# Turning Point Brands, Inc. (TPB) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Turning Point Brands, Inc.'s 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1290677/000114036122009150/brhc10034925_10k.htm
Accession: 0001140361-22-009150
Filing date: 2022-03-11
Report date: 2021-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/TPB/
All MD&A years: /company/TPB/mda/
Next year: /company/TPB/mda/fy2022/ (FY 2022)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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

Overview

We are a leading manufacturer, marketer and distributor of branded consumer products. We sell a wide range of products to adult consumers consisting of staple products with our iconic brands Zig-Zag® and Stoker’s® to our next generation products to fulfill evolving consumer preferences. Among other markets, we compete in the alternative smoking accessories and Other Tobacco Products
(“OTP”) industries. The alternative smoking accessories market is a dynamic market experiencing robust secular growth driven by cannabinoid legalization in the U.S. and Canada and positively evolving consumer perception and acceptance in North
America. The OTP industry, which consists of non-cigarette tobacco products, exhibited mid-single-digit consumer unit annualized growth over the three year period ending 2021 as reported by Management Science Associates, Inc. (“MSAi”), a
third-party analytics and information company. Our three focus segments are led by our core, proprietary brands: Zig-Zag® in the Zig-Zag Products segment; Stoker’s® along with Beech-Nut® and Trophy® in the Stoker’s Products segment; and our distribution platforms (Vapor Beast®, VaporFi® and Direct Vapor®) along with Solace® in the NewGen Products segment. Our businesses generate solid cash flow which we use to invest in our business, finance acquisitions, increase brand support, expand our
distribution infrastructure, and strengthen our capital position. We currently ship to approximately 800 distributors with an additional 200 secondary, indirect wholesalers in the U.S. that carry and sell our products. Under the leadership of a
senior management team with extensive experience in the consumer products, alternative smoking accessories and tobacco industries, we have grown and diversified our business through new product launches, category expansions, and acquisitions
while concurrently improving operational efficiency.

We believe there are meaningful opportunities to grow through acquisitions and joint ventures across all product categories. As of December 31, 2021, our products are available in approximately
195,000 U.S. retail locations which, with the addition of retail stores in Canada, brings our total North American retail presence to an estimated 215,000 points of distribution. Our sales team targets widespread distribution to all traditional
retail channels, including convenience stores, and we have a growing e-commerce business.

Products

We operate in three segments: Zig-Zag Products, Stoker’s Products and NewGen Products. In our Zig-Zag Products segment, we principally market and distribute (i) rolling papers, tubes, and related products; and (ii)
finished cigars and make-your-own (“MYO”) cigar wraps. In our Stoker’s Products segment, we (i) manufacture and market moist snuff tobacco (“MST”) and (ii) contract for and market loose leaf chewing
tobacco products. In our NewGen Products segment, we (i) market and distribute liquid vapor products and certain other products without tobacco and/or nicotine; (ii) distribute a wide assortment of products to non-traditional retail via
VaporBeast; and (iii) market and distribute a wide assortment of products to individual consumers via the VaporFi B2C online platform. Refer to the ‘Recent Developments’ section below for details regarding the Turning
Point Brands Canada (formerly ReCreation Marketing) investment.

Our portfolio of brands includes some of the most widely recognized names in the alternative smoking accessories and OTP industries, such as Zig-Zag®, Stoker’s®, Vapor Beast® and VaporFi®. The following table sets forth the market share and category rank of our core products and demonstrates their industry positions:

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[[GREPCENT_TABLE]]
[["Brand","","Product","","TPB Segment","","Market Share(1)","","Category Rank(1)"],["Zig-Zag\u00ae","","Cigarette Papers","","Zig-Zag Products","","33.6%","","#1 premium, #1 overall"],["Zig-Zag\u00ae","","MYO Cigar Wraps","","Zig-Zag Products","","56.2%","","#1 overall"],["Stoker\u2019s\u00ae","","Moist Snuff","","Stoker\u2019s Products","","5.6%","","#3 discount, #6 overall"],["Stoker\u2019s\u00ae","","Chewing Tobacco","","Stoker\u2019s Products","","25.6%","","#1 discount, #1 overall"],["(1) Market share and category rank data for all products are derived from MSAi data 52 weeks ended 12/25/21."]]
[[/GREPCENT_TABLE]]

We subscribe to a sales tracking system from MSAi that records all OTP product shipments (ours as well as those of our competitors) from approximately 600 wholesalers to over 250,000
traditional 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 180 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 acquisition of VaporBeast in 2016 expanded our revenue streams as we began selling directly to non-traditional retail outlets. Our acquisition of IVG in 2018 enhanced our B2C revenue stream with the addition of the Vapor-Fi online
platform. The acquisition of Solace in 2019 provided us with a line of leading liquids and a powerful new product development platform. Our net sales, which include federal excise taxes, consist of gross sales net of cash discounts, returns, and
selling and marketing allowances.

We rely on long-standing relationships with high-quality, established manufacturers to provide the majority of our produced products. More than 80% of our production, as measured by net sales,
is outsourced to suppliers. The remaining production consists primarily of our moist snuff tobacco operations located in Dresden, Tennessee, and Louisville, Kentucky. Our principal operating expenses include the cost of raw materials used to
manufacture the limited number of our products which we produce in-house; the cost of finished products, which are generally purchased goods; federal excise taxes; legal expenses; and compensation expenses, including benefits and costs of
salaried personnel. Our other principal expenses include interest expense and other expenses.

Key Factors Affecting Our Results of Operations

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

[[GREPCENT_TABLE]]
[["","\u2022","Our ability to further penetrate markets with our existing products;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Our ability to introduce new products and product lines that complement our core business;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Decreasing interest in tobacco products among consumers;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Price sensitivity in our end-markets;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Marketing and promotional initiatives, which cause variability in our results;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","General economic conditions, including consumer access to disposable income and other conditions affecting purchasing power such as inflation;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Cost and increasing regulation of promotional and advertising activities;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Cost of complying with regulation, including \u201cdeeming regulation\u201d;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Increasing and unpredictable regulation of NewGen products;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Counterfeit and other illegal products in our end-markets;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Currency fluctuations;"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Our ability to identify attractive acquisition opportunities; and"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Our ability to successfully integrate acquisitions."]]
[[/GREPCENT_TABLE]]

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Recent Developments

CLIPPER® Lighters 

In February 2022, we entered into an agreement with Flamagas, a renowned lighter manufacturer, for exclusive distribution of CLIPPER® lighters in the United States and Canada.

Final Rule Related to PACT Act Published

On October 21, 2021, the United States Postal Service (“USPS”) published a Final Rule entitled “Treatment of E-Cigarettes in the Mail,” which followed its earlier publication of the Proposed
Rule on February 19, 2021. This Final Rule was required as a result of the inclusion of Division FF, Title VI (Preventing Online Sales of E-Cigarettes to Children or “POSECA”) in the Further Consolidated Appropriations Act, 2021. POSECA, among
other things, expanded the definition of “cigarettes” in the Jenkins Act and Prevent All Cigarette Trafficking (“PACT”) Act to expressly capture “electronic nicotine delivery systems,” i.e., ENDS. Consistent with the Proposed Rule, the Final Rule
extends the existing prohibition on and exceptions to the mailing of “cigarettes” via USPS to ENDS products, other than the Consumer Testing and Public Health exceptions. Specifically, the Final Rule extends the following exceptions to the
prohibition on mailing of ENDS products: the Business/Regulatory Purposes Exception, the Certain Individuals Exception, and the exception for intra-Alaska and intra-Hawaii shipments. We have received certain shipping exemptions from carrier
services to carry the affected freight and have created a supplemental logistical network for those shipments not covered by the exemptions.

Unitabac

On July 23, 2021, we acquired certain assets of Unitabac, a marketer of mass-market cigars, for $10.7 million in total consideration, comprised of $9.6 million in cash and $1.1 million of
capitalized transaction costs. In the acquisition, we acquired a robust portfolio of cigarillo products and all related intellectual property, including Cigarillo Non-Tip (NT) Homogenized Tobacco Leaf (HTL) products and Rolled Leaf and Natural
Leaf Cigarillo Products.

Old Pal

On July 21, 2021, we invested $8 million in Old Pal Holding Company LLC (“Old Pal”), a leading brand in the cannabis lifestyle space that operates a non-plant touching licensing model. We invested in the form of a
convertible note which includes additional follow-on investment rights. Our investment will enable Old Pal to expand product offerings in existing states, which include California, Nevada, Michigan, Oklahoma, Ohio, Washington and Massachusetts,
and will help create the infrastructure necessary to support continued territory and product expansion.

Direct Value Wholesale

In April 2021, Turning Point Brands Canada, a VIE for which we are considered the primary beneficiary, purchased 100% of the equity interest of Westhem Ventures LTD d/b/a
Direct Value Wholesale (“DVW”) for $3.9 million in total consideration, comprised of $3.5 million paid in cash and $0.5 million in accrued consideration paid during 2021. DVW is Canadian distribution entity that operates in markets not primarily
served by Turning Point Brands Canada. The acquisition expands Turning Point Brands Canada’s markets in Canada.

Docklight Brands, Inc.

On April 19, 2021, we invested $8.7 million in Docklight Brands, Inc., a pioneering consumer products company with celebrated brands including Marley Natural® cannabis and Marley™ CBD. We have additional follow-on investment rights. As part of the investment, we have obtained exclusive U.S. distribution rights for Docklight’s Marley™ CBD topical products.

Premarket Tobacco Applications

We submitted Premarket Tobacco Applications (“PMTAs”) covering 250 products to the FDA prior to the September 9, 2020 filing deadline. The PMTAs cover a broad assortment of products in the vapor category including
multiple proprietary e-liquid offerings in varying nicotine strengths, technologies and sizes; proprietary replacement parts and components of open system tank devices through partnerships with two leading manufacturers for exclusive distribution
of products in the United States; and a closed system e-cigarette. On September 14, 2021, the FDA issued a Marketing Denial Order (“MDO”) for certain of the Company’s proprietary e-liquid products subject of these PMTAs. The Company filed a
Petition for Review in the Sixth Circuit Court of Appeals on September 23, 2021, followed by an Emergency Motion for a Stay Pending Review on September 30, 2021. On October 7, 2021, we were informed that the FDA had rescinded its September 14,
2021, MDO. We therefore withdrew both the Petition and Emergency Stay on October 8, 2021. The Rescission Letter indicated that the FDA had found additional relevant information that was not adequately assessed. The Rescission Letter further
clarified that the FDA presently has no intention of initiating any regulatory enforcement action against the products.

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Critical Accounting Policies and Uses of Estimates

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States. 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 revenue recognition, collectability of accounts receivable, inventory valuation and obsolescence, goodwill, intangibles, income
taxes, litigation, and contingencies 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.

Revenue Recognition

We recognize revenues in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (Topic 606), which include excise taxes and shipping and handling
charges billed to customers, net of cash discounts for prompt payment, sales returns and sales incentives, upon delivery of goods to the customer—at which time our performance obligation is satisfied—at an amount that we expect to be entitled to
in exchange for those goods in accordance with the five-step analysis outlined in Topic 606: (i) identify the contract with the customer, (ii) identify 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. We exclude from the transaction price, sales taxes and value-added taxes imposed at the time of sale
(which do not include excise taxes on smokeless tobacco, cigars or vaping products billed to customers).

We record an allowance for sales returns, based principally on historical volume and return rates, which is included in accrued liabilities on the consolidated balance sheets. We record sales
incentives, which consist of consumer incentives and trade promotion activities, as a reduction in revenues (a portion of which is based on amounts estimated as being due to wholesalers, retailers and consumers 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. Our management views business performance through segments that closely resemble the performance of major product lines. Thus, the primary, and most useful,
disaggregation of our contract revenue for decision making purposes is the disaggregation by segment which can be found in Note 21 of our Notes to Consolidated Financial Statements. An additional disaggregation of contract revenue by sales
channel can be found within Note 21 as well.

Derivative Instruments – Currency Forward Contracts

We use foreign currency forward contracts to hedge a portion of our exposure to changes in foreign currency exchange rates from time to time. We account for our forward contracts
under the provisions of ASC 815, Derivatives and Hedging. Under our policy, as amended, we may hedge up to 100% of our anticipated purchases of inventory in the denominated invoice currency over a forward period not to exceed twelve months. We
may also, from time to time, hedge up to ninety percent of our non-inventory purchases in the denominated invoice currency. Forward contracts that qualify as hedges 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 contracts are transferred from other comprehensive income into inventory as the
related inventories are received and are transferred to net income as inventory is sold. Changes in fair value of any contracts that do not qualify for hedge accounting or are not designated as hedges are
recognized in income currently.

Derivative Instruments - Interest Rate Swaps

We enter into interest rate swap contracts to manage interest rate risk and reduce the volatility of future cash flows. We account for interest rate swap contracts under the provisions of ASC 815, Derivatives and
Hedging. Swap contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by market prices on the measurement date, except any hedge ineffectiveness which is recognized currently in income.
Gains and losses on these swap contracts are transferred from other comprehensive income into net income upon settlement of the derivative position or at maturity of the interest rate swap contract. Changes in fair value of any contracts that do
not qualify for hedge accounting or are not designated as hedges are recognized currently in income.

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Goodwill and Other Intangible Assets

We follow the provisions of ASC 350, Intangibles – Goodwill and Other in accounting for our goodwill and other intangible assets. Goodwill and indefinite-lived intangible assets are reviewed
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. If the carrying value of the goodwill or indefinite-life intangible asset exceeds its
fair value, determined using the discounted cash flows method and the relief-from-royalty method, respectively, the goodwill or intangible asset is considered impaired. The carrying value of the goodwill or indefinite-life intangible asset would
then be reduced to fair value. For goodwill, the determination of a reporting unit’s fair value involves, among other things, our market capitalization and application of the income approach, which includes developing forecasts of future cash
flows and determining an appropriate discount rate.

Based on our annual goodwill impairment testing, the estimated fair values of each of our reporting units were in excess of the respective carrying values at December 31, 2021. We had no such
impairment of goodwill or other intangible assets during the year ended December 31, 2021. However, there could be an impairment of the goodwill of the NewGen reporting unit if future revenues do not achieve our expected future cash flows or if
macroeconomic conditions result in future increases in the weighted average cost of capital used to estimate fair value. Refer to Note 10 of Notes to Consolidated Financial Statements for further details regarding our goodwill and other
intangible assets as of December 31, 2021.

Fair Value

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

[[GREPCENT_TABLE]]
[["","\u2022","Level 1 \u2013 Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Level 2 \u2013 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."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u2022","Level 3 \u2013 Unobservable inputs that reflect management\u2019s best estimate of what market participants would use in pricing the asset or liability at the measurement date."]]
[[/GREPCENT_TABLE]]

Retirement Plans

We follow the provisions of ASC 715, Compensation – Retirement Benefits in accounting for our retirement plans, which requires an employer to (i) recognize in its statement of financial
position the funded status of a benefit plan, measured as the difference between the fair value of plan assets and benefit obligations; (ii) recognize, net of tax, the gains or losses and prior service costs or credits that arise during the
period but are not recognized as components of net periodic benefit cost; and (iii) measure defined benefit plan assets and obligations as of the date of the employer’s statement of financial position.

Income Taxes

We account for income taxes under ASC 740. We record the effects of income taxes under the liability method in which deferred income tax assets and liabilities are recognized based on the
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. We assess our 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 we determine that future benefits do not meet the “more likely than not” criteria, a valuation allowance is recorded.

Stock-Based Compensation

We measure stock compensation costs related to our stock options on the fair value-based method under the provisions of ASC 718, Compensation – Stock Compensation, which requires compensation
cost for stock options to be recognized based on the fair value of stock options granted. We determine the fair value of these awards using the Black-Scholes option pricing model.

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We grant performance-based restricted stock units (“PRSU”) subject to both performance-based and service-based vesting conditions. The fair value of each PRSU is our stock price on the date of
grant. For purposes of recognizing compensation expense as services are rendered in accordance with ASC 718, we assume all employees involved in the PRSU grant will provide service through the end of the performance period. Stock compensation
expense is recorded based on the probability of achievement of the performance conditions specified in the PRSU grant.

We grant restricted stock units (“RSU”) subject to service-based vesting conditions. The fair value of each RSU is our stock price on the date of grant. We recognize compensation expense as
services are rendered in accordance with ASC 718. Stock compensation expense is recorded over the service period in the RSU grant.

Accounts Receivable

Accounts receivable are recognized at their net realizable value. All accounts receivable are trade-related and are recorded at the invoiced amount and do not bear interest. We maintain
allowances for doubtful accounts receivable for estimated uncollectible invoices resulting from the customer’s inability to pay, which may result in write-offs. We recorded an allowance for doubtful accounts of $0.3 million and $0.2 million at
December 31, 2021 and 2020, respectively.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost was determined using the first-in, first-out (“FIFO”) method. Leaf tobacco is presented in current assets in accordance
with standard industry practice, notwithstanding the fact that such tobaccos are carried longer than one year for the purpose of curing. We recorded an inventory valuation allowance of $7.7 million and $9.9 million at December 31, 2021 and 2020,
respectively.

Results of Operations

Summary

The table and discussion set forth below relates to our consolidated results of operations for the years ended December 31 (in thousands):

[[GREPCENT_TABLE]]
[["","","For the year ended December 31,"],["","","2021","","","2020","","","% Change","","","2019","","","% Change"],["Consolidated Results of Operations Data:"],["Net sales"],["Zig-Zag products","","$","176,491","","","$","132,812","","","","32.9","%","","$","108,733","","","","22.1","%"],["Stoker\u2019s products","","","124,280","","","","115,866","","","","7.3","%","","","99,894","","","","16.0","%"],["NewGen products","","","144,700","","","","156,433","","","","-7.5","%","","","153,362","","","","2.0","%"],["Total net sales","","","445,471","","","","405,111","","","","10.0","%","","","361,989","","","","11.9","%"],["Cost of sales","","","227,637","","","","215,121","","","","5.8","%","","","224,872","","","","-4.3","%"],["Gross profit"],["Zig-Zag products","","","102,739","","","","78,278","","","","31.2","%","","","59,414","","","","31.8","%"],["Stoker\u2019s products","","","68,084","","","","61,764","","","","10.2","%","","","52,620","","","","17.4","%"],["NewGen products","","","47,011","","","","49,948","","","","-5.9","%","","","25,083","","","","99.1","%"],["Total gross profit","","","217,834","","","","189,990","","","","14.7","%","","","137,117","","","","38.6","%"],["Selling, general, and administrative expenses","","","127,513","","","","125,563","","","","1.6","%","","","109,887","","","","14.3","%"],["Operating income","","","90,321","","","","64,427","","","","40.2","%","","","27,230","","","","136.6","%"],["Interest expense, net","","","20,500","","","","13,487","","","","52.0","%","","","14,435","","","","-6.6","%"],["Investment loss (income)","","","6,673","","","","(198",")","","","-3470.2","%","","","(2,648",")","","","-92.5","%"],["(Gain) loss on extinguishment of debt","","","(2,154",")","","","-","","","NM","","","","1,308","","","","-100.0","%"],["Net periodic benefit cost (income), excluding service cost","","","-","","","","989","","","","-100.0","%","","","(4,961",")","","","-119.9","%"],["Income before income taxes","","","65,302","","","","50,149","","","","30.2","%","","","19,096","","","","162.6","%"],["Income tax expense","","","14,040","","","","11,957","","","","17.4","%","","","2,863","","","","317.6","%"],["Consolidated net income","","","51,262","","","","38,192","","","","34.2","%","","","16,233","","","","135.3","%"],["Net loss attributable to non-controlling interest","","","(797",")","","","-","","","NM","","","","-","","","NM"],["Net income attributable to Turning Point Brands, Inc.","","$","52,059","","","$","38,192","","","","36.3","%","","$","16,233","","","","135.3","%"]]
[[/GREPCENT_TABLE]]

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Comparison of Year Ended December 31, 2021, to Year Ended December 31, 2020

Net Sales. For the year ended December 31, 2021, overall net sales increased to $445.5 million from $405.1
million for the year ended December 31, 2020, an increase of $40.4 million or 10.0%. The increase in net sales was primarily driven by increased sales volume in the Zig-Zag Products segment.

For the year ended December 31, 2021, net sales in the Zig-Zag Products segment increased to $176.5 million from $132.8 million for the year ended December 31, 2020, an increase of $43.7
million or 32.9%. For the year ended December 31, 2021, Zig-Zag Products volumes increased 29.7%, and price/mix increased 3.2%. The increase in net sales was by led by double-digit growth in sales of our MYO cigar wraps and U.S. rolling papers
business. This growth was complemented by our Canadian business which benefited from the consolidation of Turning Point Brands Canada in the current year period.

For the year ended December 31, 2021, net sales in the Stoker’s Products segment increased to $124.3 million from $115.9 million for the year ended December 31, 2020, an increase of $8.4
million or 7.3%. For the year ended December 31, 2021, Stoker’s Products volume increased 1.3% and price/mix increased 6.0%. The increase in net sales was driven by the continuing double-digit growth of Stoker’s® MST offset by low single-digit decline in loose-leaf chewing tobacco. MST represented 63% of Stoker’s Products revenue in 2021, up from 59% a year
earlier.

For the year ended December 31, 2021, net sales in the NewGen products segment decreased to $144.7 million from $156.4 million for the year ended December 31, 2020, a decrease of $11.7 million
or 7.5%. The decrease in net sales was primarily the result of declines in the vape distribution businesses as a result of strong B2C orders during stay-at-home provisions in the prior year as well as the changing regulatory environment.

Gross Profit. For the year ended December 31, 2021, overall gross profit increased to $217.8 million from $190.0 million for the year ended December 31,
2020, an increase of $27.8 million or 14.7%. Gross profit as a percentage of net sales increased to 48.9% for the year ended December 31, 2021, from 46.9% for the year ended December 31, 2020. The increase in gross profit as a percentage of net
sales was driven by increased margin in the Stoker’s Products segment as a result of strong incremental margin contribution of MST.

For the year ended December 31, 2021, gross profit in the Zig-Zag Products segment increased to $102.7 million from $78.3 million for the year ended December 31, 2020, an increase of $24.5
million or 31.2%. Gross profit as a percentage of net sales decreased to 58.2% of net sales for the year ended December 31, 2021, from 58.9% of net sales for the year ended December 31, 2020. The decrease in gross profit as a percentage of net
sales is a result of the consolidation of Turning Point Brands Canada in the current year period which operates at lower margins than our traditional business.

For the year ended December 31, 2021, gross profit in the Stoker’s Products segment increased to $68.1 million from $61.8 million for the year ended December 31, 2020, an increase of $6.3
million or 10.2%. Gross profit as a percentage of net sales increased to 54.8% of net sales for the year ended December 31, 2021, from 53.3% of net sales for the year ended December 31, 2020. The increase in gross profit as a percentage of net
sales is primarily a result of pricing and strong incremental margin contribution of MST.

For the year ended December 31, 2021, gross profit in the NewGen products segment decreased to $47.0 million from $49.9 million for the year ended December 31, 2020, a decrease of $2.9 million
or 5.9%. NewGen gross profit includes $1.1 million of tariff expenses in 2021 compared to $10.1 million in 2020. Gross profit as a percentage of net sales increased to 32.5% of net sales for the year ended December 31, 2021, from 31.9% of net
sales for the year ended December 31, 2020, primarily as a result of increased margins in the vape distribution businesses.

Selling, General and Administrative Expenses. For the year ended December 31, 2021, selling, general and
administrative expenses increased to $127.5 million from $125.6 million for the year ended December 31, 2020, an increase of $2.0 million or 1.6%. Selling, general, and administrative expenses for the year ended December 31, 2021, included $7.6
million of stock options, restricted stock and incentives expense, $1.3 million of transaction expenses, $0.8 million of restructuring expenses and $2.6 million of expense related to PMTA. Selling, general, and administrative expenses for the
year ended December 31, 2020, included $2.6 million of stock options, restricted stock and incentives expense, $3.1 million of transaction expenses, $0.5 million of restructuring expenses and $14.4 million of expense related to PMTA. The increase
in selling, general and administrative expenses is a result of variable costs in our online business as well as increased shipping costs from PACT Act implementation for vape products and higher freight rates across all segments combined with the
impact of the consolidation of Turning Point Brands Canada in the current year period.

Interest Expense, net. For the year ended December 31, 2021, interest expense, on a net basis, increased to $20.5 million from $13.5 million for the year
ended December 31, 2020, primarily as a result the issuance of the Senior Secured Notes and related refinancing of the 2018 First Lien Credit Facility which increased the Company’s outstanding debt.

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Investment Loss (Income). For the year ended December 31, 2021, investment loss increased to $6.7 million
compared to $0.2 million of investment income for the year ended December 31, 2020, primarily as a result of $7.1 million impairment of our investment in dosist. See Note 11 Other Assets in the Consolidated Financial Statements for additional
information on the dosist investment.

(Gain) Loss on Extinguishment of Debt. For the year ended December 31, 2021, gain on extinguishment of debt was $2.2 million as a result of forgiveness
of the unsecured loan issued to us under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) partially offset by the repayment of the 2018 First Lien Credit Facility. For the year ended December 31, 2020, there was no
loss on extinguishment of debt.

Net Periodic Benefit Cost (Income), excluding service cost. For the year ended December 31, 2021, there was no net periodic benefit cost or income. For
the year ended December 31, 2020, net periodic cost was $0.9 million primarily as a result of the curtailment from the shutdown of the pension plan.

Income Tax Expense. The Company’s income tax expense was $14.0 million, or 21.5% of income before income taxes, for the year ended December 31, 2021, and
included discrete tax deductions of $7.5 million related to the forgiveness of the $7.5 million unsecured loan and $7.2 million relating to stock option exercises during the year. The Company’s income tax expense was $12.0 million, or 23.8% of
income before income taxes, for the year ended December 31, 2020, and included a discrete tax deduction of $3.3 million relating to stock option exercises during the year and a discrete tax benefit of $0.6 million from the shutdown of the pension
plan.

Net Loss Attributable to Non-Controlling Interest. Net loss attributable to non-controlling interest was $0.8 million for the year ended December 31,
2021, compared to $0.0 million for the year ended December 31, 2020.

Net Income Attributable to Turning Point Brands, Inc. Due to the factors described above, net income
attributable to Turning Point Brands, Inc. for the years ended December 31, 2021 and 2020, was $52.1 million and $38.2 million, respectively.

Comparison of Year Ended December 31, 2020, to Year Ended December 31, 2019

Net Sales. For the year ended December 31, 2020, overall net sales increased to $405.1 million from $362.0
million for the year ended December 31, 2019, an increase of $43.1 million or 11.9%. The increase in net sales was primarily driven by increased sales volume across all segments.

For the year ended December 31, 2020, net sales in the Zig-Zag Products segment increased to $132.8 million from $108.7 million for the year ended December 31, 2019, an increase of $24.1
million or 22.1%. For the year ended December 31, 2020, Zig-Zag Products volumes increased 19.7%, and price/mix increased 2.4%. The increase in net sales was primarily related to double digit growth in US papers and wraps, partially offset by a
$1.8 million decline in non-focus cigars and MYO pipe.

For the year ended December 31, 2020, net sales in the Stoker’s Products segment increased to $115.9 million from $99.9 million for the year ended December 31, 2019, an increase of $16.0
million or 16.0%. For the year ended December 31, 2020, Stoker’s Products volume increased 12.0% and price/mix increased 4.0%. The increase in net sales was primarily driven by the continuing double-digit volume growth of Stoker’s® MST. Sales in chewing tobacco products were up mid-single digits as compared to prior year. MST
represented 59% of Stoker’s Products revenue in 2020, up from 54% a year earlier.

For the year ended December 31, 2020, net sales in the NewGen products segment increased to $156.4 million from $153.4 million for the year ended December 31, 2019, an increase of $3.1 million
or 2.0%. The increase in net sales was primarily the result of growth in both the Nu-X and vape distribution businesses.

Gross Profit. For the year ended December 31, 2020, overall gross profit increased to $190.0 million from $137.1 million for the year ended December 31,
2019, an increase of $52.9 million or 38.6%, due to growth across all segments and $24.2 million of costs in 2019 that did not recur primarily related to inventory reserves. Consolidated gross profit for the year ended December 31, 2019, included
$1.2 million of introductory launch costs and $23.0 million of restructuring costs primarily inventory reserves. Gross profit as a percentage of net sales increased to 46.9% for the year ended December 31, 2020, from 37.9% for the year ended
December 31, 2019.

For the year ended December 31, 2020, gross profit in the Zig-Zag Products segment increased to $78.3 million from $59.4 million for the year ended December 31, 2019, an increase of $18.9
million or 31.8%. Gross profit as a percentage of net sales increased to 58.9% of net sales for the year ended December 31, 2020, from 54.6% of net sales for the year ended December 31, 2019. The increase in gross profit as a percentage of net
sales is a result of increased US paper sales and increased margin in MYO cigar sales as a result of the Durfort transaction.

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For the year ended December 31, 2020, gross profit in the Stoker’s Products segment increased to $61.8 million from $52.6 million for the year ended December 31, 2019, an increase of $9.1
million or 17.4%. Gross profit as a percentage of net sales increased to 53.3% of net sales for the year ended December 31, 2020, from 52.7% of net sales for the year ended December 31, 2019. The increase in gross profit as a percentage of net
sales is primarily a result of strong incremental margin contribution of MST.

For the year ended December 31, 2020, gross profit in the NewGen products segment increased to $49.9 million from $25.1 million for the year ended December 31, 2019, an increase of $24.9
million or 99.1%. NewGen gross profit for the year ended December 31, 2019, included $1.2 million of introductory launch costs and $23.2 million of restructuring expenses that did not recur in 2020. Additionally, the gross profit includes $10.1
million of tariff expenses in 2020 compared to $9.3 million in 2019. Gross profit as a percentage of net sales increased to 31.9% of net sales for the year ended December 31, 2020, from 16.4% of net sales for the year ended December 31, 2019,
primarily due to the impact of the $23.2 million of related write-offs and reserves in 2019 associated with the vape distribution business.

Selling, General and Administrative Expenses. For the year ended December 31, 2020, selling, general and
administrative expenses increased to $125.6 million from $109.9 million for the year ended December 31, 2019, an increase of $15.7 million or 14.3%. Selling, general, and administrative expenses for the year ended December 31, 2020, included $2.6
million of stock options, restricted stock and incentives expense, $3.1 million of transaction expenses, $0.5 million of restructuring expenses and $14.4 million of expense related to PMTA. Selling, general, and administrative expenses for the
year ended December 31, 2019, included $1.8 million of transaction costs (primarily relating to Solace and Turning Point Brands Canada as well as earnout expense for IVG), $5.0 million of introductory launch costs, $3.2 million of restructuring
expenses, and $2.2 million in PMTA expenses.

Interest Expense, net. For the year ended December 31, 2020, interest expense, on a net basis, decreased to $13.5
million from $14.4 million for the year ended December 31, 2019, primarily as a result of a decrease in interest expense on our 2018 First Lien Term Loan as result of lower interest rates partially offset by increased interest expense
from our Convertible Senior Notes.

Investment Income. For the year ended December 31, 2020, investment income decreased to $0.2 million from $2.6
million for the year ended December 31, 2019, primarily due to the impact of the $2.0 million gain on the CASH investment as a result of marking the investment to fair value in 2019. See Note 11 Other Assets in the Consolidated Financial
Statements for additional information on the CASH investment.

Loss on Extinguishment of Debt. For the year ended December 31, 2020, there was no loss on extinguishment of debt. For the year ended December 31, 2019,
loss on extinguishment of debt was $1.3 million as the result of paying off the 2018 Second Lien Credit Facility.

Net Periodic Benefit Cost (Income), excluding service cost. For the year ended December 31, 2020, net periodic cost was $0.9 million primarily as a
result of the curtailment from the shutdown of the pension plan. For the year ended December 31, 2019, net periodic income was $5.0 million primarily due to the gain on the termination of the postretirement plan.

Income Tax Expense. The Company’s income tax expense was $12.0 million, or 23.8% of income before income taxes, for the year ended December 31, 2020, and
included a discrete tax deduction of $3.3 million relating to stock option exercises during the year and a discrete tax benefit of $0.6 million from the shutdown of the pension plan. The Company’s income tax expense of $2.9 million, or 15.0% of
income before income taxes, for the year ended December 31, 2019, was lower than the expected annual effective tax rate as a result of discrete tax benefits of $4.6 million from the exercise of stock options during the year.

Net Income Attributable to Turning Point Brands, Inc . Due to the factors described above, net income for the
year ended December 31, 2020 and 2019, was $38.2 million and $16.2 million, respectively.

EBITDA and Adjusted EBITDA

To supplement our financial information presented in accordance with U.S. GAAP, we use non-U.S. GAAP financial measures including EBITDA and Adjusted EBITDA. We believe Adjusted 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, loss on extinguishment of debt, provision for income taxes, depreciation, and amortization. We define “Adjusted EBITDA” as net income before interest
expense, loss (gain) on extinguishment of debt, provision for income taxes, depreciation, amortization, other non-cash items, and other items we do not consider ordinary course in our evaluation of ongoing operating performance.

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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 table below provide a reconciliation between net income, EBITDA and Adjusted EBITDA.

[[GREPCENT_TABLE]]
[["(in thousands)","","Years ended December 31,"],["","","2021","","","2020","","","2019"],["Consolidated net income","","$","52,059","","","$","38,192","","","$","16,233"],["Add:"],["Interest expense, net","","","20,500","","","","13,487","","","","14,435"],["(Gain) loss on extinguishment of debt","","","(2,154",")","","","-","","","","1,308"],["Income tax expense","","","14,040","","","","11,957","","","","2,863"],["Depreciation expense","","","3,105","","","","3,237","","","","2,638"],["Amortization expense","","","1,907","","","","1,781","","","","1,451"],["EBITDA","","$","89,457","","","$","68,654","","","$","38,928"],["Components of Adjusted EBITDA"],["Other (a)","","","-","","","","988","","","","(11",")"],["Stock options, restricted stock, and incentives expense (b)","","","7,557","","","","2,555","","","","4,626"],["Transactional expenses and strategic initiatives (c)","","","1,267","","","","3,087","","","","1,764"],["New product launch costs (d)","","","-","","","","-","","","","6,185"],["FDA PMTA (e)","","","1,668","","","","14,435","","","","2,153"],["Corporate and vapor restructuring (f)","","","1,026","","","","517","","","","19,214"],["Non-cash asset impairment (g)","","","7,100","","","","-","","","","-"],["Vendor settlement (h)","","","-","","","","-","","","","(5,522",")"],["Adjusted EBITDA","","$","108,075","","","$","90,236","","","$","67,337"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(a)","Represents non-cash pension expense (income) and foreign exchange hedging."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(b)","Represents non-cash stock options, restricted stock, incentives expense and Solace performance stock units."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(c)","Represents the fees incurred for transaction expenses and strategic initiatives."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(d)","Represents product launch costs for our new product lines."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(e)","Represents costs associated with applications related to FDA premarket tobacco product application (\u201cPMTA\u201d)."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(f)","Costs during the year ended December 31, 2021, represent the write-down and disposal cost of discontinued vape inventory and cost of retail store lease termination. Costs during the year ended December 31, 2020, represent the costs from the retirement of a senior executive. Costs during the year ended December 31, 2019, represent the costs associated with corporate and vapor restructuring including severance and inventory reserves"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(g)","Represents impairment of investment in dosist."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["(h)","Represents net gain associated with the settlement of a vendor contract."]]
[[/GREPCENT_TABLE]]

Liquidity and Capital Resources

Our principal uses for cash are working capital, debt service, and capital expenditures. We believe our cash flows from operations and borrowing availability under our New Revolving Credit
Facility are adequate to satisfy our operating cash requirements for the foreseeable future.

Our working capital, which we define as current assets less cash and current liabilities, increased $15.5 million to $80.5 million at December 31, 2021, compared with $65.0 million at December
31, 2020. The increase in working capital is primarily due to decrease in the current portion of long-term debt as a result of paying off the 2018 Second Lien Credit Facility and the Promissory Note issued to the sellers in connection with the
Durfort acquisition.

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[[GREPCENT_TABLE]]
[["","","As of"],["(in thousands)","","December 31, 2021","","","December 31, 2020"],["Current assets","","$","120,849","","","$","121,638"],["Current liabilities","","","40,336","","","","56,629"],["Working capital","","$","80,513","","","$","65,009"]]
[[/GREPCENT_TABLE]]

During the year ended December 31, 2021 and 2020, we invested $6.2 million and $6.1 million, respectively, in capital expenditures. We had unrestricted cash on hand of $128.3 million and $41.8
million as of December 31, 2021 and 2020, respectively. The significant increase in cash on hand is primarily the result of the proceeds from the Senior Secured Note issuance. We had restricted assets of $34.7 million and $35.1 million as of
December 31, 2021 and 2020, respectively. Restricted assets consist of escrow deposits under the MSA and insurance deposits. On the 25th anniversary of each annual
deposit, 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 Operating Activities

For the year ended December 31, 2021, net cash provided by operating activities increased to $68.2 million from $43.7 million for the year ended December 31, 2020, an increase of $24.5 million
or 56%, primarily due to higher net income due to increased sales combined with the timing of changes in working capital.

For the year ended December 31, 2020, net cash provided by operating activities increased to $43.7 million from $37.8 million for the year ended December 31, 2019, an increase of $5.9 million
or 16%, primarily due to higher net income due to increased sales offset by the timing of changes in working capital.

Cash Flows from Investing Activities

For the year ended December 31, 2021, net cash used in investing activities decreased to $58.8 million from $64.8 million for the year ended December 31, 2020, a decrease of $6.0 million or 9%,
primarily due to the decrease in acquisitions partially offset by the purchase of investments in our MSA escrow account which reflects the change in restricted cash.

For the year ended December 31, 2020, net cash used in investing activities was $64.8 million compared to net cash provided by investing activities of $15.9 million for the year ended December
31, 2019, a decrease of $80.7 million or 508%, primarily due to increases in cash paid for acquisitions and investments in 2020.

Cash Flows from Financing Activities

For the year ended December 31, 2021, net cash provided by financing activities was $57.1 million compared to net cash used in financing activities $29.3 million for the year ended December 31,
2020, an increase of $86.4 million or 295%, primarily due to the net proceeds from the Senior Secured Notes partially offset by the repayment in full of the 2018 First Lien Term Loan in the first quarter of 2021 with the proceeds of the Senior
Secured Notes and the repurchase of $38.7 million of common stock during 2021.

For the year ended December 31, 2020, net cash used in financing activities was to $29.3 million compared to net cash provided by financing activities $68.0 million for the year ended December
31, 2019, a decrease of $97.3 million or 143%, primarily due to lapping the net proceeds from the issuance of the Convertible Senior Notes and the payment of the revolving credit facility and second lien term loan in 2019.

Long-Term Debt

Notes payable and long-term debt consisted of the following at December 31, 2021 and 2020, in order of preference:

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[[GREPCENT_TABLE]]
[["","","December 31, 2021","","","December 31, 2020"],["Senior Secured Notes","","$","250,000","","","$","-"],["2018 First Lien Term Loan","","","-","","","","130,000"],["Convertible Senior Notes","","","172,500","","","","172,500"],["Note payable - Promissory Note","","","-","","","","10,000"],["Note payable - Unsecured Loan","","","-","","","","7,485"],["Gross notes payable and long-term debt","","","422,500","","","","319,985"],["Less deferred finance charges","","","(8,328",")","","","(5,873",")"],["Less current maturities","","","-","","","","(12,000",")"],["Net notes payable and long-term debt","","$","414,172","","","$","302,112"]]
[[/GREPCENT_TABLE]]

As noted above under “—Recent Developments—Senior Secured Notes and New Revolving Credit Facility,” on February 11, 2021, the Company completed a comprehensive refinancing
transaction pursuant to which the Company issued $250 million of its Senior Secured Notes entered into the New Revolving Credit Facility. The proceeds from the Offering of the Senior Secured Notes were used to (i) repay all obligations
under and terminate the 2018 First Lien Term Loan and 2018 First Lien Revolver, (ii) pay related fees, costs, and expenses and (iii) for general corporate purposes.

Senior Secured Notes

On February 11, 2021, we closed a private offering (the “Offering”) of $250 million aggregate principal amount of our 5.625% senior secured notes due 2026 (the “Senior Secured Notes”). The
Senior Secured Notes bear interest at a rate of 5.625% and will mature on February 15, 2026. Interest on the Senior Secured Notes is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on August 15, 2021.We used
the proceeds from the Offering (i) to repay all obligations under and terminate the 2018 First Lien Credit Facility, (ii) to pay related fees, costs, and expenses and (iii) for general corporate purposes.

Obligations under the Senior Secured Notes are guaranteed by the Company’s existing and future wholly-owned domestic subsidiaries (the “Guarantors”) that guarantee any Credit Facility (as
defined in the Indenture governing the Senior Secured Notes or the “Senior Secured Notes Indenture”), including the 2021 Revolving Credit Facility, or capital markets debt securities of the Company or Guarantors in excess of $15.0 million. The
Senior Secured Notes and the related guarantees are secured by first-priority liens on substantially all of the assets of the Company and the Guarantors, subject to certain exceptions.

We may redeem the Senior Secured Notes, in whole or in part, at any time prior to February 15, 2023, at a price equal to 100% of the principal amount of the Notes redeemed plus accrued and
unpaid interest, if any, to, but excluding the applicable redemption date, plus a “make-whole” premium. Thereafter, we may redeem the Senior Secured Notes, in whole or in part, at established redemption prices set forth in the Senior Secured
Notes Indenture, plus accrued and unpaid interest, if any. In addition, on or prior to February 15, 2023, we may redeem up to 40% of the aggregate principal amount of the Senior Secured Notes with the net cash proceeds from certain equity
offerings at a redemption price equal to 105.625%, plus accrued and unpaid interest, if any to the redemption date; provided, however, that at least 50% of the original aggregate principal amount of the
Senior Secured Notes (calculated after giving effect to the issuance of any additional notes) remains outstanding. In addition, at any time and from time to time prior to February 15, 2023, but not more than once in any twelve-month period, we
may redeem up to 10% of the aggregate principal amount of the Senior Secured Notes at a redemption price of 103% of the aggregate principal amount of Senior Secured Notes redeemed plus accrued and unpaid interest, if any to but not including
the redemption date, on the Senior Secured Notes to be redeemed.

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

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

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

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2021 Revolving Credit Facility

In connection with the Offering, we also entered into a new $25 million senior secured revolving credit facility (the “2021 Revolving Credit Facility”) with the lenders party
thereto (the “Lenders”) and Barclays Bank PLC, as administrative agent and collateral agent (in such capacity, the “Agent”). The 2021 Revolving Credit Facility provides for a revolving line of credit of up to $25.0 million. Letters of credit
are limited to $10 million (and are a part of, and not in addition to, the revolving line of credit). We have not drawn any borrowings under the 2021 Revolving Credit Facility but do have letters of credit of approximately $3.6 million
outstanding under the facility. The 2021 Revolving Credit Facility will mature on August 11, 2025 if none of our Convertible Senior Notes are outstanding, and if any Convertible Senior Notes are outstanding, the date which is 91 days prior to
the maturity date of July 15, 2024 for such Convertible Senior Notes.

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

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

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

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

The 2021 Revolving Credit Agreement provides for customary events of default.

2018 Credit Facility

In the first quarter of 2021, we used a portion of the proceeds from the issuance of the Senior Secured Notes to prepay all outstanding amounts under and terminate the 2018 First Lien
Credit Facility in the amount of $130.0 million, and the transaction resulted in a $5.7 million loss on extinguishment of debt, which includes a $3.6 million loss from the early termination of the interest rate swap agreement. See Note 13, “Notes Payable and Long-Term Debt,” in the Notes to Consolidated Financial Statements included in this Annual Report for further discussion.

Convertible Senior Notes

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

The Convertible Senior Notes are convertible into approximately 3,208,172 shares of our voting common stock under certain circumstances prior to maturity at a conversion rate of 18.598 shares
per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.77 per share, subject to adjustment under certain conditions, but will not be adjusted for any accrued and unpaid interest. Upon
conversion, we may pay cash, shares of our common stock or a combination of cash and stock, as determined by us at our discretion. The conditions required to allow the holders to convert their Convertible Senior Notes were not met as of December
31, 2021.

The indenture covering the Convertible Senior Notes contains customary events of default.

We early adopted ASU 2020-06 effective January 1, 2021, on a retrospective basis to all periods presented. Under ASU 2020-06, the Company accounts for the Convertible Senior Notes entirely as a
liability and will no longer separately account for the Convertible Senior Notes with liability and equity components. See Note 2, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements included in this
Annual Report for further discussion of the impact of the adoption of ASU 2020-06.

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

In connection with the Convertible Senior Notes offering, we entered into privately negotiated capped call transactions with certain financial institutions. The capped call transactions have a
strike price of $53.77 per and a cap price of $82.86 per, and are exercisable when, and if, the Convertible Senior Notes are converted. We paid $20.53 million for these capped calls and charged that amount to additional paid-in capital.

Promissory Note

On June 10, 2020, in connection with the acquisition of certain Durfort assets, we issued an unsecured subordinated promissory note (“Promissory Note”) in the principal amount of
$10.0 million (the “Principal Amount”), with an annual interest rate of 7.5%, payable quarterly, with the first payment due September 10, 2020. The Principal Amount was payable in two $5.0 million installments, with the first installment due 18
months after the closing date of the acquisition (June 10, 2020), and the second installment due 36 months after the closing date of the acquisition. The second installment was subject to reduction for certain amounts payable to us as a
holdback. We prepaid all outstanding amounts under and terminated the Promissory Note in the third quarter of 2021 in the amount of $9.6 million. The transaction resulted in a $0.4 million gain on extinguishment of debt.

Unsecured Loan

On April 17, 2020, National Tobacco Company, L.P., a wholly-owned subsidiary of the Company, entered into a loan agreement with Regions Bank guaranteed by the Small Business
Administration for a $7.5 million unsecured loan issued pursuant to the CARES Act. The proceeds of the loan were received on April 27, 2020. The loan was scheduled to mature on April 17, 2022 and had a 1.00% interest rate. Under the CARES Act
we were permitted to apply for forgiveness of the loan if the proceeds were used as required for certain purposes. During 2021, we applied for forgiveness for the loan. On October 15, 2021, we received notice that our application for
forgiveness was fully approved. The extinguishment of the unsecured loan occurred in the fourth quarter of 2021 resulting in a $7.5 million gain on extinguishment of debt. We are subject to audit relating to the unsecured loan until 2027 which could result in repayment of some or all of the unsecured loan previously forgiven. However, we believe that
repayment of any amount is not probable.

Distribution Agreements

For a description of our material distribution agreements, see “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. Thus, 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. Each year’s deposit will be released
from escrow after 25 years. We are scheduled to begin receiving payments as our escrow deposits are released from escrow beginning in 2024.

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The following table summarizes our escrow deposit balances (in thousands) by sales year as of:

[[GREPCENT_TABLE]]
[["Sales","","Deposits as of December 31,"],["Year","","2021","","","2020"],["1999","","$","211","","","$","211"],["2000","","","1,017","","","","1,017"],["2001","","","1,673","","","","1,673"],["2002","","","2,271","","","","2,271"],["2003","","","4,249","","","","4,249"],["2004","","","3,714","","","","3,714"],["2005","","","4,553","","","","4,553"],["2006","","","3,847","","","","3,847"],["2007","","","4,167","","","","4,167"],["2008","","","3,364","","","","3,364"],["2009","","","1,619","","","","1,619"],["2010","","","406","","","","406"],["2011","","","193","","","","193"],["2012","","","199","","","","199"],["2013","","","173","","","","173"],["2014","","","143","","","","143"],["2015","","","101","","","","101"],["2016","","","91","","","","91"],["2017","","","82","","","","83"],["Total","","$","32,073","","","$","32,074"]]
[[/GREPCENT_TABLE]]

Off-balance Sheet Arrangements

During 2021, we did not execute any forward contracts. We had no forward contracts at December 31, 2021. During 2020, we executed various forward contracts for the purchase
of €19.7 million and sale of €21.4 million with maturity dates ranging from December 2020 to November 2021. At December 31, 2020, we had forward contracts for the purchase of €18.0 million and sale of €19.6 million. The fair value of the foreign
currency contracts were based on quoted market prices and resulted in an asset of $0.4 million included in Other current assets and liability of $0.0 million included in Accrued liabilities at December 31, 2020. We had no interest rate swap contracts at December 31, 2021. We had interest rate swap contracts for a total notional amount of $70 million at December 31, 2020. The fair values of the interest rate swap contracts were based upon quoted
market prices and resulted in a liability of $3.7 million as of December 31, 2020, included in other long-term liabilities.

Future Cash 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 13, “Notes Payable and Long-Term Debt” in the 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 16, “Lease Commitments” in the Notes to the Consolidated Financial Statements in Part
II, Item 8 of this Annual Report on Form 10-K.

In 2021, we increased our share repurchase authorization by an additional $30.7 million during the fourth quarter and spent $18.2 million to repurchase 477,707 shares at an average price of $38.09 per share.
Subsequent to the quarter end, the Company spent $6.6 million to repurchase 178,196 shares at an average price of $37.08 per share.

Inflation

We believe that any effect of inflation at current levels will be minimal. Historically, we have been able to increase prices at a rate equal to or greater than that of inflation and believe
that we will continue to be able to do so for the foreseeable future. In addition, we have been able to maintain a relatively stable variable cost structure for our products due, in part, to our successful procurement with regard to our tobacco
products and, in part, to our existing contractual agreement for the purchase of our premium cigarette papers.

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