# Turning Point Brands, Inc. (TPB) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Turning Point Brands, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1290677/000114036123011882/brhc10049632_10k.htm
Accession: 0001140361-23-011882
Filing date: 2023-03-15
Report date: 2022-12-31
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/
Previous year: /company/TPB/mda/fy2021/ (FY 2021)
Next year: /company/TPB/mda/fy2023/ (FY 2023)

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 “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 adult 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 satisfy 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 2022 as reported by Management Science Associates, Inc. (“MSAi”), a
third-party analytics and information company. Our three focus segments are led by our iconic, proprietary brands: Zig-Zag® and CLIPPER® in the Zig-Zag Products segment; Stoker’s® along with Beech-Nut® and Trophy® in the Stoker’s Products segment; and our distribution platforms (Vapor Beast®, VaporFi® and Direct Vapor®) in the NewGen segment. Our businesses generate solid cash flow which we use to re-invest in our business,
finance acquisitions, increase brand support, expand our distribution infrastructure, and strengthen our capital position. We currently ship to approximately 850 distributors with an additional 300 secondary, indirect wholesalers in the U.S. that
carry and sell our products. Under the leadership of a senior management team with extensive experience in the consumer products, alternative smoking accessories and tobacco industries, we have grown and diversified our business through new product
launches, category expansions, and acquisitions while concurrently improving operational efficiency.

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

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; (ii)
finished cigars and make-your-own (“MYO”) cigar wraps and (iii) lighters and other accessories. In addition, we have a majority stake in Turning Point Brands Canada which markets and distributes cannabis
accessories and tobacco products throughout Canada. In our Stoker’s Products segment, we (i) manufacture and market moist snuff tobacco (“MST”) and (ii) contract for and market loose-leaf chewing tobacco products. In our NewGen Products segment, we
(i) market and distribute vapor products and certain other products without tobacco and/or nicotine; (ii) distribute a wide assortment of products to non-traditional retail via Vapor Beast; and (iii) market and distribute a wide assortment of
products to individual consumers via the VaporFi and Direct Vapor B2C online platforms.

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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 within measured distribution channels:

[[GREPCENT_TABLE]]
[["Brand","","Product","","TPB Segment","","Market Share(1)","","Category Rank(1)"],["Zig-Zag\u00ae","","Cigarette Papers","","Zig-Zag Products","","35.0%","","#1 premium, #1 overall"],["Zig-Zag\u00ae","","MYO Cigar Wraps","","Zig-Zag Products","","59.2%","","#1 overall"],["Stoker\u2019s\u00ae","","Moist Snuff","","Stoker\u2019s Products","","6.3%","","#3 discount, #6 overall"],["Stoker\u2019s\u00ae","","Chewing Tobacco","","Stoker\u2019s Products","","28.0%","","#1 discount, #1 overall"]]
[[/GREPCENT_TABLE]]

(1)  Market share and category rank data for all products are derived from MSAi data 2022 53 weeks ended 12/31/22.

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 Vapor Beast 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. 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 79% 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","Labor and production costs;"]]
[[/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 FDA regulations;"]]
[[/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]]

Recent Developments

Creative Distribution Solutions

On December 21, 2022, we executed an internal reorganization whereby the NewGen entities were structurally separated from the remainder of the Company’s entities to clearly delineate the contribution
of the vaping business.  Upon execution of the reorganization, the NewGen business sits under a newly-formed wholly-owned subsidiary, South Beach Holdings LLC d/b/a Creative Distribution Solutions (“CDS”). CDS specializes in the distribution of
vapor and related products to B2B and B2C customers throughout the U.S. CDS is overseen by an independent board and a dedicated management team that differs from the Company’s management. Although the NewGen business will operate independently,
it’s leadership and independent board will continue to report to the Company’s Board. As part of the reorganization, the Company de-designated the NewGen entities as parties to its debt facilities, meaning the NewGen entities are no longer
guarantors of the Company’s debt or subject to the covenants in the Company’s debt facilities. The Company believes that the separation of the NewGen Entities from the Company’s Zig-Zag and Stoker’s segments will provide the NewGen Entities the
flexibility to navigate the current regulatory environment, adapt to future marketplace changes, and pursue further value maximizing opportunities.

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Leadership Transition

In October 2022, Graham A. Purdy, the Company’s former Chief Operating Officer, was appointed as President and Chief Executive Officer of the Company and as a member of the Board upon the resignation
of Yavor Efremov as the Company’s president and CEO and a member of the Board of Directors.

In connection with Mr. Purdy’s appointment and Mr. Efremov’s departure, David Glazek, current non-executive Chair of the Board, transitioned to the role of Executive Chair effective January 2023.  Mr.
Purdy will be the Company’s principal executive officer.  The Company appointed Ashley Davis as lead independent director at the time Mr. Glazek became the Company’s Executive Chair.

Non-Tobacco Nicotine Included Under Jurisdiction of FDA’s Center for Tobacco Products

New legislation enacted on March 15, 2022, provides authority for the FDA to regulate NTN Products. This law took effect April 14, 2022 and requires NTN Products to comply with applicable requirements
under the Federal Food, Drug, and Cosmetic Act, such as not selling to persons under 21 years of age, not marketing these products as modified risk tobacco products without FDA’s authorization, and not distributing free samples. Additionally,
companies with NTN Products in the market between March 15, 2022, and April 14, 2022, were required to file a premarket tobacco application by May 14, 2022. 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. We submitted premarket filings for certain of our NTN Products prior to the
May 14, 2022, deadline. While these applications remain under review, we will continue to supplement these filings with additional information to support a finding that the marketing of these products is “appropriate for the protection of public
health.”

Critical Accounting Policies and Uses of 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 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 20, “Segment Information” of our Notes to the Consolidated Financial Statements in Part II, Item
8 of the Annual Report on Form 10-K. An additional disaggregation of contract revenue by sales channel can be found within Note 20 as well.

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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 100% 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. 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. 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.

Goodwill and Other Intangible Assets

We follow 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, in accordance with ASC 350-20-35 and ASC 350-30-35, respectively.

When testing goodwill for impairment, we have 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 we choose 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. We determine 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, we select peer sets based on close competitors and review the revenue and EBITDA multiples to determine the fair value.
See Note 10, “Goodwill and Other Intangible Assets” ” of our Notes to the Consolidated Financial Statements in Part II, Item 8 of the Annual Report on Form 10-K 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. See Note 10, “Goodwill and Other Intangible Assets” of
our Notes to the Consolidated Financial Statements in Part II, Item 8 of the Annual Report on Form 10-K for further information on intangible assets.

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

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]]

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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 using 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.

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 $0.1 million and $0.3 million at December 31, 2022
and 2021, respectively.

Inventories

Inventories are stated at the lower of cost or net realizable value. Cost is 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 $4.5 million and $7.7 million at December 31, 2022 and 2021,
respectively.

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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,"],["","","2022","","","2021","","","% Change","","","2020","","","% Change"],["Consolidated Results of Operations Data:"],["Net sales"],["Zig-Zag products","","$","190,403","","","$","176,491","","","","7.9","%","","$","132,812","","","","32.9","%"],["Stoker\u2019s products","","","130,826","","","","124,280","","","","5.3","%","","","115,866","","","","7.3","%"],["NewGen products","","","93,784","","","","144,700","","","","-35.2","%","","","156,433","","","","-7.5","%"],["Total net sales","","","415,013","","","","445,471","","","","-6.8","%","","","405,111","","","","10.0","%"],["Cost of sales","","","209,475","","","","227,637","","","","-8.0","%","","","215,121","","","","5.8","%"],["Gross profit"],["Zig-Zag products","","","106,576","","","","102,739","","","","3.7","%","","","78,278","","","","31.2","%"],["Stoker\u2019s products","","","71,254","","","","68,084","","","","4.7","%","","","61,764","","","","10.2","%"],["NewGen products","","","27,708","","","","47,011","","","","-41.1","%","","","49,948","","","","-5.9","%"],["Total gross profit","","","205,538","","","","217,834","","","","-5.6","%","","","189,990","","","","14.7","%"],["Selling, general, and administrative expenses","","","130,024","","","","127,513","","","","2.0","%","","","125,563","","","","1.6","%"],["Operating income","","","75,514","","","","90,321","","","","-16.4","%","","","64,427","","","","40.2","%"],["Interest expense, net","","","19,524","","","","20,500","","","","-4.8","%","","","13,487","","","","52.0","%"],["Investment loss (gain)","","","13,303","","","","6,673","","","","99.4","%","","","(198",")","","","-3470.2","%"],["Goodwill and intangible impairment loss","","","27,566","","","","-","","","NM","","","","-","","","NM"],["Gain on extinguishment of debt","","","(885",")","","","(2,154",")","","","-58.9","%","","","-","","","NM"],["Net periodic benefit cost, excluding service cost","","","-","","","","-","","","NM","","","","989","","","","-100.0","%"],["Income before income taxes","","","16,006","","","","65,302","","","","-75.5","%","","","50,149","","","","30.2","%"],["Income tax expense","","","4,849","","","","14,040","","","","-65.5","%","","","11,957","","","","17.4","%"],["Consolidated net income","","","11,157","","","","51,262","","","","-78.2","%","","","38,192","","","","34.2","%"],["Net loss attributable to non-controlling interest","","","(484",")","","","(797",")","","","-39.3","%","","","-","","","NM"],["Net income attributable to Turning Point Brands, Inc.","","$","11,641","","","$","52,059","","","","-77.6","%","","$","38,192","","","","36.3","%"]]
[[/GREPCENT_TABLE]]

Comparison of Year Ended December 31, 2022, to Year Ended December 31, 2021

Net Sales. For the year ended December 31, 2022, overall net sales decreased to $415.0 million from $445.5 million for
the year ended December 31, 2021, a decrease of $30.5 million or 6.8%. The decrease in net sales was primarily driven by decreased sales volume in the NewGen segment.

For the year ended December 31, 2022, net sales in the Zig-Zag Products segment increased to $190.4 million from $176.5 million for the year ended December 31, 2021, an increase of $13.9 million or
7.9%. For the year ended December 31, 2022, Zig-Zag Products volumes increased 6.4%, and price/mix increased 1.5%. The increase in net sales was by led by double-digit growth in sales of U.S. rolling papers and e-commerce, other smoking
accessories, and Canadian businesses partially offset by a double-digit decline in the wraps business.

For the year ended December 31, 2022, net sales in the Stoker’s Products segment increased to $130.8 million from $124.3 million for the year ended December 31, 2021, an increase of $6.5 million or
5.3%. For the year ended December 31, 2022, Stoker’s Products volume decreased 2.6% and price/mix increased 7.9%. The increase in net sales was driven by the continuing double-digit growth of Stoker’s® MST offset by high single-digit decline in loose-leaf chewing tobacco. MST represented 66% of Stoker’s Products revenue in 2022, up from 63% a year
earlier.

For the year ended December 31, 2022, net sales in the NewGen products segment decreased to $93.8 million from $144.7 million for the year ended December 31, 2021, a decrease of $50.9 million or
35.2%. The decrease in net sales was primarily the result of declines in the vape distribution businesses as a result of the changing regulatory environment.

Gross Profit. For the year ended December 31, 2022, overall gross profit decreased to $205.5 million from $217.8 million for the year ended December 31, 2021, a
decrease of $12.3 million or 5.6%. Gross profit as a percentage of net sales increased to 49.5% for the year ended December 31, 2022, from 48.9% for the year ended December 31, 2021. The increase in gross profit as a percentage of net sales was
driven by product mix.

For the year ended December 31, 2022, gross profit in the Zig-Zag Products segment increased to $106.6 million from $102.7 million for the year ended December 31, 2021, an increase of $3.8 million or
3.7%. Gross profit as a percentage of net sales decreased to 56.0% of net sales for the year ended December 31, 2022, from 58.2% of net sales for the year ended December 31, 2021. The decrease in gross profit as a percentage of net sales is a
result of product mix including the launch of our CLIPPER lighters business which operates at lower gross profit margins.

For the year ended December 31, 2022, gross profit in the Stoker’s Products segment increased to $71.3 million from $68.1 million for the year ended December 31, 2021, an increase of $3.2 million or
4.7%. Gross profit as a percentage of net sales decreased to 54.5% of net sales for the year ended December 31, 2022, from 54.8% of net sales for the year ended December 31, 2020. The decrease in gross profit as a percentage of net sales is
primarily a result of product mix shift including mix of discount loose-leaf products.

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For the year ended December 31, 2022, gross profit in the NewGen segment decreased to $27.7 million from $47.0 million for the year ended December 31, 2021, a decrease of $19.3 million or 41.1%. Gross
profit as a percentage of net sales decreased to 29.5% of net sales for the year ended December 31, 2022, from 32.5% of net sales for the year ended December 31, 2021, primarily as a result of product mix and the highly promotional environment.

Selling, General and Administrative Expenses. For the year ended December 31, 2022, selling, general and administrative
expenses increased to $130.0 million from $127.5 million for the year ended December 31, 2021, an increase of $2.5 million or 2.0%. Selling, general, and administrative expenses for the year ended December 31, 2022, included $5.3 million of stock
options, restricted stock and incentives expense, $0.8 million of transaction expenses, $3.4 million of restructuring expenses, $2.0 million of ERP/CRM expenses and $4.6 million of expense related to PMTA. 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, $0.9 million of restructuring expenses and $1.7 million of expense related to
PMTA. The increase in selling, general and administrative expenses is a result of increased PMTA spend in 2022 and expenses related to of our new ERP/CRM system.

Interest Expense, net. For the year ended December 31, 2022, interest expense, on a net basis, decreased to $19.5 million from $20.5 million for the year ended
December 31, 2020, primarily as a result of interest income earned on our cash balance in 2022 that offset the interest expense.

Investment Loss. For the year ended December 31, 2022, investment loss
increased to $13.3 million compared to $6.7 million of investment loss for the year ended December 31, 2021, primarily as a result of impairments of our investments. See Note 11, “Other
Assets” of our Notes to the Consolidated Financial Statements in Part II, Item 8 of the Annual Report on Form 10-K for additional information on the investment
impairments.

Goodwill and Intangible Impairment Loss. For the year ended December 31, 2022, Goodwill and intangible impairment loss was $27.6
million primarily as a result of fully impairing the goodwill balance of the NewGen reporting unit.  For the year ended December 31, 2021 there was no Goodwill and intangible impairment loss. See Note 10, “Goodwill and Other Intangible
Assets” of our Notes to the Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K for further information on goodiwll and intangible assets.

Gain on Extinguishment of Debt. For the year ended December 31, 2022, gain on extinguishment of debt was $0.9 million as a result of the repurchase of $10.0
million principal of our Convertible Senior Notes at a discount. 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.

Income Tax Expense. The Company’s income tax expense was $4.8 million, or 30.3% of income before income taxes, for the year ended December 31, 2022. 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.

Net Loss Attributable to Non-Controlling Interest. Net loss attributable to non-controlling interest was $0.5 million for the year ended December 31, 2022,
compared to $0.8 million for the year ended December 31, 2021.

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, 2022 and 2021, was $11.6 million and $52.1 million, respectively.

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, 2022, 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, 2022, 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 2022, up from 59% a year
earlier.

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For the year ended December 31, 2021, net sales in the NewGen 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, 2022, 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 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 2022 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, $0.9 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.

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” of our Notes to the
Consolidated Financial Statements in Part II, Item 8 of this Annual Report on Form 10-K 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, 2022, 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.

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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.

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, income tax expense, depreciation, amortization, other non-cash items, and other items we do not consider ordinary course in our evaluation of ongoing operating performance.

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,"],["","","2022","","","2021","","","2020"],["Consolidated net income","","$","11,641","","","$","52,059","","","$","38,192"],["Add:"],["Interest expense, net","","","19,524","","","","20,500","","","","13,487"],["Gain on extinguishment of debt","","","(885",")","","","(2,154",")","","","-"],["Income tax expense","","","4,849","","","","14,040","","","","11,957"],["Depreciation expense","","","3,388","","","","3,105","","","","3,237"],["Amortization expense","","","1,911","","","","1,907","","","","1,781"],["EBITDA","","$","40,428","","","$","89,457","","","$","68,654"],["Components of Adjusted EBITDA"],["Corporate and vapor restructuring (a)","","","3,444","","","","1,026","","","","517"],["ERP/CRM (b)","","","1,962","","","","-","","","","-"],["Stock options, restricted stock, and incentives expense (c)","","","5,273","","","","7,557","","","","2,555"],["Transactional expenses and strategic initiatives (d)","","","801","","","","1,267","","","","3,087"],["FDA PMTA (e)","","","4,554","","","","1,668","","","","14,435"],["Non-cash asset impairment (f)","","","41,136","","","","7,100","","","","-"],["Other (g)","","","-","","","","-","","","","988"],["Adjusted EBITDA","","$","97,598","","","$","108,075","","","$","90,236"]]
[[/GREPCENT_TABLE]]

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

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

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

(d)  Represents the fees incurred for transaction expenses.

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

(f)  Represents impairment of goodwill, intangible and investment assets.

(g)  Represents non-cash pension expense (income) and foreign exchange hedging.

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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 $29.4 million to $109.9 million at December 31, 2022, compared with $80.5 million at December 31,
2021. The increase in working capital is primarily due to increased inventory levels at December 31, 2022.

[[GREPCENT_TABLE]]
[["","","As of"],["(in thousands)","","December 31, 2022","","","December 31, 2021"],["Current assets","","$","151,251","","","$","120,849"],["Current liabilities","","","41,376","","","","40,336"],["Working capital","","$","109,875","","","$","80,513"]]
[[/GREPCENT_TABLE]]

During the year ended December 31, 2022 and 2021, we invested $7.7 million and $6.2 million, respectively, in capital expenditures. We had unrestricted cash on hand of $106.4 million and $128.3
million as of December 31, 2022 and 2021, respectively. We had restricted assets of $31.0 million and $34.7 million as of December 31, 2022 and 2021, 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, 2022, net cash provided by operating activities decreased to $30.3 million from $68.2 million for the year ended December 31, 2021, a decrease of $37.9 million or 56%,
primarily due to changes in working capital including an increase in inventory.

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.

Cash Flows from Investing Activities

For the year ended December 31, 2022, net cash used in investing activities decreased to $18.8 million from $58.8 million for the year ended December 31, 2021, a decrease of $40.0 million or 68%,
primarily due to the decrease in acquisitions and investments.

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 9.0%,
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.

Cash Flows from Financing Activities

For the year ended December 31, 2022, net cash used in financing activities was $43.3 million compared to net cash provided by financing activities of $57.1 million for the year ended December 31,
2021, a decrease of $100.4 million or 176%, 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.

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.

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Long-Term Debt

Notes payable and long-term debt consisted of the following at December 31, 2022 and 2021, in order of preference:

[[GREPCENT_TABLE]]
[["","","December 31, 2022","","","December 31, 2021"],["Senior Secured Notes","","$","250,000","","","$","250,000"],["Convertible Senior Notes","","","162,500","","","","172,500"],["Gross notes payable and long-term debt","","","412,500","","","","422,500"],["Less deferred finance charges","","","(5,743",")","","","(8,328",")"],["Net notes payable and long-term debt","","$","406,757","","","$","414,172"]]
[[/GREPCENT_TABLE]]

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.

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

[[GREPCENT_TABLE]]
[["On or after February 15, 2023","","","102.813","%"],["On or after February 15, 2024","","","101.406","%"],["On or after February 15, 2025 and thereafter","","","100.000","%"]]
[[/GREPCENT_TABLE]]

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

The Senior Secured Notes Indenture contains covenants that, among other things, 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.

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.

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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 2022 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.

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.

In the fourth quarter 2022, our wholly owned subsidiary purchased $10.0 million in aggregate principal of our Convertible Senior Notes on the open market for $9.0 million that remain in the Treasury
and may be redeemed suspect to compliance with applicable securities law.  The transaction resulted in a $0.9 million gain on extinguishment of debt.  As of December 31, 2022, $162.5 million in aggregate principal amount remains outstanding.

The Convertible Senior Notes are convertible into approximately 3,029,699 shares of our voting common stock under certain circumstances prior to maturity at a conversion rate of 18.6443 shares per
$1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.64 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, 2022.

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

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 $53.64 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.

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. 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","","2022","","","2021"],["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"]]
[[/GREPCENT_TABLE]]

Off-Balance Sheet Arrangements

During 2022, we executed various foreign exchange contracts for the purchase of €28.9 million and sale of €28.9 million with maturity dates ranging from August 2022 to June 2023.
At December 31, 2022, we had foreign currency contracts for the purchase of €18.5 million and sale of €18.5 million. The fair value of the foreign currency contracts were based on quoted market prices and resulted in an asset of $1.2 million
included in Other current assets and liability of $0.0 million included in Accrued liabilities at December 31, 2022. We had no interest rate swap contracts at December 31, 2022. During 2021, we did not execute
any foreign exchange contracts.

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” of our 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 2022, we spent $29.2 million to repurchase 1,021,052 shares at an average price of $28.62 per share and had $27.2 million of authorization remaining under our Board approved repurchase program.

Inflation

Inflation in general and the recent rapid 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.

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