes due 2026 (the “Senior Secured Notes”) outstanding and $172.5 million in aggregate principalamount outstanding under our 2.50% Convertible Senior Notes due July 15, 2024 (the “Convertible Senior Notes”). We also have the ability to borrow up to $25 million under our new revolving creditfacility entered into in February 2021 (the “New Revolving Credit Facility”) under which only letters of credit of $3.6 million were outstanding as of December 31, 2021. If we cannot generate sufficient cashflow from operations to service our debt, we may need to further refinance our debt, dispose of assets or issue equity to obtain necessary funds. We do not know whether we will be able to do any of thison a timely basis or on terms satisfactory to us or at all.Our substantial amount of indebtedness could limit our ability to: •obtain necessary additional financing for working capital, capital expenditures or other purposes in the future; •plan for, or react to, changes in our business and the industries in which we operate; •make future acquisitions or pursue other business opportunities; •react in an extended economic downturn; and •pay dividends.The terms of the agreement governing our indebtedness may restrict our current and future operations, which would adversely affect our ability to respond to changes in our business and to manageour operations.The indenture governing the Senior Secured Notes and our New Revolving Credit Facility each contain, and any future indebtedness of ours would likely contain, a number of restrictive covenants thatimpose significant operating and financial restrictions on us, including restrictions on our ability to, among other things: •incur additional debt, disqualified stock and preferred stock; •pay dividends and make other restricted payments; •create liens; •make investments and acquisitions; •engage in sales of assets and subsidiary stock; •enter into sale-leaseback transactions; •enter into transactions with affiliates; and •transfer all or substantially all of our assets or enter into merger or consolidation transactions.Our New Revolving Credit Facility also requires us to maintain certain financial ratios under certain limited circumstances. A failure by us to comply with the covenants or financial ratios in our debtinstruments could result in an event of default under the facility, which could adversely affect our ability to respond to changes in our business and manage our operations. In the event of any defaultunder our debt instruments, the lenders under the facility could elect to declare all amounts outstanding under such instruments to be due and payable and require us to apply all of our available cash torepay these amounts. If the indebtedness under one of our debt instruments were to be accelerated, it could cause an event of default and/or a cross-acceleration of our obligations under our other debtinstruments and there can be no assurance that our assets would be sufficient to repay this indebtedness in full, which could have a material adverse effect on our business, results of operations, andfinancial condition.Our status as an emerging growth company.We ceased to be an emerging growth company on December 31, 2021. As a result, beginning on January 1, 2022 we are required to comply with the disclosure requirements applicable to non-emerginggrowth companies, including the requirement to obtain an auditor attestation of our internal control over financial reporting pursuant to the requirements of Section 404 of the Sarbanes-Oxley Act(“Section 404”) as well as the requirement to provide enhanced disclosure regarding executive compensation and hold a non-binding advisory vote on executive compensation. Compliance with these newdisclosure obligations could be costly and will require our management to devote increased effort toward ensuring compliance with the non-emerging growth company requirements. We cannot predict orestimate the amount of additional costs we may incur as a result of the change in our status or the timing of such costs, though such costs may be substantial. In addition, if we are unable to comply withthe disclosure requirements applicable to non-EGCs in a timely manner we may be unable to file our current and periodic reports with the SEC on time, which could cause investors to lose confidence in ourreports and also affect our ability to quickly access the capital markets.30Table of ContentsIf we fail to establish and maintain proper and effective internal control over financial reporting, our operating results and our ability to operate our business could be harmed.Section 404 of the Sarbanes-Oxley Act of 2002 requires that we establish and maintain internal control over financial reporting, and we are also required to establish disclosure controls and proceduresunder applicable SEC rules. An effective internal control environment is necessary to enable us to produce reliable financial reports and is an important component of our efforts to prevent and detectfinancial reporting errors and fraud. Management is required to provide an annual assessment on the effectiveness of our internal control over financial reporting and, as a result of ceasing to be anEmerging Growth Company, our independent registered public accounting firm is now also required to attest to the effectiveness of our internal control over financial reporting. Our and our auditor’stesting may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses and render our internal control over financial reporting ineffective. As noted below,this year’s assessment led management to conclude that a material weakness exists in our information technology control environment. No assurance can be given that we won’t discover additionalmaterial weaknesses in the future. We have incurred and we expect to continue to incur substantial accounting and auditing expense and expend significant management time in complying with therequirements of Section 404, including the requirement to have such controls tested by our independent registered public accounting firm. While an effective internal control environment is necessary toenable us to produce reliable financial statements and is an important component of our efforts to prevent and detect financial reporting errors and fraud, disclosure controls and internal control overfinancial reporting are generally not capable of preventing or detecting all financial reporting errors and all fraud. A control system, no matter how well-designed and operated, is designed to reduce ratherthan eliminate the risk of material misstatements in our financial statements. There are inherent limitations on the effectiveness of internal controls, including collusion, management override and failure inhuman judgment. A control system can provide only reasonable, not absolute, assurance of achieving the desired control objectives and the design of a control system must reflect the fact that resourceconstraints exist.If we are not able to comply with the requirements of Section 404, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that aredeemed to be material weaknesses: •our reputation may be adversely affected and our business and operating results could be harmed; •the market price of our stock could decline; •we could fail to meet our financial reporting obligations; and •we could be subject to litigation and/or investigations or sanctions by the Securities and Exchange Commission (the “SEC”), the New York Stock Exchange or other regulatory authorities.We identified a material weakness in our internal control related to ineffective information technology general controls which, if not remediated appropriately or in a timely manner, could result in lossof investor confidence and adversely impact our stock price.A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interimconsolidated financial statements will not be prevented or detected on a timely basis.In connection with the preparation of our consolidated financial statements for the year ended December 31, 2021, during the fourth quarter of 2021, management identified a material weakness in internalcontrol related to ineffective information technology general controls (“ITGCs”) in the areas of user access and program change-management over certain information technology (“IT”) systems thatsupport the Company’s financial reporting processes. See Part II, Item 9A for additional information. Internal controls related to the operation of technology systems are critical to maintaining adequateinternal control over financial reporting.As a result, management concluded that our internal control over financial reporting was not effective as of December 31, 2021. We are implementing remedial measures and, while there can be noassurance that our efforts will be successful, we plan to remediate the material weakness prior to the end of 2022. These measures will result in additional technology and other expenses. If we are unable toremediate the material weakness, or are otherwise unable to maintain effective internal control over financial reporting or disclosure controls and procedures, our ability to record, process and reportfinancial information accurately, and to prepare financial statements within required time periods, could be adversely affected, which could subject us to litigation or investigations requiring managementresources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and in turn, adversely impact our stock price.31Table of ContentsChanges in the method of determining the London Interbank Offered Rate (“LIBOR”), or the replacement of LIBOR with an alternative reference rate, may adversely affect interest expense related tooutstanding debt. Amounts drawn under certain of our debt instruments may bear interest at rates based on LIBOR. On July 27, 2017, the Financial Conduct Authority in the United Kingdom (the “FCA”) announced that itwould phase out LIBOR as a benchmark by the end of 2021. The publication of USD LIBOR will cease after June 30, 2023, and the FCA confirmed that use of USD LIBOR will not be permitted in most newcontracts after December 31, 2021. We are currently evaluating the impact of the potential replacement of the LIBOR interest rate. In addition, the overall financial markets may be disrupted as a result of thephase-out or replacement of LIBOR. Uncertainty as to the nature of such potential phase-out and alternative reference rates or disruption in the financial market could have a material adverse effect on ourfinancial condition, results of operations and cash flows.Risks Related to our Common StockOur 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 marketprice of our common stock.Our certificate of incorporation authorizes our board of directors to issue preferred stock without stockholder approval. If our board of directors elects to issue preferred stock, it could be more difficult fora third party to acquire us. In addition, some provisions of our certificate of incorporation, bylaws and applicable law could make it more difficult for a third party to acquire control of us, even if the changeof control would be beneficial to our stockholders, including: •limitations on the removal of directors; •limitations on the ability of our stockholders to call special meetings; •limitations on stockholder action by written consent; •establishing advance notice provisions for stockholder proposals and nominations for elections to the board of directors to be acted upon at meetings of stockholders; and •limitations on the ability of our stockholders to fill vacant directorships or amend the number of directors constituting our board of directors.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 andmay result in Restricted Investors being required to sell or redeem their shares at a loss or relinquish their voting, dividend and distribution rights.For so long as we or one of our subsidiaries is party to any of the Distribution Agreements, our certificate of incorporation will limit the ownership of our common stock by any “Restricted Investor” to14.9% of our outstanding common stock and shares convertible or exchangeable therefor (including our non-voting common stock) (the “Permitted Percentage”). A “Restricted Investor” is defined as: (i)any entity that directly or indirectly manufactures, sells, markets, distributes or otherwise promotes cigarette paper booklets, filter tubes, injector machines or filter tips in the United States, the District ofColumbia, the territories, possessions and military bases of the United States and the Dominion of Canada (a “RTI Competitor”), (ii) any entity that owns more than a 20% equity interest in any RTICompetitor, or (iii) any person who serves as a director or officer of, or any entity that has the right to appoint an officer or director of, any RTI Competitor or of any entity that owns more than a 20%equity interest in any RTI Competitor (each, a “Restricted Investor”). Our certificate of incorporation further provides that any issuance or transfer of shares to a Restricted Investor in excess of thePermitted Percentage will be ineffective as against us and that neither we nor our transfer agent will register the issuance or transfer of shares or be required to recognize the transferee or owner as a holderof our common stock for any purpose except to exercise our remedies described below. Any shares in excess of the Permitted Percentage in the hands of a Restricted Investor will not have any voting ordividend rights and are subject to redemption by us in our discretion. The liquidity or market value of the shares of our common stock may be adversely impacted by such transfer restrictions.As a result of the above provisions, a proposed transferee of our common stock that is a Restricted Investor may not receive any return on its investment in shares it purchases or owns, as the case maybe, and it may sustain a loss. We are entitled to redeem all or any portion of such shares acquired by a Restricted Investor in excess of the Permitted Percentage (“Excess Shares”) at a redemption pricebased on a fair market value formula that is set forth in our certificate of incorporation, which may be paid in any form, including cash or promissory notes, at our discretion. Excess Shares not yet redeemedwill not be accorded any voting, dividend or distribution rights while they constitute Excess Shares. As a result of these provisions, a stockholder who is a Restricted Investor may be required to sell itsshares of our common stock at an undesirable time or price and may not receive any return on its investment in such shares. However, we may not be able to redeem Excess Shares for cash because ouroperations may not have generated sufficient excess cash flow to fund the redemption and we may incur additional indebtedness to fund all or a portion of such redemption, in which case our financialcondition may be materially weakened.32Table of ContentsOur certificate of incorporation permits us to require that owners of any shares of our common stock provide certification of their status as a Restricted Investor. In the event that a person does not submitsuch documentation, our certificate of incorporation provides us with certain remedies, including the suspension of the payment of dividends and distributions with respect to shares held by such personand deposit of any such dividends and distributions into an escrow account. As a result of non-compliance with these provisions, an owner of the shares of our common stock may lose significant rightsassociated with those shares.Although our certificate of incorporation contains the above provisions intended to assure compliance with the restrictions on ownership of our common stock by Restricted Investors, we may not besuccessful in monitoring or enforcing the provisions. A failure to enforce or otherwise maintain compliance could lead RTI to exercise its termination rights under the agreements, which would have amaterial and adverse effect on the Company’s financial position and its results of operations.In addition to the risks described above, the foregoing restrictions could delay, defer or prevent a transaction or change in control that might involve a premium price for our common stock or that mightotherwise be in the best interest of our stockholders.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 ourstockholders.We may sell additional shares of common stock in public or private offerings and may also sell securities convertible to common stock, such as the Convertible Senior Notes. We may also be required toissue common stock and conversion of our Convertible Senior Notes at the exercise or vesting of certain awards, see Note 13, “Notes Payable and Long-Term Debt,” in the Notes to Consolidated FinancialStatements included in this Annual Report for further discussion..We cannot predict the size of future issuances of our common stock or securities convertible into common stock or the effect, if any, that future issuances and sales of shares of our common stock willhave on the market price of our common stock. Sales of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur,may adversely affect prevailing market prices of our common stock.We may issue preferred stock whose terms could adversely affect the voting power or value of our common stock.Our certificate of incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations andrelative rights, including preferences over our common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred stockcould adversely impact the voting power or value of our common stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on thehappening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affectthe residual value of the common stock.General RisksOur business may be damaged by events outside of our or our suppliers’ control, such as the impact of epidemics (e.g., coronavirus), political upheavals, or natural disasters.We have manufacturing operations in Tennessee and Kentucky. Additionally, we have critical suppliers of raw materials and finished products in other countries. Events may impact our ability tomanufacture products or prevent critical suppliers from performing their obligations to us, through no fault of any party. Examples of such events could include the effect of potential epidemics, such asCOVID-19; political upheavals including violent changes in government, regional conflicts and the reaction of the governments throughout the world to those conflicts such as the implementation ofsanctions, widespread labor unrest, or breakdowns in civil order; and natural disasters, such as hurricanes, tornados, earthquakes or floods. If such events were to occur and disrupt our manufacturingcapabilities or supply arrangements, there can be no assurance that we could quickly remedy the impact and there could be a material adverse impact on our business, results of operations, and financialcondition.Reliance on information technology means a significant disruption could affect our communications and operations.We increasingly rely on information technology systems for our internal communications, controls, reporting and relations with customers and suppliers and information technology is becoming asignificantly important tool for our sales staff. Our marketing and distribution strategy are dependent upon our ability to closely monitor consumer and market trends on a highly specified level, for whichwe are reliant on our highly sophisticated data tracking systems, which are susceptible to disruption or failure. In addition, our reliance on information technology exposes us to cyber-security risks, whichcould have a material adverse effect on our ability to compete. Security and privacy breaches may expose us to liability and cause us to lose customers or may disrupt our relationships and ongoingtransactions with other entities with whom we contract throughout our supply chain. The failure of our information systems to function as intended, or the penetration by outside parties’ intent ondisrupting business processes, could result in significant costs, loss of revenue, assets or personal or other sensitive data and reputational harm.33Table of ContentsAdditionally, in connection with the preparation of our consolidated financial statements for the year ended December 31, 2021, during the fourth quarter of 2021, management identified a materialweakness in internal control related to ineffective ITGCs in the areas of user access and program change-management over certain IT systems that support the Company’s financial reporting processes.See Part II, Item 9A for additional information. In the event we are unable to remediate the material weakness, or are otherwise unable to maintain effective internal control over financial reporting ordisclosure controls and procedures, our ability to record, process and report financial information accurately, and to prepare financial statements within required time periods, could be adversely affected,which could subject us to litigation or investigations requiring management resources and payment of legal and other expenses, negatively affect investor confidence in our financial statements and, inturn, adversely impact our stock price.Security and privacy breaches may expose us to liability and cause us to lose customers.Federal and state laws require us to safeguard our wholesalers’, retailers’ and consumers’ financial information, including credit information. Although we have established security procedures to protectagainst identity theft and the theft of our customers’ financial information, our security and testing measures may not prevent security breaches. We have been in the past and may again in the future besubject to cyberattacks, including attacks that have resulted in the theft of customer financial information, such as credit card information; however, no cyberattack we have suffered to date has resulted inmaterial liability to us. These attacks have become increasingly sophisticated over time and maybe conducted or “sponsored” by nation states with significant resources. We cannot guarantee that afuture breach would not result in material liability or otherwise harm our business. In the event of any such breach, we may be required to notify governmental authorities or consumers under breachdisclosure laws, indemnify consumers or other third parties for losses resulting from the breach, and expend resources investigating and remediating any vulnerabilities that contributed to the occurrenceof the breach. Typically, we rely on encryption and authentication technology licensed from third parties to enhance transmission security of confidential information in relation to financial and othersensitive information that we have on file. Advances in computer capabilities, new discoveries in the field of cryptography, inadequate facility security or other developments may result in a compromise orbreach of the technology used by us to protect customer data. Any compromise of our security, even a security breach that does not result in a material liability, could harm our reputation and therefore,our business and financial condition. In addition, a party who is able to circumvent our security measures or exploit inadequacies in our security measures, could, among other effects, misappropriateproprietary information (including trade secrets), cause interruptions in our operations or expose customers and other entities with which we interact to computer viruses or other disruptions. Actual orperceived vulnerabilities may lead to claims against us. While we maintain cyber errors and omissions insurance that covers certain cyber risks, our insurance coverage may be insufficient to cover allclaims or losses. To the extent the measures we have taken prove to be insufficient or inadequate, we may become subject to litigation or administrative sanctions, which could result in significant fines,penalties or damages and harm to our reputation.We may fail to manage our growth.We have expanded over our history and intend to grow in the future. We acquired the Stoker’s® brand in 2003 and have continued to develop it through the introduction of new products, such as moistsnuff. Our acquisition of the Vapor Beast® brand in 2016 accelerated our entry into non-traditional retail channels while the 2018 acquisition of IVG added a top B2C platform which enhances our marketingand selling of proprietary and third-party vapor products to adult consumers. More recently, the acquisition of Solace provided us with a leading line of e-liquids and a powerful new product developmentplatform, the acquisition of certain tobacco assets and distribution rights from Durfort and BluntWrap USA secured long-term control of our Zig-Zag MYO cigar wrap products and provided us access to aportfolio of tobacco products with significant strategic value, and the acquisition of certain tobacco assets from Unitabac expanded our capabilities in the growing cigar market. However, any futuregrowth will place additional demands on our resources, and we cannot be sure we will be able to manage our growth effectively. If we are unable to manage our growth while maintaining the quality of ourproducts and profit margins, or if new systems that we implement to assist in managing our growth do not produce the expected benefits, our business, financial position, results of operations and cashflows could be adversely affected. We may not be able to support, financially or otherwise, future growth, or hire, train, motivate and manage the required personnel. Our failure to manage growtheffectively could also limit our ability to achieve our goals as they relate to streamlined sales, marketing and distribution operations and the ability to achieve certain financial metrics.We may fail to successfully integrate our acquisitions or otherwise be unable to benefit from pursuing acquisitions.We believe there are meaningful opportunities to grow through acquisitions and joint ventures across all OTP and adjacent product categories and we expect to continue a strategy of selectivelyidentifying and acquiring businesses with complementary products. We may be unable to identify, negotiate, and complete suitable acquisition opportunities on reasonable terms. There can be noassurance that any business acquired by us will be successfully integrated with our operations or prove to be profitable to us. We may incur future liabilities related to acquisitions. Should any of thefollowing problems, or others, occur as a result of our acquisition strategy, the impact could be material:34Table of Contents •difficulties integrating personnel from acquired entities and other corporate cultures into our business; •difficulties integrating information systems; •the potential loss of key employees of acquired companies; •the assumption of liabilities and exposure to undisclosed or unknown liabilities of acquired companies; or •the diversion of management attention from existing operationsWe are subject to fluctuations in our results that make it difficult to track trends and develop strategies in the short-term.In response to competitor actions and pricing pressures, we have engaged in significant use of promotional and sales incentives. We regularly review the results of our promotional spending activities andadjust our promotional spending programs in an effort to maintain our competitive position. Accordingly, unit sales volume and sales promotion costs in any period are not necessarily indicative of salesand costs that may be realized in subsequent periods. Additionally, promotional activity significantly increases net sales in the month in which it is initiated, and net sales are adversely impacted in themonth after a promotion. Accordingly, based upon the timing of our marketing and promotional initiatives, we have and may continue to experience significant variability in our results, which could affectour ability to formulate strategies that allow us to maintain our market presence across volatile periods. If our fluctuations obscure our ability to track important trends in our key markets, it may have amaterial adverse effect on our business, results of operations and financial condition.We are subject to the risks of exchange rate fluctuations.Currency movements and suppliers’ price increases relating to premium cigarette papers and cigarette tubes are the primary factors affecting our cost of sales. These products are purchased under theDistribution Agreements and the License Agreements, and we make payments in euros. Thus, we bear certain foreign exchange rate risk for certain of our inventory purchases. In addition, as part of ourstrategy, we have begun strategic international expansions. As a result, we may be more sensitive to the risks of exchange rate fluctuations. To manage this risk, we sometimes utilize short-term forwardcurrency contracts to purchase euros for our inventory purchases. We have a foreign exchange currency policy which governs our hedging of risk. While we engage in hedging transactions from time totime, no assurance can be made that we will be successful in eliminating currency exchange risks or that changes in currency rates will not have a material adverse effect on our business, results ofoperations and financial condition.Adverse U.S. and global economic conditions could negatively impact our business, prospects, results of operations, financial condition or cash flows.Our business and operations are sensitive to global economic conditions. These conditions include interest rates, energy costs, inflation, recession, fluctuations in debt and equity capital markets and thegeneral condition of the U.S. and world economy, including as a result of the effect of the COVID-19 pandemic. A material decline in the economic conditions affecting consumers, which cause a reductionin disposable income for the average consumer, may change consumption patterns, and may result in a reduction in spending on OTP or a switch to cheaper products or products obtained through illicitchannels. Material inflation may also lead to significant increases in property, E&O and other insurance premiums which could affect our results of operations and liquidity and may also result in us self-insuring if the premiums become uneconomical. Electronic cigarettes, vaporizer, e-liquid, and other NewGen products are relatively new to market and may be regarded by users as a novelty item andexpendable. As such, demand for our NewGen products may be particularly sensitive to economic conditions such as inflation, recession, high energy costs, unemployment, changes in interest rates andmoney supply, changes in the political environment, the ultimate effect on the economy of the COVID-19 pandemic and other factors beyond our control, any combination of which could result in amaterial adverse effect on our business, results of operations and financial condition.The departure of key management personnel and the failure to attract and retain talent could adversely affect our operations.Our success depends upon the continued contributions of our senior management. Our ability to implement our strategy of attracting and retaining the best talent may be impaired by the decreasing socialacceptance of tobacco usage. The tobacco industry competes for talent with the consumer products industry and other companies that enjoy greater societal acceptance. As a result, we may be unable toattract and retain the best talent, which could have a material adverse effect on our business, results of operations and financial condition.35Table of ContentsOur intellectual property rights may be infringed or misappropriated.We currently rely on trademark and other intellectual property rights to establish and protect our products, including the brand names and logos we own or license. Third parties have in the past infringedon and misappropriated and may in the future infringe or misappropriate, these trademarks and our other intellectual property rights. Our ability to maintain and further build brand recognition is dependenton the continued and exclusive use of these trademarks, service marks and other proprietary intellectual property rights, including the names and logos we own or license. Despite our attempts to ensurethese intellectual property rights are protected, third parties may take actions that could materially and adversely affect our rights or the value of this intellectual property. Any enforcement concerning ourintellectual property rights, whether successful or unsuccessful, could result in substantial costs to us and diversions of our resources. Expenses related to protecting and enforcing our intellectualproperty rights, the loss or compromise of any of these rights or the loss of revenues as a result of infringement or misappropriation could have a material adverse effect on our business, results ofoperations and financial condition, and may prevent the brands we own or license from growing or maintaining market share.Third parties may claim that we infringe or misappropriate their intellectual property rights.Competitors in the tobacco products and NewGen markets may claim that we infringe on or misappropriate their intellectual property rights. Such claims, whether or not meritorious, may result in theexpenditure of significant financial and managerial resources, injunctions against us and/or the payment of damages. Further, our vapor distribution businesses distribute third party product brands withthose suppliers’ branding and imagery. If that branding or imagery is alleged by other parties to infringe or otherwise violate intellectual property rights, we could be drawn into such litigation.We may fail to meet expectations relating to environmental, social and governance factors.Market participants, including investors, analysts, customers and other key stakeholders are increasingly focused on environmental, social and governance (“ESG”) factors. We have recently determinedto adopt a more comprehensive ESG initiative with an initial focus on public health and began to roll-out this new initiative in 2020. However, the ESG factors by which companies’ corporate responsibilitypractices are assessed differ among market participants, are constantly evolving and could result in greater expectations of us and/or cause us to undertake costly initiatives to satisfy such new criteria.We risk damage to our brand and reputation in the event that our corporate responsibility procedures or standards do not meet the standards expected by us. Furthermore, we could fail, or be perceived tofail, in our achievement of our publicly disclosed ESG initiatives or goals and we could also be criticized for the scope of such initiatives or goals. If we fail to satisfy the expectations of investors and otherkey stakeholders or our initiatives are not executed as planned, our reputation and financial results could be materially and adversely affected.36Table of ContentsItem 1B. Unresolved Staff CommentsNoneItem 2. PropertiesAs of December 31, 2021, we operated manufacturing, distribution, office, and warehouse space in the U.S., all of which is leased with the exception of our Dresden, Tennessee, manufacturing facility whichis owned. To provide a cost-efficient supply of products to our customers, we maintain centralized management of internal manufacturing and nationwide distribution facilities. Our two manufacturing anddistribution facilities located in Louisville, Kentucky and Sheperdsville, Kentucky are used by all our segments. Our third manufacturing and distribution facilities located in Dresden, Tennessee is used byour Stoker’s Product segment. We believe our facilities are generally adequate for our current and anticipated future use.Item 3. Legal ProceedingsFor a description of our material pending legal proceedings, please see Contingencies in Note 18 to the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K,which is incorporated herein by reference.Also see ‘Risk Factors—We are subject to significant product liability litigation’ for additional details.Item 4. Mine Safety DisclosuresNot applicable.37Table of ContentsInformation about our Executive OfficersListed below are the executive officers of the Company. Our executive officers are appointed by, and serve at the discretion of, our board of directors. There are no family relationships between any of theexecutive officers, and there is no arrangement or understanding between any executive officer and any other person pursuant to which the executive officer was selected.Yavor Efremov, age 49, has served as our President and CEO since January 2022. Prior to January 2022, Mr. Efremov served as a director of our Company since July 2021. Mr. Efremov currently serves onthe board of MDH Acquisition Corp. From April 2019 to November 2019, Mr. Efremov was the CEO of Motorsport Network, a global company with 630 employees, and was responsible for restructuring thecompany, hiring a management team, developing a vision for the company and executing on that vision. Prior to Motorsport Network, Mr. Efremov spent 5 years at Liberty Media as SVP, CorporateDevelopment. Prior to that, Mr. Efremov spent 8 years in the Technology, Media and Telecom group of Goldman, Sachs & Co. in New York and, prior to that, Mr. Efremov was an M&A lawyer with Cleary,Gottlieb, Steen & Hamilton for 5 years, also in New York. Mr. Efremov holds a J.D. from the Yale Law School, a Ph.D. in Economics from Yale, B.S. (Mathematics) and B.A. (Economics) from FurmanUniversity.Graham Purdy, age 50, was appointed as Chief Operating Officer in November 2019 after serving as President of our New Ventures Division since December 2017. Mr. Purdy joined the Company in 2004 andhas held various leadership positions since that time. Prior to joining the Company, Mr. Purdy spent 7 years at Philip Morris, USA where he served in senior sales and sales management positions. Mr.Purdy holds a Bachelor of Arts from California State University, Chico. Luis Reformina, age 44, was appointed Chief Financial Officer in May 2021 after serving as the Company’s Chief Business Development Officer since October 2020. He joined the Company as VicePresident of Business Development in 2019. Prior to joining the Company, Mr. Reformina spent nearly two decades in the finance and investment industry working at Point72 Asset Management,Waterfront Capital Partners, Perella Weinberg Partners and Vestar Capital Partners in various roles deploying capital across different industries. He began his career as an investment banker at GoldmanSachs & Co. Mr. Reformina holds a B.S, Summa Cum Laude, in Electrical Engineering from Cornell University and an M.B.A from Stanford Graduate School of Business where he was an Arjay MillerScholar. Brittani N. Cushman, age 37, has been our Senior Vice President, General Counsel, and Secretary since November 2020 and has served in various roles in our legal department since joining the Company inOctober 2014. Prior to joining the Company, Ms. Cushman spent five years at Xcaliber International, Ltd., L.L.C., where she was most recently the General Counsel, responsible for all legal affairs. Ms.Cushman holds a Bachelor of Science in Business Administration in business management from the University of Tulsa and a J.D. from Washington and Lee University School of Law.38Table of ContentsPART IIItem 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMarket InformationThe principal stock exchange on which Turning Point Brands, Inc.’s common stock (par value $0.01 per share) is listed is the New York Stock Exchange under the symbol “TPB.” At March 4, 2022, therewere 145 holders of record of Turning Point Brands, Inc.’s common stock.Dividends. On November 9, 2017, our Board of Directors approved the initiation of a cash dividend to shareholders. The initial quarterly dividend of $0.04 per common share was paid on December 15, 2017to shareholders of record at the close of business on November 27, 2017. The most recent dividend of $0.055 per common share, an increase of approximately 38% compared to the initial dividend, was paidon January 7, 2022, to shareholders of record at the close of business on December 17, 2021. Future dividend amounts will be considered after reviewing financial results and capital needs and will bedeclared at the discretion of the Company’s board of directors.Performance graph. The graph below compares the cumulative total shareholder return of Turning Point Brands, Inc.’s common stock since our initial public offering on May 11, 2016, with the Russell 3000Index and the S&P Small Cap 600 Consumer Staples Index. The information presented assumes an initial investment of $100 on May 11, 2016, and that all dividends were reinvested. The cumulative returnsshown represent the value that these investments would have had on December 31, 2021.39Table of ContentsIssuer purchases of equity securities.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 marketdynamics. On October 25, 2021, the Board increased the approved share repurchase program by $30.7 million bringing the authority at the time back to $50 million (including approximately $19.3 millionavailable for repurchases under the Board’s previous authorization). As of December 31, 2021, we had $31.8 million of remaining authority under the repurchase program. This share repurchase program hasno expiration date and is subject to the ongoing discretion of the Board. All repurchases to date under our stock repurchase programs have been made through open market transactions, but in the future,we may also purchase shares through privately negotiated transactions or 10b5-1 repurchase plans. On February 24, 2022, the Board increased the approved share repurchase program by $24.6 millionbringing total authority at that time to $50 million. The following table includes information regarding purchases of our common stock made by us during the quarter ended December 31, 2021 in connection with the repurchase program described above: Period Total Numberof SharesPurchased AveragePrice Paidper Share Total Number ofShares Purchasedas Part of PubliclyAnnounced Plansor Programs Maximum Number(or ApproximateDollar Value)of Shares thatMay Yet BePurchased Under thePlans or Programs October 1 to October 31 - $- - $50,028,385 November 1 to November 30 253,000 $39.30 253,000 $40,085,485 December 1 to December 31 224,707 $36.73 224,707 $31,831,997 Total 477,707 477,707 Item 6. Selected Financial DataReserved40Table of ContentsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of OperationsYou should read the following discussion of the historical financial condition and results of operations in conjunction with our historical consolidated financial statements and accompanying notes,which are included elsewhere in this Annual Report on Form 10-K. In addition, this discussion includes forward-looking statements subject to risks and uncertainties that may result in actual resultsdiffering 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 discussion relates to the audited financial statements of Turning Point Brands, Inc., included elsewhere in this Annual Report on Form 10-K. In this discussion, unless the context requiresotherwise, 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 anyof 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 amountsand percentages in this discussion have been rounded for convenience of presentation.OverviewWe are a leading manufacturer, marketer and distributor of branded consumer products. We sell a wide range of products to adult consumers consisting of staple products with our iconic brands Zig-Zag®and Stoker’s® to our next generation products to 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 consumerperception 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 periodending 2021 as reported by Management Science Associates, Inc. (“MSAi”), a third-party analytics and information company. Our three focus segments are led by our core, proprietary brands: Zig-Zag®in the Zig-Zag Products segment; Stoker’s® along with Beech-Nut® and Trophy® in the Stoker’s Products segment; and our distribution platforms (Vapor Beast®, VaporFi® and Direct Vapor®) alongwith Solace® in the NewGen Products segment. Our businesses generate solid cash flow which we use to invest in our business, finance acquisitions, increase brand support, expand our distributioninfrastructure, 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 ourbusiness through new product launches, category expansions, and acquisitions while concurrently improving operational efficiency.We believe there are meaningful opportunities to grow through acquisitions and joint ventures across all product categories. As of December 31, 2021, our products are available in approximately 195,000U.S. retail locations which, with the addition of retail stores in Canada, brings our total North American retail presence to an estimated 215,000 points of distribution. Our sales team targets widespreaddistribution to all traditional retail channels, including convenience stores, and we have a growing e-commerce business.ProductsWe operate in three segments: Zig-Zag Products, Stoker’s Products and NewGen Products. In our Zig-Zag Products segment, we principally market and distribute (i) rolling papers, tubes, and relatedproducts; and (ii) finished cigars and make-your-own (“MYO”) cigar wraps. In our Stoker’s Products segment, we (i) manufacture and market moist snuff tobacco (“MST”) and (ii) contract for and marketloose leaf chewing tobacco products. In our NewGen Products segment, we (i) market and distribute liquid vapor products and certain other products without tobacco and/or nicotine; (ii) distribute a wideassortment 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. Refer to the‘Recent Developments’ section below for details regarding the Turning Point Brands Canada (formerly ReCreation Marketing) investment.Our portfolio of brands includes some of the most widely recognized names in the alternative smoking accessories and OTP industries, such as Zig-Zag®, Stoker’s®, Vapor Beast® and VaporFi®. Thefollowing table sets forth the market share and category rank of our core products and demonstrates their industry positions:41Table of ContentsBrand Product TPB Segment Market Share(1) Category Rank(1)Zig-Zag® Cigarette Papers Zig-Zag Products 33.6% #1 premium, #1 overallZig-Zag® MYO Cigar Wraps Zig-Zag Products 56.2% #1 overallStoker’s® Moist Snuff Stoker’s Products 5.6% #3 discount, #6 overallStoker’s® Chewing Tobacco Stoker’s Products 25.6% #1 discount, #1 overall (1) Market share and category rank data for all products are derived from MSAi data 52 weeks ended 12/25/21.We subscribe to a sales tracking system from MSAi that records all OTP product shipments (ours as well as those of our competitors) from approximately 600 wholesalers to over 250,000 traditional retailstores in the U.S. This system enables us to understand individual product share and volume trends across multiple categories down to the individual retail store level, allowing us to allocate fieldsalesforce coverage to the highest opportunity stores. Our sales and marketing group of approximately 180 professionals utilize the MSAi system to efficiently target markets and sales channels with thehighest sales potential.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. Ouracquisition of VaporBeast in 2016 expanded our revenue streams as we began selling directly to non-traditional retail outlets. Our acquisition of IVG in 2018 enhanced our B2C revenue stream with theaddition of the Vapor-Fi online platform. The acquisition of Solace in 2019 provided us with a line of leading liquids and a powerful new product development platform. Our net sales, which include federalexcise 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 80% of our production, as measured by net sales, isoutsourced to suppliers. The remaining production consists primarily of our moist snuff tobacco operations located in Dresden, Tennessee, and Louisville, Kentucky. Our principal operating expensesinclude 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 excisetaxes; 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 OperationsWe 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 tobacco products among consumers; •Price sensitivity in our end-markets; •Marketing and promotional initiatives, which cause variability in our results; •General economic conditions, including consumer access to disposable income and other conditions affecting purchasing power such as inflation; •Cost and increasing regulation of promotional and advertising activities; •Cost of complying with regulation, including “deeming regulation”; •Increasing and unpredictable regulation of NewGen 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.42Table of ContentsRecent DevelopmentsCLIPPER® Lighters In February 2022, we entered into an agreement with Flamagas, a renowned lighter manufacturer, for exclusive distribution of CLIPPER® lighters in the United States and Canada.Final Rule Related to PACT Act PublishedOn October 21, 2021, the United States Postal Service (“USPS”) published a Final Rule entitled “Treatment of E-Cigarettes in the Mail,” which followed its earlier publication of the Proposed Rule onFebruary 19, 2021. This Final Rule was required as a result of the inclusion of Division FF, Title VI (Preventing Online Sales of E-Cigarettes to Children or “POSECA”) in the Further ConsolidatedAppropriations Act, 2021. POSECA, among other things, expanded the definition of “cigarettes” in the Jenkins Act and Prevent All Cigarette Trafficking (“PACT”) Act to expressly capture “electronicnicotine delivery systems,” i.e., ENDS. Consistent with the Proposed Rule, the Final Rule extends the existing prohibition on and exceptions to the mailing of “cigarettes” via USPS to ENDS products, otherthan the Consumer Testing and Public Health exceptions. Specifically, the Final Rule extends the following exceptions to the prohibition on mailing of ENDS products: the Business/Regulatory PurposesException, the Certain Individuals Exception, and the exception for intra-Alaska and intra-Hawaii shipments. We have received certain shipping exemptions from carrier services to carry the affected freightand have created a supplemental logistical network for those shipments not covered by the exemptions.UnitabacOn July 23, 2021, we acquired certain assets of Unitabac, a marketer of mass-market cigars, for $10.7 million in total consideration, comprised of $9.6 million in cash and $1.1 million of capitalized transactioncosts. In the acquisition, we acquired a robust portfolio of cigarillo products and all related intellectual property, including Cigarillo Non-Tip (NT) Homogenized Tobacco Leaf (HTL) products and RolledLeaf and Natural Leaf Cigarillo Products.Old PalOn July 21, 2021, we invested $8 million in Old Pal Holding Company LLC (“Old Pal”), a leading brand in the cannabis lifestyle space that operates a non-plant touching licensing model. We invested in theform of a convertible note which includes additional follow-on investment rights. Our investment will enable Old Pal to expand product offerings in existing states, which include California, Nevada,Michigan, Oklahoma, Ohio, Washington and Massachusetts, and will help create the infrastructure necessary to support continued territory and product expansion.Direct Value WholesaleIn April 2021, Turning Point Brands Canada, a VIE for which we are considered the primary beneficiary, purchased 100% of the equity interest of Westhem Ventures LTD d/b/a Direct Value Wholesale(“DVW”) for $3.9 million in total consideration, comprised of $3.5 million paid in cash and $0.5 million in accrued consideration paid during 2021. DVW is Canadian distribution entity that operates inmarkets not primarily served by Turning Point Brands Canada. The acquisition expands Turning Point Brands Canada’s markets in Canada.Docklight Brands, Inc.On April 19, 2021, we invested $8.7 million in Docklight Brands, Inc., a pioneering consumer products company with celebrated brands including Marley Natural® cannabis and Marley™ CBD. We haveadditional follow-on investment rights. As part of the investment, we have obtained exclusive U.S. distribution rights for Docklight’s Marley™ CBD topical products.Premarket Tobacco ApplicationsWe submitted Premarket Tobacco Applications (“PMTAs”) covering 250 products to the FDA prior to the September 9, 2020 filing deadline. The PMTAs cover a broad assortment of products in the vaporWe submitted Premarket Tobacco Applications (“PMTAs”) covering 250 products to the FDA prior to the September 9, 2020 filing deadline. The PMTAs cover a broad assortment of products in the vaporcategory including multiple proprietary e-liquid offerings in varying nicotine strengths, technologies and sizes; proprietary replacement parts and components of open system tank devices throughpartnerships with two leading manufacturers for exclusive distribution of products in the United States; and a closed system e-cigarette. On September 14, 2021, the FDA issued a Marketing Denial Order(“MDO”) for certain of the Company’s proprietary e-liquid products subject of these PMTAs. The Company filed a Petition for Review in the Sixth Circuit Court of Appeals on September 23, 2021, followedby an Emergency Motion for a Stay Pending Review on September 30, 2021. On October 7, 2021, we were informed that the FDA had rescinded its September 14, 2021, MDO. We therefore withdrew boththe Petition and Emergency Stay on October 8, 2021. The Rescission Letter indicated that the FDA had found additional relevant information that was not adequately assessed. The Rescission Letterfurther clarified that the FDA presently has no intention of initiating any regulatory enforcement action against the products.43Table of ContentsCritical Accounting Policies and Uses of EstimatesThe accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. When more than one accounting principle, orthe method of its application, is generally accepted, we select the principle or method that is appropriate in the specific circumstances. Application of these accounting principles requires us to makeestimates about the future resolution of existing uncertainties. Actual results could differ from these estimates. We evaluate our estimates, including those related to revenue recognition, collectability ofaccounts receivable, inventory valuation and obsolescence, goodwill, intangibles, income taxes, litigation, and contingencies on an ongoing basis. We base these estimates on our historical experienceand other assumptions we believe are appropriate under the circumstances. In preparing these consolidated financial statements, we have made our best estimates and judgments of the amounts anddisclosures included in the consolidated financial statements.Revenue RecognitionWe recognize revenues in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (Topic 606), which include excise taxes and shipping and handlingcharges billed to customers, net of cash discounts for prompt payment, sales returns and sales incentives, upon delivery of goods to the customer—at which time our performance obligation is satisfied—at an amount that we expect 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 theperformance 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) performanceobligations are satisfied. We exclude 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 vapingproducts billed to customers).We record an allowance for sales returns, based principally on historical volume and return rates, which is included in accrued liabilities on the consolidated balance sheets. We record sales incentives,which consist of consumer incentives and trade promotion activities, as a reduction in revenues (a portion of which is based on amounts estimated as being due to wholesalers, retailers and consumers atthe end of the period) based principally on historical volume and utilization rates. Expected payments for sales incentives are included in accrued liabilities on the consolidated balance sheets.A further requirement of ASC 606 is for entities to disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenueand cash flows are affected by economic factors. Our management views business performance through segments that closely resemble the performance of major product lines. Thus, the primary, and mostuseful, disaggregation of our contract revenue for decision making purposes is the disaggregation by segment which can be found in Note 21 of our Notes to Consolidated Financial Statements. Anadditional disaggregation of contract revenue by sales channel can be found within Note 21 as well.Derivative Instruments – Currency Forward ContractsWe use foreign currency forward contracts to hedge a portion of our exposure to changes in foreign currency exchange rates from time to time. We account for our forward contracts under the provisionsof ASC 815, Derivatives and Hedging. Under our policy, as amended, we may hedge up to 100% of our anticipated purchases of inventory in the denominated invoice currency over a forward period not toexceed twelve months. We may also, from time to time, hedge up to ninety percent of our non-inventory purchases in the denominated invoice currency. Forward contracts that qualify as hedges areadjusted 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. Gainsand losses on these contracts are transferred from other comprehensive income into inventory as the related inventories are received and are transferred to net income as inventory is sold. Changes in fairvalue of any contracts that do not qualify for hedge accounting or are not designated as hedges are recognized in income currently.Derivative Instruments - Interest Rate SwapsWe enter into interest rate swap contracts to manage interest rate risk and reduce the volatility of future cash flows. We account for interest rate swap contracts under the provisions of ASC 815,Derivatives and Hedging. Swap contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by market prices on the measurement date, except anyhedge ineffectiveness which is recognized currently in income. Gains and losses on these swap contracts are transferred from other comprehensive income into net income upon settlement of thederivative position or at maturity of the interest rate swap contract. Changes in fair value of any contracts that do not qualify for hedge accounting or are not designated as hedges are recognized currentlyin income.44Table of ContentsGoodwill and Other Intangible AssetsWe follow the provisions of ASC 350, Intangibles – Goodwill and Other in accounting for our goodwill and other intangible assets. Goodwill and indefinite-lived intangible assets are reviewed forimpairment annually on December 31, or more frequently if certain indicators are present, in accordance with ASC 350-20-35 and ASC 350-30-35, respectively. If the carrying value of the goodwill orindefinite-life intangible asset exceeds its fair value, determined using the discounted cash flows method and the relief-from-royalty method, respectively, the goodwill or intangible asset is consideredimpaired. The carrying value of the goodwill or indefinite-life intangible asset would then be reduced to fair value. For goodwill, the determination of a reporting unit’s fair value involves, among otherthings, our market capitalization and application of the income approach, which includes developing forecasts of future cash flows and determining an appropriate discount rate.Based on our annual goodwill impairment testing, the estimated fair values of each of our reporting units were in excess of the respective carrying values at December 31, 2021. We had no such impairmentof goodwill or other intangible assets during the year ended December 31, 2021. However, there could be an impairment of the goodwill of the NewGen reporting unit if future revenues do not achieve ourexpected future cash flows or if macroeconomic conditions result in future increases in the weighted average cost of capital used to estimate fair value. Refer to Note 10 of Notes to Consolidated FinancialStatements for further details regarding our goodwill and other intangible assets as of December 31, 2021.Fair ValueGAAP 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 thehighest 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 hierarchyunder 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.Retirement PlansWe follow the provisions of ASC 715, Compensation – Retirement Benefits in accounting for our retirement plans, which requires an employer to (i) recognize in its statement of financial position thefunded status of a benefit plan, measured as the difference between the fair value of plan assets and benefit obligations; (ii) recognize, net of tax, the gains or losses and prior service costs or credits thatarise during the period but are not recognized as components of net periodic benefit cost; and (iii) measure defined benefit plan assets and obligations as of the date of the employer’s statement offinancial position.Income TaxesWe account for income taxes under ASC 740. We record the effects of income taxes under the liability method in which deferred income tax assets and liabilities are recognized based on the differencebetween the financial and tax basis of assets and liabilities using the enacted tax rates in effect for the years in which the differences are expected to reverse. We assess our ability to realize future benefitsof deferred tax assets by determining if they meet the “more likely than not” criteria in ASC 740, Income Taxes. If we determine that future benefits do not meet the “more likely than not” criteria, a valuationallowance is recorded.Stock-Based CompensationWe measure stock compensation costs related to our stock options on the fair value-based method under the provisions of ASC 718, Compensation – Stock Compensation, which requires compensationcost for stock options to be recognized based on the fair value of stock options granted. We determine the fair value of these awards using the Black-Scholes option pricing model.45Table of ContentsWe grant performance-based restricted stock units (“PRSU”) subject to both performance-based and service-based vesting conditions. The fair value of each PRSU is our stock price on the date of grant.For purposes of recognizing compensation expense as services are rendered in accordance with ASC 718, we assume all employees involved in the PRSU grant will provide service through the end of theperformance period. Stock compensation expense is recorded based on the probability of achievement of the performance conditions specified in the PRSU grant.We grant restricted stock units (“RSU”) subject to service-based vesting conditions. The fair value of each RSU is our stock price on the date of grant. We recognize compensation expense as services arerendered in accordance with ASC 718. Stock compensation expense is recorded over the service period in the RSU grant.Accounts ReceivableAccounts receivable are recognized at their net realizable value. All accounts receivable are trade-related and are recorded at the invoiced amount and do not bear interest. We maintain allowances fordoubtful accounts receivable for estimated uncollectible invoices resulting from the customer’s inability to pay, which may result in write-offs. We recorded an allowance for doubtful accounts of $0.3million and $0.2 million at December 31, 2021 and 2020, respectively.InventoriesInventories are stated at the lower of cost or net realizable value. Cost was determined using the first-in, first-out (“FIFO”) method. Leaf tobacco is presented in current assets in accordance with standardindustry practice, notwithstanding the fact that such tobaccos are carried longer than one year for the purpose of curing. We recorded an inventory valuation allowance of $7.7 million and $9.9 million atDecember 31, 2021 and 2020, respectively.Results of OperationsSummaryThe table and discussion set forth below relates to our consolidated results of operations for the years ended December 31 (in thousands): For the year ended December 31, 2021 2020 % Change 2019 % Change Consolidated Results of Operations Data: Net sales Zig-Zag products $176,491 $132,812 32.9% $108,733 22.1%Stoker’s products 124,280 115,866 7.3% 99,894 16.0%NewGen products 144,700 156,433 -7.5% 153,362 2.0%Total net sales 445,471 405,111 10.0% 361,989 11.9%Cost of sales 227,637 215,121 5.8% 224,872 -4.3%Gross profit Zig-Zag products 102,739 78,278 31.2% 59,414 31.8%Stoker’s products 68,084 61,764 10.2% 52,620 17.4%NewGen products 47,011 49,948 -5.9% 25,083 99.1%Total gross profit 217,834 189,990 14.7% 137,117 38.6% Selling, general, and administrative expenses 127,513 125,563 1.6% 109,887 14.3%Operating income 90,321 64,427 40.2% 27,230 136.6%Interest expense, net 20,500 13,487 52.0% 14,435 -6.6%Investment loss (income) 6,673 (198) -3470.2% (2,648) -92.5%(Gain) loss on extinguishment of debt (2,154) - NM 1,308 -100.0%Net periodic benefit cost (income), excluding service cost - 989 -100.0% (4,961) -119.9%Income before income taxes 65,302 50,149 30.2% 19,096 162.6%Income tax expense 14,040 11,957 17.4% 2,863 317.6%Consolidated net income 51,262 38,192 34.2% 16,233 135.3%Net loss attributable to non-controlling interest (797) - NM - NM Net income attributable to Turning Point Brands, Inc. $52,059 $38,192 36.3% $16,233 135.3%46Table of ContentsComparison of Year Ended December 31, 2021, to Year Ended December 31, 2020Net Sales. For the year ended December 31, 2021, overall net sales increased to $445.5 million from $405.1 million for the year ended December 31, 2020, an increase of $40.4 million or 10.0%. The increase innet sales was primarily driven by increased sales volume in the Zig-Zag Products segment.For the year ended December 31, 2021, net sales in the Zig-Zag Products segment increased to $176.5 million from $132.8 million for the year ended December 31, 2020, an increase of $43.7 million or 32.9%.For the year ended December 31, 2021, Zig-Zag Products volumes increased 29.7%, and price/mix increased 3.2%. The increase in net sales was by led by double-digit growth in sales of our MYO cigarwraps and U.S. rolling papers business. This growth was complemented by our Canadian business which benefited from the consolidation of Turning Point Brands Canada in the current year period.For the year ended December 31, 2021, net sales in the Stoker’s Products segment increased to $124.3 million from $115.9 million for the year ended December 31, 2020, an increase of $8.4 million or 7.3%.For the year ended December 31, 2021, Stoker’s Products volume increased 1.3% and price/mix increased 6.0%. The increase in net sales was driven by the continuing double-digit growth of Stoker’s®MST offset by low single-digit decline in loose-leaf chewing tobacco. MST represented 63% of Stoker’s Products revenue in 2021, up from 59% a year earlier.For the year ended December 31, 2021, net sales in the NewGen products segment decreased to $144.7 million from $156.4 million for the year ended December 31, 2020, a decrease of $11.7 million or 7.5%.The decrease in net sales was primarily the result of declines in the vape distribution businesses as a result of strong B2C orders during stay-at-home provisions in the prior year as well as the changingregulatory environment.Gross Profit. For the year ended December 31, 2021, overall gross profit increased to $217.8 million from $190.0 million for the year ended December 31, 2020, an increase of $27.8 million or 14.7%. Grossprofit as a percentage of net sales increased to 48.9% for the year ended December 31, 2021, from 46.9% for the year ended December 31, 2020. The increase in gross profit as a percentage of net sales wasdriven by increased margin in the Stoker’s Products segment as a result of strong incremental margin contribution of MST.For the year ended December 31, 2021, gross profit in the Zig-Zag Products segment increased to $102.7 million from $78.3 million for the year ended December 31, 2020, an increase of $24.5 million or31.2%. Gross profit as a percentage of net sales decreased to 58.2% of net sales for the year ended December 31, 2021, from 58.9% of net sales for the year ended December 31, 2020. The decrease in grossprofit as a percentage of net sales is a result of the consolidation of Turning Point Brands Canada in the current year period which operates at lower margins than our traditional business.For the year ended December 31, 2021, gross profit in the Stoker’s Products segment increased to $68.1 million from $61.8 million for the year ended December 31, 2020, an increase of $6.3 million or 10.2%.Gross profit as a percentage of net sales increased to 54.8% of net sales for the year ended December 31, 2021, from 53.3% of net sales for the year ended December 31, 2020. The increase in gross profit asa percentage of net sales is primarily a result of pricing and strong incremental margin contribution of MST.For the year ended December 31, 2021, gross profit in the NewGen products segment decreased to $47.0 million from $49.9 million for the year ended December 31, 2020, a decrease of $2.9 million or 5.9%.NewGen gross profit includes $1.1 million of tariff expenses in 2021 compared to $10.1 million in 2020. Gross profit as a percentage of net sales increased to 32.5% of net sales for the year ended December31, 2021, from 31.9% of net sales for the year ended December 31, 2020, primarily as a result of increased margins in the vape distribution businesses.Selling, General and Administrative Expenses. For the year ended December 31, 2021, selling, general and administrative expenses increased to $127.5 million from $125.6 million for the year endedDecember 31, 2020, an increase of $2.0 million or 1.6%. Selling, general, and administrative expenses for the year ended December 31, 2021, included $7.6 million of stock options, restricted stock andincentives expense, $1.3 million of transaction expenses, $0.8 million of restructuring expenses and $2.6 million of expense related to PMTA. Selling, general, and administrative expenses for the year endedDecember 31, 2020, included $2.6 million of stock options, restricted stock and incentives expense, $3.1 million of transaction expenses, $0.5 million of restructuring expenses and $14.4 million of expenserelated to PMTA. The increase in selling, general and administrative expenses is a result of variable costs in our online business as well as increased shipping costs from PACT Act implementation for vapeproducts and higher freight rates across all segments combined with the impact of the consolidation of Turning Point Brands Canada in the current year period.Interest Expense, net. For the year ended December 31, 2021, interest expense, on a net basis, increased to $20.5 million from $13.5 million for the year ended December 31, 2020, primarily as a result theissuance of the Senior Secured Notes and related refinancing of the 2018 First Lien Credit Facility which increased the Company’s outstanding debt.47Table of ContentsInvestment Loss (Income). For the year ended December 31, 2021, investment loss increased to $6.7 million compared to $0.2 million of investment income for the year ended December 31, 2020, primarily asa result of $7.1 million impairment of our investment in dosist. See Note 11 Other Assets in the Consolidated Financial Statements for additional information on the dosist investment.(Gain) Loss on Extinguishment of Debt. For the year ended December 31, 2021, gain on extinguishment of debt was $2.2 million as a result of forgiveness of the unsecured loan issued to us under theCoronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) partially offset by the repayment of the 2018 First Lien Credit Facility. For the year ended December 31, 2020, there was noloss on extinguishment of debt.Net Periodic Benefit Cost (Income), excluding service cost. For the year ended December 31, 2021, there was no net periodic benefit cost or income. For the year ended December 31, 2020, net periodiccost was $0.9 million primarily as a result of the curtailment from the shutdown of the pension plan.Income Tax Expense. The Company’s income tax expense was $14.0 million, or 21.5% of income before income taxes, for the year ended December 31, 2021, and included discrete tax deductions of $7.5million related to the forgiveness of the $7.5 million unsecured loan and $7.2 million relating to stock option exercises during the year. The Company’s income tax expense was $12.0 million, or 23.8% ofincome before income taxes, for the year ended December 31, 2020, and included a discrete tax deduction of $3.3 million relating to stock option exercises during the year and a discrete tax benefit of $0.6million from the shutdown of the pension plan.Net Loss Attributable to Non-Controlling Interest. Net loss attributable to non-controlling interest was $0.8 million for the year ended December 31, 2021, compared to $0.0 million for the year endedDecember 31, 2020.Net Income Attributable to Turning Point Brands, Inc. Due to the factors described above, net income attributable to Turning Point Brands, Inc. for the years ended December 31, 2021 and 2020, was $52.1million and $38.2 million, respectively.Comparison of Year Ended December 31, 2020, to Year Ended December 31, 2019Net Sales. For the year ended December 31, 2020, overall net sales increased to $405.1 million from $362.0 million for the year ended December 31, 2019, an increase of $43.1 million or 11.9%. The increase innet sales was primarily driven by increased sales volume across all segments.For the year ended December 31, 2020, net sales in the Zig-Zag Products segment increased to $132.8 million from $108.7 million for the year ended December 31, 2019, an increase of $24.1 million or 22.1%.For the year ended December 31, 2020, Zig-Zag Products volumes increased 19.7%, and price/mix increased 2.4%. The increase in net sales was primarily related to double digit growth in US papers andwraps, partially offset by a $1.8 million decline in non-focus cigars and MYO pipe.For the year ended December 31, 2020, net sales in the Stoker’s Products segment increased to $115.9 million from $99.9 million for the year ended December 31, 2019, an increase of $16.0 million or 16.0%.For the year ended December 31, 2020, Stoker’s Products volume increased 12.0% and price/mix increased 4.0%. The increase in net sales was primarily driven by the continuing double-digit volumegrowth of Stoker’s® MST. Sales in chewing tobacco products were up mid-single digits as compared to prior year. MST represented 59% of Stoker’s Products revenue in 2020, up from 54% a year earlier.For the year ended December 31, 2020, net sales in the NewGen products segment increased to $156.4 million from $153.4 million for the year ended December 31, 2019, an increase of $3.1 million or 2.0%.The increase in net sales was primarily the result of growth in both the Nu-X and vape distribution businesses.Gross Profit. For the year ended December 31, 2020, overall gross profit increased to $190.0 million from $137.1 million for the year ended December 31, 2019, an increase of $52.9 million or 38.6%, due togrowth across all segments and $24.2 million of costs in 2019 that did not recur primarily related to inventory reserves. Consolidated gross profit for the year ended December 31, 2019, included $1.2 millionof introductory launch costs and $23.0 million of restructuring costs primarily inventory reserves. Gross profit as a percentage of net sales increased to 46.9% for the year ended December 31, 2020, from37.9% for the year ended December 31, 2019.For the year ended December 31, 2020, gross profit in the Zig-Zag Products segment increased to $78.3 million from $59.4 million for the year ended December 31, 2019, an increase of $18.9 million or 31.8%.Gross profit as a percentage of net sales increased to 58.9% of net sales for the year ended December 31, 2020, from 54.6% of net sales for the year ended December 31, 2019. The increase in gross profit asa percentage of net sales is a result of increased US paper sales and increased margin in MYO cigar sales as a result of the Durfort transaction.48Table of ContentsFor the year ended December 31, 2020, gross profit in the Stoker’s Products segment increased to $61.8 million from $52.6 million for the year ended December 31, 2019, an increase of $9.1 million or 17.4%.Gross profit as a percentage of net sales increased to 53.3% of net sales for the year ended December 31, 2020, from 52.7% of net sales for the year ended December 31, 2019. The increase in gross profit asa percentage of net sales is primarily a result of strong incremental margin contribution of MST.For the year ended December 31, 2020, gross profit in the NewGen products segment increased to $49.9 million from $25.1 million for the year ended December 31, 2019, an increase of $24.9 million or 99.1%.NewGen gross profit for the year ended December 31, 2019, included $1.2 million of introductory launch costs and $23.2 million of restructuring expenses that did not recur in 2020. Additionally, the grossprofit includes $10.1 million of tariff expenses in 2020 compared to $9.3 million in 2019. Gross profit as a percentage of net sales increased to 31.9% of net sales for the year ended December 31, 2020, from16.4% of net sales for the year ended December 31, 2019, primarily due to the impact of the $23.2 million of related write-offs and reserves in 2019 associated with the vape distribution business.Selling, General and Administrative Expenses. For the year ended December 31, 2020, selling, general and administrative expenses increased to $125.6 million from $109.9 million for the year endedDecember 31, 2019, an increase of $15.7 million or 14.3%. Selling, general, and administrative expenses for the year ended December 31, 2020, included $2.6 million of stock options, restricted stock andincentives expense, $3.1 million of transaction expenses, $0.5 million of restructuring expenses and $14.4 million of expense related to PMTA. Selling, general, and administrative expenses for the year endedDecember 31, 2019, included $1.8 million of transaction costs (primarily relating to Solace and Turning Point Brands Canada as well as earnout expense for IVG), $5.0 million of introductory launch costs,$3.2 million of restructuring expenses, and $2.2 million in PMTA expenses.Interest Expense, net. For the year ended December 31, 2020, interest expense, on a net basis, decreased to $13.5 million from $14.4 million for the year ended December 31, 2019, primarily as a result of adecrease in interest expense on our 2018 First Lien Term Loan as result of lower interest rates partially offset by increased interest expense from our Convertible Senior Notes.Investment Income. For the year ended December 31, 2020, investment income decreased to $0.2 million from $2.6 million for the year ended December 31, 2019, primarily due to the impact of the $2.0 milliongain on the CASH investment as a result of marking the investment to fair value in 2019. See Note 11 Other Assets in the Consolidated Financial Statements for additional information on the CASHinvestment.Loss on Extinguishment of Debt. For the year ended December 31, 2020, there was no loss on extinguishment of debt. For the year ended December 31, 2019, loss on extinguishment of debt was $1.3 millionas the result of paying off the 2018 Second Lien Credit Facility.Net Periodic Benefit Cost (Income), excluding service cost. For the year ended December 31, 2020, net periodic cost was $0.9 million primarily as a result of the curtailment from the shutdown of thepension plan. For the year ended December 31, 2019, net periodic income was $5.0 million primarily due to the gain on the termination of the postretirement plan.Income Tax Expense. The Company’s income tax expense was $12.0 million, or 23.8% of income before income taxes, for the year ended December 31, 2020, and included a discrete tax deduction of $3.3million relating to stock option exercises during the year and a discrete tax benefit of $0.6 million from the shutdown of the pension plan. The Company’s income tax expense of $2.9 million, or 15.0% ofincome before income taxes, for the year ended December 31, 2019, was lower than the expected annual effective tax rate as a result of discrete tax benefits of $4.6 million from the exercise of stock optionsduring the year.Net Income Attributable to Turning Point Brands, Inc . Due to the factors described above, net income for the year ended December 31, 2020 and 2019, was $38.2 million and $16.2 million, respectively.EBITDA and Adjusted EBITDA To supplement our financial information presented in accordance with U.S. GAAP, we use non-U.S. GAAP financial measures including EBITDA and Adjusted EBITDA. We believe Adjusted EBITDAprovides 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 bymanagement 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 areappropriate 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 useAdjusted EBITDA calculations. We define “EBITDA” as net income before interest expense, loss on extinguishment of debt, provision for income taxes, depreciation, and amortization. We define “Adjusted EBITDA” as net incomebefore interest expense, loss (gain) on extinguishment of debt, provision for income taxes, depreciation, amortization, other non-cash items, and other items we do not consider ordinary course in ourevaluation of ongoing operating performance. 49Table of ContentsNon-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 requiredto 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 maynot calculate it at all, limiting its usefulness as a comparative measure. The table below provide a reconciliation between net income, EBITDA and Adjusted EBITDA.(in thousands) Years ended December 31, 2021 2020 2019 Consolidated net income $52,059 $38,192 $16,233 Add: Interest expense, net 20,500 13,487 14,435 (Gain) loss on extinguishment of debt (2,154) - 1,308 Income tax expense 14,040 11,957 2,863 Depreciation expense 3,105 3,237 2,638 Amortization expense 1,907 1,781 1,451 EBITDA $89,457 $68,654 $38,928 Components of Adjusted EBITDA Other (a) - 988 (11)Stock options, restricted stock, and incentives expense (b) 7,557 2,555 4,626 Transactional expenses and strategic initiatives (c) 1,267 3,087 1,764 New product launch costs (d) - - 6,185 FDA PMTA (e) 1,668 14,435 2,153 Corporate and vapor restructuring (f) 1,026 517 19,214 Non-cash asset impairment (g) 7,100 - - Vendor settlement (h) - - (5,522)Adjusted EBITDA $108,075 $90,236 $67,337 (a)Represents non-cash pension expense (income) and foreign exchange hedging.(b)Represents non-cash stock options, restricted stock, incentives expense and Solace performance stock units.(c)Represents the fees incurred for transaction expenses and strategic initiatives.(d)Represents product launch costs for our new product lines.(e)Represents costs associated with applications related to FDA premarket tobacco product application (“PMTA”).(f)Costs during the year ended December 31, 2021, represent the write-down and disposal cost of discontinued vape inventory and cost of retail store lease termination. Costs during the year endedDecember 31, 2020, represent the costs from the retirement of a senior executive. Costs during the year ended December 31, 2019, represent the costs associated with corporate and vapor restructuringincluding severance and inventory reserves(g)Represents impairment of investment in dosist.(h)Represents net gain associated with the settlement of a vendor contract.Liquidity and Capital ResourcesOur principal uses for cash are working capital, debt service, and capital expenditures. We believe our cash flows from operations and borrowing availability under our New Revolving Credit Facility areadequate to satisfy our operating cash requirements for the foreseeable future.Our working capital, which we define as current assets less cash and current liabilities, increased $15.5 million to $80.5 million at December 31, 2021, compared with $65.0 million at December 31, 2020. Theincrease in working capital is primarily due to decrease in the current portion of long-term debt as a result of paying off the 2018 Second Lien Credit Facility and the Promissory Note issued to the sellers inconnection with the Durfort acquisition.50Table of Contents As of (in thousands) December 31,2021 December 31,2020 Current assets $120,849 $121,638 Current liabilities 40,336 56,629 Working capital $80,513 $65,009 During the year ended December 31, 2021 and 2020, we invested $6.2 million and $6.1 million, respectively, in capital expenditures. We had unrestricted cash on hand of $128.3 million and $41.8 million as ofDecember 31, 2021 and 2020, respectively. The significant increase in cash on hand is primarily the result of the proceeds from the Senior Secured Note issuance. We had restricted assets of $34.7 millionand $35.1 million as of December 31, 2021 and 2020, respectively. Restricted assets consist of escrow deposits under the MSA and insurance deposits. On the 25th anniversary of each annual deposit, weare entitled to receive reimbursement of the principal amount of escrow remaining for that year. See “Master Settlement Agreement” below for details.Cash Flows from Operating ActivitiesFor the year ended December 31, 2021, net cash provided by operating activities increased to $68.2 million from $43.7 million for the year ended December 31, 2020, an increase of $24.5 million or 56%,primarily due to higher net income due to increased sales combined with the timing of changes in working capital.For the year ended December 31, 2020, net cash provided by operating activities increased to $43.7 million from $37.8 million for the year ended December 31, 2019, an increase of $5.9 million or 16%,primarily due to higher net income due to increased sales offset by the timing of changes in working capital.Cash Flows from Investing ActivitiesFor the year ended December 31, 2021, net cash used in investing activities decreased to $58.8 million from $64.8 million for the year ended December 31, 2020, a decrease of $6.0 million or 9%, primarily dueto the decrease in acquisitions partially offset by the purchase of investments in our MSA escrow account which reflects the change in restricted cash.For the year ended December 31, 2020, net cash used in investing activities was $64.8 million compared to net cash provided by investing activities of $15.9 million for the year ended December 31, 2019, adecrease of $80.7 million or 508%, primarily due to increases in cash paid for acquisitions and investments in 2020.Cash Flows from Financing ActivitiesFor the year ended December 31, 2021, net cash provided by financing activities was $57.1 million compared to net cash used in financing activities $29.3 million for the year ended December 31, 2020, anincrease of $86.4 million or 295%, primarily due to the net proceeds from the Senior Secured Notes partially offset by the repayment in full of the 2018 First Lien Term Loan in the first quarter of 2021 withthe proceeds of the Senior Secured Notes and the repurchase of $38.7 million of common stock during 2021.For the year ended December 31, 2020, net cash used in financing activities was to $29.3 million compared to net cash provided by financing activities $68.0 million for the year ended December 31, 2019, adecrease of $97.3 million or 143%, primarily due to lapping the net proceeds from the issuance of the Convertible Senior Notes and the payment of the revolving credit facility and second lien term loan in2019.Long-Term DebtNotes payable and long-term debt consisted of the following at December 31, 2021 and 2020, in order of preference:51Table of Contents December 31,2021 December 31,2020 Senior Secured Notes $250,000 $- 2018 First Lien Term Loan - 130,000 Convertible Senior Notes 172,500 172,500 Note payable - Promissory Note - 10,000 Note payable - Unsecured Loan - 7,485 Gross notes payable and long-term debt 422,500 319,985 Less deferred finance charges (8,328) (5,873)Less current maturities - (12,000)Net notes payable and long-term debt $414,172 $302,112 As noted above under “—Recent Developments—Senior Secured Notes and New Revolving Credit Facility,” on February 11, 2021, the Company completed a comprehensive refinancing transactionpursuant to which the Company issued $250 million of its Senior Secured Notes entered into the New Revolving Credit Facility. The proceeds from the Offering of the Senior Secured Notes were used to (i)repay all obligations under and terminate the 2018 First Lien Term Loan and 2018 First Lien Revolver, (ii) pay related fees, costs, and expenses and (iii) for general corporate purposes.Senior Secured NotesOn 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 SeniorSecured 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 inthe Indenture governing the Senior Secured Notes or the “Senior Secured Notes Indenture”), including the 2021 Revolving Credit Facility, or capital markets debt securities of the Company or Guarantorsin 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 certainexceptions.We may redeem the Senior Secured Notes, in whole or in part, at any time prior to February 15, 2023, at a price equal to 100% of the principal amount of the Notes redeemed plus accrued and unpaidinterest, if any, to, but excluding the applicable redemption date, plus a “make-whole” premium. Thereafter, we may redeem the Senior Secured Notes, in whole or in part, at established redemption prices setforth in the Senior Secured Notes Indenture, plus accrued and unpaid interest, if any. In addition, on or prior to February 15, 2023, we may redeem up to 40% of the aggregate principal amount of the SeniorSecured Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 105.625%, plus accrued and unpaid interest, if any to the redemption date; provided, however, that atleast 50% of the original aggregate principal amount of the Senior Secured Notes (calculated after giving effect to the issuance of any additional notes) remains outstanding. In addition, at any time andfrom time to time prior to February 15, 2023, but not more than once in any twelve-month period, we may redeem up to 10% of the aggregate principal amount of the Senior Secured Notes at a redemptionprice of 103% of the aggregate principal amount of Senior Secured Notes redeemed plus accrued and unpaid interest, if any to but not including the redemption date, on the Senior Secured Notes to beredeemed.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 amountof the Notes to be repurchased, plus accrued and unpaid interest.The Indenture contains covenants that, among other things, limit the ability of the Company and its restricted subsidiaries to: (i) grant or incur liens; (ii) incur, assume or guarantee additional indebtedness;(iii) sell or otherwise dispose of assets, including capital stock of subsidiaries; (iv) make certain investments; (v) pay dividends, make distributions or redeem or repurchase capital stock; (vi) engage incertain 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 exceptionsset forth in the Indenture. The Indenture provides for customary events of default. 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 ofthe Senior Secured Notes.52Table of Contents2021 Revolving Credit FacilityIn connection with the Offering, we also entered into a new $25 million senior secured revolving credit facility (the “2021 Revolving Credit Facility”) with the lenders party thereto (the “Lenders”) andBarclays Bank PLC, as administrative agent and collateral agent (in such capacity, the “Agent”). The 2021 Revolving Credit Facility provides for a revolving line of credit of up to $25.0 million. Letters ofcredit are limited to $10 million (and are a part of, and not in addition to, the revolving line of credit). We have not drawn any borrowings under the 2021 Revolving Credit Facility but do have letters ofcredit of approximately $3.6 million outstanding under the facility. The 2021 Revolving Credit Facility will mature on August 11, 2025 if none of our Convertible Senior Notes are outstanding, and if anyConvertible Senior Notes are outstanding, the date which is 91 days prior to the maturity date of July 15, 2024 for such Convertible Senior Notes.Interest is payable on the 2021 Revolving Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate plus an applicable margin of 3.50% (with step-downs upon de-leveraging). We also have the option to borrow at a rate determined by reference to the base rate.The obligations under the 2021 Revolving Credit Agreement are guaranteed on a joint and several basis by the Guarantors. The Company’s and Guarantors’ obligations under the 2021 Revolving CreditFacility are secured on a pari passu basis with the Senior Secured Notes.The 2021 Revolving Credit Agreement contains covenants that are substantially the same as the covenants in the Senior Secured Notes Indenture. The 2021 Revolving Credit Facility also requires themaintenance of a Consolidated Leverage Ratio (as defined in the 2021 Revolving Credit Agreement) of 5.50 to 1.00 (with a step down to 5.25 to 1.00 beginning with the fiscal quarter ending March 31, 2023)at the end of each fiscal quarter when extensions of credit under the 2021 Revolving Credit Facility and certain drawn and undrawn letters of credit (excluding (a) letters of credit that have been cashcollateralized and (b) letters of credit having an aggregate face amount less than $5,000,000) in the aggregate outstanding exceeds 35% of the total commitments under the 2021 Revolving Credit Facility.We incurred debt issuance costs attributable to the issuance of the 2021 Revolving Credit Facility of $0.5 million which are amortized to interest expense using the effective interest method over theexpected life of the 2021 Revolving Credit Facility.The 2021 Revolving Credit Agreement provides for customary events of default.2018 Credit FacilityIn the first quarter of 2021, we used a portion of the proceeds from the issuance of the Senior Secured Notes to prepay all outstanding amounts under and terminate the 2018 First Lien Credit Facility in theamount of $130.0 million, and the transaction resulted in a $5.7 million loss on extinguishment of debt, which includes a $3.6 million loss from the early termination of the interest rate swap agreement. SeeNote 13, “Notes Payable and Long-Term Debt,” in the Notes to Consolidated Financial Statements included in this Annual Report for further discussion.Convertible Senior NotesIn July 2019 we closed an offering of $172.5 million in aggregate principal amount of our Convertible Senior Notes. The Convertible Senior Notes bear interest at a rate of 2.50% per year, payablesemiannually 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.The Convertible Senior Notes are convertible into approximately 3,208,172 shares of our voting common stock under certain circumstances prior to maturity at a conversion rate of 18.598 shares per $1,000principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.77 per share, subject to adjustment under certain conditions, but will not be adjusted for anyaccrued and unpaid interest. Upon conversion, we may pay cash, shares of our common stock or a combination of cash and stock, as determined by us at our discretion. The conditions required to allowthe holders to convert their Convertible Senior Notes were not met as of December 31, 2021.The indenture covering the Convertible Senior Notes contains customary events of default.We early adopted ASU 2020-06 effective January 1, 2021, on a retrospective basis to all periods presented. Under ASU 2020-06, the Company accounts for the Convertible Senior Notes entirely as a liabilityand will no longer separately account for the Convertible Senior Notes with liability and equity components. See Note 2, “Summary of Significant Accounting Policies,” in the Notes to ConsolidatedFinancial Statements included in this Annual Report for further discussion of the impact of the adoption of ASU 2020-06.53Table of ContentsWe 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 theConvertible 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$53.77 per and a cap price of $82.86 per, and are exercisable when, and if, the Convertible Senior Notes are converted. We paid $20.53 million for these capped calls and charged that amount to additionalpaid-in capital.Promissory NoteOn June 10, 2020, in connection with the acquisition of certain Durfort assets, we issued an unsecured subordinated promissory note (“Promissory Note”) in the principal amount of $10.0 million (the“Principal Amount”), with an annual interest rate of 7.5%, payable quarterly, with the first payment due September 10, 2020. The Principal Amount was payable in two $5.0 million installments, with the firstinstallment due 18 months after the closing date of the acquisition (June 10, 2020), and the second installment due 36 months after the closing date of the acquisition. The second installment was subject toreduction for certain amounts payable to us as a holdback. We prepaid all outstanding amounts under and terminated the Promissory Note in the third quarter of 2021 in the amount of $9.6 million. Thetransaction resulted in a $0.4 million gain on extinguishment of debt.Unsecured LoanOn April 17, 2020, National Tobacco Company, L.P., a wholly-owned subsidiary of the Company, entered into a loan agreement with Regions Bank guaranteed by the Small Business Administration for a$7.5 million unsecured loan issued pursuant to the CARES Act. The proceeds of the loan were received on April 27, 2020. The loan was scheduled to mature on April 17, 2022 and had a 1.00% interest rate.Under the CARES Act we were permitted to apply for forgiveness of the loan if the proceeds were used as required for certain purposes. During 2021, we applied for forgiveness for the loan. On October15, 2021, we received notice that our application for forgiveness was fully approved. The extinguishment of the unsecured loan occurred in the fourth quarter of 2021 resulting in a $7.5 million gain onextinguishment of debt. We are subject to audit relating to the unsecured loan until 2027 which could result in repayment of some or all of the unsecured loan previously forgiven. However, we believe thatrepayment of any amount is not probable.Distribution AgreementsFor a description of our material distribution agreements, see “Business—Distribution and Supply Agreements.”Master Settlement AgreementOn November 23, 1998, the major U.S. cigarette manufacturers, Philip Morris USA, Inc., Brown & Williamson Tobacco Corporation, Lorillard Tobacco Company and R.J. Reynolds Tobacco Company,entered into the MSA with attorneys general representing states that agreed to settle certain recovery actions (the “Settling States”). In order to be in compliance with the MSA and subsequent states’statutes, we were required to fund an escrow account with each of the Settling States based on the number of cigarettes or cigarette equivalents (which is measured by pounds of MYO cigarette smokingtobacco) sold in such state. We discontinued our generic category of MYO in 2019 and our Zig-Zag branded MYO cigarette smoking tobacco in 2017. Thus, pending a change in MSA legislation, we haveno remaining product lines covered by the MSA and will not be required to make future escrow deposits. Each year’s deposit will be released from escrow after 25 years. We are scheduled to beginreceiving payments as our escrow deposits are released from escrow beginning in 2024.54Table of ContentsThe following table summarizes our escrow deposit balances (in thousands) by sales year as of:Sales Deposits as of December 31, Year 2021 2020 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 83 Total $32,073 $32,074 Off-balance Sheet ArrangementsDuring 2021, we did not execute any forward contracts. We had no forward contracts at December 31, 2021. During 2020, we executed various forward contracts for the purchase of €19.7 million and sale of€21.4 million with maturity dates ranging from December 2020 to November 2021. At December 31, 2020, we had forward contracts for the purchase of €18.0 million and sale of €19.6 million. The fair value ofthe foreign currency contracts were based on quoted market prices and resulted in an asset of $0.4 million included in Other current assets and liability of $0.0 million included in Accrued liabilities atDecember 31, 2020. We had no interest rate swap contracts at December 31, 2021. We had interest rate swap contracts for a total notional amount of $70 million at December 31, 2020. The fair values of theinterest rate swap contracts were based upon quoted market prices and resulted in a liability of $3.7 million as of December 31, 2020, included in other long-term liabilities.Future Cash RequirementsThe Company’s primary future cash requirements will be to fund operations, lease payments, debt service and capital expenditures. The Company’s contractual obligations primarily include long-term debtand lease obligations. For information regarding our long-term debt obligations and cash payment obligations thereunder, please see Note 13, “Notes Payable and Long-Term Debt” in the Notes to theConsolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K. For information regarding our lease obligations and cash payment obligations thereunder, please see Note 16,“Lease Commitments” in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.In 2021, we increased our share repurchase authorization by an additional $30.7 million during the fourth quarter and spent $18.2 million to repurchase 477,707 shares at an average price of $38.09 per share.Subsequent to the quarter end, the Company spent $6.6 million to repurchase 178,196 shares at an average price of $37.08 per share.InflationWe believe that any effect of inflation at current levels will be minimal. Historically, we have been able to increase prices at a rate equal to or greater than that of inflation and believe that we will continue tobe able to do so for the foreseeable future. In addition, we have been able to maintain a relatively stable variable cost structure for our products due, in part, to our successful procurement with regard toour tobacco products and, in part, to our existing contractual agreement for the purchase of our premium cigarette papers.55Table of ContentsItem 7A. Quantitative and Qualitative Disclosures About Market RiskForeign Currency SensitivityOur inventory purchases from RTI are denominated in euros. Accordingly, we have exposure to potentially adverse movements in the euro exchange rate. In addition, RTI provides a contractual hedgeagainst catastrophic currency fluctuation in our agreement. We do not use derivative financial instruments for speculative trading purposes, nor do we hedge our foreign currency exposure in a mannerthat offsets the effects of changes in foreign exchange rates.We regularly review our foreign currency risk and hedging programs and may as part of that review determine at any time to change our hedging policy. During 2021, we executed no forward contracts forthe purchase of euros. At December 31, 2021, we had no forward contracts for the purchase of euros. A 10% change in the euro to U.S. dollars exchange rate would change pre-tax income by approximately$1.7 million per year.Credit RiskAt December 31, 2021 and 2020, we had bank deposits, including MSA escrows, in excess of federally insured limits of approximately $137.2 million and $69.7 million, respectively. The Company has chosento invest a portion of the MSA escrows, from time to time, in U.S. Government securities including Treasury Notes and Treasury Bonds.We sell our products to distributors, retail establishments, and individual consumers throughout the U.S. and also have sales of Zig-Zag® premium cigarette papers in Canada. In 2021, 2020, and 2019, wehad no customers that accounted for more than 10% of our net sales. We perform periodic credit evaluations of our customers and generally do not require collateral on trade receivables. Historically, wehave not experienced significant losses due to customer credit issues.Interest Rate SensitivityIn 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 riskassociated 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 debtinstruments bear interest at fixed rates and are not subject to interest rate volatility.56Table of ContentsItem 8. Financial Statements and Supplementary DataTURNING POINT BRANDS, INC.CONTENTS Page Reports of RSM US LLP (PCAOB ID: 49)58Financial Statements: Consolidated Balance Sheets as of December 31, 2021 and 202062Consolidated Statements of Income for the years ended December 31, 2021, 2020, and 201963Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020, and 201964Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020, and 201965Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2021, 2020, and 201967Notes to Consolidated Financial Statements6857Table of ContentsReport of Independent Registered Public Accounting FirmTo the Stockholders and the Board of Directors of Turning Point Brands, Inc.Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of Turning Point Brands, Inc. and its subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements ofincome, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes to the consolidated financialstatements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, andthe results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States ofAmerica.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as ofDecember 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Our report datedMarch 11, 2022 expressed an opinion that the Company had not maintained effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control —Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.Basis for OpinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a publicaccounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financialstatements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether dueto error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believethat our audits provide a reasonable basis for our opinion.Critical Audit MattersThe critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committeeand that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical auditmatters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the criticalaudit matters or on the accounts or disclosures to which they relate.Goodwill Impairment Analysis for the NewGen Reporting UnitAs described in Note 10 to the financial statements, the Company’s goodwill balance in the NewGen segment, which is also a reporting unit, was $25.6 million at December 31, 2021, and as described inNote 2 to the financial statements, goodwill is tested for impairment, at the reporting unit level, at least annually on December 31 or more frequently if indicators of impairment require the performance of aninterim impairment assessment. To test goodwill for impairment, management compares the estimated fair value of the reporting unit, which is determined using a discounted cash flow method, with thecarrying value of the reporting unit, including goodwill.58Table of ContentsWe identified the goodwill impairment assessment for the NewGen reporting unit as a critical audit matter because of the significant estimates and assumptions used by management when estimating thefair value of this reporting unit, including management’s forecasts of expected revenue growth rates, managements selection of the discount rate, and management’s estimate of the terminal value. Auditingmanagement’s estimates and assumptions involved a high degree of auditor judgment and increased audit effort, including the use of our valuation specialists, due to the impact these assumptions haveon the estimated fair value of the NewGen reporting unit for goodwill impairment testing.Our audit procedures related to the assessment of goodwill impairment for the NewGen reporting unit included the following, among others: •Evaluating the reasonableness of management’s forecasts of revenue growth rates by comparing the projections to historical results and to publicly available market data.•Tested the accuracy of management’s estimation process by comparing current year results to prior year estimates.•We utilized valuation specialists to assist in the following, among others:oEvaluating the appropriateness of the valuation method used by management and testing its mathematical accuracy.oEvaluating the appropriateness of the methodology used by management to estimate the terminal value, comparing the inputs used by management to estimate the terminal value tomarket data, and testing its mathematical accuracy.oEvaluating the reasonableness of the discount rate by comparing the underlying source information to publicly available market data and testing the accuracy of the calculation.Fair Value of dosistTM InvestmentAs described in Note 11 to the financial statements, at December 31, 2021 the Company estimated the fair value of its investment in warrants for preferred shares of dosistTM to be $7.9 million, whichresulted in the Company recording an impairment loss of $7.1 million for the year ended December 31, 2021. Because the Company’s investment in dosistTM does not have a readily determinable fair value,the Company has elected a practical expedient to record this investment at the original cost, as adjusted for impairment and observable price changes. Under the practical expedient, if a qualitative analysisindicates impairment exists, the fair value of the investment is required to be estimated and any excess of the carrying value over the estimated fair value is recognized as an impairment loss. At December31, 2021, the Company’s qualitative assessment of its investment in dosistTM identified significant deterioration in economic performance and adverse cannabinoid market conditions as indicators ofimpairment. Consequently, the Company estimated the fair value of its investment in dosistTM using a probability weighted average of market approaches, including a valuation derived from changes in arelevant market index and a valuation derived from adjusted market multiples. The Company then compared its estimated fair value to the carrying value of the investment and recorded an impairment lossequal to the difference.We identified the estimate of the fair value of the dosistTM investment as a critical audit matter because of the complexity and judgment involved in estimating the fair value of an investment without areadily determinable fair value. Auditing management’s estimate of fair value of the dosistTM investment, which included the use of our valuation specialists, involved a high degree of auditor judgment,increased audit effort, and subjectivity to evaluate the audit evidence obtained.Our audit procedures related to the estimated fair value of the dosistTM investment included the following, among others: •Evaluating the relevance and reliability of the underlying business-related data by comparing it to the investee’s historical financial results.•Comparing the rights and preferences of the various dosistTM equity classes to the governance documents of dosistTM.•Utilizing valuation specialists to assist in developing a range of independent estimates of the fair value of the dosistTM investment through the use of market data, including guideline publiccompanies and guideline transactions.•Comparing the range of the independent estimate of fair value developed by our valuation specialists to management’s estimate of fair value./s/ RSM US LLPWe have served as the Company’s auditor since 2006.Richmond, VirginiaMarch 11, 202259Table of ContentsReport of Independent Registered Public Accounting FirmTo the Stockholders and the Board of Directors of Turning Point Brands, Inc.Opinion on the Internal Control Over Financial ReportingWe have audited Turning Point Brands, Inc.’s (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, because of the effect of the material weakness described below on the achievement of theobjectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2021 and 2020,the related consolidated statements of income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the relatednotes to the consolidated financial statements of the Company and our report dated March 11, 2022 expressed an unqualified opinion.A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’sannual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment. There weredeficiencies in the design and operation of information technology general controls (“ITGCs”) in the areas of user access and program change-management over certain information technology (“IT”)systems that support the Company’s financial reporting processes. This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the 2021financial statements, and this report does not affect our report dated March 11, 2022 on those financial statements.Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in theaccompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on ouraudit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rulesand regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internalcontrol over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weaknessexists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considerednecessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.60Table of ContentsDefinition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to themaintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only inaccordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or dispositionof the company’s assets that could have a material effect on the financial statements.Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to therisk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate./s/ RSM US LLPRichmond, VirginiaMarch 11, 202261Table of ContentsTurning Point Brands, Inc. and SubsidiariesConsolidated Balance SheetsDecember 31, 2021 and 2020(dollars in thousands except share data) December 31,2021 December 31,2020 ASSETS Current assets: Cash $128,320 $41,765 Accounts receivable, net of allowances of $262 in 2021 and $150 in 2020 6,496 9,331 Inventories 87,607 85,856 Other current assets 26,746 26,451 Total current assets 249,169 163,403 Property, plant, and equipment, net 18,650 15,524 Deferred income taxes 1,363 610 Right of use assets 15,053 17,918 Deferred financing costs, net 388 641 Goodwill 162,333 159,621 Other intangible assets, net 87,485 79,422 Master Settlement Agreement (MSA) escrow deposits 31,720 32,074 Other assets 35,399 26,836 Total assets $601,560 $496,049 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $7,361 $9,201 Accrued liabilities 32,937 35,225 Current portion of long-term debt - 12,000 Other current liabilities 38 203 Total current liabilities 40,336 56,629 Notes payable and long-term debt 414,172 302,112 Lease liabilities 13,336 16,117 Other long-term liabilities - 3,704 Total liabilities 467,844 378,562 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; 19,690,884 issued shares, 18,395,476 outstanding shares at December 31, 2021,and 19,532,464 issued shares, 19,133,794 outstanding shares at December 31, 2020 197 195 Common stock, nonvoting, $0.01 par value; authorized shares, 10,000,000; issued and outstanding shares -0- - - Additional paid-in capital 108,811 102,423 Cost of repurchased common stock (1,295,408 shares at December 31, 2021 and 398,670 shares at December 31, 2020) (48,869) (10,191)Accumulated other comprehensive loss (195) (2,635)Accumulated earnings 71,460 23,645 Non-controlling interest 2,312 4,050 Total stockholders’ equity 133,716 117,487 Total liabilities and stockholders’ equity $601,560 $496,049 The accompanying notes are an integral part of the consolidated financial statements.62Table of ContentsTurning Point Brands, Inc. and SubsidiariesConsolidated Statements of Incomefor the years ended December 31, 2021, 2020, and 2019(dollars in thousands except share data) For the year ended December 31, 2021 2020 2019 Net sales $445,471 $405,111 $361,989 Cost of sales 227,637 215,121 224,872 Gross profit 217,834 189,990 137,117 Selling, general, and administrative expenses 127,513 125,563 109,887 Operating income 90,321 64,427 27,230 Interest expense, net 20,500 13,487 14,435 Investment loss (income) 6,673 (198) (2,648)(Gain) loss on extinguishment of debt (2,154) - 1,308 Net periodic benefit cost (income), excluding service cost - 989 (4,961)Income before income taxes 65,302 50,149 19,096 Income tax expense 14,040 11,957 2,863 Consolidated net income 51,262 38,192 16,233 Net loss attributable to non-controlling interest (797) - - Net income attributable to Turning Point Brands, Inc. $ 52,059 $ 38,192 $ 16,233 Basic income per common share: Net income attributable to Turning Point Brands, Inc. $2.75 $1.97 $0.83 Diluted income per common share: Net income attributable to Turning Point Brands, Inc. $2.52 $1.85 $0.78 Weighted average common shares outstanding: Basic 18,917,570 19,398,474 19,627,093 Diluted 22,381,994 22,937,441 23,240,348 The accompanying notes are an integral part of the consolidated financial statements.63Table of ContentsTurning Point Brands, Inc. and SubsidiariesConsolidated Statements of Comprehensive Incomefor the years ended December 31, 2021, 2020, and 2019(dollars in thousands) For the year ended December 31, 2021 2020 2019 Consolidated net income $51,262 $38,192 $16,233 Other comprehensive income (loss), net of tax Amortization of unrealized pension and postretirement gain (loss), net of tax of $0 in 2021, $57 in 2020, and $136 in 2019 - 1,830 (1,150)Unrealized (loss) gain on MSA investments, net of tax of $81 in 2021 and $0 in 2020 and $351 in 2019 (272) - 1,174 Foreign currency translation, net of tax of $0 in 2021, 2020 and 2019 260 - - Unrealized gain (loss) on derivative instruments, net of tax of $813 in 2021, $233 in 2020 and $377 in 2019 2,634 (692) (1,261) 2,622 1,138 (1,237) Consolidated comprehensive income 53,884 39,330 14,996 Comprehensive loss attributable to non-controlling interest (615) - - Comprehensive income attributable to Turning Point Brands, Inc. $54,499 $39,330 $14,996 The accompanying notes are an integral part of the consolidated financial statements.64Table of ContentsTurning Point Brands, Inc. and SubsidiariesConsolidated Statements of Cash Flowsfor the years ended December 31, 2021, 2020, and 2019(dollars in thousands) For the year ended December 31, 2021 2020 2019 Cash flows from operating activities: Consolidated net income $51,262 $38,192 $16,233 Adjustments to reconcile net income to net cash provided by operating activities: (Gain) loss on extinguishment of debt (2,154) - 1,308 Pension settlement and curtailment loss - 1,188 - (Gain) loss on sale of property, plant, and equipment (54) 123 7 Impairment loss - 149 301 Gain on postretirement plan termination - - (4,915)Loss (gain) on investments 7,100 - (2,000)Depreciation expense 3,105 3,237 2,638 Amortization of other intangible assets 1,907 1,781 1,451 Amortization of deferred financing costs 2,541 2,230 1,458 Deferred income taxes (1,485) 4,742 (3,400)Stock compensation expense 7,557 2,554 3,629 Noncash lease (income) expense (167) 370 357 Gain on MSA escrow deposits (255) - - Changes in operating assets and liabilities: Accounts receivable 3,317 (2,112) (3,464)Inventories (9) (8,004) 20,665 Other current assets (134) (5,373) (1,196)Other assets 996 2,076 (2,864)Accounts payable (2,367) (5,064) 6,608 Accrued postretirement liabilities - (54) (168)Accrued liabilities and other (2,943) 7,643 1,147 Net cash provided by operating activities $68,217 $43,678 $37,795 Cash flows from investing activities: Capital expenditures $(6,156) $(6,135) $(4,815)Acquisitions, net of cash acquired (16,416) (39,441) (7,704)Payments for investments (16,657) (19,250) (1,421)Restricted cash, MSA escrow deposits (19,664) - 29,718 Proceeds on sale of property, plant and equipment 54 3 123 Net cash (used in) provided by investing activities $(58,839) $(64,823) $15,901 65Table of ContentsTurning Point Brands, Inc. and SubsidiariesConsolidated Statements of Cash Flows (cont.)for the years ended December 31, 2021, 2020, and 2019(dollars in thousands) For the year ended December 31, 2021 2020 2019 Cash flows from financing activities: Proceeds from Senior Notes $250,000 $- $- Payments of 2018 first lien term loan (130,000) (16,000) (8,000)Settlement of interest rate swaps (3,573) - - Payments of 2018 second lien term loan - - (40,000)Payments of 2018 revolving credit facility - - (26,000)Proceeds from Convertible Senior Notes - - 172,500 Payment of promissory note (9,625) - - Payment of IVG note - (4,240) - Proceeds from unsecured note - 7,485 - Standard Diversified Inc. reorganization, net of cash acquired - (1,737) - Payments for call options - - (20,528)Payment of dividends (4,096) (3,802) (3,531)Payments of financing costs (6,921) (194) (7,117)Exercise of options 2,071 862 738 Redemption of options (2,111) (1,523) (12)Surrender of restricted stock - - (84)Common stock repurchased (38,678) (10,191) - Net cash provided by (used in) financing activities $57,067 $(29,340) $67,966 Net increase (decrease) in cash $66,445 $(50,485) $121,662 Effect of foreign currency translation on cash $191 $- $- Cash, beginning of period: Unrestricted 41,765 95,250 3,306 Restricted 35,074 32,074 2,356 Total cash at beginning of period 76,839 127,324 5,662 Cash, end of period: Unrestricted 128,320 41,765 95,250 Restricted 15,155 35,074 32,074 Total cash at end of period $143,475 $76,839 $127,324 Supplemental disclosures of cash flow information: Cash paid during the period for interest $12,539 $11,455 $11,828 Cash paid during the period for income taxes, net $16,063 $3,384 $11,332 Supplemental schedule of noncash financing activities: Issuance of note payable for acquisition $- $10,000 $- Dividends declared not paid $1,261 $1,099 $962 The accompanying notes are an integral part of the consolidated financial statements.66Table of ContentsTurning Point Brands, Inc. and SubsidiariesConsolidated Statements of Changes in Stockholders’ Equityfor the years ended December 31, 2021, 2020, and 2019(dollars in thousands) VotingShares CommonStock,Voting AdditionalPaid-InCapital Cost ofRepurchasedCommonStock AccumulatedOtherComprehensiveIncome (Loss) AccumulatedEarnings(Deficit) Non-ControllingInterest Total Beginning balance January 1, 2019 19,553,857 $196 $110,466 $- $(2,536) $(21,526) $- $86,600 Unrecognized pension and postretirement cost adjustment, net of tax of $136 - - - - (1,150) - - (1,150)Unrealized gain on MSA investments, net of tax of $351 - - - - 1,174 - - 1,174 Unrealized loss on derivative instruments, net of tax of $377 - - - - (1,261) - - (1,261)Stock compensation expense - - 3,600 - - - - 3,600 Restricted stock forfeitures (1,947) - (84) - - - - (84)Exercise of options 128,763 1 738 - - - - 739 Redemption of options - - (12) - - - - (12)Dividends - - - - - (3,579) - (3,579)Purchase of call options, net of tax of $5,195 - - (15,333) - - - - (15,333)Fair value of earn-out - - 1,155 - - - - 1,155 Net income - - - - - 16,233 - 16,233 Ending balance December 31, 2019 19,680,673 $197 $100,530 $- $(3,773) $(8,872) $- $88,082 Unrecognized pension and postretirement cost adjustment, net of tax of $57 - $- $- $- $1,830 $- $- $1,830 Unrealized loss on derivative instruments, net of tax of $233 - - - - (692) - - (692)Stock compensation expense - - 2,554 - - - - 2,554 Exercise of options 96,005 - 862 - - - - 862 Redemption of options - - (1,523) - - - - (1,523)Cost of repurchased common stock (398,670) - - (10,191) - - - (10,191)Standard Diversified Inc. reorganization, net (244,214) (2) - - - (1,735) - (1,737)Dividends - - - - - (3,940) - (3,940)ReCreation acquisition - - - - - - 4,050 4,050 Net income - - - - - 38,192 - 38,192 Ending balance December 31, 2020 19,133,794 $195 $102,423 $(10,191) $(2,635) $23,645 $4,050 $117,487 Unrealized loss on MSA investments, net of tax of $81 - $- $- $- $(272) $- $- $(272)Unrealized gain on derivative instruments, net of tax of $813 - - - - 2,634 - - 2,634 Foreign currency translation, net of tax of $0 - - - - 78 - 182 260 Stock compensation expense - - 7,557 - - - - 7,557 Exercise of options 158,420 2 2,069 - - - - 2,071 Redemption of options - - (2,111) - - - - (2,111)Cost of repurchased common stock (896,738) - - (38,678) - - - (38,678)Acquisition of ReCreation Marketing interest - - (1,127) - - - (1,123) (2,250)Dividends - - - - - (4,244) - (4,244)Net income - - - - - 52,059 (797) 51,262 Ending balance December 31, 2021 18,395,476 $197 $108,811 $(48,869) $(195) $71,460 $2,312 $133,716 The accompanying notes are an integral part of the consolidated financial statements.67Table of ContentsTurning Point Brands, Inc. and SubsidiariesNotes to Consolidated Financial Statements(dollars in thousands, except where designated and per share data)Note 1. Organizations and Basis of PresentationDescription of BusinessTurning Point Brands, Inc. and its Subsidiaries (collectively referred to herein as the “Company,” “we,” “our,” or “us”) is a leading manufacturer, marketer and distributor of branded consumer products.We sell a wide range of products to adult consumers consisting of staple products with our iconic brands Zig-Zag® and Stoker’s® to our next generation products to fulfill evolving consumer preferences.Our three focus segments are led by our core, proprietary brands: Zig-Zag® in the Zig-Zag Products segment; Stoker’s® along with Beech-Nut® and Trophy® in the Stoker’s Products segment; along withour distribution platforms (Vapor Beast®, VaporFi® and Direct Vapor®) and Solace ® in the NewGen Products segment. The Company’s products are available in more than 215,000 retail outlets in NorthAmerica. We operate in three segments: (i) Zig-Zag Products, (ii) Stoker’s Products, and (iii) NewGen Products.Basis of PresentationThe accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of financialstatements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the datesof the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The Company’s significant estimates includethose affecting the valuation of goodwill and other intangible assets, deferred income tax valuation allowances, the valuation of investments and the valuation of inventory, including reserves.Certain prior year amounts have been reclassified to conform to the current year’s presentation. The changes did not have an impact on the Company’s consolidated financial position, results ofoperations, or cash flows in any of the periods presented.Note 2. Summary of Significant Accounting PoliciesConsolidationThe 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 theprimary beneficiary. All significant intercompany transactions have been eliminated.GAAP requires the Company to identify entities for which control is achieved through means other than voting rights and to determine whether the Company is the primary beneficiary of VIEs. A VIE isbroadly defined as an entity with one or more of the following characteristics: (a) the total equity investment at risk is insufficient to finance the entity’s activities without additional subordinated financialsupport; (b) as a group, the holders of the equity investment at risk lack (i) the ability to make decisions about the entity’s activities through voting or similar rights, (ii) the obligation to absorb theexpected losses of the entity, or (iii) the right to receive the expected residual returns of the entity; and (c) the equity investors have voting rights that are not proportional to their economic interests, andsubstantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately few voting rights. The Company consolidates its investment in a VIE when itdetermines that it is the VIE’s primary beneficiary. The Company may change its original assessment of a VIE upon subsequent events such as the modification of contractual arrangements that affects thecharacteristics or adequacy of the entity’s equity investments at risk and the disposition of all or a portion of an interest held by the primary beneficiary.The primary beneficiary of a VIE as the entity that has both: (i) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance; and (ii) the obligation to absorblosses or the right to receive benefits of the VIE that could be significant to the entity. The Company performs this analysis on an ongoing basis.Management of the Company has determined that Turning Point Brands Canada (formerly ReCreation Marketing) is a VIE for which the Company is considered the primary beneficiary due to the power theCompany has over the activities that most significantly impact the economic performance of Turning Point Brands Canada and the right to receive benefits and the obligation to absorb losses of TurningPoint Brands Canada through the Company’s 65% equity interest, additional subordinated financing provided by the Company to Turning Point Brands Canada and the distribution agreement withTurning Point Brands Canada for the sale of the Company’s products that makes up substantially all of Turning Point Brands Canada’s business activities. See Note 3, “Acquisitions” for further detailsregarding the consolidation of Turning Point Brands Canada.68Table of ContentsRevenue RecognitionThe Company recognizes revenues in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (Topic 606), which includes excise taxes and shipping andhandling charges billed to customers, net of cash discounts for prompt payment, sales returns and sales incentives, upon delivery of goods to the customer—at which time the Company’s performanceobligation 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 withthe 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 onsmokeless 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 Companyrecords sales incentives, which consist of consumer incentives and trade promotion activities, as a reduction in revenues (a portion of which is based on amounts estimated as being due to wholesalers,retailers and consumers at the end of the period) based principally on historical volume and utilization rates. Expected payments for sales incentives are included in accrued liabilities on the consolidatedbalance sheets.A further requirement of ASC 606 is for entities to disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenueand cash flows are affected by economic factors. Company management views business performance through segments that closely resemble the performance of major product lines. Thus, the primary andmost useful disaggregation of the Company’s contract revenue for decision making purposes is the disaggregation by segment which can be found in Note 21, “Segment Information”. An additionaldisaggregation of contract revenue by sales channel can be found within Note 21 as well.Derivative InstrumentsForeign Currency Forward Contracts: The Company enters into foreign currency forward contracts to hedge a portion of its exposure to changes in foreign currency exchange rates on inventorypurchase 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% ofits 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 ninety percent of itsnon-inventory purchases in the denominated invoice currency. Forward contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by marketprices on the measurement date, except any hedge ineffectiveness which is recognized currently in income. Gains and losses on these forward contracts are transferred from other comprehensive incomeinto 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 notdesignated as hedges are recognized currently in income.Interest Rate Swap Agreements: The Company enters into interest rate swap contracts to manage interest rate risk and reduce the volatility of future cash flows. The Company accounts for its interest rateswap contracts under the provisions of ASC 815, Derivatives and Hedging. Swap contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined bymarket prices on the measurement date, except any hedge ineffectiveness which is recognized currently in income. Gains and losses on these swap contracts are transferred from other comprehensiveincome into net income upon settlement of the derivative position or at maturity of the interest rate swap contract. Changes in fair value of any contracts that do not qualify for hedge accounting or are notdesignated as hedges are recognized currently in income.Shipping CostsThe Company records shipping costs incurred as a component of selling, general and administrative expenses. Shipping costs incurred were approximately $27.6 million, $22.8 million, and $18.1 million in2021, 2020, and 2019, respectively.Research and Development and Quality Assurance CostsResearch and development and quality assurance costs are expensed as incurred. These expenses, classified as selling, general and administrative expenses, were approximately $1.1 million, $1.3 million,and $2.5 million in 2021, 2020, and 2019, respectively.Cash and Cash EquivalentsThe Company considers any highly liquid investments with a maturity of three months or less from the date of purchase to be cash equivalents.69Table of ContentsInventoriesInventories are stated at the lower of cost or net realizable value. Cost was determined using the first-in, first-out (“FIFO”) method. Leaf tobacco is presented in current assets in accordance with standardindustry practice, notwithstanding the fact that such tobaccos are carried longer than one year for the purpose of curing.Property, Plant and EquipmentProperty, Plant and Equipment are stated at cost less accumulated depreciation and impairment. Depreciation is provided using the straight-line method over the lesser of the estimated useful lives of theassets or the life of the leases for leasehold improvements (4 to 7 years for machinery, equipment and furniture, 10 to 15 years for leasehold improvements, and up to 15 years for buildings and buildingimprovements). Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and improvements are capitalized and depreciated over their estimated usefullives. Upon disposition of fixed assets, the costs and related accumulated depreciation amounts are relieved. Any resulting gain or loss is reflected in operations during the period of disposition. Long-lived assets are reviewed for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable.Goodwill and Other Intangible AssetsThe Company follows the provisions of ASC 350, Intangibles – Goodwill and Other in accounting for goodwill and other intangible assets. Goodwill and indefinite-lived intangible assets are reviewed forimpairment annually on December 31, or more frequently if certain indicators are present, in accordance with ASC 350-20-35 and ASC 350-30-35, respectively. If the carrying value of a reporting unitincluding goodwill exceeds its fair value, which is determined using the discounted cash flows, goodwill is considered impaired. The amount of impairment loss is measured as the difference between thecarrying value and the fair value of the reporting unit but is limited to the total goodwill allocated to the reporting unit. If the carrying value of an indefinite-life intangible asset exceeds its fair value, whichis determined using discontinued cash flows or relief-from-royalty, the intangible asset is considered impaired and is reduced to fair value. For goodwill, the determination of a reporting unit’s fair valueinvolves, among other things, the Company’s market capitalization and application of the income approach, which includes developing forecasts of future cash flows and determining an appropriatediscount rate.Based on the Company’s annual goodwill impairment testing, the estimated fair values of each of our reporting units were in excess of the respective carrying values at December 31, 2021. The Companyhad no such impairment of goodwill or other intangible assets during the year ended December 31, 2021. However, there could be an impairment of the goodwill of the NewGen reporting unit if futurerevenues do not achieve our expected future cash flows or if macroeconomic conditions result in future increases in the weighted average cost of capital used to estimate fair value. See Note 10, “Goodwilland Other Intangible Assets”, for further details regarding the Company’s goodwill and other intangible assets as of December 31, 2021.Fair ValueGAAP 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 thehighest 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.70Table of ContentsRetirement PlansThe Company follows the provisions of ASC 715, Compensation – Retirement Benefits. ASC 715-30, Defined Benefit Plans – Pensions, which requires an employer to (a) recognize in its statement offinancial position the funded status of a benefit plan, measured as the difference between the fair value of plan assets and benefit obligations, (b) recognize net of tax, the gains or losses and prior servicecosts or credits that arise during the period but are not recognized as components of net periodic benefit cost, and (c) measure defined benefit plan assets and obligations as of the date of the employer’sstatement of financial position.Deferred Financing CostsDeferred financing costs are amortized over the terms of the related debt obligations using the effective interest method. Unamortized amounts are expensed upon extinguishment of the related borrowings.Deferred financing costs are presented as a direct deduction from the carrying amount of that debt liability except for deferred financing costs relating to our revolving credit facility, which are presented asan asset.Income TaxesThe Company records the effects of income taxes under the liability method in which deferred income tax assets and liabilities are recognized based on the difference between the financial and tax basis ofassets and liabilities using the enacted tax rates in effect for the years in which the differences are expected to reverse. The Company assesses its ability to realize future benefits of deferred tax assets bydetermining if they meet the “more likely than not” criteria in ASC 740, Income Taxes. If the Company determines that future benefits do not meet the “more likely than not” criteria, a valuation allowance isrecorded.Advertising and PromotionAdvertising and promotion costs, including point of sale materials, are expensed as incurred and amounted to $12.1 million, $5.2 million, and $12.0 million for the years ended December 31, 2021, 2020, and2019, respectively.Stock-Based CompensationThe Company measures stock-based compensation costs related to its stock options on the fair value-based method under the provisions of ASC 718, Compensation – Stock Compensation. The fairvalue-based method requires compensation cost for stock options to be recognized over the requisite service period based on the fair value of stock options granted. The Company determined the fairvalue of these awards using the Black-Scholes option pricing model.The Company grants performance-based restricted stock units (“PRSU”) subject to both performance-based and service-based vesting conditions. The fair value of each PRSU is the Company’s stockprice on the date of grant. For purposes of recognizing compensation expense as services are rendered in accordance with ASC 718, the Company assumes all employees involved in the PRSU grant willprovide service through the end of the performance period. Stock compensation expense is recorded based on the probability of achievement of the performance conditions specified in the PRSU grant.The Company grants restricted stock units (“RSU”) subject to service-based vesting conditions. The fair value of each RSU is the Company’s stock price on the date of grant. The Company recognizescompensation expense as services are rendered in accordance with ASC 718. Stock compensation expense is recorded over the service period in the RSU grant.Risks and UncertaintiesManufacturers 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, andprohibition 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 tobaccoproducts 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’sfinancial 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 numberand 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. 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 remainunclear.71Table of ContentsThe tobacco industry has experienced and is experiencing significant product liability litigation. Most tobacco liability lawsuits have been brought against manufacturers and sellers of cigarettes forinjuries 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 byuse 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 anddistributors of NewGen products due to malfunctioning devices. There can be no assurance the Company will not sustain losses in connection with such lawsuits and that such losses will not have amaterial adverse effect on the Company’s financial position, results of operations, or cash flows.Master Settlement Agreement (MSA): Forty-six states, certain U.S. territories, and the District of Columbia are parties to the Master Settlement Agreement (“MSA”) and the Smokeless Tobacco MasterSettlement Agreement (“STMSA”). To the Company’s knowledge, signatories to the MSA include 49 cigarette manufacturers and/or distributors. The only signatory to the STMSA is US SmokelessTobacco Company. In the Company’s opinion, the fundamental basis for each agreement is the states’ consents to withdraw all claims for monetary, equitable, and injunctive relief against certain tobaccoproducts manufacturers and others and, in return, the signatories have agreed to certain marketing restrictions and regulations as well as certain payment obligations.Pursuant to the MSA and subsequent states’ statutes, a “cigarette manufacturer” (which is defined to also include MYO cigarette tobacco) has the option of either becoming a signatory to the MSA oropening, funding, and maintaining an escrow account, with sub-accounts on behalf of each settling state. The STMSA has no similar provisions. The MSA escrow accounts are governed by states’statutes that expressly give the manufacturers the option of opening, funding, and maintaining an escrow account in lieu of becoming a signatory to the MSA. The statutes require companies who are notsignatories to the MSA to deposit, on an annual basis, into qualified banks, escrow funds based on the number of cigarettes or cigarette equivalents, i.e., the pounds of MYO tobacco, sold. The purposeof these statutes is expressly stated to be to eliminate the cost disadvantage the settling manufacturers have as a result of entering into the MSA. Such companies are entitled to direct the investment ofthe 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 anindividual state’s escrow statute to pay a final judgment to that state’s plaintiffs in the event of such a final judgment against the company. Either option – becoming an MSA signatory or establishing anescrow account – is permissible.The Company chose to open and fund an MSA escrow account as its means of compliance. It is management’s opinion, due to the possibility of future federal or state regulations, though none have todate been enacted, that entering into one or both of the settlement agreements or establishing and maintaining an escrow account would not necessarily prevent future regulations from having a materialadverse effect on the results of operations, financial position, and cash flows of the Company.Various states have enacted or proposed complementary legislation intended to curb the activity of certain manufacturers and importers of cigarettes that are selling into MSA states without signing theMSA or who have failed to properly establish and fund a qualifying escrow account. To the best of the Company’s knowledge, no such statute has been enacted which could inadvertently and negativelyimpact the Company, which has been, and is currently, fully compliant with all applicable laws, regulations, and statutes. However, there can be no assurance that the enactment of any such complementarylegislation in the future will not have a material adverse effect on the results of operations, financial position, or cash flows of the Company.Pursuant to the MSA escrow account statutes, in order to be compliant with the MSA escrow requirements, companies selling products covered by the MSA are required to deposit such funds for eachcalendar year into a qualifying escrow account by April 15 of the following year. At December 31, 2021, the Company had on deposit approximately $32.1 million, the fair value of which was approximately$31.7 million. At December 31, 2020, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $32.1 million. Inputs to the valuation methodology of the MSAescrow deposits when funds are invested include unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date. During 2021, no monies were deposited into thisqualifying escrow account. The investment vehicles available to the Company are specified in the state escrow agreements and are limited to low-risk government securities.The Company discontinued its generic category of MYO in 2019 and its Zig-Zag branded MYO cigarette smoking tobacco in 2017. Thus, pending a change in MSA legislation, the Company has noremaining product lines covered by the MSA and will not be required to make future escrow deposits.The Company has chosen to invest a portion of the MSA escrow, from time to time, in U.S. Government securities including TIPS, Treasury Notes, and Treasury Bonds. These investments are classified asavailable-for-sale and carried at fair value. Realized losses are prohibited under the MSA; thus, any investment with an unrealized loss position will be held until the value is recovered, or until maturity.72Table of ContentsFair values for the U.S. Governmental agency obligations are Level 2 in the fair value hierarchy. The following tables show cost and estimated fair value of the assets held in the MSA account, respectively,as well as the maturities of the U.S. Governmental agency obligations held in such account for the periods indicated. As of December 31, 2021 As of December 31,2020 Cost GrossUnrealizedGains GrossUnrealizedLosses EstimatedFairValue Cost and EstimatedFair Value Cash and cash equivalents $12,155 $- $- $12,155 $32,074 U.S. Governmental agency obligations (unrealized gain position < 12 months) 19,918 4 (357) 19,565 - Total $32,073 $4 $(357) $31,720 $32,074 As of December 31, 2021 Less than one year $- One to five years 5,996 Five to ten years 12,966 Greater than ten years 956 Total $19,918 The following shows the amount of deposits by sales year for the MSA escrow account:Sales Deposits as of December 31, Year 2021 2020 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 83 Total $32,073 $32,074 73Table of ContentsFederal Excise Taxes: Tobacco products, cigarette papers, and cigarette tubes are subject to federal excise taxes.Any future increases in federal excise taxes on the Company’s products could have a material adverse effect on the results of operations or financial condition of the Company. The Company is unable topredict the likelihood of passage of future increases in federal excise taxes. As of December 31, 2021, federal excise taxes are not assessed on e-cigarettes and related products.As of December 31, 2021, approximately half of the states and certain localities impose excise taxes on electronic cigarettes and/or liquid vapor. In addition, there are several local taxing jurisdictions with anexcise tax on e-cigarettes. Several states have also implemented additional measures on e-cigarettes, such as licensing requirements.FDA: On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”) authorized the FDA to immediately regulate the manufacture, sale, and marketing of four categories oftobacco 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 FDAthe authority to also regulate cigars, pipe tobacco, e-cigarettes, vaporizers, and e-liquids as “deemed” tobacco products under the FSPTCA.The FDA assesses tobacco product user fees on six classes of regulated tobacco products and computes user fees using a methodology similar to the methodology used by the U.S Department ofAgriculture to compute the Tobacco Transition Payment Program (“TTPP,” also known as the “Tobacco Buyout”) assessment. First, the total, annual, congressionally established user fee assessment isallocated 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 tobaccoproducts is divided among individual manufacturers and importers.In August 2016, the FDA’s regulatory authority under the Tobacco Control Act (the “TCA”) was extended to all tobacco products not previously covered, including: (i) certain NewGen products (such aselectronic cigarettes, vaporizers and e-liquids) and their components or parts (such as tanks, coils and batteries); (ii) cigars and their components or parts (such as cigar tobacco); (iii) pipe tobacco; (iv)hookah products; and (v) any other tobacco product “newly deemed” by the FDA. These “deeming regulations” apply to all products made or derived from tobacco intended for human consumption, butexcluding 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-derivednicotine and products intended or reasonably expected to be used to consume such e-liquids.Under the deeming regulations, the FDA has responsibility for conducting premarket review of “new tobacco products”—defined as those products not commercially marketed in the United States as ofFebruary 15, 2007. There are three pathways for obtaining premarket authorization, including submission of a premarket tobacco product application (“PMTA”).We submitted premarket filings prior to the September 9, 2020 deadline for certain of our products and have continued to supplement these applications with additional information. A successful PMTAmust 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 SubstantialEquivalence 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. TheFDA 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 toillegally sell those unauthorized products, as well as products for which manufacturers failed to submit a marketing application.The FDA has issued a number of rules related to premarket filings; however, those rules were not finalized prior to the September 9, 2020, deadline. On October 5, 2021, the FDA finalized two rules related tothe Substantial Equivalence process and the Premarket Tobacco Product Application process, respectively, which both became effective November 4, 2021. Both Final Rules indicate that any new oradditional requirements will not retroactively apply to currently pending PMTAs; however, the information outlined in the rule remains important to the FDA’s substantive review of an application. Webelieve 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 orregulations 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 usfrom 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. On September 14,2021, the FDA issued a Marketing Denial Order (“MDO”) for certain of the Company’s proprietary e-liquid products subject of these PMTAs. The Company filed a Petition for Review in the Sixth CircuitCourt of Appeals on September 23, 2021, followed by an Emergency Motion for a Stay Pending Review on September 30, 2021. On October 7, 2021, we were informed that the FDA had rescinded itsSeptember 14, 2021, MDO. We therefore withdrew both the Petition and Emergency Stay on October 8, 2021. The Rescission Letter indicated that FDA had found additional relevant information that wasnot adequately assessed. 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 theprioritization of supplementing or completing applications for high priority SKUs in our inventory position, which could adversely impact future revenues. At the time of receipt of the MDO, the Companyquarantined approximately $0.7 million in aggregate inventories of the affected products or materials subject to the MDO, which were subsequently released, once the FDA rescinded the MDO.74Table of ContentsIn 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 canbe 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 regulatorycompliance 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 themarketplace or can fully displace third-party products that are currently being distributed by us, which could adversely affect our results of operations and liquidity. For a period of time after the filingdeadline, we expect there to be a lack of enforcement, which may adversely affect our ability to compete in the marketplace against those who continue to sell unauthorized products.On April 29, 2021, the FDA announced plans to propose two tobacco product standards related to combusted tobacco products: (1) a ban on menthol as a characterizing flavor in cigarettes; and (2) a banon all characterizing flavors (including menthol) in cigars. These product standards are required to go through the formal rulemaking process where we would have the opportunity to comment on theproposed rule with regard to any impact on any of our products. The FDA’s policy on these and other regulated products may change or expand over time in ways not yet known and may significantlyimpact 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 theJenkins 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 clarifyingthe 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 tocarry the affected freight. Failure to comply with the PACT Act could result in significant financial or criminal penalties. To the extent we are unable to respond to, or comply with, these new requirements,we could lose our shipping exemptions, be subject to civil or criminal penalties, or there could be a material adverse effect on our business, results of operations and financial condition.Concentration of Credit Risk: At December 31, 2021 and 2020, the Company had bank deposits, including MSA escrow accounts, in excess of federally insured limits of approximately $137.2 million and$69.7 million, respectively. During 2021, the Company invested a portion of the MSA escrow accounts in U.S. Government securities including TIPS, Treasury Notes, and Treasury Bonds.The Company sells its products to distributors, retail establishments, and consumers throughout the United States and also sells Zig-Zag® premium cigarette papers in Canada and some smaller quantitiesin other countries. The Company had no customers that accounted for more than 10% of net sales for 2021, 2020, or 2019. The Company performs periodic credit evaluations of its customers and generallydoes not require collateral on trade receivables. Historically, the Company has not experienced significant credit losses.Accounts ReceivableAccounts receivable are recognized at their net realizable value. All accounts receivable are trade related, recorded at the invoiced amount, and do not bear interest. The Company maintains allowances fordoubtful accounts receivable for estimated uncollectible invoices resulting from a customer’s inability to pay (bankruptcy, out of business, etc., i.e. “bad debt” which results in write-offs). The activity ofallowance for doubtful accounts during 2021 and 2020 is as follows: December 31,2021 December 31,2020 Balance at beginning of period $150 $280 Additions to allowance account during period 237 86 Deductions of allowance account during period (125) (216)Balance at end of period $262 $150 Recent Accounting Pronouncements AdoptedIn December 2019, the FASB issued Accounting Standards Update (“ASU”) 2019-12 to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approachfor intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies andsimplifies other areas of ASC 740. This ASU became effective beginning in the first quarter of the Company’s fiscal year 2021. Certain amendments in this update must be applied on a prospective basis,certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retainedearnings/(deficit) in the period of adoption. The ASU was effective for the Company beginning in the first quarter of 2021. The ASU did not have an impact to the Company’s financial statements andrelated disclosures.75Table of ContentsIn August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40)(“ASU 2020-06”). This guidance simplifies the accounting for convertible debt instruments by reducing the number of accounting models and the number of embedded conversion features that could berecognized separately from the convertible instrument. This guidance also enhances transparency and improves disclosures for convertible instruments and earnings per share guidance. This ASU iseffective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning afterDecember 15, 2020. This update permits the use of either the modified retrospective or fully retrospective method of transition. The Company early adopted this ASU effective January 1, 2021 using the fullretrospective method of transition. The adoption resulted in a $7.1 million increase in Accumulated earnings, a $24.2 million increase in Notes payable and long-term debt, a $6.3 million decrease in deferredincome taxes and a $24.9 million decrease in Additional paid-in capital as of December 31, 2020, and a $2.2 million decrease in Accumulated deficit and a $24.9 million decrease in Additional paid-in capitalas of December 31, 2019. Interest expense decreased by $6.7 million annually and weighted average diluted common shares outstanding increased by approximately 3.2 million shares.Change in Accounting PrincipleEffective January 1, 2021, the Company changed its method of accounting for inventory from the LIFO method to the FIFO method. Costs determined using the LIFO method would have been utilized onapproximately 45.1% and 49.4% of inventories at December 31, 2020 and 2019, respectively, prior to this change in method, and consisted primarily of tobacco inventory. The Company believes the FIFOmethod is preferable because it: (i) conforms the accounting for all inventory with the method utilized for the majority of its inventory; (ii) better represents how management assesses and reports on theperformance of the tobacco and other LIFO product lines as LIFO is excluded from management’s economic decision making; (iii) better aligns the accounting with the physical flow of that inventory; and(iv) better reflects inventory at more current costs. The Company applied this change retrospectively to all prior periods presented. This change resulted in a $6.1 million increase in inventories, a $1.6million decrease in deferred taxes and a $4.5 million increase in Accumulated earnings as of December 31, 2020, and a $5.8 million increase in inventories, a $1.5 million decrease in deferred taxes and a $4.3million decrease in Accumulated deficit as of December 31, 2019.All prior periods presented in the consolidated financial statements have previously been retrospectively adjusted to apply the effects of the change in accounting principle from the LIFO method to theFIFO method of accounting and the adoption of ASU 2020-06.Note 3. AcquisitionsUnitabacIn July 2021, the Company acquired certain assets of Unitabac, a marketer of mass-market cigars, for $10.7 million in total consideration, comprised of $9.6 million in cash and $1.1 million of capitalizedtransaction costs. The acquisition is comprised of a portfolio of cigarillo products and all related intellectual property, including Cigarillo Non-Tip (NT) Homogenized Tobacco Leaf (HTL) products andRolled Leaf and Natural Leaf Cigarillo Products. The transaction was accounted for as an asset purchase with $10.0 million assigned to intellectual property, which has an indefinite life, and $0.7 millionassigned to inventory. The intellectual property asset is deductible for tax purposes.76Table of ContentsDirect Value WholesaleIn April 2021, Turning Point Brands Canada, a VIE for which the Company is considered the primary beneficiary, purchased 100% of the equity interests of Westhem Ventures LTD d/b/a Direct ValueWholesale (“DVW”) for $3.9 million, net of cash acquired, with $3.5 million paid in cash at closing and $0.5 million in accrued consideration paid during 2021. DVW is a Canadian distribution entity thatoperates in markets not primarily served by Turning Point Brands Canada. The acquisition expands Turning Point Brands Canada’s markets in Canada. On April 13, 2021, in connection with the acquisitionof DVW, the Company provided a $3.7 million unsecured loan to Turning Point Brands Canada bearing interest at 8% per annum and maturing April 13, 2023. The unsecured loan is eliminated in theconsolidation of Turning Point Brands Canada. As of December 31, 2021, Turning Point Brands Canada had not completed the accounting for the acquisition. The following table summarizes theconsideration transferred and calculation of goodwill based on excess of the acquisition price over the estimated fair value of the identifiable net assets acquired and are based on management’spreliminary estimates:Total consideration transferred $3,462 Adjustments to consideration transferred: Cash acquired (43)Accrued consideration 472 Adjusted consideration transferred 3,891 Assets acquired: Working capital (primarily AR and inventory) 1,334 Fixed assets and Other long term assets 27 Net assets acquired $1,361 Goodwill $2,530 The goodwill of $2.5 million consists of the synergies expected from combining the operations and is deductible for tax purposes.Turning Point Brands Canada (formerly ReCreation Marketing)In July 2019, the Company obtained a 30% stake in a Canadian distribution entity, Turning Point Brands Canada for $1 million paid at closing. In November 2020, the Company invested an additional $1million related to our 30% stake. In November 2020, the Company also invested an additional $2 million increasing its ownership interest to 50%. The Company received board seats aligned with ourownership position. The Company also provided a $2.0 million unsecured loan to Turning Point Brands Canada bearing interest at 8% per annum and maturing November 19, 2022. As discussed in Note 2,the Company has determined that Turning Point Brands Canada is a VIE due its required subordinated financial support. The Company has determined it is the primary beneficiary due its 50% equityinterest, additional subordinated financing and distribution agreement with Turning Point Brands Canada for the sale of the Company’s products. As a result, the Company began consolidating TurningPoint Brands Canada effective November 2020. The Company completed the accounting for the acquisition during the fourth quarter of 2021. The following table summarizes the consideration transferredand calculation of goodwill based on excess of the acquisition price over the estimated fair value of the identifiable net assets acquired:Total consideration transferred $4,000 Adjustments to consideration transferred: Cash acquired (3,711)Working capital 418 Debt eliminated in consolidation 2,000 Adjusted consideration transferred 2,707 Assets acquired: Working capital (primarily AR and inventory) 1,551 Fixed assets and Other long term assets 70 Other liabilities (203)Non-controlling interest (4,050)Net assets acquired $(2,632) Goodwill $5,339 The goodwill of $5.3 million consists of the synergies expected from combining the operations and is currently not deductible for tax purposes.In July 2021, the Company invested an additional $2.3 million in Turning Point Brands Canada increasing its ownership interest to 65%. The Company received board seats aligned with its ownershipposition. The Company has determined that Turning Point Brands Canada continues to be a VIE due to its required subordinated financial support. The Company has determined it remains the primarybeneficiary due to its 65% equity interest, additional subordinated financing and distribution agreement with Turning Point Brands Canada for the sale of the Company’s products. As a result of theCompany remaining the primary beneficiary, the increase in ownership interest resulted in a decrease in Non-controlling interest of $1.1 million and a decrease in Additional paid-in capital of $1.1 million.77Table of ContentsStandard Diversified Inc. (“SDI”) ReorganizationOn July 16, 2020, the Company completed its merger with SDI, whereby SDI was merged into a wholly-owned subsidiary of the Company in a tax-free downstream merger. Under the terms of the merger, theholders of SDI’s Class A Common Stock and SDI’s Class B Common Stock (collectively, “SDI Common Stock”) received in the aggregate, in return for their SDI Common Stock, TPB Voting Common Stock(“TPB Common Stock”) at a ratio of 0.52095 shares of TPB Common Stock for each share of SDI Common Stock at the time of the merger. SDI divested its assets, other than SDI’s TPB Common Stock, priorto close such that the net liabilities at closing were minimal and the only assets that SDI retained were the remaining TPB Common Stock holdings. The transaction was accounted for as an asset purchasefor $236.0 million in consideration, comprised of 7,934,704 shares of TPB Common Stock valued at $234.3 million plus transaction costs and assumed net liabilities. The $236.0 million was assigned to the8,178,918 shares of TPB Common Stock acquired. The 244,214 shares of TPB Common Stock acquired in excess of the shares issued were retired resulting in a charge of $1.7 million recorded inAccumulated earnings. The Company no longer has a controlling shareholderDurfort HoldingsIn June 2020, the Company purchased certain tobacco assets and distribution rights from Durfort Holdings S.R.L. (“Durfort”) and Blunt Wrap USA for $47.7 million in total consideration, comprised of$37.7 million in cash, including $1.7 million of capitalized transaction costs, and a $10.0 million unsecured subordinated promissory note (“Promissory Note”). With this transaction, the Company acquiredco-ownership in the intellectual property rights of all of Durfort’s and Blunt Wrap USA’s Homogenized Tobacco Leaf (“HTL”) cigar wraps and cones. The Company also entered into an exclusive MasterDistribution Agreement to market and sell the original Blunt Wrap® cigar wraps within the USA which was effective October 9, 2020. Durfort is an industry leader in alternative cigar and cigar wrapmanufacturing and distribution. Blunt Wrap USA has been an innovator of new products in the smoking alternative market since 1997 and has secured patents in the USA and internationally for novelsmoking wrappers and cones. The transaction was accounted for as an asset purchase with $42.2 million assigned to intellectual property, which has an indefinite life, and $5.5 million assigned to theMaster Distribution Agreement, which has a 15 year life. Both assets are currently deductible for tax purposes.Note 4. Derivative InstrumentsForeign CurrencyThe Company’s policy is to manage the risks associated with foreign exchange rate movements. The policy allows hedging up to 100% of its anticipated purchases of inventory over a forward period thatwill not exceed 12 rolling and consecutive months. The Company may, from time to time, hedge currency for non-inventory purchases, e.g., production equipment, not to exceed 90% of the purchase price.The Company did not execute any forward contracts during 2021. During 2020, the Company executed various forward contracts, which met hedge accounting requirements, for the purchase of €19.7million and sale of €21.4 million with maturity dates ranging from December 2020 to November 2021. At December 31, 2021, the Company had no forward contracts. At December 31, 2020, the Company hadforward contracts for the purchase of €18.0 million and sale of €19.6 million. The foreign currency contracts’ fair value at December 31, 2020, resulted in an asset of $0.4 million included in Other currentassets and a liability of $0.0 million included in Accrued liabilities.Interest Rate SwapsThe Company’s policy is to manage interest rate risk by reducing the volatility of future cash flows associated with debt instruments bearing interest at variable rates. In March 2018, the Companyexecuted various interest rate swap agreements for a notional amount of $70 million with an expiration of December 2022. The swap agreements fix LIBOR at 2.755%. The swap agreements met the hedgeaccounting requirements; thus, any change in fair value is recorded to other comprehensive income. The Company uses the Shortcut Method to account for the swap agreements. The Shortcut Methodassumes the hedge to be perfectly effective; thus, there is no ineffectiveness to be recorded in earnings. The swap agreements’ fair values at December 31, 2020, resulted in a liability of $3.7 millionincluded in other long-term liabilities. Losses of $0.1 million, $1.5 million and $0.3 million were reclassified into interest expense for the year ending December 31, 2021, 2020 and 2019 respectively. TheCompany terminated the interest rate swap agreements in conjunction with the prepayment of all outstanding amounts under the 2018 First Lien Credit Facility (as defined below) in the first quarter of 2021with the early termination payment made by the Company in the amount of $3.6 million which was reclassified out of accumulated other comprehensive loss into loss on extinguishment of debt.78Table of ContentsNote 5. Fair Value of Financial InstrumentsThe 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 todevelop 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 differentmarket assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.Cash and Cash EquivalentsCash and cash equivalents are, by definition, short-term. Thus, the carrying amount is a reasonable estimate of fair value.Accounts ReceivableThe fair value of accounts receivable approximates their carrying value due to their short-term nature.Note Payable – Promissory NoteThe Company’s Promissory Note bore interest at a rate of 7.5% per year. The fair value of the Promissory Note approximated its carrying value of $10.0 million at December 31, 2020, due to the recency ofthe note’s issuance, related to the year ended December 31, 2020. The Company prepaid all outstanding amounts under the Promissory Note in the third quarter of 2021.Note Payable – Unsecured LoanThe Company’s Unsecured Note bore interest at a rate of 1.0% per year. The fair value of the Unsecured Note approximated its carrying value of $7.5 million at December 31, 2020, due to the recency of thenote’s issuance, related to the year ended December 31, 2020. The Unsecured Note was forgiven in the fourth quarter of 2021.Long-Term DebtThe Company’s Senior Secured Notes (as defined below) bear interest at a rate of 5.625% per year and the fair value of the Senior Secured Notes approximate its carrying value of $250 million due to therecency of the notes’ issuance, related to the year ended December 31, 2021.The Company’s 2018 Credit Facility bore interest at variable rates that fluctuated with market rates. The carrying values of the 2018 Credit Facility approximated its respective fair values. As of December31, 2020, the fair value of the 2018 First Lien Term Loan approximated $130.0 million. The Company prepaid all outstanding amounts under the 2018 First Lien Credit Facility in the first quarter of 2021.The Convertible Senior Notes bear interest at a rate of 2.50% per year. As of December 31, 2021, the fair value approximated $159.8 million, with a carrying value of $172.5 million. As of December 31, 2020,the fair value approximated $155.3 million, with a carrying value of $172.5 million.See Note 13, “Notes Payable and Long-Term Debt”, for further information regarding the Company’s long-term debt.Foreign ExchangeAt December 31, 2021, the Company had no forward contracts. As there were no open contracts as of December 31, 2021, there is no resulting balance sheet position related to the fair value. At December31, 2020, the Company had forward contracts for the purchase of €18.0 million and sale of €19.6 million. The fair value of the foreign exchange contracts are based upon quoted market prices for similarinstruments, thus leading to a level 2 distinction within the fair value hierarchy, and resulted in an asset of $0.4 million and a liability of $0.0 million as of December 31, 2020.Interest Rate SwapsThe Company had swap contracts for a total notional amount of $70 million at December 31, 2020. The fair values of the swap contracts were based upon quoted market prices for similar instruments, thusleading to a level 2 distinction within the fair value hierarchy, and resulted in a liability of $3.7 million as of December 31, 2020. The Company terminated the swap contracts in conjunction with theprepayment of all outstanding amounts under the 2018 First Lien Credit Facility in the first quarter of 2021.79Table of ContentsNote 6. InventoriesThe components of inventories are as follows: December 31,2021 December 31,2020 Raw materials and work in process $6,936 $8,137 Leaf tobacco 35,900 32,948 Finished goods - Zig-Zag Products 25,663 14,903 Finished goods - Stoker’s Products 8,959 9,727 Finished goods - NewGen Products 8,591 18,916 Other 1,558 1,225 Inventories $87,607 $85,856 The following represents the inventory valuation allowance roll-forward, for the years ended December 31: 2021 2020 Balance at beginning of period $(9,924) $(21,502)Charged to cost and expense (2,795) (2,867)Deductions for inventory disposed 5,051 14,445 Balance at end of period $(7,668) $(9,924)Note 7. Other Current AssetsOther current assets consists of: December 31,2021 December 31,2020 Inventory deposits $12,091 $7,113 Insurance deposit 3,000 3,000 Prepaid taxes - 813 Other 11,655 15,525 Total $26,746 $26,451 80Table of ContentsNote 8. Property, Plant and EquipmentProperty, plant and equipment consists of: December 31,2021 December 31,2020 Land $22 $22 Buildings and improvements 3,096 2,750 Leasehold improvements 5,374 4,702 Machinery and equipment 19,591 15,612 Furniture and fixtures 9,402 9,025 Gross property, plant and equipment 37,485 32,111 Accumulated depreciation (18,835) (16,587)Net property, plant and equipment $18,650 $15,524 Note 9. Deferred Financing CostsDeferred financing costs relating to the 2018 Revolving Credit Facility (which was terminated in February 2021) and the 2021 Revolving Credit Facility consist of: December 31,2021 December 31,2020 Deferred financing costs, net of accumulated amortization of $94 and $705, respectively $388 $641 81Table of ContentsNote 10. Goodwill and Other Intangible AssetsThe following table summarizes goodwill by segment: Zig-Zag Stoker’s NewGen Total Balance as of December 31, 2019 $96,107 $32,590 $25,585 $154,282 Acquisitions 5,339 - - 5,339 Balance as of December 31, 2020 $101,446 $32,590 $25,585 $159,621 Acquisitions 2,530 - - 2,530 Cumulative translation adjustment 182 - - 182 Balance as of December 31, 2021 $104,158 $32,590 $25,585 $162,333 The following tables summarize information about the Company’s allocation of other intangible assets. Gross carrying amounts of unamortized, indefinite life intangible assets are shown below: December 31, 2021 December 31, 2020 Zig-Zag Stoker’s NewGen Total Zig-Zag Stoker’s NewGen Total Unamortized, indefinite life intangibleassets: Trade names $- $8,500 $10,786 $19,286 $ - $8,500 $10,786 $19,286 Formulas 52,217 53 - 52,270 42,245 53 - 42,298 Total $52,217 $8,553 $10,786 $71,556 $42,245 $8,553 $10,786 $61,584 Amortized intangible assets included within the NewGen segment consists of: December 31, 2021 December 31, 2020 GrossCarrying AccumulatedAmortization GrossCarrying AccumulatedAmortization Amortized intangible assets: Customer relationships (useful life of 8-10 years) $6,936 $3,939 $6,936 $3,111 Trade names (useful life of 15 years) 9,530 1,993 9,530 1,375 Master distribution agreement (useful life of 15 years) 5,489 549 5,489 183 Franchise agreements (useful life of 8 years) 780 325 780 228 Non-compete agreements (useful life of 3.5 years) 100 100 100 100 Total $22,835 $6,906 $22,835 $4,997 During 2020, $2.4 million in trade names related to Wind River Brands in the Stoker’s Product segment were determined to no longer be indefinite lived and began to be amortized. Annual amortizationexpense for each of the next five years is estimated to be approximately $1.9 million for 2022 through 2024 and $1.2 million for 2025 through 2026, assuming no additional transactions occur that require theamortization of intangible assets.82Table of ContentsNote 11. Other AssetsOther assets consists of: December 31,2021 December 31,2020 Equity investments $25,649 $24,018 Debt security investment 8,000 - Other 1,750 2,818 Total $35,399 $26,836 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 pricechanges.In July 2021, the Company invested $8 million in Old Pal Holding Company LLC (“Old Pal”). The Company invested in the form of a convertible note which includes additional follow-on investment rights.Old Pal is a leading brand in the cannabis lifestyle space that operates a non-plant touching licensing model. The Company’s investment will enable Old Pal to expand product offerings in existing states,which include California, Nevada, Michigan, Oklahoma, Ohio, Washington and Massachusetts, and will help create the infrastructure necessary to support continued territory and product expansion. Theconvertible note bears an interest rate of 3.0% per year and matures July 31, 2026. Interest and principal are receivable at maturity. Old Pal has the option to extend the maturity date in one-year increments.The interest rate is subject to change based on sales levels of Old Pal meeting certain thresholds. The weighted average interest rate was 3.0% for the year ended December 31, 2021. Old Pal has the optionto convert the note into shares once sales reach a certain threshold. The conditions required to allow Old Pal to convert the note were not met as of December 31, 2021. Additionally, the Company has theright to convert the note into shares at any time after January 1, 2022. The Company has classified the debt security with Old Pal as available for sale. The Company records the debt security at fair valueand includes unrealized gains and losses recorded in stockholders’ equity as a component of accumulated other comprehensive income on our Consolidated Balance Sheets. The Company reports interestincome on available for sale debt securities, in interest income in our Consolidated Statements of Income. The fair value of the debt security approximated its carrying value of $8.0 million at December31, 2021, due to the recency of the debt security’s purchase, related to the year ended December 31, 2021. The Company has recorded accrued interest receivable of $0.1 million at December 31, 2021, inother current assets on our Consolidated Balance Sheets.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. TheCompany has additional follow-on investment rights. As part of the investment, the Company has obtained exclusive U.S. distribution rights for Docklight’s Marley™ CBD topical products. Purchases ofinventory from Docklight Brands, Inc. were $0.0 million in 2021. There was $0.0 million outstanding at December 31, 2021.In October 2020, the Company acquired a 20% stake in Wild Hempettes LLC (“Wild Hempettes”), a leading manufacturer of hemp cigarettes under the WildHemp™ and Hempettes™ brands, for $2.5 million.The Company has options to increase its stake to a 100% ownership position based on certain milestones. As part of the transaction, the Wild Hempettes joint venture was spun off from CrownDistributing LLC and formed as a vehicle for the Company to be the exclusive distributor of Hempettes™ to U.S. bricks and mortar retailers under a profit-sharing arrangement. The Company has providedWild Hempettes with a secured line of credit up to $2.0 million with a term up to 5 years. The Company accounts for its investment in Wild Hempettes as an equity method investment. The Companyrecorded investment income of $0.1 million and $0.1 million for years ended December 31, 2021 and 2020, respectively. Purchases of inventory from Wild Hempettes was $2.1 million and $0.5 million in 2021and 2020, respectively. There were no amounts outstanding at December 31, 2021 and 2020.In October 2020, the Company invested $15.0 million in dosistTM, a global cannabinoid company, with an option to invest an additional $15.0 million on pre-determined terms over the 12 month periodending October 2021. The Company received a warrant exercisable for preferred shares of dosistTM that will automatically be exercised upon the changing of certain federal cannabis laws in the UnitedStates, rescheduling cannabis and/or permitting the general cultivation, distribution and possession of cannabis. In the fourth quarter 2021, based on the financial results of dosistTM and the overallcannabinoid market, the Company deemed our investment was impaired resulting in the fair value of our investment decreasing to $7.9 million. Fair value was determined using a valuation derived from arelevant market index (Level 2) and relevant revenue multiples (Level 3). The valuations were probability weighted based on anticipated outcomes. Given the significance of Level 3 input to the valuation,we have determined that the non-recurring valuation resulted in Level 3 classification within the fair value hierarchy. This resulted in a loss of $7.1 million which is recorded in investment loss for the yearended December 31, 2021. There were no purchases of inventory from dosistTM in 2021 or 2020.In October 2020, the Company invested $1.8 million in BOMANI Cold Buzz, LLC (“BOMANI”), a manufacturer of alcohol-infused cold brew coffee. The Company received rights to receive equity inBOMANI in the event of an equity financing. There were no purchases of inventory from BOMANI in 2021 or 2020.83Table of ContentsThe Company has a minority ownership position in Canadian American Standard Hemp (“CASH”). CASH is headquartered in Warwick, Rhode Island, and manufactures cannabidiol isolate (“CBD”)developed through highly efficient and proprietary processes. The investment in CASH positions the Company to participate in the market for hemp-derived products. In the fourth quarter 2019, CASHcompleted a fundraising round, resulting in the fair value of our investment increasing to $4.0 million. This resulted in a gain of $2 million which is recorded in investment income for 2019. In October 2020,CASH merged with Real Brands, Inc. (“Real Brands”), an over the counter traded shell company. CASH will continue business under the Real Brands name. The Company maintained its ownershipposition in Real Brands subsequent to the merger. There were no purchases of inventory from CASH in 2021 or 2020. There were no amounts outstanding at December 31, 2021 and 2020.In December 2018, the Company acquired a minority ownership position in General Wireless Operations, Inc. (d/b/a RadioShack; “RadioShack”) from 5G gaming LLC, which is owned by Standard GeneralLP, for $0.4 million. Standard General LP has a controlling interest in the Company and qualifies as a related party. There were no amounts outstanding at December 31, 2021 and 2020.Note 12. Accrued LiabilitiesAccrued liabilities at consists of: December 31,2021 December 31,2020 Accrued payroll and related items $6,974 $9,459 Customer returns and allowances 6,497 5,259 Taxes payable 2,053 4,326 Lease liabilities 2,976 3,228 Accrued interest 7,318 2,096 Other 7,119 10,857 Total $32,937 $35,225 Note 13. Notes Payable and Long-Term DebtNotes payable and long-term debt consists of the following in order of preference: December 31,2021 December 31,2020 Senior Secured Notes $ 250,000 $- 2018 First Lien Term Loan - 130,000 Convertible Senior Notes 172,500 172,500 Note payable - Promissory Note - 10,000 Note payable - Unsecured Loan - 7,485 Gross notes payable and long-term debt 422,500 319,985 Less deferred finance charges (8,328) (5,873)Less current maturities - (12,000)Net notes payable and long-term debt $414,172 $302,112 Senior Secured NotesOn February 11, 2021, the Company closed a private offering (the “Offering”) of $250 million aggregate principal amount of its 5.625% senior secured notes due 2026 (the “Senior Secured Notes”). TheSenior 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 eachyear, commencing on August 15, 2021. The Company used the proceeds from the Offering to (i) repay all obligations under and terminate the 2018 First Lien Credit Facility, (ii) pay related fees, costs, andexpenses 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 inthe Indenture governing the Senior Secured Notes or the “Senior Secured Notes Indenture”), including the 2021 Revolving Credit Facility, or capital markets debt securities of the Company or Guarantorsin 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 certainexceptions.84Table of ContentsThe Company may redeem the Senior Secured Notes, in whole or in part, at any time prior to February 15, 2023, at a price equal to 100% of the principal amount of the Notes redeemed plus accrued andunpaid interest, if any, to, but excluding the applicable redemption date, plus a “make-whole” premium. Thereafter, the Company may redeem the Senior Secured Notes, in whole or in part, at establishedredemption prices set forth in the Senior Secured Notes Indenture, plus accrued and unpaid interest, if any. In addition, on or prior to February 15, 2023, the Company may redeem up to 40% of theaggregate principal amount of the Senior Secured Notes with the net cash proceeds from certain equity offerings at a redemption price equal to 105.625%, plus accrued and unpaid interest, if any to theredemption date; provided, however, that at least 50% of the original aggregate principal amount of the Senior Secured Notes (calculated after giving effect to the issuance of any additional notes) remainsoutstanding. In addition, at any time and from time to time prior to February 15, 2023, but not more than once in any twelve-month period, the Company may redeem up to 10% of the aggregate principalamount of the Senior Secured Notes at a redemption price of 103% of the aggregate principal amount of Senior Secured Notes redeemed plus accrued and unpaid interest, if any to but not including theredemption date, on the Senior Secured Notes to be redeemed.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% ofthe principal amount of the Notes to be repurchased, plus accrued and unpaid interest.The Indenture contains covenants that, among other things, limit the ability of the Company and its restricted subsidiaries to: (i) grant or incur liens; (ii) incur, assume or guarantee additional indebtedness;(iii) sell or otherwise dispose of assets, including capital stock of subsidiaries; (iv) make certain investments; (v) pay dividends, make distributions or redeem or repurchase capital stock; (vi) engage incertain 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 exceptionsset forth in the Indenture. See Note 23, “ Dividends”, for further information regarding dividend restrictions. The Indenture provides for customary events of default.The Company incurred debt issuance costs attributable to the issuance of the Senior Secured Notes of $6.4 million which are amortized to interest expense using the effective interest method over theexpected life of the Senior Secured Notes.2021 Revolving Credit FacilityIn connection with the Offering, the Company also entered into a new $25 million senior secured revolving credit facility (the “2021 Revolving Credit Facility”) with the lenders party thereto (the “Lenders”)and Barclays Bank PLC, as administrative agent and collateral agent (in such capacity, the “Agent”). The 2021 Revolving Credit Facility provides for a revolving line of credit of up to $25.0 million. Lettersof credit are limited to $10 million (and are a part of, and not in addition to, the revolving line of credit). The Company has not drawn any borrowings under the 2021 Revolving Credit Facility but does haveletters of credit of approximately $3.6 million outstanding under the facility. The 2021 Revolving Credit Facility will mature on August 11, 2025 if none of the Company’s Convertible Senior Notes areoutstanding, and if any Convertible Senior Notes are outstanding, the date which is 91 days prior to the maturity date of July 15, 2024 for such Convertible Senior Notes.Interest is payable on the 2021 Revolving Credit Facility at a fluctuating rate of interest determined by reference to the Eurodollar rate plus an applicable margin of 3.50% (with step-downs upon de-leveraging). The Company also has the option to borrow at a rate determined by reference to the base rate.The obligations under the 2021 Revolving Credit Agreement are guaranteed on a joint and several basis by the Guarantors. The Company’s and Guarantors’ obligations under the 2021 Revolving CreditFacility are secured on a pari passu basis with the Senior Secured Notes.The 2021 Revolving Credit Agreement contains covenants that are substantially the same as the covenants in the Senior Secured Notes Indenture. The 2021 Revolving Credit Facility also requires themaintenance of a Consolidated Leverage Ratio (as defined in the 2021 Revolving Credit Agreement) of 5.50 to 1.00 (with a step down to 5.25 to 1.00 beginning with the fiscal quarter ending March 31, 2023)at the end of each fiscal quarter when extensions of credit under the 2021 Revolving Credit Facility and certain drawn and undrawn letters of credit (excluding (a) letters of credit that have been cashcollateralized and (b) letters of credit having an aggregate face amount less than $5,000,000) in the aggregate outstanding exceeds 35% of the total commitments under the 2021 Revolving Credit Facility.The 2021 Revolving Credit Agreement provides for customary events of default.The Company incurred debt issuance costs attributable to the issuance of the 2021 Revolving Credit Facility of $0.5 million which are amortized to interest expense using the effective interest method overthe expected life of the 2021 Revolving Credit Facility.85Table of Contents2018 Credit FacilityOn March 7, 2018, the Company entered into $250 million of credit facilities consisting of a $160 million 2018 First Lien Term Loan and a $50 million 2018 Revolving Credit Facility (collectively, the “2018First Lien Credit Facility”), in each case, with Fifth Third Bank, as administrative agent, and other lenders, in addition to a $40 million 2018 Second Lien Term Loan (the “2018 Second Lien Credit Facility,”and, together with the 2018 First Lien Credit Facility, the “2018 Credit Facility”) with Prospect Capital Corporation, as administrative agent, and other lenders. The 2018 Credit Facility contained a $40 millionaccordion feature. In the first quarter of 2021, the Company used a portion of the proceeds from the issuance of the Senior Secured Notes to prepay all outstanding amounts under and terminate the 2018First Lien Credit Facility in the amount of $130.0 million, and the transaction resulted in a $5.7 million loss on extinguishment of debt, which includes a $3.6 million loss from the early termination of theinterest rate swap agreement.2018 First Lien Credit Facility: The 2018 First Lien Term Loan and the 2018 Revolving Credit Facility bore interest at LIBOR plus a spread of 2.75% to 3.50% based on the Company’s senior leverage ratio.The 2018 First Lien Term Loan had quarterly required payments of $2.0 million beginning June 30, 2018, increasing to $3.0 million on June 30, 2020, and increasing to $4.0 million on June 30, 2022. The 2018First Lien Credit Facility had a maturity date of March 7, 2023. The 2018 First Lien Term Loan was secured by a first priority lien on substantially all of the assets of the borrowers and the guarantorsthereunder, including a pledge of the Company’s capital stock, other than certain excluded assets (the “Collateral”).2018 Second Lien Credit Facility: The 2018 Second Lien Credit Facility bore interest at a rate of LIBOR plus 7.00% and had a maturity date of March 7, 2024. The 2018 Second Lien Term Loan was securedby a second priority interest in the Collateral and was guaranteed by the same entities as the 2018 First Lien Term Loan. Based on an excess cash covenant for the facility, a $4.5 million principal paymentwas made in the second quarter 2019, resulting in a $0.2 million loss on extinguishment of debt. The Company used a portion of the proceeds from the issuance of the Convertible Senior Notes to prepay alloutstanding amounts related to the 2018 Second Lien Credit Facility in the third quarter 2019. The principal paid in the third quarter amounted to $35.5 million, and the transaction resulted in a $1.1 millionloss on extinguishment of debt.Convertible Senior NotesIn 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 ConvertibleSenior 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 onJuly 15, 2024, unless earlier repurchased, redeemed or converted. The Convertible Senior Notes are senior unsecured obligations of the Company.The Convertible Senior Notes are convertible into approximately 3,208,172 shares of our voting common stock under certain circumstances prior to maturity at a conversion rate of 18.598 shares per $1,000principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.77 per share, subject to adjustment under certain conditions, but will not be adjusted for anyaccrued and unpaid interest. Upon conversion, the Company may pay cash, shares of common stock or a combination of cash and stock, as determined by the Company at its discretion. The conditionsrequired to allow the holders to convert their Convertible Senior Notes were not met as of December 31, 2021.The Company early adopted ASU 2020-06 effective January 1, 2021 on a retrospective basis to all periods presented. Under ASU 2020-06, the Company accounts for the Convertible Senior Notes entirelyas a liability and no longer separately accounts for the Convertible Senior Notes with liability and equity components. See Note 2 for further discussion of the impact of the adoption of ASU 2020-06.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 ofthe 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 astrike price of $53.77 per and a cap price of $82.86 per, and are exercisable when, and if, the Convertible Senior Notes are converted. The Company paid $20.53 million for these capped calls and charged thatamount to additional paid-in capital.Promissory NoteOn June 10, 2020, in connection with the acquisition of certain Durfort assets, the Company issued the Promissory Note in the principal amount of $10.0 million (the “Principal Amount”), with an annualinterest rate of 7.5%, payable quarterly, with the first payment due September 10, 2020. The Principal Amount was payable in two $5.0 million installments, with the first installment due 18 months after theclosing date of the acquisition (June 10, 2020), and the second installment due 36 months after the closing date of the acquisition. The second installment was subject to reduction for certain amountspayable to the Company as a holdback. The Company prepaid all outstanding amounts under and terminated the Promissory Note in the third quarter of 2021 in the amount of $9.6 million. The transactionresulted in a $0.4 million gain on extinguishment of debt.86Table of ContentsUnsecured LoanOn April 6, 2020, the 2018 First Lien Credit Facility was amended to allow for an unsecured loan under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES”). On April 17, 2020,National Tobacco Company, L.P., a subsidiary of the Company, entered into a loan agreement with Regions Bank guaranteed by the Small Business Administration for a $7.5 million unsecured loan. Theproceeds of the loan were received on April 27, 2020. The loan was scheduled to mature on April 17, 2022 and had a 1.00% interest rate. During 2021, the Company applied for forgiveness for the loan. OnOctober 15, 2021, the Company received notice that its application for forgiveness was fully approved. The extinguishment of the unsecured loan occurred in the fourth quarter of 2021 resulting in a $7.5million gain on extinguishment of debt. The Company is subject to audit relating to the unsecured loan until 2027 which could result in repayment of some or all of the unsecured loan previously forgiven.However, the Company believes that repayment of any amount is not probable.Note Payable – IVGIn September 2018, the Company issued a note payable to IVG’s former shareholders (“IVG Note”). The IVG Note had a principal amount of $4.0 million with an interest rate of 6.0% per year and matured onMarch 5, 2020. All principal and accrued and unpaid interest under the IVG Note were subject to indemnification obligations of the sellers pursuant to the International Vapor Group Stock PurchaseAgreement dated as of September 5, 2018. The carrying amount of the IVG Note, $4.2 million, was deposited into an escrow account in the first quarter of 2020 pending agreement with the sellers of anyindemnification obligations. The escrow funds were distributed in the first quarter of 2021.Note 14. Income TaxesIncome tax expense (benefit) for the years ended December 31 consists of the following components: 2021 2020 2019 Current Deferred Total Current Deferred Total Current Deferred Total Federal $11,315 $(583) $10,732 $5,285 $3,642 $8,927 $5,281 $(2,626) $2,655 State and Local 4,210 (637) 3,573 1,930 1,100 3,030 982 (774) 208 Foreign - (265) (265) - - - - - - Total $15,525 $(1,485) $14,040 $7,215 $4,742 $11,957 $6,263 $(3,400) $2,863 Deferred tax assets and liabilities consists of: December 31,2021 December 31,2020 Assets Liabilities Assets Liabilities Inventory $2,096 $2 $2,567 $- Property, plant, and equipment - 3,259 - 3,107 Goodwill and other intangible assets - 8,573 - 8,144 Foreign NOL carryforward 265 - - - State NOL carryforward 2,421 - 2,236 - Unrealized loss on investments 81 - 876 - Leases 4,150 3,826 4,920 4,557 Original issue discount 2,720 - 3,800 - Other 10,244 2,305 6,611 2,356 Gross deferred income taxes 21,977 17,965 21,010 18,164 Valuation allowance (2,649) - (2,236) - Net deferred income taxes $19,328 $17,965 $18,774 $18,164 At December 31, 2021, the Company had state net operating loss (“NOL”) carryforwards for income tax purposes of approximately $55.2 million, which expire between 2025 and 2041, $19.8 million of whichhas an indefinite carryforward period. The Company has determined that, at December 31, 2021 and 2020, its ability to realize future benefits of its state NOL carryforwards does not meet the “more likelythan not” criteria in ASC 740, Income Taxes. Therefore, a valuation allowance of $2.6 million and $2.2 million has been recorded at December 2021 and 2020, respectively.87Table of ContentsASC 740-10-25 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Forthose 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 benefitthat is greater than 50 percent likely of being realized upon ultimate settlement. The Company has determined that they did not have any uncertain tax positions requiring recognition as a result of theprovisions of ASC 740-10-25. The Company’s policy is to recognize interest and penalties accrued on uncertain tax positions as part of interest expense. For the years ended December 31, 2021, 2020, and2019, no estimated interest or penalties were recognized for the uncertainty of tax positions taken. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. Ingeneral, the Company is no longer subject to U.S. federal and state tax examinations for years prior to 2018.Reconciliation of the federal statutory rate and the effective income tax rate for the years ended December 31 is as follows: 2021 2020 2019 Federal statutory rate 21.0% 21.0% 21.0%Foreign rate differential -0.1% 0.0% 0.0%State taxes 3.4% 2.9% 0.7%Permanent differences -4.1% -1.6% -5.6%Other 0.7% 4.7% -3.1%Valuation allowance 0.6% -3.2% 2.0%Effective income tax rate 21.5% 23.8% 15.0%The permanent differences for the year ended December 31, 2021 are primarily related to income tax benefits of $7.5 million ($1.6 million tax effected) as a result of the forgiveness of the $7.5 millionunsecured loan and $7.2 million ($1.5 million tax effected) as a result of stock option exercises. The permanent differences for the years ended December 31, 2020 and 2019 are primarily related to income taxbenefits of $3.3 million ($0.7 million tax effected), and $4.6 million ($1.0 million tax effected), respectively, as a result of stock option exercises.Note 15. Pension and Postretirement Benefit PlansThe Company had a defined benefit pension plan. Benefits for hourly employees were based on a stated benefit per year of service, reduced by amounts earned in a previous plan. Benefits for salariedemployees were based on years of service and the employees’ final compensation. The defined benefit pension plan was frozen. The Company’s policy was to make the minimum amount of contributionsthat can be deducted for federal income taxes. In the fourth quarter 2019, the Company elected to terminate the defined benefit pension plan, effective December 31, 2019 with final distributions made in thethird quarter of 2020.The Company sponsored a defined benefit postretirement plan that covered hourly employees. This plan provided medical and dental benefits. This plan was contributory with retiree contributionsadjusted annually. The Company’s policy was to make contributions equal to benefits paid during the year. In the fourth quarter 2019, the Company amended the plan to cease benefits effective June 30,2020. The plan amendment eliminated a significant amount of the benefits under the plan, resulting in a curtailment of $3.2 million for the year ended December 31, 2019. The curtailment resulted in $1.8million being reclassified from accumulated other comprehensive income to income in 2019. The total gain on the curtailment was $4.9 million for the year ended December 31, 2019, and is recorded in Netperiodic benefit cost (income), excluding service cost in the income statement.88Table of ContentsThe following tables provide a reconciliation of the changes in the plans’ benefit obligations and fair value of assets for the year ended December 31, 2020: PensionBenefits PostretirementBenefits 2020 2020 Reconciliation of benefit obligations: Benefit obligation at January 1 $14,217 $115 Service cost - - Interest cost 190 - Actuarial loss (gain) 249 (83)Assumptions - - Settlement/curtailment (1,869) - Annuities purchased (12,116) - Benefits paid (671) (32)Benefit obligation at December 31 $- $- Reconciliation of fair value of plan assets: Fair value of plan assets at January 1 $15,903 $- Actual return on plan assets 1,139 - Employer contributions - 32 Settlement/curtailment (1,869) - Annuities purchased (12,116) - Benefits paid (671) (32)Asset reversion upon termination (2,386) - Fair value of plan assets at December 31 $- $- The following table provides the components of net periodic pension and postretirement benefit costs and total costs for the plans for the years ended December 31: Pension Benefits Postretirement Benefits 2021 2020 2019 2021 2020 2019 Service cost $- $- $104 $- $- $- Interest cost - 190 520 - - 101 Expected return on plan assets - (322) (645) - - - Amortization of (gains) losses - 72 147 - (131) (169)Settlement and Curtailment loss (gain) - 1,180 - - - (4,915)Net periodic benefit cost (income) $- $1,120 $126 $- $(131) $(4,983)The Company also sponsors a voluntary 401(k) retirement savings plan. Eligible employees may elect to contribute up to 15% of their annual earnings subject to certain limitations. For the 2021 and 2020Plan Years, the Company contributed 4% to those employees contributing 4% or greater. For those employees contributing less than 4%, the Company matched the contribution by 100%. Additionally, forall years presented, the Company made discretionary contributions of 1% to all employees, regardless of an employee’s contribution level. Company contributions to this plan were approximately $1.6million for 2021, $1.6 million for 2020 and $1.5 million for 2019.89Table of ContentsNote 16. Lease CommitmentsThe Company’s leases consist primarily of leased property for manufacturing warehouse, head offices and retail space as well as vehicle leases. In general, the Company does not recognize any renewalperiods within the lease terms as there are not significant barriers to ending the lease at the initial term. Lease and non-lease components are accounted for as a single lease component.Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for these leases is recognized on a straight-line basis over the lease term.The components of lease expense consists of the following: For the year ended December 31, 2021 2020 2019 Operating lease cost Cost of sales $907 $908 $874 Selling, general and administrative 3,001 2,402 2,973 Variable lease cost (1) 1,182 587 463 Short-term lease cost 48 131 147 Sublease income (60) (120) (110)Total $5,078 $3,908 $4,347 (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. December 31,2021 December 31,2020 Assets: Right of use assets $15,053 $17,918 Total lease assets $15,053 $17,918 Liabilities: Current lease liabilities (2) $2,976 $3,228 Long-term lease liabilities 13,336 16,117 Total lease liabilities $16,312 $19,345 (2)Reported within accrued liabilities on the balance sheet90Table of Contents As of December 31, 2021 2020 Weighted-average remaining lease term - operating leases 6.7 years 7.2 years Weighted-average discount rate - operating leases 4.92% 4.93%Nearly all the lease contracts for the Company do not provide a readily determinable implicit rate. For these contracts, the Company uses a discount rate that approximates its incremental borrowing rate atthe time of the lease commencement.Maturities of lease liabilities consisted of the following: December 31,2021 2022 $3,674 2023 3,613 2024 2,439 2025 2,125 2026 2,084 Years thereafter 5,344 Total lease payments $19,279 Less: Imputed interest 2,967 Present value of lease liabilities $16,312 Minimum lease payments for operating leases that had initial or remaining non-cancelable lease terms in excess of one year consisted of the following:Year Payments 2022 $2,596 2023 2,568 2024 2,396 2025 2,125 2026 2,084 Years thereafter 5,344 Total $17,113 The Company recognized $0.0 million and $0.1 million in impairments of right of use assets in 2021 and 2020, respectively, related to store closures.91Table of ContentsNote 17. Share Incentive PlansOn 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 the2021 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 toemployees, 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 bespecified in the award agreement. As of December 31, 2021, net of forfeitures, there were 8,637 Restricted Stock Units (“RSUs”) and 7,500 options granted under the 2021 Plan. There are 1,383,469 sharesavailable for grant under the 2021 Plan.On April 28, 2016, the Board of Directors of the Company adopted the 2015 Plan, pursuant to which awards could have been granted to employees, non-employee directors, and consultants. In addition,the 2015 Plan provided for the granting of nonqualified stock options to employees of the Company or any subsidiary of the Company. Pursuant to the 2015 Plan, 1,400,000 shares of the Company’s votingcommon 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. The2015 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 2015Plan. 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 the2015 Plan. The 2015 Plan was administrated by the Committee.On February 8, 2006, the Board of Directors of the Company adopted the 2006 Equity Incentive Plan (the “2006 Plan”) of North Atlantic Holding Company, Inc., pursuant to which awards may be granted toemployees. 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 connectionwith 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 remainoutstanding 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: StockOptionShares WeightedAverageExercisePrice WeightedAverageGrant DateFair Value Outstanding, December 31, 2019 696,716 $18.13 $6.17 Granted 155,000 14.85 4.41 Exercised (135,146) 6.37 2.74 Forfeited (5,510) 27.25 8.64 Outstanding, December 31, 2020 711,060 19.58 6.42 Granted 119,500 50.93 13.58 Exercised (202,768) 10.22 6.35 Forfeited (7,957) 33.22 9.63 Outstanding, December 31, 2021 619,835 $28.51 $8.70 92Table of ContentsUnder the 2006 Plan, the total intrinsic value of options exercised during the years ended December 31, 2021, 2020, and 2019, was $7.9 million, $3.7 million, and $5.0 million, respectively.At December 31, 2021, under the 2006 Plan, the outstanding stock options’ exercise price for 87,340 options is $3.83 per share, all of which are exercisable. The weighted average of the remaining lives of theoutstanding stock options is approximately 2.43 years for the options with the $3.83 exercise price. The Company estimates the expected life of these stock options is ten years from the date of grant. Forthe $3.83 per share options, the weighted average fair value of options was determined using the Black-Scholes model assuming a ten-year life from grant date, a current share price and exercise price of$3.83, a risk-free interest rate of 3.57%, a volatility of 40%, and no assumed dividend yield. Based on these assumptions, the fair value of these options is approximately $2.17 per share option granted.At December 31, 2021, 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 averagelong-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 informationregarding 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 methodpresented 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 continueto 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-Scholesoption pricing model.The following table outlines the assumptions for options granted under the 2015 Plan. February 10,2017 May 17,2017 March 7,2018 March 20,2019 October 24,2019 March 18,2020 February 18,2021 May 3,2021 Number of options granted 40,000 93,819 98,100 155,780 25,000 155,000 100,000 12,000 Options outstanding at December 31, 2021 27,050 47,483 67,417 142,284 25,000 106,361 97,400 12,000 Number exercisable at December 31, 2021 27,050 47,483 67,417 110,015 16,750 33,167 9,500 - Exercise price $13.00 $15.41 $21.21 $47.58 $20.89 $14.85 $ 51.75 $ 47.76 Remaining lives 5.12 5.38 6.19 7.22 7.82 8.22 9.14 9.34 Risk free interest rate 1.89% 1.76% 2.65% 2.34% 1.58% 0.79% 0.56% 0.84%Expected volatility 27.44% 26.92% 28.76% 30.95% 31.93% 35.72% 28.69% 29.03%Expected life 6.000 6.000 6.000 6.000 6.000 6.000 6.000 6.000 Dividend yield - - 0.83% 0.42% 0.95% 1.49% 0.55% 0.59%Fair value at grant date $3.98 $4.60 $6.37 $15.63 $6.27 $4.41 $ 13.77 $ 13.06 93Table of ContentsThe following table outlines the assumptions for options granted under the 2021 Plan. May 17,2021 Number of options granted 7,500 Options outstanding at December 31, 2021 7,500 Number exercisable at December 31, 2021 - Exercise price $45.05 Remaining lives 9.38 Risk free interest rate 0.84%Expected volatility 31.50%Expected life 6.000 Dividend yield 0.63%Fair value at grant date $13.23 The Company has recorded compensation expense related to the options based on the provisions of ASC 718 under which the fixed portion of such expense is determined as the fair value of the optionson the date of grant and amortized over the vesting period. The Company recorded compensation expense related to the options of approximately $2.3 million, $1.2 million and $1.7 million for the yearsended December 31, 2021, 2020 and 2019, respectively. Total unrecognized compensation expense related to options at December 31, 2021, is $0.6 million, which will be expensed over 1.91 years.Performance-based restricted stock units (“PRSUs”) are restricted stock units subject to both performance-based and service-based vesting conditions. The number of shares of common stock a recipientwill receive upon vesting of a PRSU will be calculated by reference to certain performance metrics related to the Company’s performance over a three to five-year period. PRSUs will vest on themeasurement date, which is no more than 65 days after the performance period, provided the applicable service and performance conditions are satisfied. At December 31, 2021, there are 558,661 PRSUsoutstanding, 558,661 of which are unvested. The following table outlines the PRSUs granted and outstanding as of December 31, 2021. March 31,2017 March 7,2018 March 20,2019 July 19,2019 March 18,2020 December 28,2020 February 18,2021 Number of PRSUs granted 94,000 96,000 92,500 88,582 94,000 88,169 100,000 PRSUs outstanding at December 31, 2021 83,000 93,000 84,600 21,342 91,350 88,169 97,200 Fair value as of grant date $15.60 $21.21 $47.58 $52.15 $14.85 $46.42 $ 51.75 Remaining lives - 1.00 2.00 1.00 3.00 2.00 4.00 The Company recorded compensation expense related to the PRSUs of approximately $5.0 million, $1.4 million and $1.9 million in the consolidated statements of income for the years ended December 31,2021, 2020 and 2019, respectively, based on the probability of achieving the performance condition. Total unrecognized compensation expense related to these awards at December 31, 2021, is $8.5 million,which will be expensed over the service period based on the probability of achieving the performance condition.During 2021, the Company granted 8,637 RSUs which vest over one year. The Company has recorded compensation expense related to the RSUs based on the provisions of ASC 718 under which the fixedportion 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 ofapproximately $0.3 million for the year ended December 31, 2021. Total unrecognized compensation expense related to RSUs at December 31, 2021, is $0.1 million, which will be expensed over 0.38 years.94Table of ContentsNote 18. ContingenciesOn October 9, 2020, a purported stockholder of Turning Point Brands, Inc., Paul-Emile Berteau, filed a complaint in the Delaware Court of Chancery relating to the merger of SDI with a TPB subsidiarypursuant to the Agreement and Plan of Merger and Reorganization, dated as of April 7, 2020, by and among TPB, SDI and Merger Sub. The complaint purports to assert two derivative counts for breach offiduciary duty on TPB’s behalf and against the TPB Board of Directors and certain SDI affiliates. The third count purports to assert a direct claim against TPB and its Board of Directors based onallegations 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’sAmended 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 otherthings, the court dismissed TPB director H.C. Charles Diao as a defendant in the action and dismissed the third count of the plaintiff’s complaint as moot. The remaining defendants answered the complainton August 23, 2021. While the Company believes it has good and valid defenses to the claims, there can be no assurance that the Company will prevail in this case, and it could have a material adverseeffect on the Company’s business and results of operations.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 werebrought 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 frommalfunctioning vaporizer devices and may be subject to claims in the future relating to our other NewGen products. The Company is still evaluating these claims and the potential defenses to them. Forexample, 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 thesecases, and they could have a material adverse effect on the financial position, results of operations or cash flows of the Company.We have several subsidiaries engaged in making, distributing, and selling vapor products. As a result of the overall publicity and controversy surrounding the vapor industry generally, many companieshave received informational subpoenas from various regulatory bodies and in some jurisdictions lawsuits have been filed regarding marketing practices and possible underage sales. We expect that oursubsidiaries will be subject to some such cases and investigative requests. In the acquisition of the vapor businesses, we negotiated financial “hold-backs,” which we have used to defray expensesassociated with the information production and the cost of defending any such lawsuits as well as the franchisee lawsuit. To the extent that litigation becomes necessary, we believe that the subsidiarieshave 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 broughtby franchisees. One of our subsidiaries, which we acquired in 2018, is the franchisor of the VaporFi system. This subsidiary is a responding party in an arbitration brought by a former franchisee claiming,among other things, violations of Federal Trade Commission Rules and Florida law. While we believe we have good and valid substantive defenses against these claims, to avoid the protracted expense ofarbitration, we reached a settlement in principle with the claimants and expect the settlement to be finalized by the end of the first quarter of 2022.We have also been named in a lawsuit brought by a different former franchisee represented by the same firm that represents the plaintiff in the action described above. This case relates to the terminationof the franchise agreement by the franchisor for failure to pay franchising fees and our subsequent demand that the franchisee cease using our marks and de-image locations formerly housing thefranchises. The franchisee filed suit against us in the U.S. District Court for the Southern District of Florida sixteen months after our demand. The franchisee is claiming tortious interference andconversion. We believe the franchisor’s ultimate termination of the franchise agreement for multiple uncured material defaults by the franchisee was proper. We believe that the suit was improperly broughtbefore the U.S. District Court for the South District of Florida because the related franchising agreements included a mandatory arbitration clause. We also believe we have good and valid substantivedefenses against the claims and intend on vigorously defending our interests in this matter.95Table of ContentsNote 19. Legal SettlementThe Company engaged in discussions and mediation with VMR Products LLC (“VMR”), which was acquired in 2018. Pursuant to a Distribution and Supply agreement (“VMR Agreement”), VMR wasproviding the Company with V2 e-cigarettes for the exclusive distribution in bricks-and-mortar stores in the United States. Under the terms of the VMR Agreement, in the event of termination following achange in control, the acquirer was required to make a payment to the Company under a formula designed to provide the Company with a fair share of the value created by the Company’s performanceunder the VMR Agreement. The discussions have been completed and the Company received $6.7 million in the second quarter 2019 to settle the issue. Net of legal costs and reserves for anticipatedfuture returns associated with the discontinuance, the Company recorded a $5.5 million gain in the second quarter of 2019, which was recorded as a reduction to selling, general, and administrativeexpenses.Note 20. Income Per ShareThe following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations of net income: December 31, 2021 December 31, 2020 December 31, 2019 Income Shares PerShare Income Shares PerShare Income Shares PerShare Basic EPS: Numerator Net income attributable to Turning Point Brands, Inc. $52,059 $38,192 $16,233 Denominator Weighted average 18,917,570 $2.75 19,398,474 $1.97 19,627,093 $0.83 Diluted EPS: Numerator Net income attributable to Turning Point Brands, Inc. $52,059 $38,192 $16,233 Interest expense related to Convertible Senior Notes, net of tax 4,317 4,188 1,958 Diluted consolidated net income $56,376 $42,380 $18,191 Denominator Basic weighted average 18,917,570 19,398,474 19,627,093 Convertible Senior Notes 3,208,172 3,202,808 3,202,808 Stock options 256,252 336,159 410,447 22,381,994 $2.52 22,937,441 $1.85 23,240,348 $0.78 Note 21. Segment InformationIn accordance with ASC 280, Segment Reporting, the Company has three reportable segments, (1) Zig-Zag Products; (2) Stoker’s Products; and (3) NewGen Products. The Zig-Zag Products segmentmarkets and distributes (a) rolling papers, tubes, and related products; and (b) finished cigars and MYO cigar wraps. The Stoker’s Products segment (a) manufactures and markets moist snuff and (b)contracts for and markets loose leaf chewing tobacco products. The NewGen Products segment (a) markets and distributes liquid vapor products and certain other products without tobacco and/ornicotine; (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 VaporFiB2C online platform. Products in the Zig-Zag Products and Stoker’s Products segments are distributed primarily through wholesale distributors in the United States while products in the NewGen Productssegment are distributed primarily through e-commerce to non-traditional retail outlets and direct to consumers in the United States. The Other segment includes the costs and assets of the Company notassigned to one of the three reportable segments such as intercompany transfers, deferred taxes, deferred financing fees, and investments in subsidiaries. The Company had no customer that accountedfor more than 10% of net sales in 2021, 2020, or 2019.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. TheCompany evaluates the performance of its segments and allocates resources to them based on operating income.96Table of ContentsThe tables below present financial information about reportable segments: For the year ended December 31, 2021 2020 2019 Net sales Zig-Zag products $176,491 $132,812 $108,733 Stoker’s products 124,280 115,866 99,894 NewGen products 144,700 156,433 153,362 Total $445,471 $405,111 $361,989 Gross profit Zig-Zag products $102,739 $78,278 $59,414 Stoker’s products 68,084 61,764 52,620 NewGen products 47,011 49,948 25,083 Total $217,834 $189,990 $137,117 Operating income (loss) Zig-Zag products $77,109 $61,932 $45,086 Stoker’s products 52,073 45,042 35,008 NewGen products 2,263 5,801 (20,629)Corporate unallocated (1)(2) (41,124) (48,348) (32,235)Total $90,321 $64,427 $27,230 Interest expense, net 20,500 13,487 14,435 Investment loss (income) 6,673 (198) (2,648)(Gain) loss on extinguishment of debt (2,154) - 1,308 Net periodic benefit (income) cost, excluding service cost - 989 (4,961) Income before income taxes $65,302 $50,149 $19,096 Capital expenditures Zig-Zag products $141 $- $- Stoker’s products 5,960 5,815 2,823 NewGen products 55 320 1,992 Total $6,156 $6,135 $4,815 Depreciation and amortization Zig-Zag products $388 $182 $- Stoker’s products 2,565 2,215 1,608 NewGen products 2,059 2,621 2,481 Total $5,012 $5,018 $4,089 (1)Includes corporate costs that are not allocated to any of the three reportable segments.(2)Includes costs related to PMTA of $2.6 million, $14.4 million and $2.2 million in 2021, 2020 and 2019, respectively.97Table of Contents December 31,2021 December 31,2020 Assets Zig-Zag products $227,554 $206,900 Stoker’s products 142,334 133,016 NewGen products 72,746 91,116 Corporate unallocated (1) 158,926 65,017 Total $601,560 $496,049 (1)Includes assets not assigned to the three reportable segments. All goodwill has been allocated to the reportable segments.Revenue Disaggregation—Sales ChannelRevenues of the Zig-Zag Products and Stoker’s Products segments are primarily comprised of sales made to wholesalers while NewGen sales are made business to business and business to consumer,both online and through our corporate retail stores. NewGen net sales are broken out by sales channel below. NewGen Segment For the year ended December 31, 2021 2020 2019 Business to Business $107,235 $107,976 $112,580 Business to Consumer - Online 37,069 43,517 31,348 Business to Consumer - Corporate store - 4,751 9,273 Other 396 189 161 Total $144,700 $156,433 $153,362 Net Sales: Domestic and ForeignThe following table shows a breakdown of consolidated net sales between domestic and foreign. For the year ended December 31, 2021 2020 2019 Domestic $415,514 $391,705 $347,616 Foreign 29,957 13,406 14,373 Total $445,471 $405,111 $361,989 98Table of ContentsNote 22. Selected Quarterly Financial Information (Unaudited)The following table presents the quarterly operating results: 1st 2nd 3rd 4th 2021 Net sales $107,641 $122,643 $109,904 $105,283 Gross profit 53,261 59,973 54,269 50,331 Net income attributable to Turning Point Brands, Inc. 11,783 15,355 13,468 11,454 Basic net income attributable to Turning Point Brands, Inc. per share 0.62 0.81 0.71 0.61 Diluted net income attributable to Turning Point Brands, Inc. per share $0.57 $0.73 $0.65 $0.57 2020 Net sales $90,689 $104,963 $104,174 $105,285 Gross profit 41,431 47,936 48,307 52,316 Net income attributable to Turning Point Brands, Inc. 4,499 10,295 9,020 14,378Basic net income attributable to Turning Point Brands, Inc. per share 0.23 0.53 0.47 0.75Diluted net income attributable to Turning Point Brands, Inc. per share $0.22(1) $0.49 $0.44 $0.68(1)The effect of 3,202,808 shares issuable upon conversion of the Convertible Senior Notes were excluded from the diluted net income per share calculation because the effect would have beenantidilutive.The amounts presented in the table above are computed independently for each quarter. As a result, their sum may not equal the total year amounts.Note 23. Dividends and Share RepurchaseOn November 9, 2017, the Company’s Board of Directors approved the initiation of a cash dividend to shareholders. The initial quarterly dividend of $0.04 per common share was paid on December 15,2017, to shareholders of record at the close of business on November 27, 2017. The most recent dividend of $0.055 per common share, an increase of approximately 38%, was paid on January 7, 2022, toshareholders of record at the close of business on December 17, 2021.Dividends are considered restricted payments under the Senior Secured Notes Indenture and 2021 Revolving Credit Facility. The Company is generally permitted to make restricted payments provided that,at the time of payment, or as a result of payment, the Company is not in default on its debt covenants. Additional earning and market capitalization restrictions limit the aggregate amount of restricted,quarterly dividends during a fiscal year.On February 25, 2020, the Company’s Board of Directors approved a $50.0 million share repurchase program, which is intended for opportunistic execution based upon a variety of factors including marketdynamics. The program is subject to the ongoing discretion of the Board. The total number of shares repurchased for the year ended December 31, 2021, was 896,738 shares for a total cost of $38.7 millionand an average price per share of $43.13. On October 25, 2021, the Board increased the approved share repurchase program by $30.7 million. $31.8 million remains available for share repurchases under theprogram at December 31, 2021. On February 24, 2022, the Board increased the approve share repurchase program by $24.6 million.99Table of ContentsItem 9. Changes In and Disagreements With Accountants on Accounting and Financial DisclosureNone.Item 9A. Controls and ProceduresDisclosure Controls and ProceduresAs of December 31, 2021, the Company’s management, with participation of the Company’s President and Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectivenessof the Company’s disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on that evaluation, the CEO and CFO concluded that the Company’s disclosurecontrols and procedures were not effective as of December 31, 2021, solely due to the material weakness in internal control over financial reporting described below.Internal ControlPursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we have included a report that provides management’s assessment of our internal control over financial reporting as part of this Annual Reporton Form 10-K for the year ended December 31, 2021. Management’s report is included below under the caption entitled “Management’s Report on Internal Control Over Financial Reporting,” and isincorporated herein by reference.Management’s Report on Internal Control over Financial ReportingThe consolidated financial statements appearing in this Annual Report have been prepared by the management that is responsible for their preparation, integrity, and fair presentation. The statements havebeen prepared in accordance with U.S. generally accepted accounting principles, which requires management to make estimates and assumptions that affect the amounts reported in the consolidatedfinancial statements and accompanying notes. Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934, asamended). Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect tofinancial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time.Under the supervision and with the participation of our management, including our CEO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31,2021, based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (“COSO ICIF”).A material weakness is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of theCompany’s annual or interim financial statements will not be prevented or detected on a timely basis.Based on our evaluation under the framework in COSO ICIF, our management concluded that our internal control over financial reporting was not effective as of December 31, 2021, solely due to a materialweakness in internal control related to ineffective information technology general controls (“ITGCs”) in the areas of user access and program change-management over certain information technology(“IT”) systems that support the Company’s financial reporting processes. Our business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffectivebecause they could have been adversely impacted. We believe that these control deficiencies were a result of: IT control processes lacking sufficient documentation such that the successful operation ofITGCs was overly dependent upon knowledge and actions of certain individuals with IT expertise, which led to failures resulting from insufficient training of IT personnel on the importance of ITGCs andrisk-assessment processes that were inadequate to identify and assess changes in IT environments that could impact internal control over financial reporting. The material weakness did not result in anyidentified misstatements to the financial statements, and there were no changes to previously released financial results. 100Table of ContentsOur independent registered public accounting firm has audited the consolidated financial statements appearing in this Annual Report and the effectiveness of our internal controls over financial reportingand has issued their reports, included herein.Notwithstanding the above identified material weakness, management believes the financial statements as included in Part II of this Annual Report on Form 10-K fairly represent in all material respects theCompany’s financial condition, results of operations and cash flows as of and for the periods presented in accordance with generally accepted accounting principles in the United States.RemediationManagement has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weakness are remediated, such that these controls aredesigned, implemented, and operating effectively. The remediation actions include: (i) developing a training program addressing ITGCs and policies, including educating control owners concerning theprinciples and requirements of each control, with a focus on those related to user access and change-management over IT systems impacting financial reporting; (ii) developing and maintainingdocumentation underlying ITGCs; (iii) developing enhanced risk assessment procedures and controls related to changes in IT systems; (iv) implementing an IT management review and testing plan tomonitor ITGCs with a specific focus on systems supporting our financial reporting processes; and (v) enhanced quarterly reporting on the remediation measures to the Audit Committee of the Board ofDirectors.We believe that these actions will remediate the material weakness. The weakness will not be considered remediated, however, until the applicable controls operate for a sufficient period of time andmanagement has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to the end of 2022.Changes in Internal Controls over Financial ReportingExcept for the material weakness identified during the quarter, there were no changes in the Company’s internal controls over financial reporting during the fiscal quarter ended December 31, 2021 that havematerially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting./s/ Yavor Efremov/s/ Luis Reformina/s/ Brian WiggintonYavor EfremovLuis ReforminaBrian WiggintonPresident and Chief Executive OfficerChief Financial OfficerChief Accounting Officer Date: March 11, 2022Date: March 11, 2022Date: March 11, 2022Item 9B. Other InformationNone.101Table of ContentsPART IIIItem 10. Directors, Executive Officers and Corporate GovernanceThe information required for this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 2022 Annual Meeting of Stockholders within 120 days after the end of thefiscal year ended December 31, 2021.Item 11. Executive CompensationThe information required for this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 2022 Annual Meeting of Stockholders within 120 days after the end of thefiscal year ended December 31, 2021.Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder MattersThe information required for this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 2022 Annual Meeting of Stockholders within 120 days after the end of thefiscal year ended December 31, 2021.Item 13. Certain Relationships and Related Transactions, and Director IndependenceThe information required for this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 2022 Annual Meeting of Stockholders within 120 days after the end of thefiscal year ended December 31, 2021.Item 14. Principal Accountant Fees and ServicesThe information required for this Item is incorporated by reference from our Proxy Statement to be filed in connection with our 2022 Annual Meeting of Stockholders within 120 days after the end of thefiscal year ended December 31, 2021.102Table of ContentsPART IV Item 15. Exhibits and Financial Statement Schedulesa)Financial Information (1)Financial Statements: See “Index to Consolidated Financial Statements” in Part II, Item 8 of this Annual Report on Form 10-K. (2)Financial Statement Schedule: Information required by this item is included within the consolidated financial statements or notes in Item 8 of this Annual Report on Form 10-K. (3)Exhibits – See (b) belowb)Exhibits Index to Exhibits 103Table of ContentsIndex to ExhibitsExhibit No.Description 2International Vapor Group Stock Purchase Agreement dated as of September 5, 2018, between Turning Point Brands, Inc. and International Vapor Group, LLC (incorporated by referenceto Exhibit 2.1 to the Registrant’s Quarterly Report on Form 10-Q filed on November 7, 2018). 2.1Agreement and Plan of Merger and Reorganization, dated as of April 7, 2020, by and among TPB, SDI and Merger Sub. (incorporated by reference to Exhibit 2.1 to the Registrant’sCurrent Report on Form 8-K filed on April 8, 2020). 3.1Second Amended and Restated Certificate of Incorporation of Turning Point Brands, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filedon May 16, 2016). 3.2Second Amended and Restated By-laws (incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q filed on October 27, 2020). 4.1Registration Rights Agreement of Turning Point Brands, Inc. dated May 10, 2016, between Turning Point Brands, Inc. and the Stockholders named therein (incorporated by reference toExhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on May 16, 2016). 4.2Description of Securities. (incorporated by reference to Exhibit 4.2 to the Registrant’s Annual Report on Form 10-K filed on March 12, 2020). 4.3 Indenture dated as of February 11, 2021, between Turning Point Brands, Inc. and GLAS Trust Company LLC, (including the form of Note as Exhibit A thereto) (incorporated byreference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 5, 2021). 10.1Turning Point Brands, Inc. 2015 Equity Incentive Plan (the “2015 Plan”) (incorporated by reference to Exhibit 10.1 to the Registrant’s Registration Statement on Form S-1/A (File No.333-207816) filed on November 5, 2015). † 10.2Form of Stock Option Award Agreement under the 2015 Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K filed on March 13, 2017). † 10.3 Form of Performance-Based Restricted Stock Unit Award Agreement under the Turning Point Brands, Inc. 2015 Equity Incentive Plan (incorporated by reference to Exhibit 10.3 to theRegistrant’s Quarterly Report on Form 10-Q filed on May 11, 2017). † 10.42006 Equity Incentive Plan of Turning Point Brands, Inc. (incorporated by reference to Exhibit 10.3 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-207816) filedon November 5, 2015). † 10.5Amendment No. 1 to the 2006 Equity Incentive Plan of North Atlantic Holding Company, Inc. (incorporated by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-Kfiled on March 13, 2017). † 10.6Amendment No. 2 to the 2006 Equity Incentive Plan of North Atlantic Holding Company, Inc. (incorporated by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-Kfiled on March 13, 2017). † 10.7Amendment No. 3 to the 2006 Equity Incentive Plan of North Atlantic Holding Company, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-Kfiled on February 7, 2017). † 10.8Amendment No. 4 to the 2006 Equity Incentive Plan of North Atlantic Holding Company, Inc. (incorporated by reference to Exhibit 10.54 to the Registrant’s Annual Report on Form 10-K filed on March 13, 2017). † 10.9Form of Award Agreement under the 2006 Plan (incorporated by reference to Exhibit 10.4 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-207816) filed onNovember 5, 2015). †104Table of Contents10.10Form of Cash-Out Agreement under the 2006 Plan (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on February 7, 2017). † 10.11Form of Indemnification Agreement between Turning Point Brands, Inc. and certain directors and officers (incorporated by reference to Exhibit 10.10 to the Registrant’s RegistrationStatement on Form S-1/A (File No. 333-207816) filed on November 24, 2015). 10.12Form of Indemnification Agreement between Turning Point Brands, Inc. and Standard General Master Fund, L.P. (incorporated by reference to Exhibit 10.2 to the Registrant’sRegistration Statement on Form S-1/A (File No. 333-207816) filed on November 24, 2015). 10.13Employment Agreement between Turning Point Brands, Inc. and Lawrence Wexler dated November 23, 2015 (incorporated by reference to Exhibit 10.9 to the Registrant’s Current Reporton Form 8-K filed on May 16, 2016). † 10.14Employment Agreement between Turning Point Brands, Inc. and Mr. Robert M. Lavan dated March 13, 2018 (incorporated by reference to Exhibit 10.1 to the Registrant’s CurrentReport on Form 8-K filed on March 19, 2018). † 10.15Contract Manufacturing, Packaging and Distribution Agreement dated as of September 4, 2008, between National Tobacco Company, L.P. and Swedish Match North America, Inc.(incorporated by reference to Exhibit 10.17 to the Registrant’s Registration Statement on Form S-1/A (File No. 333-207816) filed on November 24, 2015). 10.16Amended and Restated Distribution and License Agreement dated as of November 30, 1992, between Bolloré Technologies, S.A. and North Atlantic Trading Company, Inc., aspredecessor to North Atlantic Operating Company, Inc. (U.S.) (incorporated by reference to Exhibit 10.2 to Amendment No. 2 to the Registrant’s Registration Statement (Reg. No. 333-31931) on Form S-4/A filed with the Commission on September 17, 1997). 10.17Amended and Restated Distribution and License Agreement dated as of November 30, 1992, between Bolloré Technologies, S.A. and North Atlantic Trading Company, Inc., aspredecessor to North Atlantic Operating Company, Inc. (Canada) (incorporated by reference to Exhibit 10.4 to Amendment No. 2 to the Registrant’s Registration Statement (Reg. No.333-31931) on Form S-4/A filed with the Commission on September 17, 1997). 10.18Amendment to the Amended and Restated Distribution and License Agreement dated March 31, 1993 between Bolloré Technologies, S.A. and North Atlantic Trading Company, Inc.(U.S. & Canada) (incorporated by reference to Exhibit 10.22 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). 10.19Amendment to the Amended and Restated Distribution and License Agreements dated June 10, 1996, between Bolloré Technologies, S.A. and North Atlantic Trading Company, Inc.(U.S. & Canada) (incorporated by reference to Exhibit 10.23 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). 10.20Amendment to the Amended and Restated Distribution and License Agreement dated September 1996, between Bolloré Technologies, S.A. and North Atlantic Trading Company, Inc.(U.S. & Canada) (incorporated by reference to Exhibit 10.24 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). 10.21Restated Amendment to the Amended and Restated Distribution and License Agreement between Bolloré Technologies, S.A. and North Atlantic Operating Company, Inc. dated June25, 1997 (U.S. & Canada) (incorporated by reference to Exhibit 10.5 to Amendment No. 2 to the Registrant’s Registration Statement (Reg. No. 333-31931) on Form S-4/A filed with theCommission on September 17, 1997). 10.22Amendment to the Amended and Restated Distribution and License Agreement dated October 22, 1997, between Bolloré Technologies, S.A. and North Atlantic Operating Company,Inc. (U.S. & Canada) (incorporated by reference to Exhibit 10.31 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1997). 10.23Amendment to the Amended and Restated Distribution and License Agreement dated June 19, 2002, between Bolloré S.A. and North Atlantic Operating Company, Inc. (U.S. & Canada)(incorporated by reference to Exhibit 10.31 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015).105Table of Contents10.24Trademark Consent Agreement, dated March 26, 1997, between Bolloré Technologies, S.A. and North Atlantic Trading Company, Inc. (incorporated by reference to Exhibit 10.25 to theRegistrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). 10.25Amendment to the Amended and Restated Distribution and License Agreement dated February 28, 2005, between Bolloré S.A. and North Atlantic Operating Company, Inc. (U.S. &Canada) (incorporated by reference to Exhibit 10.33 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). 10.26Amendment to the Amended and Restated Distribution and License Agreement dated April 20, 2006, between Bolloré S.A. and North Atlantic Operating Company, Inc. (U.S. &Canada) (incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2006). 10.27Amendment to the Amended and Restated Distribution and License Agreement dated March 10, 2010, between Bolloré S.A. and North Atlantic Operating Company, Inc. (U.S. &Canada) (incorporated by reference to Exhibit 10.35 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). 10.28Consent Agreement dated as of April 4, 1997, between Bolloré Technologies, S.A. and North Atlantic Trading Company, Inc. (incorporated by reference to Exhibit 10.26 to theRegistrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). 10.29Amendment No. 1 to Consent Agreement dated as of April 9, 1997, between Bolloré Technologies, S.A. and North Atlantic Operating Company, Inc. (incorporated by reference toExhibit 10.27 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). 10.30Amendment No. 2 to Consent Agreement dated as of June 25, 1997, between Bolloré Technologies, S.A. and North Atlantic Operating Company, Inc. (incorporated by reference toExhibit 10.28 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). 10.31Trademark Consent Agreement dated July 31, 2003, among Bolloré Technologies, S.A., North Atlantic Trading Company, Inc. and North Atlantic Operating Company, Inc. (incorporatedby reference to Exhibit 10.32 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). 10.32Amendment No. 2 to Trademark Consent Agreement dated December 17, 2012, between Bolloré S.A. and North Atlantic Operating Company, Inc. (incorporated by reference to Exhibit10.36 to the Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). 10.33License and Distribution Agreement dated March 19, 2013 between Bolloré S.A. and North Atlantic Operating Company, Inc. (incorporated by reference to Exhibit 10.37 to theRegistrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015). 10.34Distributors Supply Agreement dated as of April 1, 2013, between National Tobacco Company, L.P. and JJA Distributors, LLC (incorporated by reference to Exhibit 10.38 to theRegistrant’s Registration Statement on Form S-1/A (File No. 333-207816) filed on November 24, 2015). 10.35Credit Agreement, dated as of February 11, 2021, by and among Turning Point Brands, Inc., as obligor, Barclays Bank PLC, as administrative agent, and the lenders party thereto(incorporated by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on May 5, 2021). 10.36Form of Capped Call Agreement (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 31, 2019). 10.37Consulting Agreement dated August 19, 2020, effective November 1, 2020, between Turning Point Brands, Inc. and James Dobbins. (incorporated by reference to Exhibit 10.2 to theRegistrant’s Quarterly Report on Form 10-Q filed on October 27, 2020) † 10.38Employment Agreement by and between the Company and Graham A. Purdy, dated as of March 2, 2021. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed on March 5, 2021) †106Table of Contents10.39Employment Agreement by and between the Company and Luis Reformina, dated as of March 23, 2021. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed on March 24, 2021) † 10.40Employment Agreement by and between the Company and Yavor Efremov dated December 15, 2021. (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report onForm 8-K filed on December 16, 2021) † 10.41First Lien Pari Passu Intercreditor Agreement, dated as of February 11, 2021, by and among Turning Point Brands, Inc., and the other grantors party thereto, Barclays Bank PLC, as firstlien collateral agent, and GLAS Trust Company LLC, as other collateral agent (incorporated by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on May5, 2021). 10.42Pledge and Security Agreement, dated as of February 11, 2021, by and among Turning Point Brands, Inc., as grantor, the other grantors party thereto, Barclays Bank PLC, as collateralagent, and the lenders party thereto. (incorporated by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on May 5, 2021). 10.43Guaranty Agreement, dated as of February 11, 2021, by and among Turning Point Brands, Inc. and certain of its subsidiaries, as guarantors, Barclays Bank PLC, as administrative agent,and the lenders party thereto. (incorporated by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q filed on May 5, 2021). 10.44Pledge and Security Agreement, dated as of February 11, 2021, by and among Turning Point Brands, Inc., as grantor, the other grantors party thereto and GLAS Trust Company LLC, ascollateral agent (incorporated by reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q filed on May 5, 2021). 21Subsidiaries of Turning Point Brands, Inc.* 23Consent of RSM US LLP.* 31.1Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 31.2Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 31.3Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.* 32.1Certifications of Principal Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.* 101XBRL (eXtensible Business Reporting Language). The following materials from Turning Point Brands, Inc.’s Annual Report on Form 10-K for the years ended December 31, 2021, 2020,and 2019, formatted in Inline XBRL: (i) consolidated balance sheets, (ii) consolidated statements of income, (iii) consolidated statements of comprehensive income, (iv) consolidatedstatements of changes in stockholder’s equity (deficit), (v) consolidated statements of cash flows, and (vi) notes to the consolidated financial statements.* 104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).** Filed herewith† Compensatory plan or arrangement Item 16. Form 10-K Summary Not applicable. 107Table of ContentsSignaturesPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized, on March 11, 2022.TURNING POINT BRANDS, INC. By:/s/ Yavor Efremov Name:Yavor Efremov Title:Chief Executive Officer By:/s/ Luis Reformina Name:Luis Reformina Title:Chief Financial Officer By:/s/ Brian Wigginton Name:Brian Wigginton Title:Chief Accounting OfficerPursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on thedates indicated.Signature Title Date By:/s/ Yavor Efremov Director, Chief Executive Officer March 11, 2022 Yavor Efremov By:/s/ Luis Reformina Chief Financial Officer March 11, 2022 Luis Reformina By:/s/ Brian Wigginton Chief Accounting Officer March 11, 2022 Brian Wigginton By:/s/ David Glazek Chairman of the Board of Directors March 11, 2022 David Glazek By:/s/ Gregory H. A. Baxter Director March 11, 2022 Gregory H. A. Baxter By:/s/ H. C. Charles Diao Director March 11, 2022 H. C. Charles Diao By:/s/ Assia Grazioli-Venier Director March 11, 2022 Assia Grazioli-Venier By:/s/ Arnold Zimmerman Director March 11, 2022 Arnold Zimmerman By:/s/ Ashley Davis Frushone Director March 11, 2022 Ashley Davis Frushone By:/s/ Stephen Usher Director March 11, 2022 Stephen Usher By:/s/ Lawrence S. Wexler Director March 11, 2022 Lawrence S. Wexler 108Exhibit 21 Subsidiaries of Turning Point Brands, Inc. The following list outlines the subsidiaries of Turning Point Brands, Inc., as of December 31, 2021. Jurisdiction ofOrganizationTurning Point Brands, Inc. DelawareNorth Atlantic Trading Company, Inc. DelawareNational Tobacco Finance, LLC DelawareNational Tobacco Company, L.P. DelawareNorth Atlantic Operating Company, Inc. DelawareNorth Atlantic Cigarette Company, Inc. DelawareRBJ Sales, Inc. TennesseeNorth Atlantic Wrap Company LLC DelawareTPB Services LLC DelawareTurning Point Brands, LLC DelawareIntrepid Brands, LLC DelawareTPB Beast LLC DelawareTPB Shark, LLC DelawareNu-X Ventures, LLC DelawareNu-X Distribution LLC DelawareNu-Tech Holdings LLC DelawareSouth Beach Holdings LLC DelawareTPB International, LLC DelawareTurning Point Brands (Canada) Inc. Ontario, CanadaExhibit 23Consent of Independent Registered Public Accounting FirmWe consent to the incorporation by reference in (i) Registration Statements No. 333-211321 and No. 333-255758 on Form S-8 of Turning Point Brands, Inc. and (ii) Registration Statements No. 333-219114and No. 333-240310 on Form S-3 of Turning Point Brands, Inc. of our reports dated March 11, 2022 relating to the consolidated financial statements and the effectiveness of internal control over financialreporting of Turning Point Brands, Inc. and its subsidiaries appearing in this Annual Report on Form 10-K of Turning Point Brands, Inc. for the year ended December 31, 2021.Our report dated March 11, 2022, on the effectiveness of internal control over financial reporting as of December 31, 2021, expressed an opinion that Turning Point Brands, Inc. had not maintained effectiveinternal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of theTreadway Commission in 2013./s/ RSM US LLPRichmond, VirginiaMarch 11, 2022 Exhibit 31.1 CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICERPURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT I, Yavor Efremov, certify that: 1. I have reviewed this Annual Report on Form 10-K 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 underwhich 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 cashflows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer 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)) andinternal 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 theregistrant, 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 regardingthe 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 inthe 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 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 theregistrant’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 torecord, 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: March 11, 2022By:/s/ YAVOR EFREMOV Yavor Efremov President and Chief Executive Officer(Principal Executive Officer)Exhibit 31.2 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICERPURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT I, Luis Reformina, certify that: 1. I have reviewed this Annual Report on Form 10-K 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 underwhich 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 cashflows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer 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)) andinternal 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 theregistrant, 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 regardingthe 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 inthe 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 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 theregistrant’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 torecord, 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: March 11, 2022By:/s/ LUIS REFORMINA Luis Reformina Chief Financial Officer(Principal Financial Officer)Exhibit 31.3 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICERPURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT I, Brian Wigginton, certify that: 1. I have reviewed this Annual Report on Form 10-K 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 underwhich 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 cashflows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer 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)) andinternal 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 theregistrant, 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 regardingthe 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 inthe 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 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 theregistrant’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 torecord, 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: March 11, 2022By:/s/ BRIAN WIGGINTON Brian Wigginton Chief Accounting OfficerExhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT In connection with the Annual Report on Form 10-K of Turning Point Brands, Inc. (the "Company") for the year ended December 31, 2021, as filed with the Securities and Exchange Commission on the datehereof (the "Report"), we, Yavor Efremov, President and Chief Executive Officer, Luis Reformina, Chief Financial Officer, and Brian Wigginton, Chief Accounting Officer, of the Company, certify, pursuant to18 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: March 11, 2022By:/s/ YAVOR EFREMOV Yavor Efremov President and Chief Executive Officer (Principal Executive Officer) Date: March 11, 2022By:/s/ LUIS REFORMINA Luis Reformina Chief Financial Officer (Principal Financial Officer)Date: March 11, 2022By:/s/ BRIAN WIGGINTON Brian Wigginton Chief Accounting Officer 

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