UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2024
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______________ to ________________
Commission file number: 001-37763
TURNING POINT BRANDS, INC.
(Exact name of registrant as specified in its charter)
Delaware
20-0709285
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
5201 Interchange Way, Louisville, KY
40229
(Address of principal executive offices)
(Zip Code)
(502) 778-4421
(Registrant’s telephone number, including area code)
Former name, former address and former fiscal year, if changed since last report: not applicable
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
TPB
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☑ Yes ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☑ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files). ☑ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 standards provided 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) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report. ☑
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant
included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based
compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☑ No
As of June 30, 2024, the aggregate market value of the registrant’s voting common stock held by non-affiliates of the registrant was
approximately $484 million based on such closing sale price of the common stock as reported on the New York Stock Exchange.
At February 28, 2025, there were 17,747,117 shares outstanding of the registrant’s voting common stock, par value $0.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its 2025 Annual Meeting of Shareholders are incorporated by reference into Part
III of this Annual Report on Form 10-K and will be filed within 120 days of the registrant’s fiscal year end.
2
TURNING POINT BRANDS, INC.
TABLE OF CONTENTS
Page No.
PART I
ITEM 1.
Business .............................................................................................................................................
4
ITEM 1A. Risk Factors .......................................................................................................................................
16
ITEM 1B. Unresolved Staff Comments ..............................................................................................................
37
ITEM 1C. Cybersecurity .....................................................................................................................................
37
ITEM 2.
Properties ...........................................................................................................................................
39
ITEM 3.
Legal Proceedings ..............................................................................................................................
39
ITEM 4.
Mine Safety Disclosures ....................................................................................................................
39
PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities ..............................................................................................................................
40
ITEM 6.
Selected Financial Data ......................................................................................................................
41
ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations .............
42
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk ...........................................................
59
ITEM 8.
Financial Statements and Supplementary Data ..................................................................................
60
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .............
99
ITEM 9A. Controls and Procedures ....................................................................................................................
99
ITEM 9B. Other Information ..............................................................................................................................
101
ITEM 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections ...............................................
101
PART III
ITEM 10.
Directors, Executive Officers and Corporate Governance .................................................................
102
ITEM 11.
Executive Compensation ....................................................................................................................
102
ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters..............................................................................................................................................
102
ITEM 13.
Certain Relationships and Related Transactions, and Director Independence ...................................
102
ITEM 14.
Principal Accountant Fees and Services ............................................................................................
102
PART IV
ITEM 15.
Exhibits and Financial Statement Schedules ......................................................................................
103
ITEM 16.
Form 10-K Summary .........................................................................................................................
106
Signatures ...............................................................................................................................................................
107
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Cautionary Note Regarding Forward-Looking Statements
This annual report on Form 10-K (this “Annual Report”) 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 not historical facts. By their nature, forward-looking statements
involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the
future. Some, but not 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 the forward-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 it is impossible for us to predict these events or how they may
affect it. We have no obligation, and do not intend, to update any forward-looking statements after the date hereof, except as
required by federal securities laws.
4
PART I
Item 1. Business
Overview
Turning Point Brands, Inc. (the “Company,” “we,” “our,” or “us”) is a leading manufacturer, marketer and distributor of
branded consumer products. We sell a wide range of products to adult consumers consisting of staple products with our iconic
brands Zig-Zag® and Stoker’s® to fulfill evolving consumer preferences. Among other markets, we compete in the alternative
smoking accessories and Other Tobacco Products (“OTP”) industries. The alternative smoking accessories market is a
dynamic market experiencing robust secular growth driven by cannabinoid legalization in the U.S. and Canada, and positively
evolving consumer perception and acceptance in North America. The OTP industry, which consists of non-cigarette tobacco
products, exhibited low-single-digit consumer unit annualized declines during the full year period ended 2024 as reported by
Management Science Associates, Inc. (“MSAi”) a third-party analytics and information company. Our segments are led by
our core proprietary and iconic brands: Zig-Zag® in the Zig-Zag products segment, and Stoker’s® along with FRE®, Beech-
Nut® and Trophy® in the Stoker’s products segment. Our businesses generate solid cash flow which we use to invest in our
business, finance acquisitions, increase brand support, expand our distribution infrastructure, and strengthen our capital
position. We currently ship to approximately 900 distributors with an additional 600 secondary, indirect wholesalers in the
U.S. that carry and sell our products. Under the leadership of a senior management team with extensive experience in the
consumer products, alternative smoking accessories and tobacco industries, we have grown and diversified our business
through new product launches, category expansions, and acquisitions while concurrently improving operational efficiency.
We believe there are meaningful opportunities to grow through investing in organic growth, acquisitions and joint ventures
across all product categories. As of December 31, 2024, our products were available in approximately 200,000 U.S. retail
locations which, with the addition of retail stores in Canada, brings our total North American retail presence to an estimated
220,000 points of distribution. Our sales team targets widespread distribution to all traditional retail channels, including
convenience stores, and we have a growing e-commerce business.
Discontinued Operations
On January 2, 2025, the Company contributed 100% of its interest in South Beach Brands LLC (“SBB”), the subsidiary that
owned and operated the Company’s Creative Distribution Solutions (“CDS”) reportable segment, to General Wireless
Operations, Inc. (“GWO”) in exchange for 49% of the issued and outstanding GWO common stock. GWO is a joint venture
between the Company and Standard General, LP entered into in December 2018. CDS markets and distributes liquid nicotine
and ancillary products without tobacco and/or nicotine primarily through non-traditional retail and B2C online platforms, and
includes widely recognized names such as Vapor Beast® and VaporFi®
The assets and liabilities associated with the CDS segment have been classified as held for sale as of December 31, 2024 and
its financial results are classified as discontinued operations and reported separately for all periods presented herein. With the
classification of the CDS reportable segment to discontinued operations, the Company now has two reportable segments,
which are reflected herein. Unless otherwise noted, the description of business in this Annual Report on Form 10-K relates
solely to the continuing operations, comprised of the Zig-Zag and Stoker’s segments.
Products
Zig-Zag Products
In our Zig-Zag products (“Zig-Zag”) segment, we principally market and distribute (i) rolling papers, tubes, and related
products; (ii) finished cigars and make-your-own (“MYO”) cigar wraps; and (iii) other accessories. In addition, we have a
majority stake in Turning Point Brands Canada Inc. ("Turning Point Brands Canada"), a specialty marketing and distribution
firm focused on building brands in the Canadian cannabis accessories, tobacco and alternative products categories. The
strength of the Zig-Zag® brand drives our leadership position in both the rolling papers and MYO cigar wrap markets. Zig-
Zag® is the #1 premium and #1 overall rolling paper in the U.S. with approximately 33% total market share according to
MSAi.1 Management estimates that Zig-Zag® is also 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 and Supply
Agreements” below for our discussion of the Zig-Zag® distribution agreement.
1 Brand ranking and market share percentages obtained from MSAi for the 52-week period ended December 28, 2024.
5
In MYO cigar wraps, the Zig-Zag® brand remains the market leader and continues to innovate in novel ways through
additional product introductions. For instance, we introduced Zig-Zag® ‘Rillo sized 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 partner Durfort 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. In connection with the
transaction, we entered into an exclusive Master Distribution Agreement to market and sell the original Blunt Wrap® cigar
wraps within the U.S. which was effective October 9, 2020. In late 2021, we extended 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 that we increased
to a 65% ownership stake by July 2021. Our majority ownership stake leverages Turning Point Brands Canada’s significant
expertise in marketing and distributing cannabis accessories and tobacco products throughout Canada. The remainder of
Turning Point Brands Canada is owned by its management.
In July 2021, we acquired certain assets of Unitabac, LLC (“Unitabac”), a marketer of mass-market cigars. In the acquisition,
we acquired a robust portfolio of cigarillo products and all related intellectual property, including Cigarillo Non-Tip (NT)
HTL products and Rolled Leaf and Natural Leaf Cigarillo products that we are using to re-introduce the Zig-Zag® brand into
a large and growing cigarillo market.
We have continued to reposition 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.
Stoker’s Products
In our Stoker’s products (“Stoker’s”) segment, we (i) manufacture and market moist snuff tobacco (“MST”), (ii) contract for
and market FRE®, our modern oral product and (iii) contract for and market loose-leaf chewing tobacco products. Stoker’s®
is our focus brand in both MST and chewing tobacco. In MST, Stoker’s® remains among the fastest growing brands and holds
a 11.2% share in the stores with distribution and a 7.4% share of the total U.S. MST non-pouch market. Stoker’s® is a pioneer
in the MST industry.1 It was first to introduce 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.
Stoker’s® chewing tobacco has grown its market share considerably over the last several years becoming the largest brand
family in the industry and is presently the #1 discount and #1 overall brand in the industry, with approximately a 32.3%
market share.1 Our status in the chewing tobacco 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 is the #1 marketer of
chewing tobacco with approximately 37.2% market share.1 Our chewing tobacco operations are facilitated through our long-
standing relationship with Swedish Match (a division of Philip Morris International Inc.), the manufacturer of our loose-leaf
chewing tobaccos.
In 2023, the Company expanded its rollout of modern oral nicotine products with FRE® white nicotine pouches. Modern oral
nicotine products are currently one of the fastest growing categories within the nicotine space. In September 2024, one of
the Company's wholly-owned subsidiaries acquired a 50% stake in ALP Supply Co., LLC (“ALP”). ALP is a joint venture
established with Last Country Ventures, LLC for the purpose of selling and distributing tobacco-free white pouch nicotine
products in 3, 6 and 9 mg strengths. Pursuant to the joint venture agreement, the Company's subsidiary is responsible for
selling products to ALP and providing warehousing and shipping services on its behalf.
6
Competitive Strengths
We believe our competitive strengths include the following:
Large, Leading Brands with Significant Scale
We 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 date back 145 and 84 years, respectively.
•
Zig-Zag® is the #1 premium and #1 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 by MSAi.1 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 MYO cigar wraps product. Approximately 42% of our total 2024
Zig-Zag® branded net sales are under our own Zig-Zag® marks rather than those we license from RTI under the
Distribution and Licensing Agreements described below.
•
Stoker’s® is among the fastest growing MST brands in the industry and is the #1 loose-leaf chewing tobacco
brand.1 We manufacture Stoker’s® MST using only 100% American leaf, utilizing a proprietary process to produce
what we believe is a superior product.
Zig-Zag® is an iconic brand and has strong, enduring brand recognition among a wide audience of consumers. The Stoker’s®
brand is seen as an innovator in both the moist snuff and loose-leaf chewing tobacco markets.
Exposure to Growing Cannabinoid Consumption Trends
We believe that the cannabinoid market will continue to grow over the coming years as cannabinoid use becomes increasingly
accepted by the U.S. public. Our product offerings, particularly those in our Zig-Zag Products segment, are ideally positioned
to benefit from continued growth in consumer consumption.
The legal cannabis market in the U.S. is projected to grow from approximately $32 billion in 2024 to approximately
$46 billion by 2028 according to a June 2024 report of BDSA, a market research firm focused on the legal cannabis market.
With flower being the leading form factor for cannabis consumption among consumers, we believe our product offerings
provide us with significant opportunity to expand the number of retail channels we reach. A recent Gallup poll showed nearly
seven in ten Americans now support legalizing cannabis nationwide, approximately twice the amount as twenty years ago.
As of the end of 2024, 24 U.S. states and the District of Columbia had legalized cannabis for adult recreational use and a
majority of states now have comprehensive public medical cannabis programs.
Successful Track Record of New Product Launches and Category Expansions
We 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 growth potential:
•
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 a market share leader for MYO cigar wraps with approximately a 48%
share of the cigar wraps category and 71% of the share of the HTL cigar wraps sub-category. 1 We believe our
success was driven by the Zig-Zag® tobacco branding, 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
cigar wraps 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 their respective 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 and differentiation of the Stoker’s® product have firmly established us as the
market leader with over 56% of the tub market as of 2024. In 2015, we introduced Stoker’s® MST in 1.2 oz. cans
to further expand retail penetration, particularly in convenience stores.
1 Brand rankings and market share percentages obtained from MSAi for the 52-week period ended December 28, 2024.
7
•
In late 2023, we expanded our oral nicotine offering to include FRE®, a white pouch nicotine product, with a national
rollout started in 2024 during which we expanded SKU assortments to include additional nicotine strengths.
•
In late 2024, we entered into a joint venture with ALP, which launched an ALP white pouch nicotine product.
•
We have also had success in acquiring, partnering with and integrating new products and product lines, including
Cigarillos, with the acquisition of Unitabac.
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 track record and existing portfolio of brands provide
growth advantages as we continue to evaluate opportunities to extend our product lines and expand into new categories.
Extensive Distribution Network and Data Driven Sales Organization
We 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 requirements relatively low. We have long-standing
relationships in the core convenience store channel and wholesale distribution network with access to more than 220,000
retail outlets in North America. We are also increasing brand presence through non-traditional channels including 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 to facilitate our e-commerce brand presence and are selling our products on
Amazon and other e-commerce sites.
We service our customer base with an experienced sales and marketing organization of approximately 200 professionals who
possess in-depth knowledge of the OTP market. We extensively use data supported by leading technology, enabling our
salesforce to analyze changing trends and effectively identify evolving consumer preferences at the store level and respond
efficiently. We subscribe to a sales tracking system provided by MSAi that measures OTP product shipments by all market
participants, on a weekly basis, from approximately 600 wholesalers to over 265,000 traditional retail stores in the U.S. This
system enables us to understand share and volume trends across multiple categories at the 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. Within our Stoker’s segment, we continue to see 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 Flow
We 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 provides marketplace 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 tobacco and cigarette paper, among others.
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. Our supplier 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 2024, approximately 75% of our net sales were derived from outsourced production operations and our capital
expenditures have ranged between $4.7 million and $7.7 million per year over the previous five 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 are primarily 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 of our brands.
We do not outsource our MST production as a result of our proprietary manufacturing processes which are substantively
different than those of our competitors.
1 Brand ranking and market share percentages obtained from MSAi for the 52-week period ended December 28, 2024.
8
Expertise to Succeed in Dynamic Regulatory Environments
We operate in a highly regulated environment involving many different government agencies. In 2009, the U.S. Food and
Drug Administration (“FDA”) was given jurisdiction over cigarettes and smokeless tobacco, which expanded in 2016 to
include cigars and all other tobacco products. This was further expanded in 2022 to cover non-tobacco nicotine products. We
believe we have a competitive advantage due to our management team’s experience navigating the relevant regulatory
environment. We have increased 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 has implemented a premarket review process, referred to as the PMTA, or the Premarket Tobacco Application
process, which requires all tobacco products introduced or changed since 2007 to submit an application to the FDA and
receive marketing authorization prior to entering the market. For products already on the market when these requirements
became effective, the FDA required applications for those products to be on file by certain dates depending on whether the
products were originally regulated under the Family Smoking Prevention Tobacco Control Act (“TCA”), whether they were
later “deemed” tobacco products, or whether they contain non-tobacco nicotine and were not otherwise exempt from the
TCA. The PMTA process is a very expensive and resource-intensive process and there are currently hundreds of competitors
in the market but very few have the capability or the resources to get their products successfully through this process. In the
years since, the FDA has rejected millions of applications.
To date, we have spent approximately $30.0 million in order to file and supplement applications covering a broad portfolio
of noncombustible products, including novel oral nicotine products. By developing and submitting for FDA marketing
authorization a deep suite of noncombustible products and leveraging our distribution platform, we believe that we have the
opportunity to grow as consumers look toward potentially lower-risk product offerings. We believe this is a transformational
event for the industry with potential for us to realize 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
have the infrastructure needed to comply with these regulatory requirements. See “Risks Related to Legal, Tax and Regulatory
Matters” under Item 1A “Risk Factors” for additional information.
In addition, we have been building and expanding 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 the use of the U.S. Postal
Service to mail e-cigarette and related products directly to consumers and requires other common carriers to obtain adult
signature on delivery.
Experienced Management Team
With 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 improving operational efficiency. Members of
management have previous experience at other leading tobacco companies. Given the professional experience of our senior
management team, we are able to analyze risks and opportunities from a variety of perspectives. Our senior leadership has
embraced a collaborative culture which leverages experience, analytical rigor and creativity to assess opportunities 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 Strategies
We 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 improving margins 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 Internationally
We intend to remain a consumer centered organization with an innovative view and understanding of the alternative smoking
accessories and OTP markets. We believe we have strong tailwinds for growth within 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 store channel and expanding our presence into non-traditional channels including headshops,
dispensaries and e-commerce. Within our Stoker’s products segment, there is ample runway to gain market share 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.
9
In 2024, less than 10% of our revenues were generated outside of the U.S. We believe international sales represent a
meaningful growth opportunity. Having established a strong infrastructure and negotiated relationships across multiple
segments and products, we are pursuing an international growth strategy to broaden sales and strengthen margins. We further
invested in growth in Canada in 2021 by increasing our ownership in Turning Point Brands 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 assortment in Canada and selling our Stoker’s® MST products in South America, Europe, Asia and
Africa.
Expand into Adjacent Categories through Innovation and New Partnerships
We continually evaluate opportunities to expand into adjacent product categories by leveraging our current portfolio and
distribution platform, as well as by forming new partnerships. We believe there are meaningful opportunities for growth
within the alternative smoking accessories. We maintain a robust product pipeline and plan to strategically introduce new
products in attractive, growing markets, both domestically and internationally, with specific focus on our papers and MYO
wraps businesses. The strength of the Zig-Zag® brand provides a highly-leverageable platform to expand our portfolio
with complementary products such as our launch and expansion of hemp papers, paper cones, hemp wraps and natural leaf
wraps. As we have done successfully in the past, we will leverage our existing sales infrastructure to drive distribution of
new products and are investing to expand our e-commerce distribution capabilities.
We have identified a number of new opportunities and we intend to leverage our existing brands and partnerships to continue
the process of commercializing winning products that satisfy consumer needs.
Accelerate Growth Through National Distribution Network
Our business is built around a powerful sales and distribution infrastructure that currently reaches an estimated 220,000 retail
outlets in North America. We have a strong presence in independent convenience stores and now service most of the leading
chain accounts. Through our e-commerce platforms we have alternative avenues through which we sell third-party products
and an increasing amount 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 distribution system.
Combining our different platforms, we have an expansive multi-channel distribution infrastructure that gives us a competitive
advantage when we introduce new products or acquire companies that we can 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 in response to evolving consumer and market preferences.
Strategically Pursue Acquisitions
We believe there are meaningful acquisition opportunities in our fragmented markets. We regularly evaluate acquisition
opportunities across our industries. In evaluating acquisition opportunities, our focus is on identifying acquisitions that would
leverage our distribution platform, regulatory infrastructure and product offerings or enable category expansion in areas with
high growth potential to drive profit generation.
The vast majority of our 2024 U.S. gross profit was derived from sales of products currently regulated by the FDA Center
for Tobacco Products. We have significant experience in complying with the FDA regulatory regime with a compliance
infrastructure composed of legal and scientific professionals. We believe many smaller manufacturers currently lack this
infrastructure, which is necessary for complying with the broad scope of FDA regulations. We believe our regulatory
compliance infrastructure, combined with our skilled management and strong distribution platform, position us to act 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 through distribution 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 the U.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. In 2003, we acquired the Stoker’s® brand. We have
since built the brand to the #1 position in the chewing tobacco industry while successfully leveraging the brand’s value
through our MST expansion where it remains among the fastest growing MST brands. Our investment in Turning Point
Brands Canada in 2019 is accelerating Zig-Zag®’s growth through alternative channel penetration. In 2020, we acquired
certain assets from 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 was benefitting from secular growth
tailwinds and gave us access to a complimentary product in Blunt Wrap® through an exclusive distribution agreement. Our
10
investment in 2021 in Old Pal Holding Company, LLC (“Old Pal”) gives us increased exposure to the large and growing
cannabinoid market. In 2021, we also acquired certain assets from Unitabac, providing a platform to re-enter the large and
growing cigarillo category.
Raw Materials, Product Supply, and Inventory Management
We 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):
December 31, December 31,
2024
2023
Raw materials and work in process ................................................................................. $
7,699 $
5,201
Leaf tobacco ....................................................................................................................
35,622
34,894
Finished goods - Zig-Zag products ..................................................................................
38,042
41,783
Finished goods - Stoker’s products .................................................................................
12,966
8,109
Other ................................................................................................................................
1,924
1,711
Inventories ....................................................................................................................... $
96,253 $
91,698
Zig-Zag® Products
Pursuant 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 its obligations under the Zig-Zag® distribution
agreements. See “Distribution and Supply Agreements” below for a discussion of the Zig-Zag® distribution agreements. If
RTI is unable or unwilling to perform its obligations 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-month supply 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 Products
We produce our moist snuff and loose-leaf chewing tobaccos from air-cured and fire-cured leaf tobacco, respectively. We
utilize recognized suppliers that generally maintain 12- to 24-month supplies of our 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, moist snuff 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. In December 2023, a third-party warehouse
that stores our tobacco was damaged by a tornado, leading to a loss of some of our leaf tobacco inventory. We believe the
losses will be fully covered by insurance and, in light of alternative supply opportunities and our distribution schedule, the
loss of the tobacco has not impacted our ability to meet the demand for our products. See Item 1A. “Risk Factors – Our
business may be damaged by events outside of our or our suppliers’ control, such as the impact of epidemics or pandemics,
political upheavals, or natural disasters.”
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 supplier for 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 our loose-leaf chewing tobacco production is
fulfilled through our agreement with Swedish Match. See “Distribution and Supply Agreements” below for our discussion of
the Swedish Match Manufacturing Agreement.
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Distribution and Supply Agreements
The Zig-Zag Distribution and License Agreements
In 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 accordance with the terms of the Distribution Agreements. The Distribution Agreements renewed for their
second twenty-year term in November 2012.
Under 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 sufficient quantities 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 of control, 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 a competitor, 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 common stock 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 we will 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 competitor without consent. There are certain de minimis exceptions to these provisions. For further details, see Item
1A. “Risk Factors – We depend on a small number of key third-party suppliers and producers for our products.”
The Distribution Agreements and the License Agreements were initially entered into with Bolloré S.A. (“Bolloré”). In
November 2020, Bolloré assigned the Distribution Agreements and the License Agreements to RTI. For a 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 Agreement
In 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 the agreement, 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 Swedish Match 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 to approve 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
monitor production 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 to terminate 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 will expire 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 terminated by 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 first of five 10-year renewal periods in September 2018.
Production and Quality Control
We primarily outsource our manufacturing and production processes and focus on packaging, marketing, and distribution.
We currently manufacture less than 25% of our products as measured by net sales. 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 our moist snuff products at our facilities in Dresden, Tennessee and Louisville, Kentucky. Our MST
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products are processed in-house, rather than outsourced, as a result of our proprietary manufacturing processes 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 nicotine products, and packaging materials. We utilize sophisticated quality controls to test and
closely monitor the quality of our 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, and moisture content
together with strict specifications for sourced products.
Given 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 contract manufacturers. Responsibilities related to process control,
manufacturing activities, quality control, and inventory management with respect to our loose-leaf products are allocated
between us and Swedish Match under the manufacturing agreement.
Sales and Marketing
We 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 and brands.
As of December 31, 2024, we had a nationwide sales and marketing organization of approximately 200 professionals. Our
sales and marketing group focuses on priority markets and sales channels and seeks to operate with a high level of efficiency.
In 2024, our Zig-Zag and Stoker’s Products sales and marketing efforts enabled our products to reach an estimated 220,000
retail outlets in North America and over 900 direct wholesale customers with an additional 600 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, mass merchandising, drug store, and non-traditional retail channels.
For Zig-Zag Products, we have also developed a growing e-commerce business along with a sales team focused on serving
alternative channels such as headshops and dispensaries. We have expanded, and intend to continue to expand, the sales of
our products into previously underdeveloped geographic markets and retail channels. In 2024, we derived more than 90% of
our net sales from sales in the U.S., with the remainder 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 265,000 traditional 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 to allocate 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 marketplace trends 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 and temporary 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 consumer media for our tobacco products.
For the year ended December 31, 2024, we had one customer that accounted for 10.2% of our net sales. We did not have any
customer that accounted for 10% or more of our net sales for the years ended December 31, 2023 or 2022. Our customers use
an open purchase order system to buy our products 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.
Competition
Many of our competitors are better capitalized than we are and have greater resources, financial and otherwise. We believe
our ability to effectively compete and maintain strong market positions in our principal product 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 “big tobacco,” including Altria Group, Inc.; British American Tobacco p.l.c.; Swedish
Match; Swisher International, Inc.; and manufacturers 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.
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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 of cigarette consumption, the “big tobacco” companies
continue to demonstrate an increased interest and participation in a number of OTP markets.
Zig-Zag Products
Our 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 Products
Our 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, and Swisher International Group, Inc. We believe moist snuff products are used
interchangeably with loose-leaf products by many consumers. For modern oral nicotine products, our four principal
competitors are Swedish Match, Modoral Brands Inc. (a unit of British American Tobacco p.l.c.), Swisher International
Group, Inc. and Helix Innovations, LLC (a division of Altria Group, Inc.).
Patents, Trademarks, and Trade Secrets
We have numerous registered trademarks relating to our products, including: Beech-Nut®, Trophy®, Havana Blossom®,
Durango®, Stoker’s®, Tequila Sunrise®, Fred’s Choice®, Old Hillside®, Our Pride®, Red Cap®, Tennessee Chew®, Big
Mountain®, Springfield Standard®, Snake River® and FRE®. The registered trademarks, 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. 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 Assurance
We 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 and development largely bases its new product
development efforts on our high-tech data systems. We spent approximately $1.3 million, $0.6 million, and $0.6 million
dollars on research and development and quality control efforts for the years ended December 31, 2024, 2023, and 2022,
respectively.
Human Capital
As of December 31, 2024, we employed 310 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
Chief People Officer (“CPO”), focuses on the health and safety of our employees, development and retention of current
employees, and talent attraction. The Chief Executive Officer (“CEO”) and CPO regularly update the board of directors and
its committees on 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 regularly conduct safety reviews and training 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 address any potential issues in our warehouse and manufacturing facilities. In addition, we
conduct quarterly Motor Vehicle Safety training and annual Motor Vehicle Records checks for those assigned to company
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 any recordable or reportable incidents.
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Employee Engagement: We are dedicated to enhancing employee engagement through initiatives that foster connection,
transparency, and well-being. Our quarterly town halls provide a forum for leadership to share business updates, recognize
achievements, and address employee questions, reinforcing our commitment to communication and alignment. Additionally,
our wellness challenges encourage employees to prioritize their physical and mental health, fostering a culture of well-
being and teamwork. These efforts reflect our commitment to creating a workplace where employees feel informed,
supported, and empowered to succeed.
Training and Talent Development: We provide technical and leadership training to employees at both the officer and non-
officer levels. In 2025, the Company will be launching a Training and Development program, which will consist of online
and in person training and development tools used by management and employees. We believe effective training and
development for our employees is essential to maintain the strength and profitability of the Company, generally, and each
brand, specifically. The Company posts its openings internally to allow current employees to apply. In 2024, we had 38
internal promotions within the organization.
Retaining Talent: During the year ended December 31, 2024, our employee voluntary turnover rate was 16.6%. To retain our
employees, we believe it is critical to continually focus on ensuring employees are highly engaged 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 to listen 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; paid parental leave; tuition assistance; paid holidays;
and paid vacation time, paid wellbeing time and other competitive ancillary benefits.
Engaging in our Communities
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 value for all stakeholders. Our operating principles
focus on winning with accountability, integrity, and responsibility. We believe that we will maximize shareholder returns by
implementing strategies and establishing goals to address public health concerns and display responsible behaviors to
suppliers, customers, members of the organization and most of all to our consumers. Our Nominating and Governance
Committee manages oversight of these efforts. As discussed below, our initiatives are led by our Nominating and Governance
Executive Committee, as well as subordinate committees that focus on specific initiatives.
Public Health
One key aspect of our program is our distinct focus on our role in public health. We market and sell products intended for
adult use only, many containing nicotine. As a result, public health plays a central role in all our product initiatives. We
believe in, and work diligently to apply, harm reduction principles to all our products, from development through distribution
and marketing. Our 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 future for sustainable growth. We intend to accomplish this by developing
low-risk alternatives according 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 to the user. We will continue to
focus our research and development, scientific, policy, and product resources to increase the number of consumers choosing
products that are lower risk.
In September 2020 and again in May 2022, we submitted to the FDA PMTA covering several noncombustible products,
including novel oral nicotine products. This is an important and necessary step to allow us to offer adult 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 that we 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
pharmacokinetics studies, 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 we will continue to prevent youth exposure to the 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 Access
Our 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 of responsibility from us, and we are committed to
proactively preventing the underage appeal of and access to those products. We are dedicated to the responsible marketing
15
of our adult use products and are fully 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 that are 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 reasonably understood to resonate with minors. We plan 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 we are proactive in implementing programs to prevent
youth access. For our own online retail (B2C) sales, we display our policies related to age to purchase, battery safety, and
shipping restrictions. Additionally, we verify B2B customers using business licenses in order to further prevent bulk sales to
consumers, which we believe contributes to social sourcing by youth.
Corporate Governance and Community Leadership
Good 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 our business conduct policy. We train all employees
on our business conduct policies. We have established meaningful measures for our governance program and our targets and
actions will allow us to achieve our goals in this area.
We focus our efforts on fostering a supportive and safe work environment for our team. Our efforts are evidenced through
programs like our veterans and women focused business inclusion groups. Our goal is to provide an injury-free workplace
where every employee has a safe work environment and feels empowered to speak up. We regularly monitor and provide
training as part of our safety program and have active safety committees at each of our sites dedicated to implementing best
practices.
Being good stewards of the planet will support our business success. Our major areas of focus are lowering vehicle emissions
produced by our fleet, incorporating energy savings initiatives at our facilities, reducing water consumption in our operations,
and increasing our recycling efforts. Within each of these categories we are concentrating on developing and measuring
progress with an aim to define metrics against which we can track our efforts
In 2024, we continued to integrate these principles into our business practices. Our Nominating and Governance committees
report to the Nominating and Governance Executive Committee, comprised of the President and CEO, CFO, and General
Counsel, who in turn work with the Board’s Nominating and Governance Committee to enhance and execute our core
principles. The following committees report to the Nominating and Governance Executive Committee:
•
The Environmental Committee provides a platform to enhance and track the progress of our environmental practices
within our business units. The committee is charged with recommending, implementing, and monitoring best
practices in the areas of carbon emissions, waste, water conservation, and biodiversity within our business units. In
2024, the Company continued to make substantial investments around reducing energy consumption and
environmental waste in our manufacturing operations. Additionally, we have reduced our total fleet mileage through
innovative dispatch and scheduling procedures.
•
The Social Committee provides a platform to help us become the employer of choice. The committee is charged
with recommending and implementing best practices in health and safety, Talent Development and Retention, and
Community Engagement.
•
The Policies Committee provides a platform to review our governance practices and implement new or updated
policies as our needs evolve. The committee is responsible for recommending and implementing appropriate best
practices in business ethics, political engagement, supply chain processes, and cybersecurity. The committee is also
responsible for recommending and implementing best practices in public health, responsible marketing, and youth
access prevention. In 2024, the Policies Committee introduced several new policies, particularly aimed at
cybersecurity, and held training sessions with our marketing teams related to prevention of youth appeal.
Further information related to our efforts can be found on our website.
Available Information
More information about Turning Point Brands is available on the Company’s website at www.turningpointbrands.com. The
U.S. Securities and Exchange Commission (the “SEC”) maintains a website at https://www.sec.gov that contains reports,
proxy and information statements, and other information regarding issuers 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
16
filings with 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. We make 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.
Item 1A. Risk Factors
The 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 to decline. 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 affect our 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, including delays in product shipments and increases
in freight cost;
•
the possibility that our licenses to use certain brands or trademarks will be terminated, challenged or restricted;
•
failure to maintain consumer brand recognition and loyalty of our customers and in anticipating and responding to
changes in consumer preferences and purchase behavior;
•
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 products;
•
complications with the design or implementation of our new enterprise resource planning system could adversely
impact our business and operations;
•
recalls of our products;
Risks Related to Legal, Tax and Regulatory Matters
•
substantial and increasing regulation and changes in FDA enforcement priorities;
•
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 nicotine-related taxes;
•
our products are marketed pursuant to a policy of FDA enforcement priorities which could change, and our products
could become subject to increased regulatory burdens by the FDA;
•
our products are subject to developing and unpredictable regulation, such as court actions that impact obligations;
•
increase in tax of our products could adversely affect our business;
•
sensitivity of end-customers to increased sales taxes and economic conditions, including as a result 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;
Risks Related to Financial Results, Finances and Capital Structure
•
our amount of indebtedness;
•
our credit rating and ability to access well-functioning capital markets;
•
the terms of our indebtedness, which may restrict our current and future operations;
•
our ability to establish and maintain effective internal controls over financial reporting;
•
identification of material weaknesses in our internal control over financial reporting, which, if not remediated
appropriately or timely, could result in loss of investor confidence and adversely impact our stock price;
17
Risks 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 the market price of our common stock;
•
our certificate of incorporation limits the ownership of our common stock by individuals and entities that are
Restricted Investors (as defined in our Certificate of Incorporation). These restrictions may affect the liquidity of
our common stock and may result in Restricted Investors being required to sell or redeem their shares at a loss or
relinquish their voting, dividend and distribution rights;
•
future sales of our common stock in the public market could reduce our stock price, and any additional capital raised
by us through the sale of equity or convertible securities may dilute your ownership in us;
•
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 or
pandemics, political upheavals, or natural disasters;
•
adverse impact of climate change and legal and regulatory requirements related to climate change and
environmental sustainability;
•
our reliance on information technology;
•
cybersecurity and privacy breaches, including due to artificial intelligence;
•
failure to manage our growth;
•
failure to successfully identify, negotiate and complete suitable acquisition opportunities, 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
•
impairment of intangible assets, including trademarks and goodwill
Risks Related to Our Business and Industry
Sales 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, increased pressure 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. These factors have intensified over time, especially as it relates to regulation. While OTP products
have been more resilient than cigarettes as measured by MSAi, the expectation is that all categories will continue to decline.
Our tobacco products comprised approximately 47% of our total 2024 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 or increased 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 2024, our two most important suppliers and 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 related accessories in the U.S. and Canada. See Item 1 – “Business – Distribution and Supply
Agreements.” Many of our suppliers compete with us in one or more product categories. For example, we have a supply
agreement with Swedish Match to manufacture our loose-leaf chewing tobacco, and Swedish Match also manufactures its
own brand of loose-leaf chewing tobacco, which it sells in the same channels as we do.
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 renewed for 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 the provisions 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, we retain the
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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 responsibilities with 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 Match of 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 Swedish Match, 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 our business, results of operations, and financial condition. We
entered into these agreements when Swedish Match was an independent company, but it has since been acquired by Phillip
Morris International. While Swedish Match continues to honor all obligations to us and has indicated that it will continue to
do so in the future, relationship dynamics may change over time in light of its new owners.
All of our Zig-Zag® premium cigarette papers, cigarette tubes and injectors are sourced from RTI, pursuant to the Distribution
Agreements. The Distribution Agreements were initially entered into with Bolloré. In November 2020, Bolloré sold its rights
to its trademarks for the 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 our competitors. The Distribution
Agreements were most recently renewed in 2012, with pricing terms subject to renegotiation every five years, the most recent
of which occurred in 2022.
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 their facilities. 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 any of 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. For example, in December
2023, a third-party warehouse in Tennessee used to store some of the Company’s leaf tobacco incurred significant tornado
damage including damage to the Company’s leaf tobacco. Although we have insurance coverage for these events, including
Company’s stock throughput insurance, 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, Swedish Match or any other significant supplier, a failure to renew any of our
agreements or an inability or unwillingness by any supplier to produce sufficient quantities of our products in a timely manner
and our failure to find a replacement supplier would have a significant impact on our ability to continue distributing the same
volume and quality of products and maintain our market share, even if the disruption were temporary. Such impact 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 regulatory requirements. 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 approve such 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 suppliers may 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 able to 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 prolonged disruptions 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 to adequately 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 unrecognizable brands 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 Distribution and License Agreements for use of the Zig-Zag® name and associated trademarks in
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connection with certain of our cigarette papers and related products. See Item 1 – “Business - Distribution and Supply
Agreements” for a discussion of these agreements and their major provisions.
We have a number of License 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 cigarette injector machines, the second governs licensing,
sourcing and the use of the Zig-Zag® name with respect to e-cigarettes, vaporizers, and e-liquids, and the third governs the
licensing, sourcing and use of the Zig-Zag trademark on paper cones. In 2024, we generated approximately $192.4 million
in net sales of Zig-Zag® products, of which approximately $131.6 million was generated from products sold through the
License Agreements. In the event that one or more of these License 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 cigarette papers of a competitor to Zig-Zag® without RTI’s consent, except in limited
instances. 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 License Agreements with respect to the Zig-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.
In the event that any license to use a brand or trademark in our portfolio is terminated or is not renewed after the end of
its term, there is no guarantee we will be able to find a suitable replacement, 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 a material adverse effect on our business, results of operations, and financial condition.
We may not be successful in maintaining the consumer brand recognition and consumer loyalty to our products or
in anticipating and responding to changes in consumer preferences and purchase behavior.
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, in particular, 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 best option. 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 the market 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 or license 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 or react 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 to health concerns associated
with tobacco and other products we sell, price-sensitivity in the presence of competitors’ products or substitute products, as
well as celebrity and other endorsements. For example, we have witnessed a shift in consumer purchases from chewing
tobacco to moist snuff due to its increased affordability. Along with 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 future could 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 markets in 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, including by broadening our product portfolios across price-points and categories and by bringing to market new
and innovative products that appeal to adult consumers, the demand for our 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 the
marketing of tobacco products, that would make it more difficult to appeal to our consumers and 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 resources
than 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 of our 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 material adverse effect on our business, results of operations and financial condition.
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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 brand names 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 national chains. 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, our ability to access the
end-user markets with our products and our ability to maintain our relationships with the producers of our products. For
example, our inability to meet benchmarking provisions in contracts or maintain and leverage our retail relationships on a
scale sufficient to make us an attractive distributor would have a material adverse effect 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 industry consolidation.
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 of brick-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 may ultimately 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.
We 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 suppliers and 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 and to improve and maintain a brand’s market
position. Our principal competitors are “big tobacco,” which includes Altria Group, Inc. and British American Tobacco p.l.c.,
as well as Swedish Match, Swisher International and manufacturers of electronic cigarettes, 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, at both wholesale and retail levels. For example, certain competitors have entered into agreements
limiting retail-merchandising displays of other companies’ products or imposing minimum prices for OTP products, 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 the
November 2022 acquisition of Swedish Match AB by Philip Morris International Inc., the December 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 Reynolds American, 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 national distribution
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 be dominated by “big tobacco” could have a material adverse effect
on our business, results of operations and financial condition.
There can be no assurance that our products will be able to compete successfully against “big tobacco” or any of our other
competitors, some of which have far greater resources, capital, experience, market penetration, sales and distribution channels
than us.
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 or innovative products, higher taxes, higher
absolute prices and larger gaps between price categories, reliance on competitors for certain raw materials and product
regulation that diminishes the consumer’s ability to differentiate tobacco products. Due to the impact of these factors, as well
as higher state and local excise taxes and the increased market share of deep discount brands, the tobacco industry has become
increasingly price competitive. As we seek to adapt 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 expansive
portfolios, with which we are not positioned to compete.
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We also expect our competitors to continue to improve their technology infrastructure, including with the use of artificial
intelligence (“AI”) and machine learning solutions, to interact with clients, suppliers and other third-parties to sell their
products, utilize (and even monetize) their data and support and grow their client base. Our ability to innovate our own
technology infrastructure and integrate new technology solutions into our existing infrastructure will affect our ability 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 consumers switching 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 more difficult 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 to commoditization of our products.
We have continued to see increases in the sale of illicit or unauthorized tobacco and nicotine products, which the FDA and
other agencies have had limited success in combating. If we are unable to compete against these products, our sales volumes
may be negatively materially impacted until the implementation of stronger enforcement activity.
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 for authenticity 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 sales of 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 in securing 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 be successful 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 result in significant expenses to the Company. Any failure to track and prevent counterfeiting of our products
could have a material adverse effect on our ability to maintain or effectively compete for the products we distribute under our
brand names, which would have a material adverse effect on our business, financial position, results of operations and cash
flows.
Contamination 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 significant amounts of inventory of our products in
warehouses and it is possible that this inventory could become contaminated or damaged during the storage period. For
example, in December 2023, a third-party warehouse in Tennessee used to store some of the Company’s leaf tobacco incurred
significant tornado damage including damage to all the Company’s leaf tobacco stored in that warehouse. Although we have
alternative sources of tobacco to ensure we meet all demand, if another event were to occur we may not have sufficient
supply. In addition, our suppliers generally keep significant amounts of our inventory on hand and it is probable that such
inventory could become contaminated or damaged even prior to arrival at our premises. If contamination or damage 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 customer demand
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 to comply with all federal, state and local laws. These
third-party suppliers and co-manufacturers, however, may not continue to produce products that are consistent with our
standards or that are in compliance with applicable laws, and we cannot guarantee that we will be able to identify instances
in which our third-party suppliers or co-manufacturers 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 or brands, 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 competitors may benefit from an increased market share that could be difficult and costly to regain. Such a
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contamination event could have a material adverse effect on our business, financial position, results of operations and cash
flows.
The market for certain of our products is subject to a great deal of uncertainty and is still evolving.
Novel nicotine and cannabinoid products, having been introduced to the market over the past fifteen years, are at a relatively
early stage of development compared to “traditional” tobacco products and represent the core components of a market that is
evolving rapidly, highly regulated and characterized by a number of market participants. Rapid growth in the use of, and
the interest in, these products is recent and may not continue on a lasting basis. The long-term demand trends and market
acceptance for these products are subject to a high level of uncertainty. Therefore, we are subject to all of the business risks
associated with a new enterprise 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 on our 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 in the novel nicotine and cannabinoid 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 currently engaged in the implementation of a new enterprise resource planning (“ERP”) system, which is part of the
remediation efforts for our material weakness in internal controls over financial reporting discussed below. This ERP system
will replace our existing operating and financial systems. The ERP system is designed to accurately maintain the Company’s
financial records, 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 requires the 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 unable to 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
could be negatively impacted.
We could decide, or be required to, recall products, which could have a material adverse effect on our business,
reputation, financial position, results of operations, or cash flows.
We could decide, or laws or regulations could require us, to recall products due to the failure to meet quality standards or
specifications, suspected or confirmed and deliberate or unintentional product contamination, or other product adulteration,
misbranding or tampering. A product recall or a product liability or other claim (even if unsuccessful or without merit) could
have negative economic consequences and also generate negative publicity about us and our products. In addition, if another
company recalls or experiences negative publicity related to a product in a category in which we compete, adult tobacco
consumers might reduce their overall consumption of products in the category. Any of these events could have a material
adverse effect on our business, reputation, financial position, results of operations, or cash flows.
We may encounter difficulties or liabilities arising from investments in joint ventures, acquisitions or divestitures.
We have made substantial investments acquisitions, joint ventures and strategic initiatives and we expect that we will continue
to do so in the foreseeable future. For instance, in January 2025, we contributed our interest in our former CDS segment to
GWO, an entity owned by us and affiliates of Standard General, L.P., and now have a 49% interest in GWO. We are
continually evaluating acquisitions, divestitures and strategic investments that are significant to our business both in the
United States and in Canada. However, these activities involve numerous risks. Key challenges include the difficulty of
identifying suitable acquisition targets, negotiating acquisitions on favorable terms, retaining essential customers, employees,
and contracts, and successfully integrating new businesses without significant disruptions. Additionally, there may be
unforeseen costs associated with integration, liabilities that exceed expectations, or operating results that fall short of
projections. There is also a risk that anticipated synergies and value may not materialize as expected. For example, we recently
entered into a joint venture with ALP to further our presence in the modern oral nicotine space. While we are optimistic about
its potential success, we recognize the possibility of encountering difficulties, including strategic differences that could impact
performance lead to business losses.
Furthermore, any acquisitions, joint ventures and strategic investments and associated integration activities demand
significant time and attention from our management team and other key personnel, which can divert resources from other
priorities. There can be no assurance that any acquisitions, joint ventures and strategic investments will be successfully
integrated into our operations, that competition for attractive opportunities will not intensify or that we will be able to
complete such acquisitions, joint ventures and strategic investments on acceptable terms and conditions. The costs and
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challenges associated with unsuccessful acquisition, joint venture or strategic investment efforts may adversely affect our
business, financial condition, results of operations and cash flows.
Additionally, in connection with any acquisitions or divestitures, we may become subject to contingent liabilities or legal
claims, including but not limited to third party liability and other tort claims; claims for breach of contract; employment-
related claims; environmental, health and safety regulatory actions and liabilities; permitting, regulatory or other legal
compliance issues; or tax liabilities. If we become subject to any of these liabilities or claims, and they are not adequately
covered by insurance or an enforceable indemnity or similar agreement from a creditworthy counterparty, we may be
responsible for significant out-of-pocket expenditures. These liabilities, if they materialize, could have an adverse effect on
our business, financial condition, results of operations and cash flows.
Risks Related to Legal, Tax and Regulatory Matters
We 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 and federal 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 May 4, 2022, the FDA proposed 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 characterizing flavors (including menthol) in
cigars, and in May 2023, the FDA proposed additional requirements for tobacco product manufacturing practice regarding
the manufacture, design, packing and storage of tobacco products. Together with changing public attitudes towards tobacco
consumption, the constant expansion of regulations has been a major cause of the overall decline in the consumption 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 the minimum age to purchase tobacco products, imposition of taxes,
sampling and advertising bans or restrictions, flavor bans or restrictions, ingredient and constituent disclosure
requirements and media campaigns and restrictions on where consumers may use tobacco products. Additional restrictions
may be adopted or agreed to in the future. These limitations may make it difficult for us to maintain the value of any brand.
The trend toward increasing regulation of the tobacco industry experienced over the last few decades is likely to differ
between the various U.S. states and Canadian provinces in which we currently conduct the majority 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 to accommodate such regulations in a cost-effective manner that allows us to continue
to compete in an economically viable way. Regulations are often introduced without industry input and have significantly
contributed to 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 smokeless tobacco packages and prohibiting the advertising
of smokeless tobacco products on media subject to the jurisdiction of the Federal Communications Commission (“FCC”).
Since 1986, other proposals have 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 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
established cigarette sales reporting requirements for state excise tax collection, to require individuals and businesses that
make interstate sales of certain cigarette or smokeless tobacco to comply with state tax laws. The PACT Act was later
extended to also cover e-cigarette and related products. See Item 1A - "Many of our products have not obtained premarket
authorization from the FDA and are currently marketed pursuant to a policy of FDA enforcement priorities, which could
change. There could be a material adverse impact on our business development efforts if the FDA determines that our products
are not subject to this compliance policy, or if our products become subject to increased regulatory enforcement burdens
imposed by the FDA and other regulatory or legislative bodies" below for further details. Additional federal or state regulation
relating to the manufacture, sale, distribution, advertising, labeling, mandatory ingredients disclosure and nicotine yield
information disclosure of tobacco products could reduce sales, increase costs, and have a material adverse effect on our
business, financial position, results of operations and cash flows.
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 Tobacco Control Act also amended the Federal Cigarette Labeling and
Advertising Act, which governs how cigarettes can be advertised and marketed, as well as the Comprehensive Smokeless
Tobacco Health Education Act, which governs 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 Trade Commission,
the Department of Justice, the Alcohol and Tobacco Tax and Trade Bureau , the U.S. Environmental Protection Agency, the
U.S. Department of Agriculture (“USDA”), the Consumer Product Safety Commission , the U.S. Customs and Border
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Protection and the U.S. Center for Disease Control and Prevention’s Office on Smoking and Health. There have also been
adverse legislative and political decisions and other unfavorable developments for the tobacco industry concerning cigarette
smoking and the tobacco industry generally, which we believe have received widespread 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, up to 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 any assurance 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, ability to compete, financial position, results of operations and cash flows.
However, the recent change in the U.S. presidential administration, along with the overturning of the Chevron doctrine, which
previously granted judicial deference to regulatory agencies, has increased uncertainty in the regulatory and legislative
processes. As a result, we cannot predict whether challenges to existing agency regulations will increase or how lower courts
will interpret this decision in relation to other regulatory schemes without further clarification from the U.S. Supreme Court.
This could have significant consequences on tobacco regulations, tobacco advertisement and marketing, tax laws, consumer
protection, environmental regulations and other regulatory areas with which we must comply. Any of these regulation changes
could negatively affect how we conduct our business and market our offerings and increase our regulatory compliance or tax
expense, which could, in turn, have a material adverse effect on our business, financial condition and results or operation.
Furthermore, new policy approaches may have the effect of harming our business regardless of whether that is the intent and
may also affect our ability to operate as we have in the past.
Our products are regulated by the FDA, which has broad regulatory powers.
The vast majority of our 2024 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 the design, 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 product standards 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 and
impose various additional restrictions. Such restrictions may include requiring reduction or elimination of the use of particular
constituents or components, requiring product testing, or addressing other aspects 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 tobacco products, (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 to disclose 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, including
menthol, (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 product applications 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 product manufacturers (and certain other entities) to register with the FDA.
The 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 the FDA, 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 which additional products may be subject to such fees or the magnitude of such fees, which could become
significant. A change in which products are subject to these fees may also impact the amount of fees payable by us (or to
which we are subject) due to the reallocation of fees across new product categories.
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 all roll-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 could nonetheless 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 more quickly 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 the market, 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
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authorizations from the FDA 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, as a result of
the U.S. Supreme Court’s decision to overturn the Chevron doctrine, it will become increasingly difficult to determine which
new laws will apply to our business and when, as there will likely be an increase in legal challenges to new regulations.
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 extent we are unable to respond to, or comply with,
new FDA regulations it could have a material adverse effect on our business, financial position, results of operations and cash
flows.
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, but not 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/or discontinue 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, results of 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 roll your own (“RYO”)/MYO cigarette tobacco) 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, with sub-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 Attorney General. 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 pounds of 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 principal
for twenty-five years from the year of each annual deposit, except to withdraw funds deposited pursuant to an individual
state’s escrow statute to pay a final judgment to that state’s plaintiffs in the event of 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 states without 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.
Future changes to the MSA, such as legislation that extends the MSA to products to which it does not currently apply or
legislation that limits the 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. For example, Oregon recently passed a law that would
create new fees on NPM companies for future sales of cigarettes. Despite the amounts maintained and 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 industry from having a material adverse effect on our business, results of operations
and financial condition.
Increases 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, in some cases significantly, to fund various
legislative initiatives or further disincentivize tobacco usage. Since 1986, smokeless products have been subject to federal
excise tax. Federally, smokeless products are taxed by weight (in pounds or fractional parts thereof) manufactured or
imported.
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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 RYO/MYO cigarette smoking products market, and also caused
volume declines in 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, the reauthorization 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 not been any increases enacted since 2009, but bills are introduced regularly,
which, if enacted into law, could result in an increase in federal excise and other tobacco-related taxes. 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
consumers from 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 raise excise 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 as well. Tax increases, depending on their parameters, may result in consumers switching between
tobacco products or may depress overall tobacco consumption, which is likely to result in declines in overall sales 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 adversely affect 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 our business, results of operations and financial condition.
Many of our products have not obtained premarket authorization from the FDA and are currently marketed pursuant
to a policy of FDA enforcement priorities, which could change. There could be a material adverse impact on our
business development efforts if the FDA determines that our products are not subject to this compliance policy, or if
our products become subject to increased regulatory enforcement burdens imposed by the FDA and other regulatory
or legislative bodies.
Effective August 8, 2016, FDA’s regulatory authority under the Tobacco Control Act was extended to all remaining tobacco-
derived products, including: (i) cigars and their components or parts (such as cigar tobacco); (ii) pipe tobacco; (iii) hookah
products; or (iv) any other tobacco product “newly deemed” by the FDA. These deeming regulations apply to all products
made or derived from tobacco intended for human consumption, but excluding accessories of tobacco products (such as
lighters). Subsequently, on April 14, 2022, the FDA Center for Tobacco Products also obtained jurisdiction over non-tobacco
nicotine products (“NTN Products”), including synthetic nicotine. That law subjects NTN Products to the same requirements
as tobacco-derived products.
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 and implied 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 distributing free 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 on packaging
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 also subject 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 for these 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.
Marketing authorizations will be necessary in order for us to continue our distribution of certain of our cigar and other novel
nicotine products, such as our nicotine pouches. The FDA has announced various compliance policies whereby it does not
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 in certain 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 for newly-deemed products were required to have been submitted no later than September 9, 2020,
with the exception of our “preexisting” products (products in commerce as of February 15, 2007) which are 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”) or Refuse to File notification and who continue to illegally sell those unauthorized products, as well as
products for which manufacturers failed to submit a marketing application. Further, NTN Product manufacturers were
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required to file a PMTA by May 14, 2022, in order to continue selling products currently on the market. NTN Products subject
of a timely-filed PMTA, and not in receipt of a negative action, were allowed to remain on the market until July 13, 2022, at
which time these products became subject to enforcement, similar to tobacco-derived products remaining under review.
In September 2020, we submitted applications on a timely basis for the appropriate authorizations for our products that are
deemed products under the 2016 deeming regulations, not otherwise grandfathered. We believe that these products satisfy
the criteria for current marketing pursuant to the FDA’s compliance policy. For our NTN Products, we filed several PMTAs
by May 14, 2022. There can be no guarantee that the FDA will authorize these products, and the FDA may bring an
enforcement action against our products for lack of premarket authorization and/or deny our premarket applications in the
meantime. If the FDA were to issue additional MDOs that remained in effect it could have an adverse impact on our business.
We also have certain previously regulated tobacco products which the FDA removed from review but remain subject to
“provisional” substantial equivalence submissions made on March 22, 2011; however, the FDA has the discretion to reinitiate
review of these products. We cannot predict whether regulators, including the FDA, will permit the marketing or sale of any
particular products or whether they will impose a burdensome regulatory framework on such products. In addition, the FDA
could, for a variety of reasons, determine that products on the market but pending FDA review of the associated PMTA, or
those that have previously received authorization are not appropriate for the public health, and the FDA could require such
products be taken off the market. We also cannot predict whether or to what extent the FDA will take enforcement actions
against manufacturers and products that violate the law. If the FDA establishes regulatory processes that we are unable or
unwilling to comply with, our business, results of operations, financial condition and prospects could be adversely affected.
The anticipated costs of complying with future FDA regulations will be dependent on the rules issued and implemented by
the FDA, the timing and clarity of any new rules or guidance documents accompanying these rules, the reliability and
simplicity (or complexity) of the electronic systems utilized by the FDA for information and reports to be submitted, and the
details required by FDA for such information and reports with 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 our business, 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 in our product categories.
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 ability to market and sell certain of our 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 the industry, which would affect our competitive position.
Furthermore, in addition to the FDA, federal, state and local government entities have also proposed or effectuated restrictions
related to our products. For example, the PACT Act has now been amended to apply to products not originally intended to
be covered, 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 passed legislatively at the federal, state, or local levels, or promulgated via rulemaking
by a government agency. Increased regulation of additives in tobacco products through federal, state, or local governments
may also adversely affect our products. Some states have also adopted or are considering adopting laws that create a “registry”
of products allowed to be sold by licensed distributors and retailers. Certain of our products may not meet the criteria to be
added to or remain on these registries, which may discourage or prevent licensed distributors and retailers from selling such
products. The application of these types of restrictions, and of any new laws or regulations 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 of our products, any of which could have a material adverse effect on our business, results of
operations and financial condition. The present regulatory landscape has made it even harder to predict whether there will be
increased challenges to how the FDA and other government entities regulate the manner of marketing and sale of our products.
The unpredictability could also negatively affect our business, financial position, results of operations and cash flows.
Our distribution to our wholesalers and retailers is dependent on the demands of their customers who are sensitive to
increased 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, interest rates, 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 recessionary periods or at other times when disposable income is lower, and taxes may be higher. In 2022, the
U.S. and other developed countries experienced significantly heightened inflationary pressures related to the policies
implemented during the coronavirus pandemic and the ensuing economic recovery, causing disruptions in demand, supply
chains and labor markets. While the global inflation rate began to ease somewhat in 2023 and 2024 as a result of central bank
policy tightening, core inflation remains persistent and downward pressure on consumer purchasing power remains. While
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the decline in consumer purchasing power has not as of yet, led to a decrease in sales of our products, continued economic
pressures in our target consumer market could lead to a decrease in discretionary purchases which could have a material
adverse impact on our business results of operations and financial conditions.
In addition, some states have begun collecting taxes on internet sales. These taxes apply to our online sales of FRE 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 them onto 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 internet
purchases 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 our online 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 have a 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 and regulate tobacco in an effort to encourage
tobacco cessation. Over 180 governments worldwide have ratified the FCTC. The FCTC has led to increased efforts to reduce
the supply and demand of tobacco products and to encourage governments to further regulate the tobacco industry. These
efforts have, over time, expanded to focus broadly on consumer products containing nicotine, such as vapor products. The
tobacco industry expects significant regulatory developments to take place over the next few years, driven principally by 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 workplaces 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, financial position, results of operations and cash flows could be materially and 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 may subject us to additional international regulation, either
by the countries that are the object of the strategic expansion or through international regulatory regimes, such as the FCTC,
to which those countries may be signatories. While we are primarily engaged in business activities in the United States, we
engage in certain international business activities that are subject to various U.S. and foreign laws and regulations, such as
foreign privacy laws, the U.S. Foreign Corrupt Practices Act (“FCPA”) and other laws prohibiting bribery and corruption.
On February 10, 2025, the President issued an executive order directing a pause in enforcement of the FCPA for an initial
180-day period while new enforcement guidelines are created. While the scope and substance of the forthcoming new FCPA
enforcement guidelines remains unclear, the executive order by itself is not expected to produce a significant or lasting change
in the FCPA compliance environment. As such, although we have a compliance system designed to prevent and detect
violations of applicable law, no system can provide assurance that it will always protect against improper actions by
employees, joint venture partners, investees or third parties. Violations of these laws, or allegations of such violations could
result in reputational harm, legal challenges and significant penalties and other costs.
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 our business, financial position, results of operations
and cash flows.
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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 similarly subject 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 a disruption 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 that could
have a material adverse effect on our business, financial position, results of operations and cash flows.
Imposition of significant tariffs on imports into the U.S. could have a material 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 the Creative Distribution Solutions joint
venture’s products are sourced from China. In 2018, the U.S. imposed significant additional tariffs on certain goods imported
from outside the U.S. by executive administrative action, and these tariffs remain in place. These additional tariffs apply to a
significant portion of the Creative Distribution Solutions joint venture’s products and may result in increased prices for its
customers and in turn, reduced 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 it more costly for us
to import goods from other countries. As a result, our business, financial condition and results of operations could be
materially adversely affected.
While the President and his administration have taken steps to impose tariffs on a number of countries, most notably Canada,
Mexico and China, there is little visibility into how U.S. trade policies will be affected by these actions. For instance, tariffs
initially placed on goods from Mexico and Canada were immediately paused for further consideration. While we do not
anticipate any impact on our business from these tariffs as we do not import any raw materials or finished goods from Canada,
Mexico or China, we cannot predict whether the current administration may impose additional tariffs on goods imported from
other countries, such as those in the European Union. If the U.S. were to impose additional tariffs on goods we import, it is
likely to make it more costly for us to import goods from other countries. While the future administrations may have a desire
to repeal some or all of these tariffs, no assurance can be given that they will do so. As a result, our business, financial
condition and results of operations could be materially adversely affected.
The scientific community has not yet studied extensively the long-term health effects of certain substances contained
in some of the products we previously sold and some products sold by joint ventures in which we have invested.
Electronic cigarettes, vaporizers and modern oral nicotine/white pouch products were recently developed and therefore the
scientific community has not had a sufficient period of time to study the long-term health effects 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 these products 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 demand for
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 operations and 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 cigarettes by 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 brought against manufacturers and sellers of smokeless products for injuries to health allegedly
caused by use of smokeless products. Litigation is subject to significant uncertainty, and there could be adverse developments
in pending or future cases. An unfavorable outcome or settlement of pending litigation could encourage the commencement
of additional litigation. In addition to the risks to our business, results of operations and financial condition 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 be no 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, financial position, results of operations
and cash flows.
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 may be subject to claims in the future relating
to our other Creative Distribution Solutions products. We are still evaluating these claims and the potential defenses to them.
As a result of their relative novelty, electronic cigarette and vaporizer product manufacturers and sellers have only recently
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become subject to litigation. We may see increasing litigation over Creative Distribution Solutions products or the regulation
of our products, as the regulatory regimes 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 19 “Contingencies” in 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 the products we ship, which could have a material adverse effect on our business, financial
position, results of operations and cash flows.
Risks Related to Financial Results, Finances and Capital Structure
We have a substantial amount of indebtedness that could affect our financial condition.
In February 2025, we issued $300.0 million of our 7.625% senior secured notes due 2032 (the “2032 Notes”), the proceeds
of which were used to repay our existing 5.625% senior secured notes due 2026. The 2032 Notes are senior secured
obligations of the Company and guarantors and currently comprise all of our outstanding debt. We have the ability to borrow
up to $75.0 million under our new asset-backed revolving credit facility entered into in November 2023 (the “2023 ABL
Facility”), subject to borrowing base compliance, under which only letters of credit of $2.3 million were outstanding as of
December 31, 2024. The 2023 ABL Facility bears interest at a floating rate. If we cannot generate sufficient cash flow 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 this on 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;
•
pay dividends; and
•
repurchase stock.
Our credit rating and ability to access well-functioning capital markets are important to our ability to secure future
debt financing on acceptable terms.
Our access to capital markets and the terms of such access depend on multiple factors including the condition of the capital
markets, our operating performance and our credit ratings. These ratings are based on a number of factors including their
assessment of our financial strength and financial policies. Our borrowing costs will be dependent to some extent on the
rating assigned to our debt. However, there can be no assurance that any particular rating assigned to us will remain in effect
for any given period of time or that a rating will not be changed or withdrawn by a rating agency if, in that rating agency’s
judgment, future circumstances relating to the basis of the rating so warrant. Incurrence of additional debt by us could
adversely affect our credit rating. Any disruptions or turmoil in the capital markets or any downgrade of our credit rating
could adversely affect our cost of funds, liquidity, competitive position and access to capital markets, which could materially
and adversely affect our business operations, financial condition and results of operations. In addition, downgrading the credit
rating of our debt securities or placing us on a watch list for possible future downgrading would likely have an adverse effect
on the market price of our securities.
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 manage our operations.
The indenture governing the 2026 Notes and our 2023 ABL Facility each contain, and any future indebtedness of ours would
likely contain, a number of restrictive covenants that impose 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;
31
•
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 2023 ABL 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 debt instruments 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
default under 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 to repay 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 debt instruments 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, and financial condition.
Even though the Federal Reserve cut interest rates by 100 basis points in 2024, it remains more expensive for us to borrow
under the floating rate in our 2023 ABL Facility than it was historically for us to borrow under our previous revolving credit
facility.
If 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 procedures under 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 detect financial reporting errors and fraud. Management is required to provide an annual assessment
on the effectiveness of our internal control over financial reporting and our independent registered public accounting firm is
required to attest to the effectiveness of our internal control over financial reporting. Our and our auditor’s testing 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. In 2021, management concluded that we had two material weaknesses in our
internal control over financial reporting. As noted below, management concluded, during this year’s assessment, that we had
one material weakness in our internal control over financial reporting, which is a material weakness that remains in existence
from 2022 which the Company is continuing to remediate. No assurance can be given that we won’t discover additional
material 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 the requirements 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 to enable 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 over financial
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 rather than 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 in human 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 resource constraints
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 are deemed 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 SEC, the New York Stock Exchange or
other regulatory authorities.
We identified a material weakness in our internal control over financial reporting which, if not remediated
appropriately or in a timely manner, could result in loss of 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 interim consolidated financial statements will
not be prevented or detected on a timely basis.
32
Management previously identified a material weakness 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
systems that support the Company’s financial reporting processes. See Part II, Item 9A of this Annual Report on Form 10-K
for additional information.
While we have implemented controls that we believe will remediate the material weakness in 2025, the material weakness
remains unremediated as of December 31, 2024, primarily due to the need to finalize testing of the controls and, as a result,
management concluded that our internal control over financial reporting was not effective as of December 31, 2024. Our
remediation measures have and will continue to result in additional technology, new personnel, the creation of training
programs and other expenses. If we are unable to remediate 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
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 in turn, adversely impact our stock price.
Risks 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 the market price 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 for a 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 change of 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 and may 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” to 14.9% 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 U.S., the District of Columbia,
the territories, possessions and military bases of the U.S. and the Dominion of Canada (a “RTI Competitor”), (ii) any entity
that owns more than a 20% equity interest in any RTI Competitor, 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 the Permitted 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 holder of 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 or dividend
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 may be, 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 price based 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 redeemed will not be
33
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 its shares 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 our operations 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 financial condition may be materially
weakened.
Our 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 submit such 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 person and 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 rights associated
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 be successful 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 a material 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 might otherwise 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 our stockholders.
We may sell additional shares of common stock in public or private offerings and may also sell securities convertible to
common stock. We may also be required to issue common stock at the exercise or vesting of certain of our incentive equity
awards of which 616,270 shares remain outstanding and unvested. Further, on December 13, 2024, the Company entered into
an at-the-market offering program (the “ATM Program”) with B. Riley Securities Inc. and Barclays Capital Inc. The
Company may sell up to $100.0 million of common stock under the ATM Program. See Note 14, “Notes Payable and Long-
Term Debt,” of our Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K 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 will have 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 and relative 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 stock could 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 the happening 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 affect the residual value of the common stock.
General Risks
Our business may be damaged by events outside of our or our suppliers’ control, such as the impact of epidemics,
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 regions of the U.S. and in other countries. Events may impact our ability to manufacture 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 epidemics; political upheavals including violent changes in government, regional conflicts, such
as the war in Ukraine, and the reaction of the governments throughout the world to those conflicts such as the implementation
of sanctions, widespread labor unrest, or breakdowns in civil order; and natural disasters, such as hurricanes, tornados,
34
earthquakes or floods. In December 2023, a third-party warehouse in Tennessee used to store some of the Company’s leaf
tobacco incurred significant tornado damage including damage to the Company’s leaf tobacco, which resulted in us recording
a $15.2 million inventory reserve related to our leaf tobacco inventory. If such events were to occur or reoccur and disrupt
our manufacturing capabilities 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, financial position, results of operations, and cash flows.
Additionally, current macroeconomic conditions including high inflation, high gas prices and unpredictable interest rates
have caused and may continue to cause delays to supply chain and commercial markets, which limit access to, and increase
the cost of, raw materials and services. Furthermore, challenging economic conditions can create the risk that our suppliers,
distributors, logistics providers or other third-party partners suffer financial or operational difficulties, which may impact
their ability to provide us with or distribute finished product or raw materials and services in a timely manner or at all. If we
are unable to compensate for supply shortages or elevated commodity and other costs through sustained price increases, cost
efficiencies, such as in manufacturing and distribution, or otherwise manage the exposure through sourcing strategies, the
limited use of commodity hedging contracts or through other initiatives, any such delays or distribution challenges could
have a material adverse impact on our business, financial position, results of operations and cash flows.
Climate change and legal and regulatory requirements related to climate change and environmental sustainability
may have an adverse impact on our business and results of operations.
Our operations may be impacted by adverse weather patterns or other natural disasters, such as hurricanes, earthquakes,
floods, fires, and tornadoes. While we seek to mitigate our business risks associated with climate change by seeking business
partners, including within our supply chain, that are committed to operating in ways that protect the environment or mitigate
environmental impacts, we recognize that there are inherent climate-related risks wherever business is conducted. Our
operations may be vulnerable to the adverse effects of climate change, which are predicted to increase the frequency and
severity of weather events and other natural cycles such as wildfires and droughts. For instance, if a hurricane or tornado
were to shut down, damage or destroy one of our facilities or warehouses, as occurred in December of 2023, our operations
could be severely impacted. See “—Our business may be damaged by events outside of our or our suppliers’ control, such as
the impact of epidemics, political upheavals, or natural disasters” above. Such events have the potential to disrupt our
operations, cause manufacturing facility closures, disrupt the business of our third-party suppliers and impact our customers,
all of which may cause us to suffer losses and additional costs to maintain or resume operations.
In addition, legal and regulatory requirements have been adopted that are intended to reduce or mitigate environmental issues
and may relate to, among other things, greenhouse gas emissions, alternative energy policy, single-use plastics and additional
disclosure obligations with respect to climate change and environmental sustainability matters. This additional regulation
could materially adversely affect our business, results of operations, cash flows and financial condition by increasing our
compliance and manufacturing costs and negatively impacting our reputation if we are unable to, or are perceived not to,
satisfy such requirements.
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 a significantly 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 which we 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, which could have a material
adverse effect on our ability to compete. We expect our use of data to increase, including through the use of analytics, and
the continued use of AI and machine learning solutions. In engaging in these data-related activities, we rely on our own
technology systems and software, and those of third-party vendors. These data-related activities are vulnerable to potential
disruption or failure.
Security and privacy breaches, including increasingly prevalent and sophisticated cyberattacks, may expose us to liability,
cause us to lose customers or may disrupt our relationships and ongoing transactions 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 on disrupting business processes, could result in significant costs, loss of revenue, assets or personal
or other sensitive data and reputational harm.
Additionally, in connection with the preparation of our consolidated financial statements, management identified a material
weakness in internal control related to ineffective ITGCs in the areas of user access and program change-management over
certain information technology systems that support the Company’s financial reporting processes. See Part II, Item 9A of this
Annual Report on Form 10-K for additional information. In the event we are unable to remediate the material weakness, or
35
are otherwise unable to maintain effective internal control over financial reporting or disclosure 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, in turn,
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 card information. Although we have established security procedures to protect against 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 be subject to cyberattacks, including attacks that have resulted in the theft of customer
financial information, such as credit card information; however, no cyberattack on our systems to date has resulted in material
liability for us. Companies have been increasingly subject to a wide variety of cybersecurity attacks, hacking, phishing,
malware, ransomware and other attempts to gain unauthorized access to systems or data. These attacks have become
increasingly sophisticated over time and may be conducted or “sponsored” by nation states with significant resources. The
rapid evolution and increased adoption of AI technology and other evolving technology may also increase the prevalence and
impact of cyber-attacks and might also intensify our cybersecurity risk.
We cannot guarantee that a future 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 breach disclosure 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 occurrence of 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 other sensitive 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 or breach 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,
misappropriate proprietary 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 or perceived vulnerabilities may
lead to claims against us. While we maintain cyber errors and omissions ("E&O") insurance that covers certain cyber risks,
our insurance coverage may be insufficient to cover all claims 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 moist snuff. In 2024, we accelerated our national
roll-out and expanded manufacturing of our white nicotine pouch brand FRE and on behalf of our joint venture, ALP Supply
Co, LLC (“ALP”), furthering our entry into the modern oral nicotine space. 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 a portfolio 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 future growth 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 our products 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
cash flows 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 growth effectively 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.
36
We may fail to successfully identify, negotiate, and complete suitable investment or acquisition opportunities, 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 selectively identifying and acquiring businesses with
complementary products. For instance, in 2024, we entered the ALP joint venture to expand our product offering in the
modern oral space. We may be unable to identify, negotiate, and complete suitable acquisition opportunities on reasonable
terms in the future. There can be no assurance 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 the following
problems, or others, occur as a result of our acquisition strategy, the impact could be material:
•
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 operations
We 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 and adjust 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 sales and 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 the month
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 affect our 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 a material 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 the Distribution 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 our strategy, 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 forward currency
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 to time, 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 of operations 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 the general condition of the U.S. and world economy.
A material decline in the economic conditions affecting consumers, which causes a reduction in 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 illicit channels. Although the high rates of inflation experienced over the past three
years in the United States and other countries in which we operate began to ease somewhat in 2023 and 2024, core inflation
remains persistent. As a result, inflation has had, and may continue to have, a negative impact on the purchasing power of
consumers. 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.
We currently self-insure a portion of our risk through our captive insurance company. To the extent that our captive insurance
company is unable to bear that risk, we may be required to fund additional capital to our captive insurance company or we
may be required to bear that loss.
37
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 social acceptance 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 to attract and retain the best talent, which could have a material adverse effect on our business,
results of operations and financial condition.
Our 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 infringed on 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 dependent on 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 ensure these
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 our intellectual 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 intellectual property 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 of operations 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, liquid nicotine and other markets in which we operate may claim that we infringe on or
misappropriate their intellectual property rights. Such claims, whether or not meritorious, may result in the expenditure of
significant financial and managerial resources, injunctions against us and/or the payment of damages. Further, our distribution
businesses distribute third-party product brands with those 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 be required to write down intangible assets, including trademarks and goodwill, due to impairment, which
could have a material adverse effect on our results of operations or financial position.
We periodically calculate the fair value of our reporting units and intangible assets to test for impairment. This calculation
may be affected by several factors, including general macroeconomic conditions, government actions, including FDA
regulatory actions and inaction, changes in category growth (decline) rates as a result of changing adult consumer preferences,
success of planned new product expansions, competitive activity, unfavorable outcomes with respect to litigation
proceedings, including actions brought against us alleging patent infringement, and income and excise taxes. Certain events
also can trigger an immediate review of intangible assets. If an impairment is determined to exist, we will incur impairment
losses, which could have a material adverse effect on our results of operations or financial position.
Item 1B. Unresolved Staff Comments
None
Item 1C. Cybersecurity
We rely on our technology infrastructure and information systems for our internal communications, controls, reporting and
relations with customers and suppliers, to utilize our data, and to bill, collect, and make payments. Our technology
infrastructure and information systems also support and form the foundation for our accounting and finance systems and form
an integral part of our disclosure and accounting control environment. Our internally developed system and processes, as well
as those systems and processes provided by third-party vendors, may be susceptible to damage or interruption from
cybersecurity threats, which include any unauthorized access to our information systems that may result in adverse effects on
the confidentiality, integrity, or availability of such systems or the related information. Potential cybersecurity threats include
terrorist or hacker attacks, the introduction of malicious computer viruses, ransomware, falsification of banking and other
information, insider risk, or other security breaches. Such attacks have become more and more sophisticated over time,
especially as threat actors have become increasingly well-funded by, or themselves include, governmental actors with
significant means. We expect that sophistication of cyber-threats will continue to evolve as threat actors increase their use of
AI and machine-learning technologies.
38
We have implemented robust processes to assess, identify, and manage cybersecurity risks, including potentially material
risks, related to our internal information systems and our products. In response to the increasing threats presented by cyber
incidents, in 2023 we established a Cybersecurity Steering Committee, which meets bimonthly. This committee is comprised
of our Head of IT and Security Leader, along with our Deputy General Counsel who reports to our General Counsel. The
Cybersecurity Steering Committee oversees activities related to the monitoring, prevention, detection, mitigation and
remediation of cybersecurity risks. The Cybersecurity Steering Committee develops and implements cybersecurity risk
mitigation strategies and activities, including the management of comprehensive incident response plans, oversees the
cybersecurity risks posed by third-party vendors, ensures policies and procedures are current and followed, and receives
regular updates on cybersecurity-related matters.
Our Board of Directors oversees our enterprise risk management process and our Audit Committee of the Board has direct
oversight of our management of cybersecurity risks. Under the direction and supervision of our Chief Financial Officer, we
conduct an annual comprehensive enterprise risk assessment, which includes details of our management of enterprise-wide
risk topics, such as those related to cybersecurity risks. The Board of Directors receives the full results of the annual enterprise
risk assessment, including an evaluation of cybersecurity risks presented, a detailed description of the actions we have taken
to mitigate these risks. Our Cybersecurity Steering Committee reviews the results of any enterprise risk assessment with
management on a bimonthly basis and with the Board of Directors quarterly or when risks are identified. Management
provides a comprehensive update to the Audit Committee of the Board on cybersecurity threats and risk mitigation at least
annually, and more frequently as relevant.
Our Head of IT, reporting to our Chief Financial Officer, has principal responsibility for assessing and managing
cybersecurity risks and threats, implementing the activities and systems necessary to address such risks and threats and
preparing updates for the Board of Directors. Our Head of IT has over 20 years of IT experience, including over 10 years
experience in cybersecurity, data security and regulatory compliance. Our Security Leader reports to our Head of IT and is
responsible for the operation of our cybersecurity program and management of our cybersecurity team. Our Security Leader
has 20 years of IT experience.
We have adopted the National Institute of Standards and Technology Cybersecurity Framework and the Center for Internet
Security Critical Security Controls to continually evaluate and enhance our cybersecurity. Activities include mandatory
quarterly online training for all employees, technical security controls, enhanced data protection, the maintenance of backup
and protective systems, policy review and implementation, the evaluation and retention of cybersecurity insurance, periodic
assessments of third-party service providers to assess cyber preparedness of key vendors, and running simulated cybersecurity
drills, including vulnerability scanning, penetration testing and disaster recovery exercises, throughout our organization.
These cybersecurity drills are performed both in-house and by a third-party service provider. We use automated tools that
monitor, detect, and prevent cybersecurity risks and have a security operations center that operates 24 hours a day to alert us
to any potential cybersecurity threats. Our Cybersecurity Steering Committee also has effected comprehensive incident
response plans that outline the appropriate communication flow and response for certain categories of potential cybersecurity
incidents. The Cybersecurity Steering Committee escalates events, including to the Chief Financial Officer, Audit Committee
and Board of Directors, as relevant, according to pre-defined criteria.
If we were to experience a cybersecurity incident, our Security Leader would inform the Cybersecurity Steering Committee,
which would then evaluate and assess the materiality of the incident to the Company and the impact of the incident on the
Company’s information technology infrastructure and data integrity, and determine whether the incident should be reported
to the Audit Committee of the Board in advance of the next regular cybersecurity update. The Cybersecurity Steering
Committee, with the assistance and input of the Audit Committee of the Board, has established a set of predefined criteria
that it uses to make such determinations. Once a cybersecurity incident has been reported to the Audit Committee of the
Board, the Audit Committee of the Board, with the input of the Cybersecurity Steering Committee, will determine how to
address it.
We engage subject matter experts such as consultants and auditors to assist us in establishing processes to assess, identify,
and manage potential and actual cybersecurity threats, to actively monitor our systems internally using widely accepted digital
applications, processes, and controls, and to provide forensic assistance to facilitate system recovery in the case of an incident.
The Cybersecurity Steering Committee oversees and establishes the parameters of our engagement with these experts to
ensure we obtain supplement assistance needed in this area, if any.
If we were to experience a cybersecurity incident, we may suffer interruptions in service, loss of assets or data, or reduced
functionality. Security breaches of our systems which allow inappropriate access to or inadvertent transfer of information and
misappropriation or unauthorized disclosure of confidential information, belonging to us or to our employees, providers,
suppliers, customers or insurance companies could result in our suffering significant financial and reputational damage.
Though we take steps to ensure our products and software are secure, a cyber-attack could result in the loss or compromise
39
of our or our employees’, suppliers’ and customers’ critical data. If a supplier or customer alleges that a cyber-attack causes
or contributes to a loss or compromise of critical data, whether or not caused by us, we could face harm to our reputation and
financial condition and incur regulatory repercussions. See Item 1A “Risk Factors – Security and privacy breaches may
expose us to liability and cause us to lose customers”. A cybersecurity incident could materially harm our reputation and
financial condition and cause us to incur legal liability and increased costs when responding to such events.
Item 2. Properties
As of December 31, 2024, 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, which is 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 and distribution facilities located in Louisville, Kentucky and Shepherdsville,
Kentucky are used by both our segments. Our third manufacturing and distribution facility located in Dresden, Tennessee is
used by our Stoker’s Product segment. We believe our facilities are adequate for our current and anticipated future use.
Item 3. Legal Proceedings
For a description of our material pending legal proceedings, see Note 19, “Contingencies” in 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 Item 1A “Risk Factors - We are subject to significant product liability litigation” for additional details.
Item 4. Mine Safety Disclosures
Not applicable.
Information about our Executive Officers
Listed 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 the executive officers, and there is no arrangement
or understanding between any executive officer and any other person pursuant to which the executive officer was selected.
Graham Purdy, age 53, has served as our President and CEO since October 2022. Prior to October 2022, Mr. Purdy served
as Chief Operating Officer since November 2019 after serving as President of our New Ventures Division since December
2017. Mr. Purdy joined the Company in 2004 and has 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.
David Glazek, age 47, was appointed Executive Chair of the Board in January 2023. Mr. Glazek served as a director of our
Company since November 2012, and as our Lead Independent Director from January 2018 until October 2022, and as our
non-executive Chair since September 2019. Mr. Glazek was a Partner and Portfolio Manager of Standard General L.P. from
2008 to 2023, and an investment banker at Lazard Frères & Co. from 2000 to 2003 and from 2006 to 2008. He also worked
at the Blackstone Group. Throughout his career he has served on numerous public and private company boards of directors. In
addition, he is an Adjunct Professor at Columbia Business School. Mr. Glazek holds a Bachelor of Arts from the University
of Michigan and a J.D. from Columbia Law School.
Andrew Flynn, age 49, joined the Company as our Chief Financial Officer in April 2024. Mr. Flynn previously served as the
CFO of Connected Cannabis Co. from September 2021 until March 2024. Prior to joining Connected, from June 2019 until
September 2021, Mr. Flynn served in various positions at Juul Labs, including as Senior Vice President. Earlier in his career,
Mr. Flynn served as Vice President of Finance at James Hardie Building Products, and Vice President of Finance at Arrow
Electronics. Mr. Flynn holds a BS from Indiana University and an MBA from the University of Colorado, Denver.
Brittani N. Cushman, age 40, 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 in October 2014, most recently serving as
Senior Vice President of External Affairs. 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, magna cum laude, in business management from the University of
Tulsa and a J.D. from Washington and Lee University School of Law.
40
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Market Information
The principal stock exchange on which Turning Point Brands, Inc.’s common stock, par value $0.01 per share, (the “Common
Stock”) is listed is the New York Stock Exchange under the symbol “TPB.” At February 28, 2025, there were 133 holders of
record of the Company’s Common Stock. The last reported sales price of the Company’s Common Stock on February 28,
2025 was $70.30.
Dividends. We have a history of paying cash dividends. Future dividend amounts will be considered after reviewing financial
results and capital needs and will be declared at the discretion of our Board of Directors.
Equity Compensation Plan Information. For certain information concerning securities authorized for issuance under the
Company’s equity compensation plans, see “Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder matters,” which notes that the information required by this Item is incorporated by reference from
our Proxy Statement to be filed in connection with our 2025 Annual Meeting of Stockholders within 120 days after the end
of the fiscal year ended December 31, 2024.
Performance graph. The graph below compares the cumulative total shareholder return of our common stock for the last
five years with the cumulative total return for the same period of the Russell 3000 Index and the S&P Small Cap 600
Consumer Staples Index. The information presented assumes the investment of $100 in common stock and each of the indices
as of the market close on December 31, 2019 and the reinvestment of all dividends on a quarterly basis.
41
Issuer 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 market dynamics. On October 25, 2021, the
Board of Directors increased the approved share repurchase program by $30.7 million, and by an additional $24.6 million on
February 24, 2022. On November 6, 2024, the Board of Directors of the Company increased the Company’s share
repurchase authorization by $77.9 million to an aggregate amount of $100.0 million. This share repurchase program has no
expiration date and is subject to the ongoing discretion of the Board of Directors. All repurchases to date under our stock
repurchase programs have been made through open market transactions, but in the future, we may also purchase shares
through privately negotiated transactions or 10b5-1 repurchase plans.
The following table includes information regarding purchases of our common stock made by us during the three months
ended December 31, 2024 in connection with the repurchase program described above:
Total Number
of Shares
Purchased
Maximum Number
(or Approximate
Total Number
Average
as Part of
Publicly
Announced
Dollar Value) of
Shares that May
Yet Be Purchased
of Shares
Price Paid
Plans or
Under the
Period
Purchased (1)
per Share
Programs
Plans or Programs
October 1 to October 31 ................
21,072 $
41.83
21,072 $
22,147,035
November 1 to November 30 ........
512 $
62.30
- $
100,000,000
December 1 to December 31 .........
2,542 $
60.10
- $
100,000,000
Total ..............................................
24,126
21,072
(1) The total number of shares purchased includes shares withheld by the Company in an amount equal to the statutory
withholding taxes for holders who vested in stock-based awards, which totaled 512 shares in November and 2,542 shares
in December. Shares withheld by the Company to cover statutory withholdings taxes are repurchased pursuant to the
applicable plan and not the authorization under the share repurchase program.
Item 6. Selected Financial Data
Reserved
42
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is intended to help the reader understand the results of operations and financial condition of the
Company. The discussion is provided as a supplement to, and should be read in conjunction with our historical consolidated
financial statements and accompanying notes, which are included elsewhere in this Annual Report on Form 10-K and
incorporated herein by reference. In addition, this discussion includes forward-looking statements subject to risks and
uncertainties that may result in actual results differing from statements we make. See “Cautionary Note Regarding Forward-
Looking Statements.” Factors that could cause actual results to differ include those risks and uncertainties discussed in Item
1A “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 requires otherwise, references to “the Company” “we,”
“our,” or “us” refer to Turning Point Brands, Inc., and its consolidated subsidiaries. References to “TPB” refer to Turning
Point Brands, Inc., without any of its subsidiaries. We were incorporated in 2004 under the name North Atlantic Holding
Company, Inc. On November 4, 2015, we changed our name to Turning Point Brands, Inc. Many of the amounts and
percentages in this discussion have been rounded for convenience of presentation.
Overview
Turning Point Brands, Inc. is a leading manufacturer, marketer and distributor of branded consumer products. We sell a wide
range of products to adult consumers consisting of staple products with our iconic brands Zig-Zag® and Stoker’s® and our
next-generation products to fulfill evolving consumer preferences. Among other markets, we compete in the alternative
smoking accessories and Other Tobacco Products (“OTP”) industries. The alternative smoking accessories market is a
dynamic market experiencing robust secular growth driven by cannabinoid legalization in the U.S. and Canada and positively
evolving consumer perception and acceptance in North America. The OTP industry, which consists of non-cigarette tobacco
products, exhibited low-single-digit consumer unit annualized growth over the four-year period ended 2024 as reported by
Management Science Associates, Inc. a third-party analytics and information company. Our segments are led by our core
proprietary and iconic brands: Zig-Zag® in the Zig-Zag products segment and Stoker’s® along with FRE®, Beech-
Nut® and Trophy® in the Stoker’s products segment. Our businesses generate solid cash flow which we use to invest in our
business, finance acquisitions, increase brand support, expand our distribution infrastructure, and strengthen our capital
position. We currently ship to approximately 900 distributors with an additional 600 secondary, indirect wholesalers in the
U.S. that carry and sell our products. Under the leadership of a senior management team with extensive experience in the
consumer products, alternative smoking accessories and tobacco industries, we have grown and diversified our business
through new product launches, category expansions and acquisitions while concurrently improving operational efficiency.
We believe there are meaningful opportunities to expand through investing in organic growth via acquisitions and joint
ventures across all product categories. Our products are currently available in approximately 200,000 U.S. retail locations,
which, with the addition of retail stores in Canada, bring our total North American retail presence to an estimated 220,000
points of distribution. Our sales team targets widespread distribution to all traditional retail channels, including convenience
stores, and we have a growing e-commerce business.
Recent Developments
Contribution of Creative Distribution Solutions
On January 2, 2025, the Company contributed 100% of its interest in South Beach Brands LLC (“SBB”), the subsidiary that
owns and operates the Company’s former Creative Distribution Solutions (“CDS”) reportable segment, to General Wireless
Operations, Inc. (“GWO”). GWO is a joint venture between the Company and Standard General, LP entered into in December
2018, the primary operations of which will be related to the CDS business. The divestiture of the CDS business represents a
strategic shift of operations and allows the Company to focus resources on its Zig-Zag and Stoker's product segments. The
assets and liabilities associated with the CDS business have been classified as held for sale as of December 31, 2024, and the
CDS operations have been classified as discontinued operations and reported separately for all periods presented in this annual
report of Form 10-K.
The Company holds a 49% minority interest in GWO and will account for its investment in GWO under the equity
method. Refer to Note 3, "Assets and Liabilities Held for Sale and Discontinued Operations" and Note 24, "Subsequent
Events" in Notes to Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further
discussion regarding the divestiture.
43
Senior Secured Notes Offering
In February 2025, we issued $300.0 million in aggregate principal amount of our 7.625% senior secured notes due 2032 (the
“2032 Notes”) at a price of 100%, the proceeds of which were used to repay in full the $250 million in aggregate principal
amount outstanding of 5.625% senior secured notes due 2026 (the “2026 Notes”). The 2026 Notes were originally issued in
2021. The 2032 Notes are guaranteed by certain of the Company’s wholly-owned domestic subsidiaries but not the borrower
under the Company’s ABL facility. The 2023 Notes are senior secured obligations of the Company and guarantors secured
on a first lien basis by all assets of the Company and guarantors, subject to customary exclusions.
Products
We operate in two segments: Zig-Zag products and Stoker’s products segments. In our Zig-Zag products segment, we
principally market and distribute (i) rolling papers, tubes, and related products; (ii) finished cigars and make-your-own
(“MYO”) cigar wraps; and (iii) lighters and other accessories. In addition, we have a majority stake in Turning Point Brands
Canada which is a specialty marketing and distribution firm focused on building brands in the Canadian cannabis accessories,
tobacco and alternative products categories. In our Stoker’s products segment, we (i) manufacture and market moist snuff
tobacco (“MST”) and (ii) contract for and market FRE®, our modern oral product; and (iii) contract for and market loose-leaf
chewing tobacco products.
Our portfolio of brands includes some of the most widely recognized names in the alternative smoking accessories and OTP
industries such as Zig-Zag® and Stoker’s®. The following table sets forth the market share and category rank of our core
products and demonstrates their industry positions within measured distribution channels:
Brand
Product
TPB Segment
Market
Share(1)
Category Rank(1)
Zig-Zag® ........... Cigarette Papers
Zig-Zag Products
32.8% #1 premium, #1 overall
Zig-Zag® ........... MYO Cigar Wraps
Zig-Zag Products
47.8% #1 overall
Stoker’s® ........... Moist Snuff
Stoker’s Products
7.4% #2 discount, #5 overall
Stoker’s® ........... Chewing Tobacco
Stoker’s Products
32.3% #1 discount, #1 overall
(1) Market share and category rank data for all products are derived from MSAi data for the 52 week period ended
December 28, 2024.
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 265,000 traditional 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 to allocate field salesforce coverage to the highest opportunity stores. Our sales and marketing group of
approximately 200 professionals utilize the MSAi system to efficiently target markets and sales channels with the highest
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. Our net sales, which include federal excise taxes,
consist of gross sales net of cash discounts, returns, and selling and marketing allowances.
We rely on long-standing relationships with high-quality, established manufacturers to provide the majority of our produced
products. Approximately 70% of our production, as measured by net sales, is outsourced to suppliers. The remaining
production consists primarily of our moist snuff tobacco operations located in Dresden, Tennessee and Louisville, Kentucky.
Our principal operating expenses include the cost of raw materials used to manufacture the limited number of our products
which we produce in-house; the cost of finished products, which are generally purchased goods; federal excise taxes; legal
expenses; and compensation expenses, including benefits and costs of salaried personnel.
Key Factors Affecting Our Results of Operations
We consider the following to be the key factors affecting our results of operations:
•
Our ability to further penetrate markets with our existing products;
•
Our ability to introduce new products and product lines that complement our core business;
•
Decreasing interest in some tobacco products among consumers;
•
Price sensitivity in our end-markets;
44
•
Marketing and promotional initiatives, which cause variability in our results;
•
Cost related to increasing regulation of promotional and advertising activities;
•
General economic conditions, including consumer access to disposable income and other conditions affecting
purchasing power such as inflation and the interest rate environment;
•
Labor and production costs;
•
Cost of complying with regulation, including the “deeming regulation”, as well as the unpredictable nature of the
regulatory regimes;
•
Changes to U.S. trade policies;
•
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.
Results of Operations
Summary
The table and discussion set forth below relates to our consolidated results of continuing operations for the years ended:
(in thousands)
For the years ended December 31,
2024
2023
% Change
2022
% Change
Consolidated Results of Operations Data:
Net sales
Zig-Zag products .............................................. $
192,394 $
180,455
6.6% $
190,403
-5.2%
Stoker’s products ..............................................
168,266
144,609
16.4%
130,826
10.5%
Total net sales ................................................
360,660
325,064
11.0%
321,229
1.2%
Cost of sales .........................................................
159,095
142,122
11.9%
143,399
-0.9%
Gross profit
Zig-Zag products ..............................................
106,585
101,055
5.5%
106,576
-5.2%
Stoker’s products ..............................................
94,980
81,887
16.0%
71,254
14.9%
Total gross profit ...........................................
201,565
182,942
10.2%
177,830
2.9%
Selling, general, and administrative expenses ......
122,407
104,327
17.3%
103,822
0.5%
Other operating income ........................................
(1,674)
(4,345 )
-61.5%
-
NM
Operating income
Zig-Zag products ..............................................
66,697
68,280
-2.3%
73,342
-6.9%
Stoker's products ...............................................
68,272
62,208
9.7%
53,331
16.6%
Total segment operating income ...................
134,969
130,488
3.4%
126,673
3.0%
Corporate unallocated .......................................
(54,137)
(47,528 )
13.9%
(52,665)
-9.8%
Total operating income .................................
80,832
82,960
-2.6%
74,008
12.1%
Interest expense, net .............................................
13,983
14,645
-4.5%
19,524
-25.0%
Investment loss .....................................................
1,893
11,914
-84.1%
13,303
-10.4%
Other income ........................................................
-
(4,000 )
-100.0%
-
NM
Gain on extinguishment of debt ...........................
-
(1,664 )
-100.0%
(885)
88.0%
Income from continuing operations before
income taxes ..............................................
64,956
62,065
4.7%
42,066
47.5%
Income tax expense ..............................................
16,929
23,999
-29.5%
10,980
118.6%
Consolidated net income from continuing
operations ..................................................
48,027
38,066
26.2%
31,086
22.5%
Net income (loss) attributable to non-controlling
interest ..............................................................
701
(681 )
-202.9%
(484)
40.7%
Net income from continuing operations
attributable to Turning Point Brands, Inc. . $
47,326 $
38,747
22.1% $
31,570
22.7%
45
Comparison of Year Ended December 31, 2024, to Year Ended December 31, 2023
Net Sales: For the year ended December 31, 2024, consolidated net sales increased $35.6 million, or 11.0%, compared to the
prior year period, driven by increases in net sales across both segments.
For the year ended December 31, 2024, net sales in the Zig-Zag products segment increased $11.9 million, or 6.6%, compared
to the prior year period. The increase in net sales was driven primarily by $11.5 million of growth in papers, wraps and
accessories, as well as $5.6 million of growth in cigars. This growth was partially offset by declines of $5.0 million in our
Clipper lighter business.
For the year ended December 31, 2024, net sales in the Stoker’s products segment increased $23.7 million, or 16.4%,
compared to the prior year period. For the year ended December 31, 2024, sales volume of Stoker’s products increased 6.8%
as compared with the prior year period contributing $9.9 million to the increase, and price/product mix increased 9.6% which
contributed $13.8 million to the increase. The increase in net sales was driven primarily by $19.0 million of growth in modern
oral products while the remaining growth is attributable to MST and loose-leaf chewing tobacco.
Gross Profit: For the year ended December 31, 2024, consolidated gross profit increased $18.6 million, or 10.2%, compared
to the prior year period. Gross profit as a percentage of net sales decreased to 55.9% of net sales for the year ended December
31, 2024, from 56.3% of net sales for the year ended December 31, 2023. The overall decrease in gross profit margin
was driven primarily by increased sales in modern oral in the Stoker’s products segment and cigars in the Zig-Zag products
segment which generates lower margins than other product categories.
For the year ended December 31, 2024, gross profit in the Zig-Zag products segment increased $5.5 million, or 5.5%,
compared to the prior year period. Gross profit as a percentage of net sales decreased to 55.4% of net sales for the year ended
December 31, 2024, from 56.0% of net sales for the year ended December 31, 2023, driven primarily by growth in net sales
of cigar products which generate lower margins than other products in the segment.
For the year ended December 31, 2024, gross profit in the Stoker’s products segment increased $13.1 million, or 16.0%,
compared to the prior year period. Gross profit as a percentage of net sales decreased to 56.4% of net sales for the year ended
December 31, 2024 from 56.6% of net sales for the year ended December 31, 2023, driven primarily by the growth in net
sales of modern oral products which generate lower margins than other products in the segment.
Selling, General and Administrative Expenses: For the year ended December 31, 2024, selling, general and administrative
expenses increased $18.1 million, or 17.3%, compared to the prior year period. Selling, general and administrative expenses
for the year ended December 31, 2024, included $7.2 million of stock options, restricted stock and incentives expense,
$4.6 million of expense related to corporate restructuring, $3.6 million of expense related to PMTA, $2.1 million related to
transaction costs and $0.9 million of expense related to the implementation of the new ERP and CRM systems. Corporate
restructuring expense increased in 2024 compared to the prior year period primarily due to a voluntary early
retirement program offered to employees in October 2024. This program offered early retirement benefits to employees
meeting certain criteria. Agreements with employees were finalized in the fourth quarter of 2024 and the Company booked a
$2.7 million reserve for estimated future payments. Selling, general and administrative expenses for the year ended December
31, 2023, included $6.6 million of stock options, restricted stock and incentives expense, $2.1 million of expense related to
PMTA, $0.6 million of expense related to the implementation of the new ERP and CRM systems, $0.2 million of expense
related to corporate restructuring and $0.2 million related to transaction costs.
Other Operating Income: For the year ended December 31, 2024, other operating income decreased $2.7 million compared
to the prior year period due to a federal excise tax refund of $1.7 million received in 2024 compared to a $4.3 million federal
excise tax refund received in 2023.
Operating Income: For the year ended December 31, 2024, consolidated operating income decreased $2.1 million, or 2.6%,
compared to the prior year period. Operating income as a percentage of net sales decreased to 22.4% of net sales for the year
ended December 31, 2024 from 25.5% of net sales for the year ended December 31, 2023, primarily due to an increase in
unallocated corporate expenses, as discussed below, driven by increases in restructuring costs related to a voluntary early
retirement program, stock compensation and transaction costs.
For the year ended December 31, 2024, operating income in the Zig-Zag products segment decreased $1.6 million, or 2.3%,
compared to the prior year period. Operating income as a percentage of net sales decreased to 34.7% of net sales for the year
ended December 31, 2024 from 37.8% of net sales for the year ended December 31, 2023, primarily due to a federal excise
tax refund of $1.7 million received in 2024 which increased operating income, compared to a $4.3 million federal excise tax
refund received in 2023, along with increased selling and marketing costs in 2024.
46
For the year ended December 31, 2024, operating income in the Stoker’s products segment increased $6.1 million, or 9.7%,
compared to the prior year period. Operating income as a percentage of net sales decreased to 40.6% of net sales for the year
December 31, 2024 from 43.0% of net sales for the year ended December 31, 2023, primarily due to increased sales and
marketing costs to support the sales growth in modern oral.
Included in consolidated operating income are costs of the Company which are not assigned to one of the two reportable
segments and includes: (i) corporate overhead expense, including executive management, finance, legal and information
technology salaries and professional services, such as audit, external legal costs and information technology services; as well
as (ii) costs related to the FDA premarket tobacco product application. For the year ended December 31, 2024, unallocated
costs were $54.1 million compared to $47.5 million in the prior year period, an increase of $6.6 million or 13.9%, primarily
driven by increases of $4.4 million in restructuring expense, $1.9 million in transaction costs, $1.5 million related to
PMTA and $0.7 million in stock compensation expense.
Interest Expense, net: For the year ended December 31, 2024, interest expense, net decreased $0.7 million compared to the
prior year period as a result of the maturity of the Convertible Senior Notes in 2024 and increased interest income on cash as
a result of higher interest rates on cash deposits.
Investment Loss: For the year ended December 31, 2024, investment loss decreased to $1.9 million compared to
$11.9 million for the year ended December 31, 2023. The change is primarily the result of impairment charges recognized on
our investments in Bomani for $1.8 million and Old Pal for $0.8 million for the year ended December 31, 2024, compared to
impairment charges recognized on our investments in Docklight for $8.7 million, Wild Hempettes for $2.2 million and Old
Pal for $1.3 million for the year ended December 31, 2023.
Other Income: For the year ended December 31, 2024, other income was zero compared to $4.0 million in the prior year as
a result of a $4.0 million gain related to a legal settlement.
Gain on Extinguishment of Debt: For the year ended December 31, 2024, gain on extinguishment of debt was zero
compared to $1.7 million for the year ended December 31, 2023, as a result of the repurchase of $44.0 million in aggregate
principal amount of our Convertible Senior Notes at a discount in 2023.
Income Tax Expense: The Company’s income tax expense was $16.9 million, or 26.1% of income from continuing
operations before income taxes for the year ended December 31, 2024. The Company's income tax expense was
$24.0 million, or 38.7% of income from continuing operations before income taxes for the year ended December 31, 2023
and included $6.4 million of valuation allowance for the deferred tax asset related to unrealized loss on investments and $1.7
million valuation allowance for foreign net operating losses.
Net Income (Loss) Attributable to Non-Controlling Interest: Net income attributable to non-controlling interest was $0.7
million for the year ended December 31, 2024, compared to a net loss of $0.7 million for the year ended December 31, 2023.
Net Income from Continuing Operations Attributable to Turning Point Brands, Inc.: Due to the factors described above,
net income from continuing operations attributable to Turning Point Brands, Inc. for the years ended December 31, 2024 and
2023, was $47.3 million and $38.7 million, respectively.
Comparison of Year Ended December 31, 2023, to Year Ended December 31, 2022
Net Sales: For the year ended December 31, 2023, consolidated net sales increased $3.8 million, or 1.2%, compared to the
prior year period, driven by an increase in the Stoker’s products segment.
For the year ended December 31, 2023, net sales in the Zig-Zag products segment decreased $9.9 million, or 5.2%, compared
to the prior year period. The decrease in net sales was driven by declines in the U.S. rolling papers and wraps businesses
which were impacted by a reduction of trade inventory, partially offset by growth in our Clipper products. Additionally, the
discontinuation of an unprofitable product line negatively impacted Canadian sales by $4.9 million against the previous year.
For the year ended December 31, 2023, net sales in the Stoker’s products segment increased $13.8 million, or 10.5%,
compared to the prior year period. For the year ended December 31, 2023, Stoker’s products volume increased 4.2% and
price/mix increased 6.3%. The increase in net sales was driven primarily by double-digit growth of Stoker’s® MST. MST
represented 68% of Stoker’s products revenue in 2023, up from 66% for the same period in 2022.
47
Gross Profit: For the year ended December 31, 2023, consolidated gross profit increased $5.1 million, or 2.9%, compared
to the prior year period. Gross profit as a percentage of net sales increased to 56.3% of net sales for the year ended December
31, 2023, from 55.4% of net sales for the year ended December 31, 2022. The overall increase in gross profit margin was
driven primarily by increased margins in the Stoker’s products segment.
For the year ended December 31, 2023, gross profit in the Zig-Zag products segment decreased $5.5 million, or 5.2%,
compared to the prior year period. Gross profit as a percentage of net sales remained unchanged at 56.0% of net sales for the
years ended December 31, 2024 and 2023, respectively.
For the year ended December 31, 2023, gross profit in the Stoker’s products segment increased $10.6 million, or 14.9%,
compared to the prior year period. Gross profit as a percentage of net sales increased to 56.6% of net sales for the year ended
December 31, 2023, from 54.5% of net sales for the year ended December 31, 2022, as a result of strong incremental margin
contribution of MST.
Selling, General and Administrative Expenses: For the year ended December 31, 2023, selling, general, and administrative
expenses increased $0.5 million, or 0.5% compared to the prior year period. Selling, general and administrative expenses for
the year ended December 31, 2023, included $6.6 million of stock options, restricted stock and incentives expense, $2.1
million of expense related to PMTA, $0.6 million of expense related to the implementation of the new ERP and CRM systems,
$0.2 million of expense related to corporate restructuring and $0.2 million related to transaction costs. Selling, general and
administrative expenses for the year ended December 31, 2022, included $5.3 million of stock options, restricted stock and
incentives expense, $4.6 million of expense related to PMTA, $3.3 million of expense related to corporate restructuring,
$2.0 million of expense related to the implementation of the new ERP and CRM systems and $0.8 million related to
transaction costs.
Other Operating Income: For the year ended December 31, 2023, other operating income was $4.3 million, resulting from
a federal excise tax refund and a $15.2 million gain related to insurance, partially offset by a $15.2 million reduction in
inventory due to storm damage. For the year ended December 31, 2022, there was no other operating (income) expense.
Operating Income: For the year ended December 31, 2023, consolidated operating income increased $9.0 million, or 12.1%,
compared to the prior year period. Operating income as a percentage of net sales increased to 25.5% of net sales for the year
ended December 31, 2023, from 23.0% of net sales for the year ended December 31, 2022, primarily due to increased margins
in the Stokers products segment partially offset by decreases in unallocated corporate expenses.
For the year ended December 31, 2023, operating income in the Zig-Zag products segment decreased $5.1 million, or 6.9%,
compared to the prior year period. Operating income as a percentage of net sales decreased to 37.8% of net sales for the year
ended December 31, 2023, from 38.5% of net sales for the year ended December 31, 2022, primarily driven by decreased
gross profits in U.S. papers and wraps.
For the year ended December 31, 2023, operating income in the Stoker’s products segment increased $8.9 million, or 16.6%,
compared to the prior year period. Operating income as a percentage of net sales increased to 43.0% of net sales for the year
December 31, 2023, from 40.8% of net sales for the year ended December 31, 2022, primarily driven by higher net sales of
MST.
Included in consolidated operating income are costs of the Company which are not assigned to one of the two reportable
segments and includes: (i) corporate overhead expense, including executive management, finance, legal and information
technology salaries, and professional services, such as audit, external legal costs and information technology services, as well
as (ii) costs related to the FDA premarket tobacco product application. For the year ended December 31, 2023, unallocated
costs were $47.5 million compared to $52.7 million in the prior year period, a decrease of $5.1 million or 9.8%, primarily
driven by decreases of $3.1 million of restructuring expense and $2.5 million of expense related to PMTA.
Interest Expense, net: For the year ended December 31, 2023, interest expense, net decreased $4.9 million compared to the
prior year period primarily as a result of the repurchases of $44.0 million and $10.0 million in aggregate principal amount of
Convertible Senior Notes in 2023 and 2022, respectively, and increased interest income on cash as a result of rising interest
rates.
Investment Loss: For the year ended December 31, 2023, investment loss decreased to $11.9 million compared to
$13.3 million for the year ended December 31, 2022. The change is primarily a result of the 2023 impairment charges
recognized on our investments in Docklight, Wild Hempettes and Old Pal of $8.7 million, $2.3 million and $1.3 million,
respectively, in 2023, compared to impairment charges of $7.9 million, $4.3 million and $1.4 million in 2022 related to our
investments in Dosist, Real Brands and Old Pal, respectively.
48
Other Income: For the year ended December 31, 2023, other income was $4.0 million compared to zero in the prior year
period as a result of a $4.0 million gain related to a legal settlement.
Gain on Extinguishment of Debt: For the year ended December 31, 2023, gain on extinguishment of debt was $1.7 million
compared to $0.9 million for the year ended December 31, 2022, as a result of the repurchase of $44.0 million in aggregate
principal amount of our Convertible Senior Notes at a discount. For the year ended December 31, 2022, gain on
extinguishment of debt resulted from the repurchase of $10.0 million in aggregate principal of our Convertible Senior Notes
at a discount.
Income Tax Expense: The Company’s income tax expense was $24.0 million, or 38.7% of income before income taxes for
the year ended December 31, 2023, and included $6.4 million of valuation allowance for the deferred tax asset related to
unrealized loss on investments and $1.7 million valuation allowance for foreign net operating losses. The Company's income
tax expense was $11.0 million, or 26.1% of income before income taxes for the year ended December 31, 2022.
Net Income (Loss) Attributable to Non-Controlling Interest: Net loss attributable to non-controlling interest was $0.7
million for the year ended December 31, 2023, compared to a $0.5 million loss for the year ended December 31, 2022.
Net Income from Continuing Operations 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, 2023 and 2022, was $38.7 million
and $31.6 million, respectively.
Loss from Discontinued Operations, net of tax
On January 2, 2025, the Company contributed 100% of its interest in SBB, the subsidiary that owns and operates the
Company’s CDS segment, to GWO in exchange for 49% of the issued and outstanding GWO common stock on a fully-
diluted basis. GWO is a joint venture between the Company and Standard General, LP entered into in December 2018. The
assets and liabilities associated with the CDS business have been classified as held for sale as of December 31, 2024, and its
financial results are classified as discontinued operations and reported separately for all periods presented herein. Upon
meeting the criteria for held for sale classification, the Company recorded a non-cash charge of $8.8 million with an
equivalent valuation allowance against net assets held for sale to reduce the carrying value of the disposal group to fair value.
As of December 2024, total assets and liabilities associated with the CDS segment classified as held for sale were
$15.3 million and $2.0 million, respectively. As of December 2023, total assets and liabilities associated with the CDS
segment classified as held for sale were $27.0 million and $2.2 million, respectively.
Loss from discontinued operations, net of tax for the years ended December 31 are as follows:
(in thousands)
For the years ended December 31,
2024
2023
2022
Loss from discontinued operations, net of tax .................................... $
(7,517) $
(285 ) $
(19,929)
Comparison of Year Ended December 31, 2024, to Year Ended December 31, 2023
For the year ended December 31, 2024, net loss from discontinued operations, net of tax, increased $7.2 million compared to
the prior year period. The loss is primarily due to lower net sales of $21.3 million for the year ended December 31, 2024
compared to prior year and a $8.8 million non-cash charge recognized in discontinued operations in 2024 to reduce the
carrying value of the disposal group to its fair value.
Comparison of Year Ended December 31, 2023, to Year Ended December 31, 2022
For the year ended December 31, 2023, net loss from discontinued operations, net of tax, decreased $19.6 million compared
to the prior year period. The decreased in loss for the year ended December 31, 2023 is primarily due to a goodwill impairment
charge of $27.6 million recognized for the year ended December 31, 2022 to reduce the carrying value of the CDS
segment goodwill balance to zero.
49
EBITDA and Adjusted EBITDA
To supplement our financial information presented in accordance with generally accepted accounting principles in the United
States, or U.S. GAAP, we use non-U.S. GAAP financial measures including EBITDA and Adjusted EBITDA. We believe
Adjusted EBITDA provides useful information to management and investors regarding certain financial and business trends
relating to our financial condition and results of operations. Adjusted EBITDA is used by management to compare our
performance to that of prior periods for trend analyses and planning purposes and is presented to our Board of Directors. We
believe that EBITDA and Adjusted EBITDA are appropriate measures of operating performance because they eliminate the
impact of expenses that do not relate to operating performance. In addition, our debt instruments contain covenants which
use Adjusted EBITDA calculations.
We define “EBITDA” as net income before interest expense, gain (loss) on extinguishment of debt, income tax expense,
depreciation, and amortization. We define “Adjusted EBITDA” as net income before interest expense, gain (loss) on
extinguishment of debt, income tax expense, depreciation, amortization, other non-cash items, and other items we do not
consider the ordinary course in our evaluation of ongoing operating performance noted in the reconciliation below. Among
other items that we adjust Adjusted EBITDA for is FDA PMTA expense. The Company believes it is appropriate to adjust
for this spend as the costs are incurred in connection with what we view as a non-traditional regulatory process that requires
applications be submitted for covered products that are already on the market. As a result, Company’s management believes
it is most appropriate to assess the performance of the Company’s business – the sale of our various products - without regard
to these costs and believes that adjusting for these costs provides investors and the public markets with the most meaningful
metrics to assess performance of the business.
Non-U.S. GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in
accordance with U.S. GAAP. Adjusted EBITDA excludes significant expenses required to be recorded in our financial
statements by U.S. GAAP and is subject to inherent limitations. Other companies in our industry may calculate this non-U.S.
GAAP measure differently than we do or may not calculate it at all, limiting its usefulness as a comparative measure. The
tables below provide reconciliations between net income and Adjusted EBITDA.
(in thousands)
Years ended December 31,
2024
2023
2022
Net income attributable to Turning Point Brands, Inc. ....................... $
39,809 $
38,462 $
11,641
Loss from discontinued operations, net of tax ....................................
7,517
285
19,929
Add:
Interest expense, net ....................................................................
13,983
14,645
19,524
Gain on extinguishment of debt ..................................................
-
(1,664 )
(885)
Income tax expense .....................................................................
16,929
23,999
10,980
Depreciation expense ..................................................................
3,329
2,780
2,859
Amortization expense ..................................................................
2,333
1,338
525
EBITDA ............................................................................................. $
83,900 $
79,845 $
64,573
Components of Adjusted EBITDA
Corporate restructuring (a) ..........................................................
4,634
199
3,329
ERP/CRM (b) ..............................................................................
993
552
1,962
Stock based compensation (c) .....................................................
7,243
6,561
5,273
Transactional expenses and strategic initiatives (d) ....................
2,107
165
801
FDA PMTA (e) ...........................................................................
3,592
2,098
4,554
Non-cash asset impairment (f) ....................................................
2,722
12,177
13,570
FET Refund (g) ...........................................................................
(1,674)
(4,345 )
-
Legal settlement (h) .....................................................................
-
(4,000 )
-
Mark-to-market loss on Canadian inter-company note (i) ..........
942
-
-
Adjusted EBITDA .............................................................................. $
104,459 $
93,252 $
94,062
(a) Represents costs associated with corporate restructuring, including severance and early retirement.
(b) Represents cost associated with scoping and mobilization of new ERP and CRM systems and cost of duplicative ERP
licenses.
(c) Represents non-cash stock options, restricted stock, PSRUs, etc.
(d) Represents the fees incurred for transaction expenses.
(e) Represents costs associated with applications related to FDA premarket tobacco product application (“PMTA”). The
PMTA regime requires the Company to submit an application to the FDA to receive marketing authorization to continue
to sell certain of its product lines with continued sales permitted during the pendency of the applications. The application
50
is a onetime resource-intensive process for each covered product line; however, due to the nature of the implementation
process for those product lines already in the market, applications can take multiple years to complete rather than the
typical one-time submission. The Company currently has only two product lines currently subject to the PMTA process,
having utilized other regulatory pathway options available for our other product lines. The Company does not expect to
submit additional PMTA applications for any new product lines after the submission for the remaining two are complete.
(f) Represents impairment of goodwill, intangible and investment assets.
(g) Represents a federal excise tax refund included in other operating income.
(h) Represents other income from litigation settlement.
(i) Represents a mark-to-market loss attributable to foreign exchange fluctuation.
Liquidity and Capital Resources
Our principal uses for cash are working capital, debt service and capital expenditures. As of December 31, 2024, we had
$46.2 million cash on hand, excluding CDS segment cash of $2.8 million, ($116.7 million, excluding CDS segment cash of
$1.2 million, as of December 31, 2023) and have up to $57.4 million of availability under the 2023 ABL Facility. After giving
effect to the issuance of the 2032 Notes and redemption of the 2026 Notes in February 2025, our cash on hand would have
been $90.2 million as of December 31, 2024 and borrowing availability under the ABL would have remained the same. We
have no borrowings outstanding under our ABL as of December 31, 2024. Our Convertible Senior Notes matured on July 15,
2024 and were retired with cash.
Our adjusted working capital, excluding CDS segment assets and liabilities held for sale, which we define as current assets
less cash and current liabilities, increased $57.3 million compared to the prior year end. The increase in working capital was
primarily a result of a $58.3 million decrease in current liabilities due to the July 15, 2024 maturity of our Convertible Senior
Notes which were retired with cash on that date. With our strong cash balance, free cash flow generation and borrowing
availability under the 2023 ABL Facility, we expect to have ample liquidity to satisfy our operating cash requirements for
the foreseeable future.
As of
(in thousands)
December 31, December 31,
2024
2023
Current assets .................................................................................................................. $
140,577 $
138,637
Current liabilities .............................................................................................................
42,771
98,140
Adjusted working capital ................................................................................................. $
97,806 $
40,497
For the years ended December 31, 2024 and 2023, we invested $4.6 million and $5.7 million, respectively, in capital
expenditures. We had restricted assets of $30.7 million and $33.6 million as of December 31, 2024 and 2023, respectively.
Restricted assets consist of escrow deposits under the MSA and insurance deposits. On the 25th anniversary of each annual
deposit, we are entitled to receive reimbursement of the principal amount of escrow remaining for that year. See “Master
Settlement Agreement” below for details.
Cash Flows from Continuing Operations
Our cash flows from continuing operations as reflected in the Consolidated Statements of Cash Flows are summarized as
follows:
(in thousands)
For the years ended December 31,
2024
2023
2022
Cash provided by (used in)
Operating activities ......................................................................... $
60,958 $
56,240 $
21,298
Investing activities .......................................................................... $
(10,509) $
(5,906 ) $
(18,969)
Financing activities ......................................................................... $
(128,284) $
(49,505 ) $
(43,303)
Cash Flows from Operating Activities
For the year ended December 31, 2024, net cash provided by operating activities was $61.0 million, an increase of
$4.7 million compared to the prior year period, primarily due to an increase in net income, net of non-cash items of
$12.6 million and a favorable change in other assets of $3.1 million, partially offset by a $11.0 million unfavorable change
in working capital. The primary drivers of non-cash items were a $9.5 million decrease in loss on investments compared to
the prior year period and a $6.5 million decrease in deferred tax expense, partially offset by increases of $1.6 million in
51
depreciation and other amortization expense and a $1.7 million decrease in gains on extinguishment of debt compared to the
prior year period.
For the year ended December 31, 2023, net cash provided by operating activities was $56.2 million, an increase of
$34.9 million compared to the prior year period, primarily due to an increase in the change in working capital of $35.2 million
(net of inventory reserve), partially offset by a decrease in the change in other assets of $5.3 million. The increase in working
capital was primarily driven by an increase in the change in inventories of $40.0 million related to the timing of changes in
inventory.
Cash Flows from Investing Activities
For the year ended December 31, 2024, net cash used in investing activities was $10.5 million, an increase of $4.6 million
compared to the prior year period, primarily due to the net purchase of an additional $5.4 million in investments by our
captive insurance subsidiary.
For the year ended December 31, 2023, net cash used in investing activities was $5.9 million, a decrease of $13.1 million
compared to the prior year period, primarily due to a $10.2 million decrease in purchases of investments in our MSA escrow
account.
Cash Flows from Financing Activities
For the year ended December 31, 2024, net cash used in financing activities was $128.3 million, an increase of $78.8 million
compared to the prior year period, primarily due to a $118.5 million cash payment for retirement of the Convertible Senior
Notes and $5.1 million of cash used for the repurchase of common stock during the period in 2024, partially offset by $41.8
million in repurchases of Convertible Senior Notes that occurred during the same period in 2023.
For the year ended December 31, 2023, net cash used in financing activities was $49.5 million, an increase of $6.2 million
compared to the prior year period, primarily due to $41.8 million in repurchases of Convertible Senior Notes during the
period, partially offset by a decrease in repurchases of common stock of $29.2 million during 2023.
Cash Flows from Discontinued Operations
The cash flows of the discontinued operations are reflected in the Consolidated Statements of Cash Flows and are summarized
below.
(in thousands)
For the years ended December 31,
2024
2023
2022
Cash provided by
Operating activities ......................................................................... $
6,104 $
10,641 $
8,975
Investing activities .......................................................................... $
- $
- $
176
Cash Flows from Operating Activities
For the year ended December 31, 2024, net cash provided by operating activities was $6.1 million, a decrease of $4.5
million compared to the prior year period, primarily due to an unfavorable $5.8 million change in working capital.
For the year ended December 31, 2023, net cash provided by operating activities was $10.6 million, an increase of
$1.7 million compared to the prior year period, primarily due to a $9.2 million favorable change in working capital, reduced
by a $7.5 million decrease in net loss, net of non-cash items.
52
Long-Term Debt
Notes payable and long-term debt consisted of the following at December 31, 2024 and 2023, in order of preference:
December 31, December 31,
2024
2023
2026 Notes ...................................................................................................................... $
250,000 $
250,000
Convertible Senior Notes ................................................................................................
-
118,541
Gross notes payable and long-term debt ......................................................................
250,000
368,541
Less deferred financing costs ..........................................................................................
(1,396 )
(3,183)
Less current maturities ....................................................................................................
-
(58,294)
Notes payable and long-term debt ............................................................................... $
248,604 $
307,064
Senior Secured Notes
On February 11, 2021, we closed a private offering of $250.0 million aggregate principal amount of our 5.625% senior
secured notes due 2026 (the “2026 Notes”). The 2026 Notes incurred interest at a rate of 5.625%. Interest on the 2026 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 2026 Notes were guaranteed by the Company’s existing and future wholly-owned domestic subsidiaries
(the “Guarantors”) that guarantee any credit facility (as defined in the indenture governing the 2026 Notes or the “2026 Notes
Indenture”) or capital markets debt securities of the Company or Guarantors in excess of $15.0 million. The 2026 Notes and
the related guarantees are secured by first-priority liens on substantially all of the assets of the Company and the Guarantors,
subject to certain exceptions. We were in compliance with all covenants under the 2026 Notes as of December 31, 2024.
In February 2025, we redeemed the 2026 Notes with the proceeds from the offering of the 2032 Notes.
We incurred debt issuance costs attributable to the issuance of the 2026 Notes of $6.4 million which are amortized to interest
expense using the straight-line method over the expected life of the 2026 Notes.
2032 Notes
In February 2025, the Company closed a private offering of $300.0 million aggregate principal amount of 7.625% senior
secured notes due to mature on March 15, 2032 (the “2032 Notes”). Interest on the 2032 Notes is payable semi-annually on
March 15 and September 15 of each year, commencing on September 15, 2025. The Company used the proceeds from the
offering (i) to repay all obligations under and terminate the 2026 Notes, (ii) to pay related fees, costs, and expenses and (iii)
for general corporate purposes. The 2032 Notes are fully and unconditionally guaranteed on a senior secured basis, jointly
and severally, by each current wholly-owned domestic restricted subsidiary of the Company that guaranteed the 2026
Notes. The 2032 Notes and the related guarantees are secured by first-priority liens on substantially all of the assets of
the Company and the guarantors, subject to certain exceptions. Proceeds from the offering were approximately $294.0
million.
The 2032 Notes Indenture contains covenants that, among other things, restrict the ability of the Company and its restricted
subsidiaries to: (i) grant or incur liens; (ii) incur, assume or guarantee additional indebtedness; (iii) sell or otherwise dispose
of assets, including capital stock of subsidiaries; (iv) make certain investments; (v) pay dividends, make distributions or
redeem or repurchase capital stock; (vi) engage in certain transactions with affiliates; and (vii) consolidate or merge with or
into, or sell substantially all of our assets to another entity. These covenants are subject to a number of several limitations and
exceptions set forth in the 2032 Notes Indenture. For instance, the Company is generally permitted to make restricted
payments, including the payment of dividends to shareholders, provided that, at the time of payment, or as a result of payment,
the Company is not in default on its debt covenants; however, there are earnings and market capitalization requirements that
if not met could limit the aggregate amount of quarterly dividends payable during a fiscal year. The 2032 Notes Indenture
provides for customary events of default.
53
2023 ABL Facility
On November 7, 2023, TPB Specialty Finance, LLC, a wholly-owned subsidiary of the Company (the “ABL Borrower”),
entered into a new $75.0 million asset-backed revolving credit facility (the “2023 ABL Facility”), with the several lenders
thereunder, and Barclays Bank PLC, as administrative agent (the “Administrative Agent”) and as collateral agent (the
“Collateral Agent”) and First-Citizens Bank & Trust Company as additional collateral agent (the “Additional Collateral
Agent”). Under the 2023 ABL Facility, the ABL Borrower may draw up to $75.0 million under Revolving Credit Loans and
Last In Last Out (“LILO”) Loans. The 2023 ABL Facility includes a $40.0 million accordion feature. In connection with the
2023 ABL Facility, certain existing inventory was contributed to the ABL Borrower. The 2023 ABL Facility is secured on a
first priority basis (subject to customary exceptions) by all assets of the ABL Borrower.
The 2023 ABL Facility contains customary borrowing conditions including a borrowing base equal to the sum of (a) the
lesser of (1) 85% of the lower of (A) the market value (on a first in first out basis) of the sum of eligible inventory, plus
eligible in-transit inventory of the ABL Borrower and (B) 85% of the cost of the sum of eligible inventory, plus eligible in-
transit inventory of the ABL Borrower and (2) 85% of the net orderly liquidation value (“NOLV”) percentage of the lower
of (1)(A) or (1)(B); plus (b) 85% of the face value of all eligible accounts of the ABL Borrower minus (c) the amount of all
eligible reserves. The 2023 ABL Facility also includes a LILO borrowing base equal to the sum of (a) the lesser of: (1) 10%
of the lower of (A) the market value (on a first in first out basis) of the sum of eligible inventory, plus eligible in-transit
inventory of the ABL Borrower and (B) the cost of the sum of eligible inventory, plus eligible in-transit inventory and (2)
10% of the NOLV percentage of the lower of (1)(A) or (1)(B); plus (b) 10% of the face amount of eligible account; minus
(c) the amount of all eligible reserves.
Amounts borrowed under the 2023 ABL Facility are subject to an interest rate margin per annum equal to (a) from and after
the closing date until the last day of the first full fiscal quarter ended after the closing date, (i) 1.25% per annum, in the case
base rate loans, and (ii) 2.25% per annum, in the case of revolving credit loans that are SOFR Loans, (b)(i) 2.25% per annum,
in the case of LILO loans that are base rate loans, and (ii) 3.25% per annum, in the case of LILO loans that are SOFR loans,
(c) on the first day of each fiscal quarter, the applicable interest rate margins will be determined from the pricing grid below
based upon the historical excess availability for the most recent fiscal quarter ended immediately prior to the relevant date,
as calculated by the Administrative Agent.
Applicable Margin Applicable Margin
Level
Historical Excess Availability
for SOFR Loans or Base Rate Loans
I
Greater than or equal to 66.66%
1.75 %
0.75 %
II
Less than 66.66%, but greater than or equal to 33.33%
2.00 %
1.00 %
III
Less than 33.33%
2.25 %
1.25 %
The 2023 ABL Facility also requires the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio of
at least 1.00 to 1.00 as of the end of any four consecutive fiscal quarters if excess availability is less than the greater of (a)
12.5% of the line cap and (b) $9.4 million, at any time and continuing until excess availability is equal to or exceeds the
greater of (i) 12.5% of the line and (ii) $9.4 million for thirty (30) consecutive calendar days with the $9.4 million level
automatically increased in proportion to the amount of any increase in the aggregate revolving credit commitments thereunder
in connection with any incremental facility.
The 2023 ABL Facility will mature on the earlier of (x) November 7, 2027 and (y) the date that is 91 days prior to the maturity
date of any material debt of the ABL Borrower or the Company or any of its restricted subsidiaries (subject to customary
extensions agreed by the lenders thereunder); provided that clause (y) will not apply to the extent that on any applicable date
of determination (on any date prior to the date set forth in clause (y)), (A) the sum of (x) cash that is held in escrow for the
repayment of such material debt pursuant to arrangements satisfactory to the Administrative Agent, (y) cash that is held in
accounts with the Administrative Agent and/or the Additional Collateral Agent, plus (z) excess availability, is sufficient to
repay such material debt and (B) the ABL Borrower has excess availability of at least $15.0 million after giving effect to such
repayment of material debt, including any borrowings under the commitments in connection therewith.
The Company has not drawn any borrowings under the 2023 ABL Facility but has letters of credit of approximately $2.3
million outstanding under the facility and has an available balance of $57.4 million based on the borrowing base as of
December 31, 2024.
The Company incurred debt issuance costs attributable to the 2023 ABL Facility of $2.6 million which are amortized to
interest expense using the straight-line method over the expected life of the 2023 ABL Facility.
54
Convertible Senior Notes
The Company's 2.5% convertible senior notes matured and were retired with cash on July 1, 2024. No principal amounts
remain outstanding as of December 31, 2024.
Additional Information with Respect to our Unrestricted Subsidiaries
Under the terms of the 2026 Notes that were recently redeemed with proceeds from the February 2025 issuance of the 2032
Notes, the Company designated certain of its subsidiaries as “Unrestricted Subsidiaries” as of December 31, 2024, including
Interchange Partners LLC and Intrepid Brands, LLC. The Company is required under the terms of the indentures governing
the Notes to present additional information that reflects the financial condition and results of operations of the Company and
its Restricted Subsidiaries separate from the financial condition and results of operations of the Company’s Unrestricted
Subsidiaries as of and for the periods presented. This additional information for 2024 is presented below. With the
classification of the Company's CDS products business to discontinued operations in December 2024, there are no meaningful
results for Unrestricted Subsidiaries to present for 2023 or 2022.
Income Statement for the year ended December 31, 2024:
Year Ended December 31,
2024
Company and
Restricted Unrestricted
Subsidiaries Subsidiaries Consolidated
Net sales ............................................................................................. $
355,712 $
4,948 $
360,660
Cost of sales .......................................................................................
157,501
1,594
159,095
Gross profit .....................................................................................
198,211
3,354
201,565
Selling, general, and administrative expenses ....................................
121,859
548
122,407
Other operating income ......................................................................
(1,674)
-
(1,674)
Operating income ............................................................................
78,026
2,806
80,832
Interest expense (income), net ............................................................
14,390
(407 )
13,983
Investment loss ...................................................................................
1,893
-
1,893
Income before income taxes ...........................................................
61,743
3,213
64,956
Income tax expense ............................................................................
16,092
837
16,929
Consolidated net income .................................................................
45,651
2,376
48,027
Net (loss) income attributable to non-controlling interest ..................
(390)
1,091
701
Net income attributable to Turning Point Brands, Inc. ................... $
46,041 $
1,285 $
47,326
55
Balance Sheet as of December 31, 2024:
Company and
Restricted
Unrestricted
Subsidiaries Subsidiaries Eliminations Consolidated
ASSETS
Current assets:
Cash ............................................................................... $
37,279 $
8,879 $
- $
46,158
Accounts receivable, net ................................................
9,624
-
-
9,624
Inventories, net ..............................................................
95,378
875
-
96,253
Current assets held for sale ............................................
11,470
-
11,470
Other current assets ........................................................
33,599
1,101
-
34,700
Total current assets .....................................................
187,350
10,855
-
198,205
Property, plant, and equipment, net ...................................
26,337
-
-
26,337
Deferred income taxes .......................................................
995
-
-
995
Right of use assets .............................................................
11,610
-
-
11,610
Deferred financing costs, net .............................................
1,823
-
-
1,823
Goodwill ............................................................................
135,932
-
-
135,932
Other intangible assets, net ................................................
65,254
-
-
65,254
Master Settlement Agreement (MSA) escrow deposits .....
28,676
-
-
28,676
Noncurrent assets held for sale ..........................................
3,859
-
-
3,859
Other assets .......................................................................
14,365
6,297
-
20,662
Investment in unrestricted subsidiaries .............................
-
750
(750)
-
Total assets ................................................................. $
476,201 $
17,902 $
(750) $
493,353
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable ........................................................... $
8,420 $
3,255 $
- $
11,675
Accrued liabilities ..........................................................
29,540
719
837
31,096
Current liabilities held for sale .......................................
2,049
-
-
2,049
Total current liabilities ...............................................
40,009
3,974
837
44,820
Notes payable and long-term debt .....................................
248,604
-
-
248,604
Lease liabilities ..................................................................
9,549
-
-
9,549
Total liabilities ........................................................... $
298,162 $
3,974 $
837 $
302,973
Commitments and contingencies
Stockholders’ equity:
Total Turning Point Brands Inc. Stockholders’
Equity/Net parent investment in unrestricted
subsidiaries ....................................................................
177,481
12,087
(1,587)
187,981
Non-controlling interest ....................................................
558
1,841
-
2,399
Total stockholders’ equity ..........................................
178,039
13,928
(1,587)
190,380
Total liabilities and stockholders’ equity ................... $
476,201 $
17,902 $
(750) $
493,353
Distribution Agreements
For a description of our material distribution agreements, see Item 1. “Business - Distribution and Supply Agreements.”
Master Settlement Agreement
On 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 smoking tobacco) sold in
such state. We discontinued our generic category of MYO in 2019 and our Zig-Zag branded MYO cigarette smoking tobacco
in 2017. Pending a change in MSA legislation, we have no remaining product lines covered by the MSA and will not be
required to make future escrow deposits and, therefore, do not expect to accrue any loss contingencies subject to the MSA in
the future.
56
The following table summarizes our escrow deposit balances (in thousands) by sales year as of:
Deposits as of December 31,
Sales Year
2024
2023
1999 ......................................................... $
211 $
211
2000 .........................................................
1,017
1,017
2001 .........................................................
1,673
1,673
2002 .........................................................
2,271
2,271
2003 .........................................................
4,249
4,249
2004 .........................................................
3,714
3,714
2005 .........................................................
4,553
4,553
2006 .........................................................
3,847
3,847
2007 .........................................................
4,167
4,167
2008 .........................................................
3,364
3,364
2009 .........................................................
1,619
1,619
2010 .........................................................
406
406
2011 .........................................................
193
193
2012 .........................................................
199
199
2013 .........................................................
173
173
2014 .........................................................
143
143
2015 .........................................................
101
101
2016 .........................................................
91
91
2017 .........................................................
82
82
Total ........................................................ $
32,073 $
32,073
Off-Balance Sheet Arrangements
During 2024, we executed various foreign exchange contracts for the purchase of €3.6 million and sale of €3.6 million with
maturity dates ranging from October 2024 to June 2025. At December 31, 2024, we had foreign currency contracts
outstanding for the purchase of €2.1 million and sale of €2.1 million. The fair value of the foreign currency contracts
was based on quoted market prices and resulted in an asset of $0.0 million included in Other current assets and a liability of
$0.1 million included in Accrued liabilities at December 31, 2024. We had no interest rate swap contracts at December 31,
2024 and 2023.
During 2023, we executed various foreign exchange contracts for the purchase of €20.1 million and sale of €15.2 million
with maturity dates ranging from July 2023 to September 2024. At December 31, 2023, we had foreign currency contracts
outstanding for the purchase of €15.2 million and sale of €15.2 million. The fair value of the foreign currency contracts was
based on quoted market prices and resulted in an asset of $0.3 million included in Other current assets and a liability of
$0.1 million included in Accrued liabilities at December 31, 2023.
Future Cash Requirements
The 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 debt and lease obligations. For information
regarding our long-term debt obligations and cash payment obligations thereunder, please see Note 14, “Notes Payable and
Long-Term Debt” in Notes to the Consolidated 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 17, “Lease
Commitments” in the Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K.
In 2024, we repurchased 154,945 shares of our common stock for a total cost of $5.1 million at an average price per share of
$32.60, and have $100 million of authorization remaining under our Board approved repurchase program at December 31,
2024. In 2023, we made no repurchases of our common stock.
57
Regulation and Legislation
While we are subject to several regulatory regimes and requirements, the following may meaningfully impact operations or
resources:
Federal Regulation
Certain tobacco and nicotine 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 to predict the likelihood of passage of future increases in
federal excise taxes. As of December 31, 2024, federal excise taxes are not assessed on certain novel nicotine products,
including nicotine pouches, e-cigarettes and related products.
State and Local Regulation
As of December 31, 2024, the states require excise tax payments on most of our products. These required taxes may increase
over time or be expanded to cover additional product categories and may in some cases impact the consumer demand of the
products. In addition, there are several local taxing jurisdictions requiring taxes and/or licensing. Several states have also
implemented or are considering implementing additional regulations on our products, including sales restrictions. These
requirements may impact which products we are allowed to offer for sale or may influence retailers’ likelihood of carrying
regulated products more generally.
FDA Regulation
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 of tobacco products – cigarettes, cigarette tobacco, roll-your-
own tobacco, and smokeless tobacco. On August 8, 2016, the FDA deeming regulation became effective. The deeming
regulation gave the FDA the authority to also regulate all products made or derived from tobacco intended for human
consumption, but excluding accessories of tobacco products (such as lighters). Accordingly, the FDA has since regulated our
cigar and cigar wrap products. Subsequently, on April 14, 2022, the FDA Center for Tobacco Products also obtained
jurisdiction over non-tobacco nicotine products (“NTN Products”), including synthetic nicotine. That law subjects NTN
Products to the same requirements as tobacco-derived products.
The FDA currently assesses tobacco product user fees on six classes of regulated tobacco products and computes user fees
using a methodology similar to the methodology used by the U.S Department of Agriculture to compute the Tobacco
Transition Payment Program (“TTPP,” also known as the “Tobacco Buyout”) assessment. First, the total, annual,
congressionally established user fee assessment is allocated among the various classes of tobacco products using the federal
excise tax weighted market share of tobacco products subject to regulation. Then, the assessment for each class of tobacco
products is divided among individual manufacturers and importers.
Tobacco products regulated by FDA are subject to premarket filing requirements, most significantly Premarket Tobacco
Product Applications (“PMTAs”) or Substantial Equivalence Reports (“SEs”).
A successful PMTA must demonstrate that the subject product is “appropriate for the protection of public health,” taking into
account the effect of the marketing of the product on all sub-populations while a Substantial Equivalence Report must
demonstrate that a new product either has the same characteristics as its predicate product or different characteristics but does
not raise different questions of public health. We submitted premarket filings for certain of our regulated products in order to
continue selling these products while they remain under review. We have continued to supplement these applications with
additional information and have responded to information requests from the FDA; however, there can be no guarantee that
the FDA will accept such amendments and responses or that the applications will meet the standard of “appropriate for the
protection of public health” or “substantially equivalent,” as appropriate. FDA’s interpretation and implementation of these
standards likewise may change over time, which may negatively impact our existing or future premarket filings. Currently,
the FDA has indicated its enforcement priority is those applicants who have received negative action on their application,
such as a Marketing Denial Order or Refuse to File notification and who continue to illegally sell those unauthorized products,
as well as products for which manufacturers failed to submit a premarket filing. Despite these stated enforcement priorities,
given the FDA’s limited resources we expect that for a period of time there may be a lack of enforcement, which may
adversely impact our ability to compete in the marketplace against those who continue to sell unauthorized products. This
issue could grow worse should the federal government decrease the size of certain agencies or resources, including the U.S.
Department of Justice or U.S. Customs and Border Protection.
58
On May 4, 2022, the FDA proposed two tobacco product standards related to combusted tobacco products: (1) a ban on
menthol as a characterizing flavor in cigarettes; and (2) a ban on all characterizing flavors (including menthol) in cigars. On
June 21, 2022, the FDA also issued a proposed product standard related to restricting the level of nicotine in traditional
cigarettes. On March 8, 2023, the FDA proposed requirements for tobacco product manufacturing practice (“TPMPs”). Once
finalized, TPMPs would establish requirements for tobacco product manufacturers regarding the manufacture, design,
packing and storage of finished and bulk tobacco products. These regulations are required to go through the formal rulemaking
process where we have had the opportunity to provide comments with regard to the impact such standards would have on our
products. As of January 2025, these proposed rules were withdrawn or otherwise delayed. The FDA’s policy on these and
other regulated products may change or expand over time in ways not yet known and may significantly impact our products
or our premarket filings.
Inflation
Inflation in general and the continued increases in costs of goods and services, such as food and gas prices, have had a
substantial negative effect on the purchasing power of consumers. While historically, we have been able to pass on most cost
increases to our consumers, no assurance can be given that we will continue to be able to do so. In addition, we have been
able to maintain a relatively stable variable cost structure for our products due, in part, to our successful procurement with
regard to our tobacco products and, in part, to our existing contractual agreement for the purchase of our premium cigarette
papers.
Recent Accounting Pronouncements
See Item 8 of Part II, “Financial Statements and Supplementary Data - Note 2 - Summary of Significant Accounting Policies
- Recent Accounting Pronouncements”.
Critical Accounting Estimates
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the U.S. When more than one accounting principle, or the 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 make estimates about the future resolution of existing uncertainties. Actual results could differ from these
estimates. We evaluate our estimates, including those related to intangibles, investments in debt security and the fair value of
the Creative Distribution Solutions segment on an ongoing basis. We base these estimates on our historical experience and
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 and disclosures included in the consolidated financial
statements. Our significant accounting policies are discussed in Note 2 of the Notes to Consolidated Financial Statements in
Item 8 of Part II of this Annual Report on Form 10-K.
Indefinite-lived Intangible Assets
We follow the provisions of ASC 350, Intangibles – Goodwill and Other in accounting for indefinite-lived intangible assets.
Indefinite-lived intangible assets are tested for impairment 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. Examples of such indicators could include
but are not limited to a significant loss of market share, significant decline in operating results, change in management strategy
or operations, economic decline, and other significant disruptions to the business.
We estimate the fair value of our indefinite-lived assets using the relief from royalty valuation methodology. This
methodology is based on what the Company would be willing to pay as a royalty in order to exploit the related benefits of
the asset. The value of the asset is determined by discounting the inherent after-tax royalty savings associated with ownership
or possession of the asset over the expected useful life. In 2024, based on quantitative assessments, the fair values of our Zig-
Zag and Stokers’ indefinite-lived intangible assets exceeded their carrying values by a significant amount. We identified the
estimate of the fair value of the Company’s indefinite lived assets as a critical estimate because of the significant assumptions
used in these analyses including, but are not limited to, projected revenue, the weighted average cost of capital and royalty
rate. We used modest growth rates in projecting the revenue related to these indefinite-lived intangible assets. As we do for
each impairment assessment, for our future impairment assessments we will evaluate the reasonableness and relevance of our
previous performance assumptions, considering both internal and external factors existing at the impairment test date, to
determine if changes to those performance assumptions are warranted.
If actual results are not consistent with the Company’s estimates and/or other assumptions change, the Company may be
exposed to future impairment charges that could materially and adversely impact its financial position and results of
operations.
59
Investments in Debt Security
We have classified our debt security investment as available-for-sale and, as a result, this security is recorded at fair value. We
estimate the fair value of the debt security investment using a Monte Carlo simulation, which utilizes unobservable inputs
that are classified as Level 3 inputs under the fair value hierarchy. We identified the estimate of the fair value of the
Company’s debt security investment as a critical estimate because of the complexity of the Monte Carlo simulation valuation
methodology and the significant assumptions used in estimating the fair value, including the enterprise valuation of the
investee, enterprise value to revenue market multiples applied to the financial results of the investee to estimate an enterprise
valuation of the investee, and investment hold period scenarios used in the weighting of Monte Carlo simulation valuation
results.
If actual results are not consistent with the Company’s estimates and/or other assumptions change, the Company may be
exposed to future allowance for credit losses that could materially and adversely impact its financial position and results of
operations.
Fair Value of the Creative Distribution Solution Segment
Our CDS segment met the criteria to be classified as held-for-sale as of December 31, 2024. As a result, we are required to
carry the net assets of the CDS segment at fair value less costs to sell. We determined the fair value of the CDS segment using
a weighted average of three valuation methodologies that consisted of the discounted cash flow method, the guideline public
company method and the similar transaction method. We identified the estimate of the fair value of the CDS segment as a
critical accounting estimate because of the significant estimates and assumptions used by management in the discounted cash
flow method, including forecasts of expected revenue growth rates, estimated terminal value and the selection of the discount
rate.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Sensitivity
Our 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 hedge against 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 manner that 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 2024, we executed various foreign exchange contracts for the purchase of €3.6 million
and sale of €3.6 million with maturity dates ranging from October 2024 to June 2025. At December 31, 2024, we had foreign
currency contracts outstanding for the purchase of €2.1 million and sale of €2.1 million. A 10% change in the euro to U.S.
dollars exchange rate would change our pre-tax income by approximately $1.5 million per year.
Credit Risk
At December 31, 2024 and 2023, we had bank deposits, including MSA escrows, in excess of federally insured limits of
approximately $47.4 million and $119.0 million, respectively. The Company has chosen to 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 2024, we had one customer that accounted for 10.2% of our net sales. In 2023and 2022, we
had 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, we have not experienced significant losses due to
customer credit issues.
Interest Rate Sensitivity
In February 2021, we issued the 2026 Notes in an aggregate principal amount of $250 million. In February 2025, we issued
the 2032 Notes in an aggregate principal amount of $300 million and utilized a portion of the proceeds to retire the
2026 Notes. We carry the 2032 Notes at face value. Since the 2032 Notes bear interest at a fixed rate, we have no financial
statement risk associated with increases in interest rates. However, the fair value of the 2023 Notes changes when the market
price of our stock fluctuates, or interest rates change. Our remaining debt instrument is the 2023 ABL Facility, which has no
borrowing outstanding. The 2023 ABL Facility is subject to a floating rate. Accordingly, if we make borrowings under the
2023 ABL Facility, we will be exposed to fluctuations in interest rates.
60
Item 8. Financial Statements and Supplementary Data
TURNING POINT BRANDS, INC.
CONTENTS
Page
Reports of RSM US LLP (PCAOB ID: 49) ..................................................................................................................
61
Financial Statements:
Consolidated Balance Sheets as of December 31, 2024 and 2023 ................................................................................
65
Consolidated Statements of Income for the years ended December 31, 2024, 2023, and 2022 ....................................
66
Consolidated Statements of Comprehensive Income for the years ended December 31, 2024, 2023, and 2022 ..........
67
Consolidated Statements of Cash Flows for the years ended December 31, 2024, 2023, and 2022 .............................
68
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2024, 2023, and
2022 ............................................................................................................................................................................
70
Notes to Consolidated Financial Statements .................................................................................................................
71
61
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Turning Point Brands, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Turning Point Brands, Inc. and its subsidiaries (the
Company) as of December 31, 2024 and 2023, 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, 2024, and the related
notes to the consolidated financial statements (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, 2024 and 2023, and the
results of its operations and its cash flows for each of the three years in the period ended December 31, 2024, in conformity
with accounting principles generally accepted in the United States of America.
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 of December 31, 2024, based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission in 2013. Our report dated March 6, 2025 expressed an opinion that the Company had not maintained
effective internal control over financial reporting as of December 31, 2024, based on criteria established in Internal Control—
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
Basis for Opinion
These 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 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
rules and regulations of the Securities 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 audit to obtain reasonable assurance about whether the financial statements 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 due to 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 believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The 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 committee and that: (1) relate to accounts or disclosures
that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The
communication of critical audit matters 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 critical audit matters
or on the accounts or disclosures to which they relate.
Controlling Financial Interest Assessment of Equity Investment
As described in Notes 3 and 24 to the financial statements, on January 2, 2025, the Company sold 100% of its equity interest
in South Beach Brands LLC (“SBB”), the subsidiary that owns and operates the Company’s Creative Distribution Solutions
(“CDS”) segment, to General Wireless Operations, Inc. (“GWO”) in exchange for 1,006.45 shares of GWO common stock
and 680 shares of GWO Series B Preferred Stock, which together represent 49% of the issued and outstanding GWO common
stock on a fully-diluted basis (“SBB Exchange Transaction”). The Company determined that, upon completion of the SBB
Exchange Transaction, it will not have a controlling financial interest in GWO and, as a result, will deconsolidate SBB on
January 2, 2025. Having met applicable criteria prior to December 31, 2024, the Company recorded the assets and liabilities
of SBB as held for sale as of December 31, 2024 and 2023 and the results of operations and cash flows of SBB as discontinued
operations for each of the three years in the period ended December 31, 2024.
As described in Note 2 to the financial statements, when the Company concludes it has a controlling financial interest in a
legal entity, the Company consolidates the legal entity as a subsidiary. The evaluation of whether or not the Company has a
controlling financial interest in a legal entity requires the application of complex accounting rules and the evaluation of a
number of factors, including determining the consolidation model that applies, the Company’s decision-making ability
through voting or other rights, and the Company’s exposure to variability to the legal entity, among other items.
62
We identified the Company’s accounting conclusion that it will not have a controlling financial interest in GWO as a critical
audit matter because of the complexity involved in evaluating the exchange transaction structure and related agreements with
management’s interpretation and application of the accounting rules. Auditing management’s accounting conclusion involved
a high degree of auditor judgment and an increase in audit effort due to the impact management’s conclusion would have on
the Company’s financial statement presentation.
Our audit procedures related to the Company’s assessment of whether or not it will have a controlling financial interest in
GWO included the following, among others:
●
We obtained management’s accounting memoranda and evaluated the reasonableness of management’s
application of accounting rules used to support the Company’s accounting conclusion for its investment in
GWO.
●
We assessed the accuracy and completeness of management’s application of the applicable accounting rules by
reading the relevant SBB exchange transaction agreements and contracts to understand the nature of the
Company’s involvement with GWO and GWO’s structure and operations. Our assessment included:
o
Evaluating the capitalization of GWO and the relative power held by the equity holders in GWO to
determine the appropriate consolidation model that is required to be applied. This included evaluating
if any close business relationships and/or any de facto agent relationships exist that could potentially
have impacted management’s assessment.
o
Evaluating the Company’s decision-making power over GWO, including determining whether the
Company has control without a majority voting interest.
o
Evaluating the impact certain future rights held by the Company would have on the accounting
conclusion.
Fair Value of Creative Distribution Solutions Segment
As described in Note 3 to the financial statements, the Company has classified the assets and liabilities of the Creative
Distribution Solutions (“CDS”) segment as held for sale as of December 31, 2024 and 2023, and recognized a valuation
allowance of $8.8 million against the net assets of CDS as of December 31, 2024 to adjust the carrying value of the CDS
segment to fair value less cost to sell. The Company estimated the fair value of the CDS segment using a weighted average
of three valuation methodologies that consisted of a discounted cash flow method, a guideline public company method and a
guideline transaction method.
We identified the estimate of the fair value of the Company’s CDS segment as a critical audit matter because of the significant
estimates and assumptions used by management when estimating the fair value of the segment, including management’s
forecasts of expected revenue growth rates, management’s selection of the discount rate and management’s estimate of the
terminal value, which were all used in the discounted cash flow method. Auditing management’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 have on the estimated fair value of the CDS segment.
Our audit procedures related to the estimated fair value of the CDS segment included the following, among others:
●
We evaluated the reasonableness of management’s forecasts of revenue growth rates by comparing the
projections to historical results.
●
We tested the accuracy of management’s estimation process by comparing current year results to prior year
estimates.
●
We utilized our valuation specialists to assist in the following, among others:
o
Assessing the appropriateness of management’s valuation methodologies and testing their
mathematical accuracy.
o
Assessing the appropriateness of the methodology used by management to estimate the terminal
value in the discounted cash flow method.
o
Assessing the reasonableness of the discount rate used in the discounted cash flow method by
comparing the underlying source information to publicly available market data and testing the
mathematical accuracy of the calculation.
●
We recomputed the estimated fair value of the CDS segment, using the weighting ascribed by management to
each valuation methodology, for mathematical accuracy.
/s/ RSM US LLP
We have served as the Company’s auditor since 2006.
Charlotte, North Carolina
March 6, 2025
63
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Turning Point Brands, Inc.
Opinion on the Internal Control Over Financial Reporting
We have audited Turning Point Brands, Inc.’s (the Company) internal control over financial reporting as of December 31,
2024, based on criteria established in Internal Control—Integrated Framework issued 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 the objectives of the control criteria, the Company has not maintained effective internal control
over financial reporting as of December 31, 2024, based on criteria established in Internal Control—Integrated Framework
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, 2024 and 2023, 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, 2024, and the related notes to the consolidated financial statements of the Company and our report dated March
6, 2025 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’s annual 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 were deficiencies 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 systems that support the Company’s financial
reporting processes. The business process controls (automated and manual) that are dependent on the affected ITGCs were
also deemed ineffective because they could have been adversely impacted.
This material weakness was considered in determining the nature, timing and extent of audit tests applied in our audit of the
2024 financial statements, and this report does not affect our report dated March 6, 2025 on those financial statements.
Basis for Opinion
The 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 the accompanying 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 our audit. 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 rules and
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 internal control 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 weakness exists, 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 considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A 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 for external 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 the maintenance 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 are recorded 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 in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the company’s assets that could have a material effect on the financial statements.
64
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 the risk 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 LLP
Charlotte, North Carolina
March 6, 2025
65
Turning Point Brands, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2024 and 2023
(dollars in thousands except share data)
December 31, December 31,
2024
2023
ASSETS
Current assets:
Cash ............................................................................................................................. $
46,158 $
116,725
Accounts receivable, net of allowances of $66 in 2024 and $78 in 2023 ....................
9,624
10,002
Inventories, net ............................................................................................................
96,253
91,698
Current assets held for sale ..........................................................................................
11,470
12,267
Other current assets ......................................................................................................
34,700
36,937
Total current assets ...................................................................................................
198,205
267,629
Property, plant, and equipment, net .................................................................................
26,337
25,142
Deferred tax assets, net ....................................................................................................
995
1,468
Right of use assets ...........................................................................................................
11,610
11,359
Deferred financing costs, net ...........................................................................................
1,823
2,450
Goodwill ..........................................................................................................................
135,932
136,250
Other intangible assets, net ..............................................................................................
65,254
66,490
Master Settlement Agreement (MSA) escrow deposits ...................................................
28,676
28,684
Noncurrent assets held for sale ........................................................................................
3,859
14,731
Other assets .....................................................................................................................
20,662
15,166
Total assets ............................................................................................................... $
493,353 $
569,369
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable ......................................................................................................... $
11,675 $
7,794
Accrued liabilities ........................................................................................................
31,096
32,052
Current portion of long-term debt ................................................................................
-
58,294
Current liabilities held for sale .....................................................................................
2,049
2,209
Total current liabilities .............................................................................................
44,820
100,349
Notes payable and long-term debt ...................................................................................
248,604
307,064
Lease liabilities ................................................................................................................
9,549
9,898
Noncurrent liabilities held for sale ..................................................................................
-
52
Total liabilities .........................................................................................................
302,973
417,363
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; 20,200,886
issued shares, 17,729,481 outstanding shares at December 31, 2024, and
19,922,137 issued shares, 17,605,677 outstanding shares at December 31, 2023 ....
202
199
Common stock, nonvoting, $0.01 par value; authorized shares, 10,000,000; issued
and outstanding shares -0- ........................................................................................
-
-
Additional paid-in capital ................................................................................................
126,662
119,075
Cost of repurchased common stock (2,471,405 and 2,316,460 shares at December 31,
2024 and 2023) ............................................................................................................
(83,144 )
(78,093)
Accumulated other comprehensive loss ..........................................................................
(2,903 )
(2,648)
Accumulated earnings .....................................................................................................
147,164
112,443
Non-controlling interest ..................................................................................................
2,399
1,030
Total stockholders’ equity ........................................................................................
190,380
152,006
Total liabilities and stockholders’ equity ................................................................. $
493,353 $
569,369
The accompanying notes are an integral part of the consolidated financial statements.
66
Turning Point Brands, Inc. and Subsidiaries
Consolidated Statements of Income
for the years ended December 31, 2024, 2023, and 2022
(dollars in thousands except share data)
For the years ended December 31,
2024
2023
2022
Net sales ............................................................................................. $
360,660 $
325,064 $
321,229
Cost of sales .......................................................................................
159,095
142,122
143,399
Gross profit .....................................................................................
201,565
182,942
177,830
Selling, general, and administrative expenses ....................................
122,407
104,327
103,822
Other operating income ......................................................................
(1,674)
(4,345 )
-
Operating income ............................................................................
80,832
82,960
74,008
Interest expense, net ...........................................................................
13,983
14,645
19,524
Investment loss ...................................................................................
1,893
11,914
13,303
Other income ......................................................................................
-
(4,000 )
-
Gain on extinguishment of debt .........................................................
-
(1,664 )
(885)
Income from continuing operations before income taxes ...............
64,956
62,065
42,066
Income tax expense ............................................................................
16,929
23,999
10,980
Income from continuing operations ................................................
48,027
38,066
31,086
Loss from discontinued operations, net of tax ................................
(7,517)
(285 )
(19,929)
Consolidated net income .............................................................
40,510
37,781
11,157
Net income (loss) attributable to non-controlling interest ..............
701
(681 )
(484)
Net income attributable to Turning Point Brands, Inc. ................ $
39,809 $
38,462 $
11,641
Basic income (loss) per common share:
Continuing operations ..................................................................... $
2.67 $
2.20 $
1.76
Discontinued operations .................................................................
(0.43)
(0.01 )
(1.11)
Basic earnings per share .............................................................. $
2.24 $
2.19 $
0.65
Diluted income (loss) per common share:
Continuing operations ..................................................................... $
2.53 $
2.02 $
1.75
Discontinued operations .................................................................
(0.39)
(0.01 )
(1.11)
Diluted earnings per share ........................................................... $
2.14 $
2.01 $
0.64
Weighted average common shares outstanding:
Basic ...............................................................................................
17,734,239
17,578,270
17,899,794
Diluted ............................................................................................
19,362,806
20,467,406
18,055,015
The accompanying notes are an integral part of the consolidated financial statements.
67
Turning Point Brands, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
for the years ended December 31, 2024, 2023, and 2022
(dollars in thousands)
For the years ended December 31,
2024
2023
2022
Consolidated net income .................................................................... $
40,510 $
37,781 $
11,157
Other comprehensive income (loss), net of tax
Unrealized (loss) gain on MSA investments, net of tax of $9 in
2024 and $161 in 2023 and $860 in 2022 ...................................
(17)
542
(2,879)
Foreign currency translation, net of tax of $0 in 2024, 2023 and
2022 .............................................................................................
(197)
(74 )
(269)
Unrealized (loss) gain on derivative instruments, net of tax of
$54 in 2024, $237 in 2023 and $273 in 2022 ..............................
(173)
(747 )
857
Unrealized gain on investments, net of tax of $0 in 2024 ...............
50
-
-
(337)
(279 )
(2,291)
Consolidated comprehensive income .................................................
40,173
37,502
8,866
Comprehensive income (loss) attributable to non-controlling
interest ............................................................................................
619
(705 )
(577)
Comprehensive income attributable to Turning Point Brands, Inc..... $
39,554 $
38,207 $
9,443
The accompanying notes are an integral part of the consolidated financial statements.
68
Turning Point Brands, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
for the years ended December 31, 2024, 2023, and 2022
(dollars in thousands)
For the years ended December 31,
2024
2023
2022
Cash flows from operating activities:
Consolidated net income ................................................................. $
40,510 $
37,781 $
11,157
Loss from discontinued operations, net of tax ................................
7,517
285
19,929
Adjustments to reconcile net income to net cash provided by
operating activities:
Gain on extinguishment of debt ..................................................
-
(1,664 )
(885)
Loss (gain) on sale of property, plant, and equipment ................
75
62
(33)
Gain on insurance recovery of inventory loss .............................
-
(15,181 )
-
Loss on investments ....................................................................
2,722
12,177
13,570
Depreciation and other amortization expense .............................
4,439
2,921
2,859
Amortization of other intangible assets .......................................
1,223
1,197
524
Amortization of deferred financing costs ....................................
2,430
2,445
2,576
Deferred income tax (benefit) expense .......................................
519
7,024
(6,506)
Stock compensation expense .......................................................
7,243
6,561
5,273
Noncash lease (income) expense .................................................
(622)
(72 )
84
Gain on MSA investments ..........................................................
(14)
-
(54)
Changes in operating assets and liabilities:
Accounts receivable ....................................................................
185
(2,625 )
(3,344)
Inventories ...................................................................................
(4,770)
13,287
(26,719)
Other current assets .....................................................................
(1,421)
(3,794 )
(379)
Other assets .................................................................................
(1,767)
(4,865 )
420
Accounts payable ........................................................................
3,689
100
1,506
Accrued liabilities and other .......................................................
(1,000)
601
1,320
Operating cash flows from continuing operations ...................
60,958
56,240
21,298
Operating cash flows from discontinued operations ................
6,104
10,641
8,975
Net cash provided by operating activities ............................ $
67,062 $
66,881 $
30,273
Cash flows from investing activities:
Capital expenditures ....................................................................... $
(4,623) $
(5,707 ) $
(7,834)
Purchases of investments ................................................................
(10,857)
(202 )
(1,000)
Proceeds from sale of investments ..................................................
5,420
-
-
Purchases of non-marketable equity investments ...........................
(500)
-
-
Proceeds on sale of property, plant and equipment .........................
5
3
35
MSA escrow deposits, net ..............................................................
46
-
(10,170)
Investing cash flows from continuing operations ........................
(10,509)
(5,906 )
(18,969)
Investing cash flows from discontinued operations ....................
-
-
176
Net cash used in investing activities .................................... $
(10,509) $
(5,906 ) $
(18,793)
69
Turning Point Brands, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (cont.)
for the years ended December 31, 2024, 2023, and 2022
(dollars in thousands)
For the years ended December 31,
2024
2023
2022
Cash flows from financing activities:
Convertible Senior Notes repurchased ............................................ $
- $
(41,794 ) $
(9,000)
Payment of Convertible Senior Notes .............................................
(118,541)
-
-
Proceeds from call options ..............................................................
-
114
51
Payment of dividends .....................................................................
(4,905)
(4,497 )
(4,250)
Payments of financing costs ...........................................................
(133)
(2,437 )
-
Exercise of options .........................................................................
2,807
450
504
Redemption of options ....................................................................
(335)
(346 )
(155)
Redemption of restricted stock units ...............................................
(914)
(995 )
(1,229)
Redemption of performance based restricted stock units ...............
(1,212)
-
-
Common stock repurchased ............................................................
(5,051)
-
(29,224)
Financing cash flows from continuing operations .......................
(128,284)
(49,505 )
(43,303)
Financing cash flows from discontinued operations ...................
-
-
-
Net cash used in financing activities .................................... $
(128,284) $
(49,505 ) $
(43,303)
Net (decrease) increase in cash........................................................... $
(71,731) $
11,470 $
(31,823)
Effect of foreign currency translation on cash .................................... $
(182) $
13 $
(320)
Cash, beginning of period:
Unrestricted .................................................................................... $
117,886 $
106,403 $
128,320
Restricted ........................................................................................
4,929
4,929
15,155
Total cash at beginning of period ................................................ $
122,815 $
111,332 $
143,475
Cash, end of period:
Unrestricted .................................................................................... $
48,941 $
117,886 $
106,403
Restricted ........................................................................................
1,961
4,929
4,929
Total cash at end of period .......................................................... $
50,902 $
122,815 $
111,332
Supplemental disclosures of cash flow information:
Cash paid during the period for interest .......................................... $
17,488 $
18,047 $
18,717
Cash paid during the period for income taxes, net .......................... $
20,997 $
12,447 $
13,369
Supplemental schedule of noncash investing activities:
Accrued capital expenditures .......................................................... $
18 $
8 $
11
Accrued consideration for acquisition of investments .................... $
- $
248 $
-
Supplemental schedule of noncash financing activities:
Dividends declared not paid ........................................................... $
1,588 $
1,489 $
1,354
The accompanying notes are an integral part of the consolidated financial statements.
70
Turning Point Brands, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
for the years ended December 31, 2024, 2023, and 2022
(dollars in thousands)
Cost of
Accumulated
Common Additional Repurchased
Other
Accumulated
Non-
Voting Stock, Paid-In Common Comprehensive Earnings Controlling
Shares Voting Capital
Stock
Income (Loss)
(Deficit)
Interest
Total
Beginning balance January 1, 2022 .......................... 18,395,476 $
197 $ 108,811 $
(48,869) $
(195) $
71,460 $
2,312 $133,716
Unrealized loss on MSA investments, net of tax of
$860 .......................................................................
- $
- $
- $
- $
(2,879) $
- $
- $ (2,879)
Unrealized gain on derivative instruments, net of
tax of $273 ............................................................
-
-
-
-
857
-
-
857
Foreign currency translation, net of tax of $0 ...........
-
-
-
-
(176)
-
(93)
(269)
Stock compensation expense .....................................
-
-
5,273
-
-
-
-
5,273
Exercise of options ....................................................
35,394
1
503
-
-
-
-
504
Redemption of options ..............................................
-
-
(155)
-
-
-
-
(155)
Issuance of performance based restricted stock units
69,756
-
-
-
-
-
-
-
Redemption of performance based restricted stock
units .......................................................................
-
-
(1,141)
-
-
-
- (1,141)
Issuance of restricted stock units...............................
5,589
-
-
-
-
-
-
-
Redemption of restricted stock units .........................
-
-
(88)
-
-
-
-
(88)
Cost of repurchased common stock .......................... (1,021,052)
-
-
(29,224)
-
-
- (29,224)
Settlement of call options, net of tax of $12 .............
-
-
39
-
-
-
-
39
Dividends ...................................................................
-
-
-
-
-
(4,410)
- (4,410)
Net income.................................................................
-
-
-
-
-
11,641
(484) 11,157
Ending balance December 31, 2022 ......................... 17,485,163 $
198 $ 113,242 $
(78,093) $
(2,393) $
78,691 $
1,735 $113,380
Unrealized gain on MSA investments, net of tax of
$161 .......................................................................
- $
- $
- $
- $
542 $
- $
- $
542
Unrealized loss on derivative instruments, net of tax
of $237 ..................................................................
-
-
-
-
(747)
-
-
(747)
Foreign currency translation, net of tax of $0 ...........
-
-
-
-
(50)
-
(24)
(74)
Stock compensation expense .....................................
-
-
6,561
-
-
-
-
6,561
Exercise of options ....................................................
33,851
-
450
-
-
-
-
450
Redemption of options ..............................................
(15,985)
-
(346)
-
-
-
-
(346)
Issuance of performance based restricted stock units
105,032
1
75
-
-
-
-
76
Redemption of performance based restricted stock
units .......................................................................
(34,704)
-
(800)
-
-
-
-
(800)
Issuance of restricted stock units...............................
40,910
-
2
-
-
-
-
2
Redemption of restricted stock units .........................
(8,590)
-
(195)
-
-
-
-
(195)
Settlement of call options, net of tax of $28 .............
-
-
86
-
-
-
-
86
Dividends ...................................................................
-
-
-
-
-
(4,710)
- (4,710)
Net income.................................................................
-
-
-
-
-
38,462
(681) 37,781
Ending balance December 31, 2023 ......................... 17,605,677 $
199 $ 119,075 $
(78,093) $
(2,648) $
112,443 $
1,030 $152,006
Unrealized loss on MSA investments, net of tax of
$9 ...........................................................................
- $
- $
- $
- $
(17) $
- $
- $
(17)
Unrealized loss on derivative instruments, net of
tax of $54 ..............................................................
-
-
-
-
(173)
-
-
(173)
Foreign currency translation, net of tax of $0 ...........
-
-
-
-
(115)
-
(82)
(197)
Unrealized gain on investments, net of tax of $0 .....
-
-
-
-
50
-
-
50
Acquisition of non-controlling interest .....................
-
-
-
-
-
-
750
750
Stock compensation expense .....................................
-
-
7,243
-
-
-
-
7,243
Exercise of options ....................................................
132,572
1
2,806
-
-
-
-
2,807
Redemption of options ..............................................
(9,735)
-
(335)
-
-
-
-
(335)
Issuance of performance based restricted stock units
129,316
1
-
-
-
-
-
1
Redemption of performance based restricted stock
units .......................................................................
(48,170)
-
(1,212)
-
-
-
- (1,212)
Issuance of restricted stock units...............................
106,249
1
78
-
-
-
-
79
Redemption of restricted stock units .........................
(31,483)
-
(993)
-
-
-
-
(993)
Cost of repurchased common stock ..........................
(154,945)
-
-
(5,051)
-
-
- (5,051)
Dividends ...................................................................
-
-
-
-
-
(5,088)
- (5,088)
Net income.................................................................
-
-
-
-
-
39,809
701 40,510
Ending balance December 31, 2024 ......................... 17,729,481 $
202 $ 126,662 $
(83,144) $
(2,903) $
147,164 $
2,399 $190,380
The accompanying notes are an integral part of the consolidated financial statements.
71
Turning Point Brands, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except where designated and per share data)
Note 1. Organizations and Basis of Presentation
Description of Business
Turning Point Brands, Inc., including its subsidiaries (collectively referred to herein as the “Company,” “we,” “our,” or “us”),
is a leading manufacturer, marketer and distributor of branded consumer products. The Company sells a wide range of
products to adult consumers consisting of staple products with its iconic brands Zig-Zag® and Stoker’s® and its next
generation products to fulfill evolving consumer preferences. The Company's segments are led by its core proprietary and
iconic brands: Zig-Zag® and Stoker’s® along with FRE®, Beech-Nut® and Trophy®. The Company’s products are available in
more than 220,000 retail outlets in North America. The Company operates two segments, Zig-Zag products and Stoker’s
products.
Contribution of Creative Distribution Solutions
On January 2, 2025, the Company contributed 100% of its interest in South Beach Brands LLC ("SBB"), the subsidiary that
owns and operates the Company’s Creative Distribution Solutions (“CDS”) segment, to General Wireless Operations, Inc.
(“GWO”) in exchange for 49% of the issued and outstanding GWO common stock. GWO is a joint venture between the
Company and Standard General, LP entered into in December 2018. The Company will provide certain transition services to
GWO in connection with the operation of SBB on an arm’s length basis.
For all periods presented in these consolidated financial statements, the assets and liabilities associated with the CDS
disposal group have been classified as held for sale in the Consolidated Balance Sheets and its operations have been classified
as discontinued operations in the Consolidated Statements of Income and Cash Flows. See Note 3, "Assets Held for Sale and
Discontinued Operations" for additional information regarding the CDS divestiture, including the assets and liabilities held
for sale and the loss from discontinued operations. Unless otherwise noted, disclosures in the notes to these consolidated
financial statements relate solely to the Company's continuing operations.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the U.S. (“U.S. GAAP”) and Securities and Exchange Commission (“SEC”) regulations. The preparation of
financial statements in conformity with U.S. 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 dates of 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 estimates include those affecting the valuation of goodwill and other intangible assets, the fair value of assets
held for sale, 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 of operations, or cash flows in any of the periods presented.
Note 2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company, its subsidiaries, all of which are wholly-owned,
and variable interest entities (“VIEs”) for which the Company is considered to have a controlling interest based on the voting
interest entity model or the variable interest entity model. All significant intercompany transactions have been eliminated.
U.S. 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 is broadly 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 financial support; (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 the expected
72
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, and substantially 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 it determines 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 the
characteristics 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 is 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 absorb losses 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 and ALP Supply Co, LLC ("ALP") are VIEs
for which the Company is required to consolidate. The Company has a controlling financial interest of 65% equity in Turning
Point Brands Canada, provides additional subordinated financing, and has a distribution agreement for the sale of the
Company’s products that makes up a significant portion of Turning Point Brands Canada’s business activities. The Company
has a 50% equity interest in ALP, provides additional financing, has a supply agreement to be the exclusive provider of
product and is the primary beneficiary due to the power the Company has over the activities that most significantly impact
the economic performance, and the right to receive benefits and the obligation to absorb losses. See Note 4,"Joint Venture
Agreement" for additional information on the current year ALP transaction.
Revenue Recognition
The Company recognizes revenues in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from
Contracts with Customers (Topic 606), which includes excise taxes and shipping and handling charges billed to customers,
net of cash discounts for prompt payment, sales returns and incentives, upon delivery of goods to the customer – at which
time the Company’s performance obligation is satisfied - at an amount that the Company expects to be entitled to in exchange
for those goods in accordance with the five-step analysis outlined in Topic 606: (i) identify the contract with the customer,
(ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price
to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied. The Company
includes in its transaction price excise taxes on smokeless tobacco, cigars or other nicotine products billed to customers, and
excludes sales taxes and value-added taxes imposed at the time of sale.
The Company records an allowance for sales returns, based principally on historical volume and return rates, which is included
in accrued liabilities on the consolidated balance sheets. The Company records sales incentives, which consist of consumer
incentives and trade promotion activities, as a reduction in revenues (a portion of which is based on amounts estimated to be
due to wholesalers, retailers and consumers at the end of the period) based principally on historical volume and utilization
rates. Expected payments for sales incentives are included in accrued liabilities on the consolidated balance sheets.
A further requirement of ASC 606 is for entities to disaggregate revenue recognized from contracts with customers into
categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic
factors. The Company’s management views business performance through segments that closely resemble the performance
of major product lines. Thus, the primary and most useful disaggregation of the Company’s contract revenue for decision
making purposes is the disaggregation by segment which can be found in Note 21, “Segment Information”.
Held for Sale and Discontinued Operations
The Company classifies assets and liabilities to be sold (disposal group) as held for sale in the period when all of the applicable
criteria are met, including: (i) management commits to a plan to sell, (ii) the disposal group is available to sell in its present
condition, (iii) there is an active program to locate a buyer, (iv) the disposal group is being actively marketed at a reasonable
price in relation to its fair value, (v) significant changes to the plan to sell are unlikely, and (vi) the sale of the disposal group
is generally probable of being completed within one year.
Assets and liabilities held for sale are presented separately within the Consolidated Balance Sheets with any adjustments
necessary to measure the disposal group at the lower of its carrying value or fair value less costs to sell. Depreciation of
property, plant and equipment and amortization of intangible and right-of-use assets are not recorded while these assets are
classified as held for sale. For each period the disposal group remains classified as held for sale, its recoverability is
reassessed, and any necessary adjustments are made to its carrying value.
73
The Company reports the results of operations of a business as discontinued operations if a disposal represents a strategic
shift that will have a major effect on its operations and financial results. The results of discontinued operations are reported
as Loss from discontinued operations, net of tax in the Consolidated Statements of Income for the current and prior periods
commencing in the period in which the held for sale criteria are met. Loss from discontinued operations includes direct costs
attributable to the divested business and excludes any cost allocations associated with any shared or corporate
functions. Loss from discontinued operations will include any gain or loss recognized upon disposition or from any
adjustment of the carrying amount of the assets and liabilities of the discontinued operations to fair value less costs to
sell while classified as held for sale.
Derivative Instruments
The Company enters into foreign currency forward contracts to hedge a portion of its exposure to changes in foreign currency
exchange rates on inventory purchase commitments. The Company accounts for its forward contracts under the provisions
of ASC 815, Derivatives and Hedging. Under the Company’s policy, the Company may hedge up to 100% of its anticipated
purchases of inventory in the denominated invoice currency over a forward period not to exceed twelve months. The
Company may also, from time to time, hedge up to 100% of its non-inventory purchases (e.g., production equipment) in the
denominated invoice currency. Forward contracts that qualify as hedges are adjusted to their fair value through other
comprehensive income as determined by market prices on the measurement date, except any hedge ineffectiveness which is
recognized currently in income. Gains and losses on these forward contracts are reclassified from other comprehensive
income into inventory as the related inventories are received and are transferred to net income as inventory is sold. Changes
in fair value of any contracts that do not qualify for hedge accounting or are not designated as hedges are recognized currently
in income.
Shipping Costs
The Company records shipping costs incurred as a component of selling, general and administrative expenses. Shipping costs
incurred were approximately $17.9 million, $16.0 million, and $14.0 million in 2024, 2023, and 2022, respectively.
Research and Development and Quality Assurance Costs
Research and development and quality assurance costs are expensed as incurred. These expenses, classified as selling, general
and administrative expenses, were approximately $1.3 million, $0.6 million, and $0.6 million in 2024, 2023, and 2022,
respectively.
Cash and Cash Equivalents
The Company considers any highly liquid investments with a maturity of three months or less from the date of purchase to
be cash equivalents.
Inventories
Inventories are stated at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method. Leaf tobacco is
presented in current assets in accordance with standard industry practice, notwithstanding the fact that such tobaccos are
carried longer than one year for the purpose of curing.
Property, Plant and Equipment
Property, plant and equipment is 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 the assets 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 building improvements). 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 useful lives. 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.
74
Goodwill and Other Intangible Assets
The Company follows the provisions of ASC 350, Intangibles – Goodwill and Other in accounting for goodwill and other
intangible assets. Goodwill is tested for impairment annually on December 31, or more frequently if certain indicators are
present.
When testing goodwill for impairment, the Company has the option to first perform qualitative testing to determine whether
it is more likely than not that the fair value of a reporting unit is less than its carrying value. If the Company chooses not to
complete a qualitative assessment for a given reporting unit or if the initial assessment indicates that it is more likely than not
that the carrying value of a reporting unit exceeds its estimated fair value, additional quantitative testing is required. If the
carrying value of a reporting unit exceeds its fair value, an impairment loss is recognized in the amount by which the carrying
value of the reporting unit exceeds its fair value, limited to the amount of goodwill at the reporting unit. The Company
determines fair values for each of the reporting units using a combination of the income approach and/or market approach.
Under the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at
an appropriate risk-adjusted rate. Under the market approach, the Company selects peer sets based on close competitors and
reviews the revenue and EBITDA multiples to determine the fair value. See Note 11, “Goodwill and Other Intangible Assets”
for further information on goodwill.
Indefinite-lived intangible assets are tested for impairment at least annually; however, these tests are performed more
frequently when events or changes in circumstances indicate that the asset may be impaired. Impairment exists when carrying
value exceeds fair value. The Company’s fair value methodology is primarily based on the relief from royalty approach.
Definite-lived intangible assets are amortized over their estimated useful lives, generally on a straight-line basis for periods
ranging primarily from 3.5 to 15 years. The Company continually evaluates the reasonableness of the useful lives of these
assets.
Fair Value
U.S. GAAP establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted
prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy under U.S. 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.
Equity Investments
The Company's investments include equity securities, which are accounted for at cost and under the equity method of
accounting.
For equity investments that do not qualify to be accounted for under the equity method of accounting and that do not have a
readily determinable fair value, the Company has elected a practical expedient to record the investment at the original cost,
as adjusted for impairment and observable price changes. Under the practical expedient, if a qualitative analysis indicates
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.
Equity investments accounted for under the equity method of accounting are assessed for impairment when events or
circumstances suggest that any loss in value of the investment may be other than temporary. A loss in value of an investment
is other than temporary when evidence of a loss in value indicates the absence of an ability to recover the carrying amount of
the investment or inability of the investee to sustain an earnings capacity that would justify the carrying amount of the
investment.
75
In the absence of observable data, the Company estimates the fair values of these investments using a market approach derived
from applying market multiples of comparable public companies to the financial results of each investment. The valuation
methodology and the significant assumptions used by management in estimating the fair values of each investment involve a
high degree of judgment and may involve the use of third-party valuation specialists.
Deferred Financing Costs
Deferred financing costs are amortized over the terms of the related debt obligations using the straight-line 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 as an asset.
Income Taxes
The 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 of assets 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 by determining 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 is recorded.
Advertising and Promotion
Advertising and promotion costs, including point of sale materials, are expensed as incurred and amounted to $12.0 million,
$7.6 million, and $6.2 million for the years ended December 31, 2024, 2023, and 2022, respectively.
Stock-Based Compensation
The 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 fair value-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 fair value 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 stock price 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 will provide 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 recognizes compensation 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 Uncertainties
Manufacturers and sellers of tobacco products are subject to regulation at the federal, state, and local levels. Such regulations
include, among others, labeling requirements, limitations on advertising, and prohibition of sales to minors. The tobacco
industry is likely to continue to be heavily regulated. There can be no assurance as to the ultimate content, timing, or effect
of any regulation of tobacco products by any federal, state, or local legislative or regulatory body, nor can there be any
assurance that any such legislation or regulation would not have a material adverse effect on the Company’s financial position,
results of operations, or cash flows. In a number of states targeted flavor bans have been proposed or enacted legislatively or
by the administrative process. Depending on the number and location of such bans, that legislation or regulation could have
a material adverse effect on the Company’s financial position, results of operations or cash flows. The U.S. Food and Drug
Administration (“FDA”) continues to consider various restrictive regulations around our products, including targeted flavor
bans; however, the details, timing, and ultimate implementation of such measures remain unclear.
The tobacco industry has experienced, and is experiencing, significant product liability litigation. Most tobacco liability
lawsuits have been brought against manufacturers and sellers of cigarettes for injuries allegedly caused by smoking or
exposure to smoke. However, several lawsuits have been brought against manufacturers and sellers of smokeless products
for injuries to health allegedly caused by use of smokeless products. Typically, such claims assert that use of smokeless
products is addictive and causes oral cancer. There can be no assurance the Company will not sustain losses in connection
76
with such lawsuits and that such losses will not have a material adverse effect on the Company’s financial position, results
of operations, or cash flows.
Master Settlement Agreement (MSA)
Forty-six states, certain U.S. territories, and the District of Columbia are parties to the Master Settlement Agreement (“MSA”)
and the Smokeless Tobacco Master Settlement 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 Smokeless Tobacco
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 tobacco products 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 make-your-
own ("MYO") cigarette tobacco) has the option of either becoming a signatory to the MSA or opening, funding, and
maintaining an escrow account, 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 not signatories 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 purpose of 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 of the escrowed funds and withdraw any appreciation, but cannot withdraw the principal
for twenty-five years from the year of each annual deposit, except to withdraw funds deposited pursuant to an individual
state’s escrow statute to pay a final 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 an escrow 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 to date 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 material adverse 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 the MSA 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 negatively impact 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 complementary legislation 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 each calendar year into a qualifying escrow account by
April 15 of the following year. At December 31, 2024 and 2023, the Company had on deposit approximately $32.1 million,
the fair value of which was approximately $28.7 million. During 2024, no monies were deposited into this qualifying 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 no remaining product lines covered by the MSA and
will not be required to make future escrow deposits.
The Company has chosen to invest a portion of the MSA escrow, from time to time, in U.S. Government securities including
Treasury inflation-protected securities, Treasury notes and Treasury bonds. These investments are classified as available-for-
sale and carried at fair value. Realized losses are prohibited under the MSA; thus, any investment with an unrealized loss
position will be held until the value is recovered, or until maturity.
77
Fair values for the U.S. Governmental agency obligations are Level 2 in the fair value hierarchy. The following tables show
cost and estimated fair value of the assets held in the MSA account, respectively, as well as the maturities of the U.S.
Governmental agency obligations held in such account for the periods indicated.
As of December 31, 2024
As of December 31, 2023
Gross
Gross Estimated
Gross
Gross Estimated
Unrealized Unrealized
Fair
Unrealized Unrealized
Fair
Cost
Gains
Losses
Value Cost
Gains Losses Value
Cash and cash equivalents .......... $ 1,961 $
- $
- $
1,961 $ 1,929 $
- $
- $
1,929
U.S. Governmental agency
obligations (unrealized
position < 12 months) ............. 4,168
11
(48)
4,131
-
-
-
-
U.S. Governmental agency
obligations (unrealized
position > 12 months) ............. 25,944
95
(3,455) 22,584 30,144
-
(3,389) 26,755
Total ........................................... $32,073 $
106 $
(3,503) $ 28,676 $32,073 $
- $
(3,389) $ 28,684
As of
December 31,
2024
Less than one year ......................................................................................................................................... $
250
One to five years ...........................................................................................................................................
14,771
Five to ten years ............................................................................................................................................
13,136
Greater than ten years ....................................................................................................................................
1,955
Total .............................................................................................................................................................. $
30,112
The following shows the amount of deposits by sales year for the MSA escrow account:
Deposits as of December 31,
Sales Year
2024
2023
1999 ......................................................... $
211 $
211
2000 .........................................................
1,017
1,017
2001 .........................................................
1,673
1,673
2002 .........................................................
2,271
2,271
2003 .........................................................
4,249
4,249
2004 .........................................................
3,714
3,714
2005 .........................................................
4,553
4,553
2006 .........................................................
3,847
3,847
2007 .........................................................
4,167
4,167
2008 .........................................................
3,364
3,364
2009 .........................................................
1,619
1,619
2010 .........................................................
406
406
2011 .........................................................
193
193
2012 .........................................................
199
199
2013 .........................................................
173
173
2014 .........................................................
143
143
2015 .........................................................
101
101
2016 .........................................................
91
91
2017 .........................................................
82
82
Total ........................................................ $
32,073 $
32,073
Concentration of Credit Risk: At December 31, 2024 and 2023, the Company had bank deposits, including MSA escrow
accounts, in excess of federally insured limits of approximately $47.4 million and $119.0 million, respectively. During 2024
and 2023, the Company invested a portion of the MSA escrow accounts in U.S. Government securities including TIPS,
Treasury notes, and Treasury bonds.
78
The Company sells its products to distributors, retail establishments, and consumers throughout the U.S. and also sells Zig-
Zag® premium cigarette papers in Canada and some smaller quantities in other countries. For 2024, the Company had one
customer that accounted for 10.2% of net sales. There were no customers that accounted for more than 10% of net sales
for 2023 or 2022. The Company performs periodic credit evaluations of its customers and generally does not require collateral
on trade receivables. Historically, the Company has not experienced significant credit losses.
Accounts Receivable
Accounts 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 for credit losses 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 of allowance for credit losses for the years ended December 31, 2024, 2023 and 2022 is as follows:
2024
2023
2022
Balance at beginning of period ........................................................... $
78 $
40 $
29
Additions to allowance account during period ...................................
23
38
24
Deductions of allowance account during period ................................
(35)
-
(13)
Balance at end of period ..................................................................... $
66 $
78 $
40
Recent Accounting Pronouncements
Recently adopted
In November 2023, the Financial Accounting Standards Board (“FASB”) issued guidance that enhances reportable segment
disclosures by requiring disclosure of significant reportable segment expenses and other items regularly provided to the Chief
Operating Decision Maker (“CODM”) and included within measures of a segment’s profit or loss. Additional requirements
include the title and position of the CODM and an explanation of how the CODM uses the reported measure of a segment’s
profit or loss to assess performance and allocate resources, and the amount and composition of other segment items necessary
to reconcile segment revenue, significant expenses, and the reported measure of profit or loss. The Company adopted this
guidance retrospectively beginning with its fiscal 2024 annual financial statements. See Note 21, "Segment Information" for
the additional disclosures required by this guidance.
Issued but not yet adopted
In December 2023, the FASB issued guidance which enhances income tax disclosures to require reporting entities to disclose
annual income taxes paid, net of refunds, disaggregated by federal, state, and foreign taxes and to provide additional
disaggregated information for individual jurisdictions under certain conditions. The guidance also requires disclosure of
amounts and percentages in the annual rate reconciliation table, rather than amounts or percentages, and will eliminate certain
existing disclosure requirements related to uncertain tax positions and unrecognized deferred tax liabilities. This guidance
will be effective for the Company beginning with its fiscal 2025 annual financial statements, with early adoption permitted.
The guidance may be applied prospectively, while retrospective application is permitted. The Company is currently assessing
the impact of this guidance and expects its incremental disclosures will likely be provided on a prospective basis upon
adoption.
In November 2024, the FASB issued guidance requiring reporting entities to disclose in the notes to the financial statements,
specified information about certain categories of expenses including purchases of inventory, employee compensation,
depreciation and amortization for each caption on the income statement where such expenses are included. This guidance will
be effective for the Company beginning with its fiscal 2027 annual financial statements and interim periods thereafter. Early
adoption is permitted, in addition to either prospective or retrospective application. The Company is currently assessing the
impact and extent to which this guidance will affect its disclosures.
Note 3. Assets and Liabilities Held for Sale and Discontinued Operations
On January 2, 2025, the Company entered into an agreement to contribute 100% of its interest in SBB, the subsidiary that
owns and operates the Company’s CDS segment, to GWO in exchange for 49% of the issued and outstanding GWO common
stock on a fully-diluted basis. GWO is a joint venture between the Company and Standard General, LP entered into in
December 2018. Under certain circumstances the Company has the right to redeem the contribution of SSB from GWO at
79
fair market value. In addition, the Company received an option with a 15-year term to purchase the remaining 51% of GWO
at an exercise price initially set at $22.0 million, which decreases over time based on certain tax sharing payments to GWO.
The assets and liabilities associated with the CDS business have been classified as held for sale as of December 31, 2024, and
its financial results are classified as discontinued operations and reported separately for all periods presented herein. With the
strategic shift of the Company's operations, as a result of this transaction, the CDS segment has been classified as discontinued
operations. As a result, the Company now has two reportable segments as disclosed in Note 21, "Segment Information".
Upon meeting the criteria for held for sale classification, the Company recorded a non-cash charge of $8.8 million with an
equivalent valuation allowance against net assets held for sale to reduce the carrying value of the disposal group to fair value.
Fair value of the disposal group utilized inputs within Level 3 of the fair value hierarchy, and was determined using both a
market and an income approach.
The following table summarizes income from discontinued operations, net of tax, included in the Consolidated Statements of
Income:
For the years ended December 31,
2024
2023
2022
Net sales ............................................................................................. $
59,051 $
80,329 $
93,784
Cost of sales .......................................................................................
46,041
60,030
66,076
Gross profit ...................................................................................
13,010
20,299
27,708
Selling, general, and administrative expenses ....................................
12,246
18,442
24,287
Loss on assets held for sale fair value adjustment ..............................
8,801
-
-
Depreciation .......................................................................................
236
341
529
Amortization of other intangible assets ..............................................
1,843
1,899
1,386
Goodwill and intangible impairment loss ...........................................
-
-
27,566
Operating loss from discontinued operations .............................
(10,116)
(383 )
(26,060)
Interest income ...................................................................................
(146)
-
-
Loss from discontinued operations before income taxes ...........
(9,970)
(383 )
(26,060)
Income tax benefit ..............................................................................
(2,453)
(98 )
(6,131)
Loss from discontinued operations .............................................. $
(7,517) $
(285 ) $
(19,929)
The following table summarizes the carrying amounts of assets and liabilities classified as held for sale and included in the
Consolidated Balance Sheets:
December 31,
2024
2023
Current assets
Cash ................................................................................................................................. $
2,783 $
1,161
Inventories, net ................................................................................................................
5,813
7,262
Other current assets .........................................................................................................
2,874
3,844
Current assets held for sale ..........................................................................................
11,470
12,267
Noncurrent assets
Property, plant, and equipment, net .................................................................................
-
158
Right of use assets ...........................................................................................................
51
121
Other intangible assets, net ..............................................................................................
12,609
14,452
Allowance to adjust held for sale assets to fair value ......................................................
(8,801)
-
Noncurrent assets held for sale ....................................................................................
3,859
14,731
Total assets held for sale .......................................................................................... $
15,329 $
26,998
Current liabilities
Accounts payable ............................................................................................................ $
532 $
613
Accrued liabilities ...........................................................................................................
1,517
1,596
Current liabilities held for sale .....................................................................................
2,049
2,209
Noncurrent liabilities
Lease liabilities ................................................................................................................
-
52
Noncurrent liabilities held for sale ...............................................................................
-
52
Total liabilities held for sale ..................................................................................... $
2,049 $
2,261
80
Note 4. Joint Venture Agreement
In September 2024, a wholly-owned subsidiary of the Company invested $0.8 million to acquire a 50% ownership interest in
ALP Supply Co., LLC ("ALP"). Additionally, the Company has provided ALP with a $10.0 million line of credit. ALP is a
joint venture established between the subsidiary and Last Country Ventures, LLC for the purpose of selling and distributing
tobacco-free moist nicotine pouches in various strengths. Per the joint venture agreement, the Company's subsidiary will be
responsible for selling products to ALP and providing warehousing and shipping services on its behalf. The Company has
determined that ALP is a VIE and that it has a controlling financial interest requiring consolidation. As a result, the assets,
liabilities and result of operations of ALP have been included in the Company's consolidated financial statements.
The assets and liabilities of ALP included in the consolidated balance sheet at December 31, 2024 primarily include $5.3
million in cash, $0.9 million of inventory, $1.1 million of other assets, and accounts payable and accrued liabilities of $3.6
million inclusive of amounts payable to the Company of $3.2 million.
Note 5. Derivative Instruments
Foreign Currency
The 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 that will not exceed 12 rolling and consecutive
months. The Company may, from time to time, hedge currency for non-inventory purchases, e.g., production equipment, not
to exceed 100% of the purchase price. During 2024, the Company executed various foreign exchange contracts which met
hedge accounting requirements for the purchase of €3.6 million and sale of €3.6 million. During 2023, the Company executed
various foreign exchange contract, which met hedge accounting requirements for the purchase of €20.1 million and sale of
€15.2 million.
At December 31, 2024, the Company had foreign currency contracts outstanding for the purchase of €2.1 million and sale of
€2.1 million. The fair value of the foreign currency contracts at December 31, 2024, resulted in an asset of $0.0 million
included in Other current assets and a liability of $0.1 million included in Accrued liabilities. At December 31, 2023, the
Company had foreign currency contracts outstanding for the purchase of €15.2 million and sale of €15.2 million. The fair
value of the foreign currency contracts at December 31, 2023, resulted in an asset of $0.3 million included in Other current
assets and a liability of $0.1 million included in Accrued liabilities. A $0.2 million gain, $0.9 million gain and $0.1 million
loss were reclassified from Accumulated other comprehensive loss to Cost of sales for the years ended December 31,
2024, 2023 and 2022, respectively.
Note 6. Fair Value of Financial Instruments
The estimated fair value amounts have been determined by the Company using the methods and assumptions described below.
However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Cash and Cash Equivalents
Cash and cash equivalents are, by definition, short-term. Thus, the carrying amount is a reasonable estimate of fair value.
Accounts Receivable
The fair value of accounts receivable approximates their carrying value due to their short-term nature.
Long-Term Debt
The Company’s Senior Secured Notes bear interest at a rate of 5.625% per year. As of December 31, 2024, the fair value
approximated $251.2 million, with a carrying value of $250 million. As of December 31, 2023, the fair value approximated
$234.9 million with a carrying value of $250 million.
81
The Convertible Senior Notes with a carrying value of $118.5 million were retired with cash on July 15, 2024. As of
December 31, 2023, the fair value approximated $114.7 million, with a carrying value of $118.5 million.
See Note 14, “Notes Payable and Long-Term Debt” for further information regarding the Company’s long-term debt.
Foreign Currency
The fair value of the Company’s foreign currency contracts are based upon quoted market prices for similar instruments, thus
leading to a Level 2 classification within the fair value hierarchy. See Note 5, "Derivative Instruments", for further
information regarding the Company's foreign currency contracts.
Note 7. Inventories
The components of inventories, net are as follows:
December 31, December 31,
2024
2023
Raw materials and work in process ................................................................................. $
7,699 $
5,201
Leaf tobacco ....................................................................................................................
35,622
34,894
Finished goods - Zig-Zag products ..................................................................................
38,042
41,783
Finished goods - Stoker’s products .................................................................................
12,966
8,109
Other ................................................................................................................................
1,924
1,711
Inventories ....................................................................................................................... $
96,253 $
91,698
The following represents the activity in the inventory valuation allowance for the years ended December 31:
2024
2023
2022
Balance at beginning of period ........................................................... $
(16,927) $
(772 ) $
(4,122)
Charged to cost and expense ..............................................................
(648)
(17,370 )
(772)
Deductions for inventory disposed .....................................................
-
1,215
4,122
Balance at end of period ..................................................................... $
(17,575) $
(16,927 ) $
(772)
In December 2023, a third-party warehouse in Tennessee used to store some of the Company’s leaf tobacco incurred
significant tornado damage resulting in damage to the leaf tobacco. As a result, the Company recorded a $15.2 million
inventory reserve related to its leaf tobacco inventory, which is included in Other operating income, net in the Consolidated
Statement of Income for the year ended December 31, 2023. The leaf tobacco inventory is covered by the Company’s stock
throughput insurance policy and the Company believes the inventory loss is probable of being fully recovered under the
policy. As a result, the Company recorded a $15.2 million insurance recovery receivable which is included in Other current
assets in the Consolidated Balance Sheets.
In 2022, the Company determined that the incorrect weight had been used in calculating the amount of federal excise tax
assessed and paid on its imported MYO cigar wraps during the years 2019 - 2021. As a result, the Company filed a refund
claim for $4.3 million with the Alcohol and Tobacco Tax and Trade Bureau for the overpayment of federal excise taxes,
which was approved and paid. The Company filed an additional claim for $1.7 million in 2023, which was approved and paid
in 2024. The refunds are presented in Other operating income in the Consolidated Statements of Income.
Note 8. Other Current Assets
Other current assets consists of:
December 31, December 31,
2024
2023
Inventory deposits ........................................................................................................... $
5,981 $
3,612
Insurance deposit .............................................................................................................
-
3,000
Prepaid taxes ...................................................................................................................
3,586
153
Settlement receivable ......................................................................................................
-
4,000
Insurance recovery receivable .........................................................................................
15,181
15,181
Other ................................................................................................................................
9,952
10,991
Total ................................................................................................................................ $
34,700 $
36,937
82
Note 9. Property, Plant and Equipment, Net
Property, plant and equipment consists of:
December 31, December 31,
2024
2023
Land................................................................................................................................. $
22 $
22
Buildings and improvements ...........................................................................................
4,216
3,956
Leasehold improvements .................................................................................................
7,983
5,440
Machinery and equipment ...............................................................................................
31,207
29,645
Furniture and fixtures ......................................................................................................
4,723
5,765
Gross property, plant and equipment ...............................................................................
48,151
44,828
Accumulated depreciation ...............................................................................................
(21,814 )
(19,686)
Property, plant and equipment, net .................................................................................. $
26,337 $
25,142
Note 10. Deferred Financing Costs, Net
Deferred financing costs consist of:
December 31, December 31,
2024
2023
Deferred financing costs, net of accumulated amortization of $747 and $104,
respectively .................................................................................................................. $
1,823 $
2,450
Note 11. Goodwill and Other Intangible Assets
The following table summarizes goodwill by segment:
Zig-Zag
Stoker’s
Total
Balance as of December 31, 2022 ...................................................... $
103,663 $
32,590 $
136,253
Cumulative translation adjustment .....................................................
(3)
-
(3)
Balance as of December 31, 2023 ...................................................... $
103,660 $
32,590 $
136,250
Cumulative translation adjustment .....................................................
(318)
-
(318)
Balance as of December 31, 2024 ...................................................... $
103,342 $
32,590 $
135,932
The Company tests goodwill for impairment annually as of December 31, or more frequently when events or changes in
circumstances indicate that the fair value is below its carrying value. The Company performed a quantitative assessment in
evaluating its Zig-Zag and Stoker’s reporting units for impairment as of December 31, 2024.
For the quantitative assessment, the Company used a discounted cash flow model (income approach) utilizing Level 3
unobservable inputs. The Company’s significant assumptions for the discount cash flow model include, but are not limited
to, future cash flow projections, the weighted average cost of capital, the terminal growth rate, and the tax rate. The Company
believes the current assumptions and estimates utilized in the discounted cash flow model are both reasonable and
appropriate. The Company’s estimates of future cash flows are based on current regulatory and economic climates, recent
operating results, and planned business strategies. These estimates could be negatively affected by changes in federal, state,
or local regulations or economic downturns. Future cash flow estimates are, by their nature, subjective and actual results may
differ materially from the Company’s estimates. If the Company’s ongoing estimates of future cash flows are not met or if
discount rates change, the Company may have to record impairment charges in future periods. Based on the analysis
performed, the Company concluded that no impairment exists for its Zig-Zag or Stoker's reporting units as of December 31,
2024.
83
In 2023, the Company performed a qualitative assessment in evaluating its Zig-Zag and Stoker’s reporting units. As part of
that assessment, the Company considered macro and micro-economic indicators, changes in costs, overall financial
performance and other relevant entity-specific events, and noted no indications of impairment. The Company also considered
the significant excess of fair values over carrying values as determined in the 2022 quantitative assessment. The underlying
assumptions utilized during the 2022 quantitative assessment remained sufficiently similar in 2023 and in line with Company
projections. Accordingly, such underlying assumptions on which the previous fair values were based had not sufficiently
changed from 2022 to suggest a material difference in the 2023 fair value assessments, and thus indicated that the fair values
of the reporting units as of December 31, 2023 remained above their carrying amounts.
The following tables summarize information about the Company’s other intangible assets. Gross carrying amounts of
indefinite-lived intangible assets are shown below:
December 31, 2024
December 31, 2023
Zig-Zag Stoker’s
Total
Zig-Zag Stoker’s
Total
Indefinite-lived intangible assets:
Trade names .................................. $
- $
8,500 $
8,500 $
- $
8,500 $
8,500
Formulas ....................................
42,245
53
42,298
42,245
53
42,298
Total .............................................. $
42,245 $
8,553 $
50,798 $
42,245 $
8,553 $
50,798
In 2024, the Company performed a quantitative assessment of its indefinite-lived intangible assets and noted no indicators of
impairment as of December 31, 2024. The Company’s fair value methodology for the quantitative assessment is primarily
based on the relief from royalty approach. Significant assumptions in this approach include, but are not limited to, projected
revenue, the weighted average cost of capital and royalty rate.
In 2023, the Company performed a qualitative assessment of its indefinite-lived intangible assets. As part of this assessment,
the Company evaluated whether indicators of impairment were present by considering macro and micro-economic factors,
along with market and other relevant company-specific events and determined that there were no indications of impairment
as of December 31, 2023. In January 2023, the Company transferred certain of its indefinite-lived formulas within the Zig-
Zag segment to amortized intangible assets. The Company began to amortize the formula over its useful life of 15 years and,
as a result, incurred additional amortization expense of $0.7 million in 2023. The effect of this change in estimate reduced
2023 net income by $0.4 million and reduced 2023 basic and diluted earnings per share by $0.02 per share. The estimated
annual straight line amortization expense related to this transfer is $0.7 million per year for each of the next five years.
Amortized intangible assets consists of:
Zig-Zag
Stoker’s
December 31,
December 31,
December 31,
December 31,
2024
2023
2024
2023
Gross Accumulated Gross Accumulated Gross Accumulated Gross Accumulated
Carrying Amortization Carrying Amortization Carrying Amortization Carrying Amortization
Amortized intangible
assets:
Trade names (useful
life of 15 years) ......... $
437 $
45 $
449 $
10 $
2,372 $
791 $
2,372 $
633
Formulas (useful life of
15 years) ...................
9,972
1,330
9,972
665
-
-
-
-
Master distribution
agreement (useful life
of 15 years) ...............
5,489
1,648
5,489
1,281
-
-
-
-
Total ............................. $ 15,898 $
3,023 $ 15,910 $
1,956 $
2,372 $
791 $
2,372 $
633
Annual amortization expense for the next five years is estimated to be approximately $1.2 million for 2025 and $4.8 million
for 2026 through 2029, assuming no additional transactions occur that require the amortization of intangible assets.
84
Note 12. Other Assets
Other assets consists of:
December 31, December 31,
2024
2023
Non-marketable equity investments ................................................................................ $
1,231 $
2,405
Debt security investment .................................................................................................
6,276
6,750
Capitalized software ........................................................................................................
7,409
5,923
Captive investments - available-for-sale marketable securities .......................................
5,487
-
Other ................................................................................................................................
259
88
Total ................................................................................................................................ $
20,662 $
15,166
Debt Security and Non-Marketable Equity Investments
The Company records its non-marketable equity investments without a readily determinable fair value, that are not accounted
for under the equity method, at cost, with adjustments for impairment and observable price changes. Should assumptions
underlying the determination of the fair values of the Company’s non-marketable equity and debt security investments change,
it could result in material future impairment charges.
In January 2024, the Company invested $0.8 million to acquire an 18.7% stake in Teaza Energy, LLC (“TeaZa”). TeaZa is
an innovative brand of flavorful oral pouch products that can be dipped or sipped, designed as a health-conscious alternative
to high energy drinks and other conventional oral stimulants. The investment was comprised of $0.5 million in cash and a
$0.3 million payable to be offset against the Company’s allocated portion of future profit distributions. The Company also
has the option to purchase, at fair value, up to 100% of the equity interest from February 1, 2025 through June 30, 2026. The
Company accounts for its investment in TeaZa using the equity method of accounting.
In July 2021, the Company invested $8.0 million in Old Pal Holding Company, LLC (“Old Pal”), with an additional
$1.0 million invested in July 2022. The Company invested in the form of a convertible note which includes additional follow-
on investment rights. Interest on the convertible note is payable annually in arrears in July of each year. Accrued interest of
$0.2 million, $0.3 million and $0.3 million was rolled into the convertible note in July 2022, 2023 and 2024, respectively,
resulting in a total investment of $9.8 million. Old Pal is a leading brand in the cannabis lifestyle space that operates a non-
plant touching licensing model. The convertible note bears an interest rate of 3.0% per year and matures July 31, 2027. Interest
and principal not paid to date are receivable at maturity. Old Pal has the option to extend the maturity date of the convertible
note in one-year increments. The interest rate is subject to change based on Old Pal reaching certain sales thresholds. The
weighted average interest rate on the convertible note was 3.0% as of December 31, 2024 and 2023. Old Pal has the option
to convert the note into shares once sales reach a certain threshold. The conditions required to allow Old Pal to convert the
note were not met as of December 31, 2024. Additionally, the Company has the right to convert the note into shares at any
time. The Company has classified the debt security with Old Pal as available for sale. The Company reports interest income
on available for sale debt securities in interest income in our Consolidated Statements of Income. The Company performs a
qualitative assessment on a quarterly basis to determine if the fair value of the investment could be less than the amortized
cost basis. In addition, the Company utilizes a third-party to perform a quantitative assessment to determine fair value using
a Monte Carlo simulation (Level 3) when indicated, and at least bi-annually. Based upon a quantitative fair value assessment,
the Company determined the fair value to be $6.4 million, $6.9 million and $7.9 million as of December 31, 2024, 2023 and
2022, respectively. The Company recorded an allowance for credit losses of $0.8 million, $1.3 million and $1.4 million
included in investment loss for the years ended December 31, 2024, 2023 and 2022, respectively. The Company has recorded
an accrued interest receivable of $0.1 million and $0.1 million at December 31, 2024 and 2023, respectively, in Other current
assets on our Consolidated Balance Sheets.
In April 2021, the Company invested in Docklight Brands, Inc. (“Docklight”). In 2023, based on Docklight’s financial results,
a decline in the revenue multiples for comparable public companies, and a significant change in Docklight’s business model,
the Company deemed the investment in Docklight fully impaired resulting in a loss of $8.7 million which was recorded in
investment loss for the year ended December 31, 2023. Fair value was determined using a valuation derived from relevant
revenue multiples (Level 3). There were no purchases of inventory from, or amounts payable to Docklight Brands, Inc. at
December 31, 2024 and 2023.
In October 2020, the Company acquired a 20% stake in Wild Hempettes, LLC (“Wild Hempettes”). In 2023, based on Wild
Hempettes' financial results, the Company deemed its investment in Wild Hempettes to be impaired resulting in a $2.2 million
impairment charge included in investment loss for the year ended December 31, 2023. Fair value for the Company’s share of
85
investment in Wild Hempettes was determined using a valuation derived from relevant revenue multiples (Level 3). In 2024,
the Company reached an agreement to return its 20% equity stake to Wild Hempettes for no consideration resulting in an
impairment charge of $0.3 million recorded in investment loss for the year ended December 31, 2024. The Company
accounted for its 20% share of Wild Hempettes using the equity method of accounting. There were no purchases of inventory
from, or amounts payable to Wild Hempettes at December 31, 2024 and 2023. The Company had a $0.2 million receivable
from Wild Hempettes at December 31, 2023 for the return of previously purchased and paid for product.
In October 2020, the Company invested in BOMANI Cold Buzz, LLC (“Bomani”). In 2024, due to market conditions in the
cold brew, alcohol-infused caffeinated beverages industry, the Company has determined that the fair value of Bomani is zero,
and thus recorded a $1.8 million impairment which is included in investment loss for the year ended December 31,
2024. There were no purchases of inventory from, or amounts payable to Bomani at December 31, 2024 and 2023.
In December 2018, the Company acquired a minority ownership position in General Wireless Operations, Inc. from 5G
gaming LLC for $0.4 million. In December 2024, the Company entered into an agreement to contribute 100% of its interest
in SBB, the subsidiary that owns and operates the Company’s CDS segment, to General Wireless Operations, Inc. in exchange
for 49% of the issued and outstanding GWO common stock. See Note 3, "Assets Held for Sale and Discontinued Operations"
for more information regarding the disposal of the Company's CDS business. There were no amounts payable to General
Wireless Operations, Inc. at December 31, 2024 and 2023.
In October 2020, the Company invested $15.0 million in dosist™ (“Dosist”), a global cannabinoid company. In 2021, based
on the financial results of Dosist and the overall cannabinoid market, the Company deemed its investment was impaired
resulting in a loss of $7.1 million recorded in investment loss for the year ended December 31, 2021. In 2022, after a
contemplated sale of the assets of Dosist did not occur, Dosist entered into an agreement with a new buyer receiving the assets
of Dosist for the assumption of its liabilities. As such, the Company considered its remaining investment in Dosist to be fully
impaired and recorded an additional loss of $7.9 million in investment loss for the year ended December 31, 2022.
The Company had 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. In 2022, as a result of a significant decline in the enterprise value, the Company determined that the fair value of
the investment was $0.0 and fully impaired the investment. The impairment resulted in a loss of $4.3 million which is recorded
in investment loss for the year ended December 31, 2022.
Captive Investments - Available-for-Sale Marketable Securities
In December 2023, the Company formed a captive insurance company, Interchange, IC, incorporated in the District of
Columbia, to write a portion of its insurance coverage, including with respect to general product, and officer and director
liability coverages under deductible reinsurance policies. Interchange, IC is a fully licensed captive insurance company
holding a certificate of authority from the District of Columbia Department of Insurance, Securities and Banking. Interchange,
IC is a wholly-owned subsidiary of Turning Point Brands and is consolidated in the Company’s financial statements.
The investments held within the captive insurance company are not available for operating activities and are carried at fair
value on the Consolidated Balance Sheet as of December 31, 2024. They consist of money market, stocks, corporate bonds,
government securities and real estate investment trusts. The Company believes any investments held with gross unrealized
losses to be temporary and not the result of credit risk.
The Company’s captive investments are summarized in the following table (excludes money market funds):
As of December 31, 2024
Amortized
Cost
Gross
Unrealized
Gains (Losses)
Estimated
Fair Value
Stocks ................................................................................................. $
1,517 $
9
1,526
Exchange traded funds .......................................................................
1,189
(5)
1,184
Corporate Bonds .................................................................................
2,383
50
2,433
Real estate investment trusts ..............................................................
343
1
344
Total ................................................................................................... $
5,432 $
55 $
5,487
86
The following table summarizes the fair value of the Company's captive investments by contractual maturity:
As of
December 31,
2024
Due within one year ...................................................................................................................................... $
2,242
Due in one to five years .................................................................................................................................
191
Stocks, real estate investment trusts and exchange traded funds ...................................................................
3,054
Total investments at fair value ...................................................................................................................... $
5,487
Note 13. Accrued Liabilities
Accrued liabilities consists of:
December 31, December 31,
2024
2023
Accrued payroll and related items ................................................................................... $
9,564 $
6,599
Customer returns and allowances ....................................................................................
5,160
5,064
Taxes payable ..................................................................................................................
358
3,413
Lease liabilities ................................................................................................................
3,121
2,608
Accrued interest ...............................................................................................................
5,473
6,682
Other ................................................................................................................................
7,420
7,686
Total ................................................................................................................................ $
31,096 $
32,052
Note 14. Notes Payable and Long-Term Debt
Notes payable and long-term debt consists of the following in order of preference:
December 31, December 31,
2024
2023
2026 Notes ...................................................................................................................... $
250,000 $
250,000
Convertible Senior Notes ................................................................................................
-
118,541
Gross notes payable and long-term debt..........................................................................
250,000
368,541
Less deferred financing costs ..........................................................................................
(1,396 )
(3,183)
Less current maturities ....................................................................................................
-
(58,294)
Notes payable and long-term debt ................................................................................... $
248,604 $
307,064
The components of interest expense, net consists of the following:
For the years ended December 31,
2024
2023
2022
Interest expense .................................................................................. $
18,526 $
21,028 $
21,920
Interest income ...................................................................................
(4,543)
(6,383 )
(2,396)
Interest expense, net ........................................................................... $
13,983 $
14,645 $
19,524
2026 Notes
On February 11, 2021, we closed a private offering of $250.0 million aggregate principal amount of our 5.625% senior
secured notes due 2026 (the “2026 Notes”). The 2026 Notes incurred interest at a rate of 5.625%. Interest on the 2026 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.
87
Obligations under the 2026 Notes were guaranteed by the Company’s existing and future wholly-owned domestic subsidiaries
(the “Guarantors”) that guarantee any credit facility (as defined in the indenture governing the 2026 Notes or the “2026 Notes
Indenture”) or capital markets debt securities of the Company or Guarantors in excess of $15.0 million. The 2026 Notes and
the related guarantees are secured by first-priority liens on substantially all of the assets of the Company and the Guarantors,
subject to certain exceptions. We were in compliance with all covenants under the 2026 Notes as of December 31, 2024.
The 2026 Notes Indenture contains covenants that, among other things, restrict the ability of the Company and its restricted
subsidiaries to: (i) grant or incur liens; (ii) incur, assume or guarantee additional indebtedness; (iii) sell or otherwise dispose
of assets, including capital stock of subsidiaries; (iv) make certain investments; (v) pay dividends, make distributions or
redeem or repurchase capital stock; (vi) engage in certain transactions with affiliates; and (vii) consolidate or merge with or
into, or sell substantially all of our assets to another entity. These covenants are subject to a number of limitations and
exceptions set forth in the Senior Secured Notes Indenture. For instance, the Company is generally permitted to make
restricted payments, including the payment of dividends to shareholders, provided that, at the time of payment, or as a result
of payment, the Company is not in default on its debt covenants; however, there are earnings and market capitalization
requirements that if not met could limit the aggregate amount of quarterly dividends payable during a fiscal year. The 2026
Notes Indenture provides for customary events of default.
The Company incurred debt issuance costs attributable to the issuance of the 2026 Notes of $6.4 million which are amortized
to interest expense using the straight-line method over the expected life of the 2026 Notes.
The 2026 Notes were redeemed on February 20, 2025. See Note 24, "Subsequent Events" for additional information.
2021 Revolving Credit Facility
In connection with the Offering, the Company also entered into a $25.0 million senior secured revolving credit facility (the
“2021 Revolving Credit Facility”) with the lenders party thereto and Barclays Bank PLC, as administrative agent and
collateral agent. On May 10, 2023, the Company and certain of its subsidiaries, as guarantors, entered into an amendment
(the “Amendment”) to the 2021 Revolving Credit Facility (as amended, the “Amended Revolving Credit Facility”). The
Amendment includes certain modifications to the 2021 Revolving Credit Facility relating to the replacement of the London
Inter-Bank Offered Rate with a Secured Overnight Financing Rate (“SOFR”) as the interest rate benchmark under the 2021
Revolving Credit Facility and adjusts certain other provisions to reflect current documentation standards and other agreed
modifications.
On November 7, 2023, in connection with the entry by a subsidiary of the Company in a new asset-backed revolving credit
facility, the Company terminated the Amended Revolving Credit Facility. See “2023 ABL Facility” below.
The Company incurred debt issuance costs attributable to the issuance of the Amended Revolving Credit Facility of
$0.5 million, with a remaining $0.2 million written off to gain on debt extinguishment upon termination of the facility in
2023.
2023 ABL Facility
On November 7, 2023, TPB Specialty Finance, LLC, a wholly-owned subsidiary of the Company (the “ABL Borrower”),
entered into a new $75.0 million asset-backed revolving credit facility (the “2023 ABL Facility”), with the several lenders
thereunder, and Barclays Bank PLC, as administrative agent (the “Administrative Agent”) and as collateral agent and First-
Citizens Bank & Trust Company as additional collateral agent (the “Additional Collateral Agent”). Under the 2023 ABL
Facility, the ABL Borrower may draw up to $75.0 million under revolving credit loans and last-in, last-out (“LILO”) loans.
The 2023 ABL Facility includes a $40.0 million accordion feature. In connection with the 2023 ABL Facility, the Company
contributed certain existing inventory to the ABL Borrower. The 2023 ABL Facility is secured on a first-priority basis (subject
to customary exceptions) by all assets of the ABL Borrower.
The 2023 ABL Facility contains customary borrowing conditions including a borrowing base equal to the sum of (a) the lesser
of (1) 85% of the lower of (A) the market value (on a first in first out basis) of the sum of eligible inventory, plus eligible in-
transit inventory of the ABL Borrower and (B) 85% of the cost of the sum of eligible inventory, plus eligible in-transit
inventory of the ABL Borrower and (2) 85% of the net orderly liquidation value (“NOLV”) percentage of the lower of (1)(A)
or (1)(B); plus (b) 85% of the face value of all eligible accounts of the ABL Borrower minus (c) the amount of all eligible
reserves. The 2023 ABL Facility also includes a LILO borrowing base equal to the sum of (a) the lesser of: (1) 10% of the
lower of (A) the market value (on a first in first out basis) of the sum of eligible inventory, plus eligible in-transit inventory
of the ABL Borrower and (B) the cost of the sum of eligible inventory, plus eligible in-transit inventory and (2) 10% of the
88
NOLV percentage of the lower of (1)(A) or (1)(B); plus (b) 10% of the face amount of eligible account; minus (c) the amount
of all eligible reserves.
Amounts borrowed under the 2023 ABL Facility are subject to an interest rate margin per annum equal to (a) from and after
the closing date until the last day of the first full fiscal quarter ended after the closing date, (i) 1.25% per annum, in the case
base rate loans, and (ii) 2.25% per annum, in the case of revolving credit loans that are SOFR Loans, (b)(i) 2.25% per annum,
in the case of LILO loans that are base rate loans, and (ii) 3.25% per annum, in the case of LILO loans that are SOFR loans,
(c) on the first day of each fiscal quarter, the applicable interest rate margins will be determined from the pricing grid below
based upon the historical excess availability for the most recent fiscal quarter ended immediately prior to the relevant date, as
calculated by the Administrative Agent.
Applicable
Margin
Applicable
Margin
Level
Historical Excess Availability
for SOFR
Loans
or Base Rate
Loans
I
Greater than or equal to 66.66%
1.75 %
0.75 %
II
Less than 66.66%, but greater than or equal to 33.33%
2.00 %
1.00 %
III
Less than 33.33%
2.25 %
1.25 %
The 2023 ABL Facility also requires the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio of
at least 1.00 to 1.00 as of the end of any four consecutive fiscal quarters if excess availability shall be less than the greater of
(a) 12.5% of the line cap and (b) $9.4 million, at any time and continuing until excess availability is equal to or exceeds the
greater of (i) 12.5% of the line and (ii) $9.4 million for thirty (30) consecutive calendar days; provided that such $9.4 million
level shall automatically increase in proportion to the amount of any increase in the aggregate revolving credit commitments
thereunder in connection with any incremental facility.
The 2023 ABL Facility shall mature on the earlier of (x) November 7, 2027 and (y) the date that is 91 days prior to the
maturity date of any material debt of the ABL Borrower or the Company or any of its restricted subsidiaries (subject to
customary extensions agreed by the lenders thereunder); provided that clause (y) shall not apply to the extent that on any
applicable date of determination (on any date prior to the date set forth in clause (y)), (A) the sum of (x) cash that is held in
escrow for the repayment of such material debt pursuant to arrangements satisfactory to the Administrative Agent, (y) cash
that is held in accounts with the Administrative Agent and/or the Additional Collateral Agent, plus (z) excess availability, is
sufficient to repay such material debt and (B) the ABL Borrower has excess availability of at least $15.0 million after giving
effect to such repayment of material debt, including any borrowings under the commitments in connection therewith.
The Company has not drawn any borrowings under the 2023 ABL Facility but has letters of credit of approximately
$2.3 million outstanding under the facility and has an available balance of $57.4 million based on the borrowing base as of
December 31, 2024.
The Company incurred debt issuance costs attributable to the 2023 ABL Facility of $2.6 million which are amortized to
interest expense using the straight-line method over the expected life of the 2023 ABL Facility.
Convertible Senior Notes
In July 2019, the Company closed an offering of $172.5 million in aggregate principal amount of its 2.50% convertible senior
notes due July 15, 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes were senior unsecured obligations
of the Company and the remaining outstanding balance of $118.5 million was retired with cash on July 15, 2024.
In 2022, a wholly owned subsidiary of the Company repurchased $10.0 million in aggregate principal amount of the
Convertible Senior Notes on the open market resulting in a $0.9 million gain on extinguishment of debt. Subsequent principal
repurchases occurred in 2023 for an aggregate principal amount of $44.0 million resulting in a gain on extinguishment of
debt of $1.9 million. Including amounts repurchased in 2022, a total of $54.0 million in aggregate principal amount of the
Convertible Senior Notes had been repurchased as of December 31, 2023. The repurchased notes were retired on July 1,
2024, with no principal amounts remaining outstanding or held by third parties as of December 31, 2024. As of December
31, 2023, $118.5 million aggregate principal was recorded in current liabilities on the Company’s Consolidated Balance
Sheet.
89
Note 15. Income Taxes
Income tax expense (benefit) for the years ended December 31 consists of the following components:
2024
2023
2022
Current Deferred Total Current Deferred Total Current Deferred Total
Federal .................... $ 14,005 $
240 $ 14,245 $ 13,404 $
4,091 $ 17,495 $ 13,505 $ (4,713) $ 8,792
State and Local .......
2,405
279
2,684
3,587
2,166
5,753
3,897
(1,291)
2,606
Foreign ...................
-
-
-
(16)
767
751
84
(502)
(418)
Total ....................... $ 16,410 $
519 $ 16,929 $ 16,975 $
7,024 $ 23,999 $ 17,486 $ (6,506) $ 10,980
Deferred tax assets and liabilities consists of:
December 31,
December 31,
2024
2023
Assets
Liabilities
Assets
Liabilities
Inventory ...................................................................................... $
4,802 $
- $
5,310 $
-
Property, plant, and equipment .....................................................
-
3,433
-
3,120
Goodwill and other intangible assets ............................................
-
3,549
-
3,182
Foreign NOL carryforward ..........................................................
1,505
-
1,495
-
State NOL carryforward ...............................................................
2,339
-
2,398
-
Unrealized loss on investments ....................................................
3,846
-
7,203
-
Leases ...........................................................................................
3,278
3,004
3,278
2,978
Original issue discount .................................................................
-
-
426
-
Stock compensation ......................................................................
4,306
-
4,879
-
Insurance receivable .....................................................................
-
3,728
-
3,764
Capital loss carryforward .............................................................
4,108
-
-
-
Other .............................................................................................
5,117
2,006
4,536
3,567
Gross deferred income taxes .....................................................
29,301
15,720
29,525
16,611
Valuation allowance .....................................................................
(12,586)
-
(11,446)
-
Net deferred income taxes ........................................................ $
16,715 $
15,720 $
18,079 $
16,611
At December 31, 2024, the Company had state net operating loss (“NOL”) carryforwards for income tax purposes of
approximately $23.6 million, which expire between 2034 and 2042, $27.2 million of which has an indefinite carryforward
period. The Company has determined that, at December 31, 2024 and 2023 its ability to realize future benefits of its state
NOL carryforwards does not meet the “more likely than not” criteria in ASC 740, Income Taxes. Therefore, a valuation
allowance for state NOL carryforwards of $3.1 million and $2.9 million has been recorded at December 2024 and 2023,
respectively. The Company has determined that at December 31, 2024 and 2023, its ability to realize future benefits of its
capital loss carryforward, unrealized loss on investments and foreign NOL carryforwards do not meet the “more likely than
not” criteria in ASC 740, Income Taxes. Therefore, a valuation allowance for capital loss carryforward of $4.1 million,
unrealized loss on investments of $3.1 million and foreign NOL carryforwards of $1.8 million has been recorded at December
31, 2024 and a valuation allowance for unrealized loss on investments of $6.4 million and foreign NOL carryforwards of
$1.7 million has been recorded as of December 31, 2023.
ASC 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. For those benefits to be recognized, a tax position
must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as
the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company
has determined that they did not have any uncertain tax positions requiring recognition as a result of the provisions 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, 2024, 2023, and 2022, 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. In general, the Company is no longer subject to U.S. federal and state tax examinations for years prior to 2021.
90
Reconciliation of the federal statutory rate and the effective income tax rate for the years ended December 31 is as follows:
2024
2023
2022
Federal statutory rate .........................................................................
21.0%
21.0%
21.0%
Foreign rate differential .....................................................................
(0.1)%
(0.1)%
(0.2)%
State taxes ..........................................................................................
3.4%
4.3%
5.0%
Permanent differences .......................................................................
(0.6)%
(0.1)%
-
Other ..................................................................................................
0.6%
-
0.2%
Valuation allowance ..........................................................................
1.8%
13.6%
0.1%
Effective income tax rate ...................................................................
26.1%
38.7%
26.1%
The permanent differences for the years ended December 31, 2024, 2023 and 2022 are not significant in the aggregate.
Note 16. 401(k) Retirement Savings Plan
The Company 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 2024, 2023 and 2022 plan years, the Company contributed 4% to
employees who contributed 4% or more of their annual earnings. Employees contributing less than 4% received a 100%
match on their contributions. Additionally, for all 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
$1.5 million for 2024, $1.4 million for 2023 and $1.5 million for 2022.
Note 17. Lease Commitments
The Company’s leases consist primarily of leased property for manufacturing, warehouse, corporate offices and retail space
as well as vehicle leases. At lease inception, the Company recognizes a lease right of use asset and lease liability calculated
as the present value of future minimum lease payments. Some leases may require payment of other components such as taxes,
insurance, maintenance and operating expenses. When payments related to these other components are considered fixed, they
are included in the determination of the lease liability due to the Company’s election to combine lease and non-lease
components and account for them as a single lease component. Otherwise, they are recognized as variable payments, along
with variable payments not based on a rate or index, in the period in which the obligation for those payments is incurred.
In general, the Company does not recognize renewal periods within the lease terms as there are no significant barriers to
ending the lease at the initial term. 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 consist of the following:
For the year ended December 31,
2024
2023
2022
Operating lease cost ...........................................................................
Cost of sales ....................................................................................... $
502 $
507 $
940
Selling, general and administrative ....................................................
1,760
1,756
1,388
Variable lease cost ..............................................................................
1,091
1,161
699
Short-term lease cost ..........................................................................
-
24
37
Total ................................................................................................... $
3,353 $
3,448 $
3,064
For the year ended December 31,
2024
2023
2022
Financing lease cost ...........................................................................
Selling, general and administrative .................................................... $
860 $
1,164 $
1,138
Interest expense, net ...........................................................................
173
-
-
Variable lease cost ..............................................................................
72 $
- $
-
Total ................................................................................................... $
1,105 $
1,164 $
1,138
91
The Company's lease balances consist of the following:
December 31, December 31,
2024
2023
Assets:
Right of use assets - Operating ........................................................................................ $
8,338 $
8,829
Right of use assets - Financing ........................................................................................
3,272
2,530
Total lease assets ............................................................................................................. $
11,610 $
11,359
Liabilities:
Current lease liabilities - Operating (1) ............................................................................. $
2,011 $
1,921
Current lease liabilities - Financing (1) .............................................................................
1,110
687
Long-term lease liabilities - Operating ............................................................................
7,400
8,322
Long-term lease liabilities - Financing ............................................................................
2,149
1,576
Total lease liabilities ........................................................................................................ $
12,670 $
12,506
(1) Reported within accrued liabilities on the balance sheet
Other information related to the Company's leases consists of the following:
December 31, December 31,
2024
2023
Right of use assets obtained in exchange for lease obligations:
Operating leases .............................................................................................................. $
1,209 $
143
Finance leases .................................................................................................................. $
1,842 $
2,169
As of December 31,
2024
2023
Weighted-average remaining lease term - operating leases (years) .................................
4.8
5.7
Weighted-average discount rate - operating leases .........................................................
5.65 %
5.17%
Weighted-average remaining lease term - financing leases (years) .................................
3.1
3.4
Weighted-average discount rate - financing leases .........................................................
6.64 %
6.48%
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 at the time of the lease commencement.
The following table illustrates the Company's future minimum rental payments for non-cancelable leases as of December 31,
2024:
Year
Operating
Finance
2025 ................................................................................................................................. $
2,487 $
1,293
2026 .................................................................................................................................
2,299
1,176
2027 .................................................................................................................................
2,449
833
2028 .................................................................................................................................
1,158
302
2029 .................................................................................................................................
1,159
-
Years thereafter ...............................................................................................................
1,379
-
Total lease payments .......................................................................................................
10,931
3,604
Less: Imputed interest .....................................................................................................
1,520
345
Present value of lease liabilities ...................................................................................... $
9,411 $
3,259
92
Note 18. Share Incentive Plans
On March 22, 2021, the Company’s Board of Directors adopted the Turning Point Brands, Inc. 2021 Equity Incentive Plan
(the “2021 Plan”), pursuant to which awards may be granted to employees, non-employee directors, and consultants. In
addition, the 2021 Plan provides for the granting of nonqualified stock options to employees of the Company or any subsidiary
of the Company. Pursuant to the 2021 Plan, 1,290,000 shares, plus 100,052 shares remaining available for issuance under the
2015 Equity Incentive Plan (the “2015 Plan”), of TPB Common Stock are reserved for issuance as awards to employees, non-
employee directors, and consultants as compensation for past or future services or the attainment of certain performance
goals. The 2021 Plan is scheduled to terminate on March 21, 2031. The 2021 Plan is administered by the compensation
committee (the “Committee”) of the Company’s Board of Directors. The Committee determines the vesting criteria for the
awards, with such criteria to be specified in the award agreement. As of December 31, 2024, net of forfeitures, there were
381,717 Restricted Stock Units (“RSUs”), 125,213 options and 75,059 Performance Based Restricted Stock Units (“PRSUs”)
granted under the 2021 Plan. There are 808,063 shares available for future 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. Upon adoption of the 2021 Plan,
the 2015 Plan was terminated, and the Company determined no additional grants would be made under the 2015 Plan.
However, all awards issued under the 2015 Plan that have not been previously terminated or forfeited remain outstanding and
continue unaffected. There are no shares available for grant under the 2015 Plan.
Stock option activity for the 2015 and 2021 Plans is summarized below:
Weighted
Weighted
Stock
Average
Average
Option
Exercise
Grant Date
Shares
Price
Fair Value
Outstanding, December 31, 2022 .......................................................
683,214 $
29.74 $
9.24
Granted ...............................................................................................
77,519
20.71
6.45
Exercised ............................................................................................
(33,851)
13.30
4.24
Forfeited .............................................................................................
(69,931)
27.51
9.11
Outstanding, December 31, 2023 .......................................................
656,951 $
29.79 $
9.18
Granted ...............................................................................................
54,289
27.19
9.21
Exercised ............................................................................................
(132,572)
21.36
6.97
Forfeited .............................................................................................
(42,878)
38.11
11.94
Outstanding, December 31, 2024 .......................................................
535,790 $
30.69 $
9.51
Under the 2015 and 2021 Plans, the total intrinsic value of options exercised during the years ended December 31, 2024,
2023, and 2022, was $2.6 million, $0.3 million, and $0.7 million, respectively.
At December 31, 2024, under the 2015 and 2021 Plans, the risk-free interest rate is based on the U.S. Treasury rate for the
expected life at the time of grant. The expected volatility is based on the average long-term historical volatilities of peer
companies. We intend to continue to consistently use the same group of publicly traded peer companies to determine expected
volatility until sufficient information regarding volatility of our share price becomes available or until the selected companies
are no longer suitable for this purpose. Due to our limited trading history, we are using the simplified method presented by
SEC Staff Accounting Bulletin No. 107 to calculate expected holding periods, which represent the periods of time for which
options granted are expected to be outstanding. We will continue to use this method until we have sufficient historical exercise
experience to give us confidence in the reliability of our calculations. The fair values of these options were determined using
the Black-Scholes option pricing model.
93
The following table outlines the assumptions for options granted under the 2015 Plan.
February 10, May 17, March 7, March 20, March 18, February 18,
2017
2017
2018
2019
2020
2021
Number of options granted .....
40,000
93,819
98,100
155,780
155,000
100,000
Options outstanding at
December 31, 2024 .............
20,000
30,969
49,267
100,147
62,207
68,900
Number exercisable at
December 31, 2024 .............
20,000
30,969
49,267
100,147
62,207
68,900
Exercise price ......................... $
13.00 $
15.41 $
21.21 $
47.58 $
14.85 $
51.75
Remaining lives ......................
2.12
2.38
3.19
4.22
5.22
6.14
Risk free interest rate ..............
1.89%
1.76%
2.65%
2.34%
0.79%
0.56%
Expected volatility ..................
27.44%
26.92%
28.76%
30.95%
35.72%
28.69%
Expected life ...........................
6.000
6.000
6.000
6.000
6.000
6.000
Dividend yield ........................
-
-
0.83%
0.42%
1.49%
0.55%
Fair value at grant date ........... $
3.98 $
4.60 $
6.37 $
15.63 $
4.41 $
13.77
The following table outlines the assumptions for options granted under the 2021 Plan.
May 17, March 14, April 29, May 12, March 11,
2021
2022
2022
2023
2024
Number of options granted ...................................
7,500
100,000
14,827
77,519
54,289
Options outstanding at December 31, 2024 ..........
7,500
58,719
6,273
77,519
54,289
Number exercisable at December 31, 2024 ..........
7,500
38,744
4,203
77,519
54,289
Exercise price ....................................................... $
45.05 $
30.46 $
31.39 $
20.71 $
27.19
Remaining lives ....................................................
6.38
7.21
7.33
8.37
9.20
Risk free interest rate ............................................
0.84%
2.10%
2.92%
3.41%
4.06%
Expected volatility ................................................
31.50%
35.33%
35.33%
34.51%
35.09%
Expected life .........................................................
6.000
6.000
6.000
5.186
5.186
Dividend yield ......................................................
0.63%
1.01%
0.98%
1.61%
1.26%
Fair value at grant date ......................................... $
13.23 $
10.23 $
11.07 $
6.45 $
9.21
The Company has recorded compensation expense related to the options based on the provisions of ASC 718 under which
the fixed portion of such expense is determined as the fair value of the options on the date of grant and amortized over the
vesting period. The Company recorded compensation expense related to the options of approximately $0.5 million,
$0.7 million and $1.1 million for the years ended December 31, 2024, 2023 and 2022, respectively. At December 31, 2024,
the options have been fully expensed with zero remaining.
PRSUs are restricted stock units subject to both performance-based and service-based vesting conditions. The number of
shares of TPB Common Stock a recipient will receive upon vesting of a PRSU will be calculated by reference to certain
performance metrics related to the Company’s performance over a five-year period. PRSUs will vest on the measurement
date, which is no more than 65 days after the performance period provided the applicable service and performance conditions
are satisfied. At December 31, 2024, there are 372,218 PRSUs outstanding.
The following table outlines the PRSUs granted and outstanding as of December 31, 2024.
March 18, February 18, March 14,
May 4, March 1, April 1,
2020
2021
2022
2023
2024
2024
Number of PRSUs granted ............
94,000
100,000
49,996
133,578
111,321
8,242
PRSUs outstanding at
December 31, 2024 ....................
70,910
69,190
33,049
93,313
97,514
8,242
Fair value as of grant date ............. $
14.85 $
51.75 $
30.46 $
22.25 $
26.52 $
29.12
Remaining lives .............................
-
1.00
2.00
1.00
2.00
2.00
The Company recorded compensation expense related to the PRSUs of approximately $3.4 million, $3.0 million and
$2.9 million in the consolidated statements of income for the years ended December 31, 2024, 2023 and 2022, respectively,
based on the probability of achieving the performance condition. Total unrecognized compensation expense related to these
awards at December 31, 2024, is $2.7 million, which will be expensed over the service period based on the probability of
achieving the performance condition.
94
RSUs are stock units subject to service-based vesting conditions over one to five years. At December 31, 2024, there are
222,007 RSUs outstanding.
The following table outlines the RSUs granted and outstanding as of December 31, 2024.
March 14, March 14, April 29, May 5, March 1, April 1, May 8,
2022
2022
2022
2023
2024
2024
2024
Number of RSUs granted ........
50,004
28,726
4,522 130,873 105,257
5,495 16,905
RSUs outstanding at
December 31, 2024 ..............
32,091
9,481
1,913 69,114 87,008
5,495 16,905
Fair value as of grant date ....... $
30.46 $
30.46 $
31.39 $
22.25 $
26.52 $
29.12 $
33.13
Remaining lives .......................
2.00
-
2.00
1.25
2.25
2.25
0.25
The Company has recorded compensation expense related to the RSUs based on the provisions of ASC 718 under which the
fixed portion of such expense is determined as the fair value of the RSUs on the date of grant and amortized over the vesting
period. The Company recorded compensation expense related to the RSUs of approximately $3.3 million, $2.9 million and
$1.3 million for the years ended December 31, 2024, 2023 and 2022, respectively. Total unrecognized compensation expense
related to RSUs at December 31, 2024, is $2.2 million, which will be expensed over 1.9 years.
Note 19. Contingencies
On October 9, 2020, a purported stockholder of Turning Point Brands, Inc., Paul-Emile Berteau, filed a complaint in the
Delaware Court of Chancery relating to the merger of Standard Diversified, Inc. (“SDI”) with a TPB subsidiary (“Merger
Sub”) pursuant to the Agreement and Plan of Merger and Reorganization, dated as of April 7, 2020, by and among TPB, SDI
and Merger Sub. The parties attended a mediation in late November 2022 where a settlement was reached. On December 12,
2023, the Court approved the settlement and dismissed the action with prejudice. As of December 31, 2023, the Company
recorded a $4.0 million receivable in other current assets, and a corresponding gain on settlement in other income on its
Consolidated Statement of Income for the year ended December 31, 2023. These funds were received in January 2024.
Other major tobacco companies are defendants in product liability claims. In a number of these cases, the amounts of punitive
and compensatory damages sought are significant and, if such a claim were brought against the Company, could have a
material adverse effect on our business and results of operations.
The CDS segment has several subsidiaries engaged in making, distributing, and selling liquid nicotine products. As a result
of the overall publicity and controversy surrounding the industry generally, many companies have received informational
subpoenas from various regulatory bodies and in some jurisdictions regulatory lawsuits have been filed regarding marketing
practices and possible underage sales. We expect that our subsidiaries will be subject to some such cases and investigative
requests. To the extent that litigation becomes necessary, we believe that the subsidiaries have strong factual and legal
defenses against claims that they unfairly marketed products.
The probable losses, if any, associated with any such lawsuits are not currently reasonably estimable and therefore are not
accrued.
Note 20. Earnings Per Share
The Company calculates earnings per share using the treasury stock method for its options and non-vested restricted stock
units, and the if-converted method for its Convertible Senior Notes.
95
The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations:
December 31, 2024
December 31, 2023
December 31, 2022
Income
(Loss)
Shares
Per
Share
Income
(Loss)
Shares
Per
Share
Income
(Loss)
Shares
Per
Share
Basic EPS:
Numerator
Income from continuing
operations less non-
controlling interest ........... $ 47,326
$
2.67 $ 38,747
$
2.20 $ 31,570
$
1.76
Loss from discontinued
operations, net of tax ........ (7,517)
(0.43 )
(285)
(0.01) (19,929)
(1.11)
Net income attributable to
Turning Point Brands,
Inc. ............................... $ 39,809
$
2.24 $ 38,462
$
2.19 $ 11,641
$
0.65
Denominator
Weighted average .................
17,734,239
17,578,270
17,899,794
Diluted EPS:
Numerator
Income from continuing
operations less non-
controlling interest ........... $ 47,326
$ 38,747
$ 31,570
Interest expense related to
Convertible Senior Notes,
net of tax .......................... 1,597
2,667
-
Diluted income from
continuing operations ....... $ 48,923
$
2.53 $ 41,414
$
2.02 $ 31,570
$
1.75
Loss from discontinued
operations, net of tax ........ (7,517)
(0.39 )
(285)
(0.01) (19,929)
(1.11)
Diluted net income ............... $ 41,406
$
2.14 $ 41,129
$
2.01 $ 11,641
$
0.64
Denominator
Basic weighted average ........
17,734,239
17,578,270
17,899,794
Convertible Senior Notes (1) .
1,192,597
2,533,201
-
Stock options and restricted
stock units (2) ....................
435,970
355,935
155,221
19,362,806
20,467,406
18,055,015
(1) For 2022, the effect of 3,208,172 shares issuable upon conversion of the Convertible Senior Notes were excluded from
the diluted net income per share calculation because the effect would have been antidilutive.
(2) There were 0.2 million, 0.2 million and 0.2 million outstanding stock options not included in the computation of diluted
earnings per share for the years ended December 31, 2024, 2023 and 2022, respectively, because the effect would have
been antidilutive.
Note 21. Segment Information
In accordance with ASC 280, Segment Reporting, the Company has two reportable segments, Zig-Zag products and Stoker’s
products. The Zig-Zag products segment markets and distributes (a) rolling papers, tubes, and related products; (b) finished
cigars and MYO cigar wraps; and (c) lighters and other accessories. The Stoker’s products segment (a) manufactures and
markets moist snuff, (b) contracts for and markets loose-leaf chewing tobacco products, and (c) FRE, its modern oral
product. The Company's products are distributed primarily through wholesale distributors in the U.S. and Canada. Corporate
unallocated includes the costs and assets of the Company not assigned to one of the two reportable segments and includes
corporate overhead expense, including executive management, finance, legal and information technology salaries, and
professional services such as audit, external legal costs and information technology services, as well as costs related to the
FDA premarket tobacco product application. The Company had one customer that accounted for 10.2% of net sales in 2024,
of which 54% was in the Stoker's product segment and 46% was in the Zig-Zag products segment. The Company had no
customer that accounted for more than 10% of net sales in 2023, or 2022.
96
The Company’s CODM is its President and Chief Executive Officer and uses segment operating income as the measure of
earnings to evaluate the performance of each segment and to make decisions about allocating resources, including employees,
property, plant and equipment, as well as financial and capital resources. On a quarterly basis, the CODM reviews segment
operating income budget-to-actual variances to assess segment performance and make resource allocation decisions. For both
reportable segments, cost of sales is the significant segment expense that is regularly provided to the CODM.
The accounting policies of these segments are the same as those of the Company. Corporate costs are not directly charged to
the two reportable segments in the ordinary course of operations.
The tables below present financial information about reportable segments:
For the years ended December 31,
2024
2023
2022
Net sales
Zig-Zag products ............................................................................ $
192,394 $
180,455 $
190,403
Stoker’s products ............................................................................
168,266
144,609
130,826
Total ................................................................................................... $
360,660 $
325,064 $
321,229
Cost of sales
Zig-Zag products ............................................................................ $
85,809 $
79,400 $
83,827
Stoker’s products ............................................................................
73,286
62,722
59,572
Total ................................................................................................... $
159,095 $
142,122 $
143,399
Gross profit
Zig-Zag products ............................................................................ $
106,585 $
101,055 $
106,576
Stoker’s products ............................................................................
94,980
81,887
71,254
Total ................................................................................................... $
201,565 $
182,942 $
177,830
Other segment items (1)
Zig-Zag products ............................................................................ $
39,888 $
32,775 $
33,234
Stoker’s products ............................................................................
26,708
19,679
17,923
Total ................................................................................................... $
66,596 $
52,454 $
51,157
Operating income (loss)
Zig-Zag products ............................................................................ $
66,697 $
68,280 $
73,342
Stoker’s products ............................................................................
68,272
62,208
53,331
Total segment operating income ........................................................
134,969
130,488
126,673
Corporate unallocated (2)(3) ..............................................................
(54,137)
(47,528 )
(52,665)
Total ................................................................................................... $
80,832 $
82,960 $
74,008
Interest expense, net .........................................................................
13,983
14,645
19,524
Investment loss ..................................................................................
1,893
11,914
13,303
Other income ....................................................................................
-
(4,000 )
-
Gain on extinguishment of debt ......................................................
-
(1,664 )
(885)
Income from continuing operations before income taxes ............. $
64,956 $
62,065 $
42,066
Capital expenditures
Zig-Zag products ............................................................................ $
2,342 $
1,112 $
4,641
Stoker’s products ............................................................................
2,271
4,595
3,044
Total ................................................................................................ $
4,613 $
5,707 $
7,685
Depreciation and amortization
Zig-Zag products ................................................................................ $
1,469 $
1,077 $
412
Stoker’s products ................................................................................
4,193
3,041
2,972
Total ................................................................................................... $
5,662 $
4,118 $
3,384
(1) Includes primarily selling and marketing costs
(2) Includes corporate costs that are not allocated to any of the three reportable segments
(3)
Includes costs related to PMTA of $3.6 million, $2.1 million and $4.6 million in 2024, 2023, and 2022, respectively.
97
December 31, December 31,
2024
2023
Assets
Zig-Zag products ......................................................................................................... $
224,052 $
177,135
Stoker’s products .........................................................................................................
197,038
175,013
Assets held for sale ......................................................................................................
15,329
26,998
Corporate unallocated (1) ..............................................................................................
56,934
190,223
Total ................................................................................................................................ $
493,353 $
569,369
(1) Includes assets not assigned to the two reportable segments. All goodwill has been allocated to the reportable segments.
Net Sales: Domestic and Foreign
The following table shows a breakdown of consolidated net sales between domestic and foreign.
For the years ended December 31,
2024
2023
2022
Domestic ............................................................................................ $
330,690 $
294,296 $
288,874
Foreign ...............................................................................................
29,970
30,768
32,355
Total ................................................................................................... $
360,660 $
325,064 $
321,229
Note 22. Dividends and Share Repurchase
The Company currently pays a quarterly cash dividend. Dividends are considered restricted payments under the Senior
Secured Notes Indenture. 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; however, there are earnings and
market capitalization requirements that if not met could limit the aggregate amount of restricted, quarterly dividends during
a fiscal year. During the years ended December 31, 2024, 2023 and 2022, the Company paid cash dividends of $0.28 per
common share for $4.9 million, $0.26 per common share for $4.5 million and $0.24 per common share for $4.3 million,
respectively.
On February 25, 2020, the Company’s Board of Directors approved a $50.0 million share repurchase program which is
intended for opportunistic execution based upon a variety of factors including market dynamics. The program is subject to
the ongoing discretion of the Board of Directors. On October 25, 2021, the Board of Directors increased the approved share
repurchase program by $30.7 million, and by an additional $24.6 million on February 24, 2022. On November 6, 2024, the
Board of Directors of the Company increased the Company’s share repurchase authorization by $77.9 million to an aggregate
amount of $100.0 million. The total number of shares repurchased for the year ended December 31, 2024 was 154,945 shares
for a total cost of $5.1 million and an average price per share of $32.60. As of December 31, 2024, $100.0 million remains
available for share repurchases under the program. There were no shares repurchased for the year ended December 31, 2023.
The Company repurchased 1,021,052 shares for a total cost of $29.2 million for the year ended December 31, 2022.
98
Note 23. Selected Quarterly Financial Information (Unaudited)
The following table presents the quarterly operating results:
(Per-share amounts in dollars)
First Quarter Second Quarter Third Quarter Fourth Quarter
2024 2023 2024 2023 2024 2023 2024 2023
Net sales .............................................. $ 83,064 $ 75,549 $ 93,225 $ 82,778 $ 90,704 $ 83,670 $ 93,667 $ 83,067
Gross profit .......................................... $ 48,354 $ 41,855 $ 50,398 $ 46,390 $ 50,395 $ 47,317 $ 52,418 $ 47,380
Operating income ................................ $ 19,270 $ 17,581 $ 22,872 $ 20,085 $ 20,805 $ 20,697 $ 17,885 $ 24,597
Income from continuing operations ..... $ 12,181 $ 7,147 $ 12,961 $ 9,363 $ 12,525 $ 11,211 $ 10,360 $ 10,345
(Loss) Income from discontinued
operations, net of tax ........................ $
(2 ) $
195 $
(41) $
345 $
(165) $
(345) $ (7,309) $
(480)
Net income .......................................... $ 12,179 $ 7,342 $ 12,920 $ 9,708 $ 12,360 $ 10,866 $ 3,051 $ 9,865
Net income (loss) attributable to non-
controlling interests ......................... $
169 $
(255) $
(87) $
(217) $
(16) $
35 $
635 $
(244)
Net Income attributable to Turning
Point Brands, Inc. ............................ $ 12,010 $ 7,597 $ 13,007 $ 9,925 $ 12,376 $ 10,831 $ 2,416 $ 10,109
Net Earnings per share
Basic
Continuing operations ...................... $
0.68 $
0.42 $
0.74 $
0.54 $
0.71 $
0.64 $
0.55 $
0.60
Discontinued operations ..................
(0.00 )
0.01
(0.00)
0.02
(0.01)
(0.02)
(0.41)
(0.03)
Basic earnings per share .................. $
0.68 $
0.43 $
0.74 $
0.56 $
0.70 $
0.62 $
0.14 $
0.57
Diluted
Continuing operations ...................... $
0.63 $
0.40 $
0.68 $
0.51 $
0.69 $
0.59 $
0.53 $
0.56
Discontinued operations ..................
(0.00 )
0.01
(0.00)
0.02
(0.01)
(0.01)
(0.40)
(0.03)
Diluted earnings per share ............... $
0.63 $
0.41 $
0.68 $
0.53 $
0.68 $
0.58 $
0.13 $
0.53
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 24. Subsequent Events
Contribution of Creative Distribution Solutions
On January 2, 2025, the Company contributed 100% of its interest in South Beach Brands LLC (“SBB”), the subsidiary that
owns and operates the Company’s Creative Distribution Solutions (“CDS”) segment, to General Wireless Operations, Inc.
(“GWO”) in exchange for a 49% equity interest in GWO. GWO is a joint venture between the Company and Standard
General, LP entered into in December 2018. Under certain circumstances the Company has the right to redeem the
contribution of SSB from GWO at fair market value. In addition, the Company received an option with a 15-year term to
purchase the remaining 51% of GWO at an exercise price initially set at $22.0 million, which decreases over time based on
certain tax sharing payments to GWO. The Company will provide certain transition services to GWO in connection with the
operation of SBB on an arm’s length basis. The Company determined that, upon completion of the SBB exchange transaction,
it will not have a controlling financial interest in GWO and, as a result, will deconsolidate SBB on January 2, 2025, and
account for its interest in GWO under the equity method of accounting.
2032 Notes
On February 19, 2025, the Company entered into an indenture relating to the issuance and sale of $300.0 million aggregate
principal amount of its 7.625% Senior Secured Notes due 2032 (the “2032 Notes”), by and among the Company, the
guarantors party thereto and GLAS Trust Company LLC, as trustee and notes collateral agent. Obligations under the 2032
Notes are guaranteed by the Company’s current wholly-owned domestic restricted subsidiaries that guaranteed its 2026 Notes.
The 2032 Notes and the related guarantees are secured by first-priority liens on substantially all of the assets of the Company
and the guarantors, subject to certain exceptions. Proceeds from the offering were approximately $294.0 million and were
used to redeem the 2026 Notes and for general corporate purposes.
2026 Notes
On February 20, 2025 (the “Redemption Date”), the Company used a portion of the proceeds from the issuance and sale of
the 2032 Notes to redeem all $250.0 million of its outstanding 2026 Notes at a redemption price equal to 100% of the
aggregate principal amount of the 2026 Notes, plus accrued and unpaid interest thereon to, but excluding the Redemption
Date. Upon redemption of the 2026 Notes, the indenture governing the 2026 Notes was satisfied and discharged in accordance
with its terms.
99
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Previously Disclosed Material Weakness Related to IT Controls
As previously reported in the 10K filing for year-end December 31, 2023, the Company did not design and maintain effective
internal controls related to our information technology general controls (“ITGCs”) in the areas of user access and program
change-management over certain information technology (“IT”) systems that support the Company’s financial reporting
processes. Our business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed
ineffective because they could have been adversely impacted. We believe that these control deficiencies were a result of: IT
control processes lacking sufficient documentation such that the successful operation of ITGCs was overly dependent upon
knowledge and actions of certain individuals with IT expertise and inherent system limitations. The material weakness did
not result in any identified misstatements to the financial statements, and there were no changes to previously released
financial results.
Disclosure Controls and Procedures
As of December 31, 2024, the Company’s management, with participation of the Company’s President and Chief Executive
Officer (“CEO”) and Chief Financial Officer (“CFO”), evaluated the effectiveness of 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 disclosure controls and procedures were not effective as of December 31, 2024, solely due to the
previously disclosed material weaknesses related to ITGCs in the areas of user access and program change-management over
certain IT systems that support the Company’s financial reporting processes. No financial restatements were made as a result
of this material weakness.
Internal Control
Pursuant 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 Report on Form 10-K for the year ended December 31,
2024. Management’s report is included below under the caption entitled “Management’s Report on Internal Control Over
Financial Reporting,” and is incorporated herein by reference.
Management’s Report on Internal Control Over Financial Reporting
The consolidated financial statements appearing in this Annual Report have been prepared by the management that is
responsible for their preparation, integrity, and fair presentation and reviewed by the Audit Committee of the Board of
Directors. The statements have been 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 consolidated financial
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, as amended). 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 in accordance 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 to financial statement preparation and
presentation. Further, because of changes in conditions over the normal and routine course of business, the effectiveness of
an internal control system may vary over time.
With the oversight of the Audit Committee of the Board of Directors, and under the supervision and with the participation of
our management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2024, based on the standardized framework in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (“COSO
ICIF”).
100
According to this standard, 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 the Company’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, 2024, which was previously reported. The material weakness did
not require a financial restatement.
Internal Controls Related to Information Technology and User Access
While we designed and implemented internal controls related to our ITGCs in the areas of user access and program change-
management over certain IT systems that support the Company’s financial reporting processes, we did not maintain those
controls for a sufficient period of time to effectively demonstrate the operating effectiveness of those ITGCs. Our business
process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because
they could have been adversely impacted. We believe that these control deficiencies were a result of ITGCs overly dependent
upon knowledge and actions of certain individuals with IT expertise and inherent system limitations creating segregation of
duties risks for most of the fiscal year.
Our 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 reporting and 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 the Company’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 U.S.
Remediation Plan
In 2024, we have been engaged in the implementation of a new enterprise resource planning (“ERP”) system, which is part
of the remediation efforts for our material weakness in internal controls over financial reporting identified. This ERP system
will replace our operating and financial systems and is designed to accurately maintain the Company’s financial records,
enhance operational functionality and provide timely information to the Company’s management team related to the
operation of the business.
While we have taken meaningful steps to improve our internal controls, full remediation of the previously identified material
weakness was not realized as of December 31, 2024. We anticipate that the remediation will be complete by the end of fiscal
year 2025, as at that time the referenced controls will have been in place for a sufficient period of time to demonstrate
operating effectiveness.
The Company implemented the following remediation control activities in 2024:
●
Enhanced policies and procedures to improve our overall control environment, including processes for
reporting deficiencies to those parties responsible for taking corrective action, such as senior management and
the Board of Directors, as appropriate.
●
Recruited key positions within our technology, accounting, and other support functions with appropriate
qualified experience to 1) enhance our risk assessment processes and internal control activities; 2) allow for
additional segregation of duties and improved change management; and 3) provide appropriate oversight and
reviews.
●
Provided training and education programs for personnel responsible for the performance of key IT controls
and business processes throughout the Company to facilitate their understanding of the risks being addressed
by the controls they are performing, as well as educate them in the documentation requirements of the internal
control framework.
●
Made investments in our technology platforms and associated monitoring tools, in order to provide better
reporting capabilities and allow for transparency as to the changes made by users with privileged access. We
also implemented monitoring controls utilizing these tools to validate that activities performed by those
accounts were authorized and appropriate.
●
Modified and restricted access to key system privileges to minimize segregation of duties risks within the
Company and its IT systems.
●
Made significant progress in enhancements to the business process control environment to address the noted
design deficiencies.
●
Increased resource allocations to further support the internal controls compliance program.
101
While we have put forth significant resources and effort in our remediation activities described above, ongoing and additional
activities are required to fully remediate our material weaknesses. Our ongoing efforts include:
●
Anticipated completion of the implementation of the new ERP system in the first half of 2025 providing an
enhanced control environment.
●
Continue to utilize third-party consultants specialized in ITGC’s, internal audit, risk management and
compliance functions. Their expertise will help us to continually assess risk and design and implement
appropriate controls to address said risks.
●
Continuing to implement and enhance ITGCs and related policies.
●
Continuing to configure system access and new tools, such as monitoring software, to allow us to better report
upon and evaluate software modifications, data changes, and other relevant IT changes.
●
Providing additional training for control owners and reviewers with specific focus on understanding the risks
being addressed by the controls they are performing, as well as requirements for sufficient documentation and
evidence in the execution of the controls.
●
Continuing to enhance our reporting process related to the remediation measures to the Audit Committee of
the Board of Directors.
Upon the completion of the steps above, we believe that these actions will remediate the material weakness. However, the
material weakness will not be considered fully remediated until the applicable controls have been in place for a sufficient
period of time, and management has concluded, through testing, that these controls are operating effectively.
Role of the Audit Committee in Material Weakness Remediation
The Audit Committee of the Board of Directors is actively overseeing the remediation of the material weaknesses. Working
closely with management, as well as with the Company’s internal audit, finance teams, and independent auditors, the Audit
Committee has and will continue to monitor and evaluate the effectiveness of the remediation throughout the fiscal year
ending December 31, 2025. Regular updates on progress have been and will continue to be provided to the Board of Directors,
with the Audit Committee ensuring management’s testing of the remediated controls is completed as soon as practicable
Changes in Internal Controls over Financial Reporting
Other than in connection with aspects of our remediation plan, there were no changes in the Company’s internal controls over
financial reporting during the fiscal quarter ended December 31, 2024 that have materially affected, or are reasonably likely
to materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
102
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required for this Item is incorporated by reference from our Proxy Statement to be filed in connection with
our 2025 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2024.
We have adopted a Securities Trading Policy that governs the purchase, sale, and/or other dispositions of our securities by
our directors, officers, and employees designed to promote compliance with insider trading laws, rules, and regulations, and
any listing standards applicable to us. A copy of our Securities Trading Policy, as currently in effect, is filed as Exhibit 19.1 to
this Annual Report on Form 10-K.
Item 11. Executive Compensation
The information required for this Item is incorporated by reference from our Proxy Statement to be filed in connection with
our 2025 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2024.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required for this Item is incorporated by reference from our Proxy Statement to be filed in connection with
our 2025 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2024.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required for this Item is incorporated by reference from our Proxy Statement to be filed in connection with
our 2025 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2024.
Item 14. Principal Accountant Fees and Services
The information required for this Item is incorporated by reference from our Proxy Statement to be filed in connection with
our 2025 Annual Meeting of Stockholders within 120 days after the end of the fiscal year ended December 31, 2024.
103
PART IV
Item 15. Exhibits and Financial Statement Schedules
a) 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) below
b) Exhibits Index to Exhibits
Index to Exhibits
Exhibit No. Description
1
At Market Issuance Sales Agreement, dated December 13, 2024, by and among Turning Point Brands, Inc.,
B. Riley Securities, Inc. and Barclays Capital Inc. (incorporated by reference to Exhibit 1.1 to the
Registrant’s Current Report on Form 8-K filed on December 13, 2024).
2
International Vapor Group Stock Purchase Agreement dated as of September 5, 2018, between Turning Point
Brands, Inc. and International Vapor Group, LLC (incorporated by reference to Exhibit 2.1 to the Registrant’s
Quarterly Report on Form 10-Q filed on November 7, 2018).
3.1
Second 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 filed on May 16, 2016).
3.2
Second 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).
4.1
Registration Rights Agreement of Turning Point Brands, Inc. dated May 10, 2016, between Turning Point
Brands, Inc. and the Stockholders named therein (incorporated by reference to Exhibit 4.1 to the Registrant’s
Current Report on Form 8-K filed on May 16, 2016).
4.2
Description 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 19, 2025, between Turning Point Brands, Inc. and GLAS Trust Company LLC
(including the form of Note as Exhibit A thereto).*
10.1
Turning Point Brands, Inc. 2021 Equity Incentive Plan, dated as of March 22, 2021 (incorporated by reference
to Appendix A of the Company’s definitive proxy statement on Schedule 14A, filed with the Commission on
March 25, 2021). †
10.2
Turning 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). †
10.3
Form 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). †
10.4
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 the Registrant’s Quarterly Report on Form
10-Q filed on May 11, 2017). †
104
10.5
2006 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) filed on November 5, 2015). †
10.6
Amendment 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-K filed on March 13, 2017). †
10.7
Amendment 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-K filed on March 13, 2017). †
10.8
Amendment 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-K filed on February 7, 2017). †
10.9
Amendment 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). †
10.10
Form 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 on November 5, 2015). †
10.11
Form 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). †
10.12
Form of Indemnification Agreement between Turning Point Brands, Inc. and certain directors and officers
(incorporated by reference to Exhibit 10.10 to the Registrant’s Registration Statement on Form S-1/A (File No.
333-207816) filed on November 24, 2015).
10.13
Contract 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).
10.14
Amended and Restated Distribution and License Agreement dated as of November 30, 1992, between
Bolloré Technologies, S.A. and North Atlantic Trading Company, Inc., as predecessor 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).
10.15
Amended and Restated Distribution and License Agreement dated as of November 30, 1992, between
Bolloré Technologies, S.A. and North Atlantic Trading Company, Inc., as predecessor 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).
10.16
Amendment 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).
10.17
Amendment 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).
10.18
Amendment 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).
105
10.19
Restated Amendment to the Amended and Restated Distribution and License Agreement between
Bolloré Technologies, S.A. and North Atlantic Operating Company, Inc. dated June 25, 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 the Commission on September 17, 1997).
10.20
Amendment 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).
10.21
Amendment 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).
10.22
Trademark 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 the Registrant’s Registration Statement
on Form S-1 (File No. 333-207816) filed on November 5, 2015).
10.23
Amendment 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).
10.24
Amendment 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).
10.25
Amendment 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).
10.26
Consent 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 the Registrant’s Registration Statement on Form
S-1 (File No. 333-207816) filed on November 5, 2015).
10.27
Amendment 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 to Exhibit 10.27 to the Registrant’s
Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015).
10.28
Amendment 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 to Exhibit 10.28 to the Registrant’s
Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015).
10.29
Trademark Consent Agreement dated July 31, 2003, among Bolloré Technologies, S.A., North Atlantic Trading
Company, Inc. and North Atlantic Operating Company, Inc. (incorporated by reference to Exhibit 10.32 to the
Registrant’s Registration Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015).
10.30
Amendment No. 2 to Trademark Consent Agreement dated December 17, 2012, between Bolloré S.A. and North
Atlantic Operating Company, Inc. (incorporated by reference to Exhibit 10.36 to the Registrant’s Registration
Statement on Form S-1 (File No. 333-207816) filed on November 5, 2015).
10.31
License 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 the Registrant’s Registration Statement on Form
S-1 (File No. 333-207816) filed on November 5, 2015).
106
10.32
Distributors 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 the Registrant’s Registration Statement on
Form S-1/A (File No. 333-207816) filed on November 24, 2015).
10.33
Employment Agreement by and between the Company and Andrew Flynn, dated as of March 6, 2024.†*
10.34
Pledge and Security Agreement, dated as of February 19, 2025, by and among the Company, the other grantors
party thereto and GLAS Trust Company LLC, as collateral agent.*
10.35
Patent Security Agreement, dated as of February 19, 2025, by and among the grantors party thereto and GLAS
Trust Company LLC.*
19.1
Securities Trading Policy.*
21
Subsidiaries of Turning Point Brands, Inc.*
23
Consent of RSM US LLP.*
31.1
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.3
Certification of Principal Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1
Certifications 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.*
97.1
Clawback policy of Turning Point Brands, Inc. (incorporated by reference to Exhibit 97 to the Registrant’s
Annual Report on Form 10-K filed on February 24, 2024).
101
XBRL (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, 2024, 2023, and 2022, formatted in Inline
XBRL: (i) consolidated balance sheets, (ii) consolidated statements of income, (iii) consolidated statements of
comprehensive income, (iv) consolidated statements of changes in stockholder’s equity (deficit), (v)
consolidated statements of cash flows, and (vi) notes to the consolidated financial statements.*
104
Cover 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
Signatures
Pursuant 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 thereunto duly authorized, on March 6, 2025.
TURNING POINT BRANDS, INC.
By: /s/ Graham Purdy
Name: Graham Purdy
Title: Chief Executive Officer
By: /s/ Andrew Flynn
Name: Andrew Flynn
Title: Chief Financial Officer
By: /s/ Brian Wigginton
Name: Brian Wigginton
Title: Chief Accounting Officer
Pursuant 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 the dates indicated.
Signature
Title
Date
By: /s/ Graham Purdy
Director, Chief Executive Officer
March 6, 2025
Graham Purdy
By: /s/ Andrew Flynn
Chief Financial Officer
March 6, 2025
Andrew Flynn
By: /s/ Brian Wigginton
Chief Accounting Officer
March 6, 2025
Brian Wigginton
By: /s/ David Glazek
Executive Chair of the Board
March 6, 2025
David Glazek
By: /s/ Gregory H. A. Baxter
Director
March 6, 2025
Gregory H. A. Baxter
By: /s/ John Catsimatidis
Director
March 6, 2025
John Catsimatidis
By: /s/ H. C. Charles Diao
Director
March 6, 2025
H. C. Charles Diao
By: /s/ Ashley Davis Frushone
Director
March 6, 2025
Ashley Davis Frushone
By: /s/ Rohith Reddy
Director
March 6, 2025
Rohith Reddy
By: /s/ Stephen Usher
Director
March 6, 2025
Stephen Usher
By: /s/ Lawrence S. Wexler
Director
March 6, 2025
Lawrence S. Wexler