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 Quarterly Report on Form 10-Q. 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 unaudited financial statements of Turning Point Brands, Inc., included elsewhere in this Quarterly Report on Form 10-Q. 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

Turning Point Brands, Inc. (the "Company," "we," "our," or "us") is a leading manufacturer, marketer and distributor of branded consumer products. We sell a wide range of products to adult consumers consisting of staple products with our iconic brands Zig-Zag® and Stoker's® and our next generation products to fulfill evolving consumer preferences. Among other markets, we compete in the alternative smoking accessories and Other Tobacco Products ("OTP") industries. The alternative smoking accessories market is a dynamic market experiencing robust secular growth driven by cannabinoid legalization in the U.S. and Canada, and positively evolving consumer perception and acceptance in North America. The OTP industry, which consists of non-cigarette tobacco products, exhibited mid-single-digit consumer unit growth over the 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 flows which we use to invest in our business, finance acquisitions, increase brand support, expand our distribution infrastructure, and strengthen our capital position. We currently ship to approximately 800 distributors with an additional 200 secondary, indirect wholesalers in the U.S. that carry and sell our products. Under the leadership of a senior management team with extensive experience in the consumer products, alternative smoking accessories and tobacco industries, we have grown and diversified our business through new product launches, category expansions, and acquisitions while concurrently improving operational efficiency.

We believe there are meaningful opportunities to grow through acquisitions and joint ventures across all product categories. 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.



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Operations

Our core Zig-Zag Products and Stoker's Products segments primarily generate revenues from the sale of our products to wholesale distributors who, in turn, resell the products to retail operations. Our 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:

• Our ability to further penetrate markets with our existing products;

• Our ability to introduce new products and product lines that complement our

core business;

• Decreasing interest in some tobacco products among consumers;

• Marketing and promotional initiatives, which cause variability in our results;

• General economic conditions, including consumer access to disposable income and

other conditions affecting purchasing power such as inflation;

• Supply chain challenges and freight costs;

• Price sensitivity in our end-markets;

• Cost and increasing regulation of promotional and advertising activities;

• Cost of complying with regulation, including the "deeming regulation";

• Increasing and unpredictable regulation of NewGen products;

• Counterfeit and other illegal products in our end-markets;

• Currency fluctuations;

• Our ability to identify attractive acquisition opportunities; and

• Our ability to successfully integrate acquisitions.





Recent Developments

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. Efremov's termination of employment he is eligible to receive severance benefits as set forth in his employment agreement. We expect to take a charge of approximately $2.2 million in the fourth quarter 2022 for the severance benefits.

In connection with Mr. Purdy's appointment and Mr. Efremov's departure, David Glazek, current non-executive Chair of the Board, will transition to the role of Executive Chair effective January 2023. Mr. Purdy will be the Company's principal executive officer. The Company expects to appoint a lead independent director at the time Mr. Glazek becomes the Company's Executive Chair.



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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 tobacco products containing nicotine from any source ("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."

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.

Critical Accounting Policies and Uses of Estimates

There have been no material changes to our critical accounting policies and estimates from the information provided in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2021 Annual Report on Form 10-K.

Recent Accounting Pronouncements

There are no recent accounting pronouncements that impact the Company.



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Results of Operations

Comparison of the Three Months Ended September 30, 2022, to the Three Months Ended September 30, 2021

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



                                                             Three Months Ended September 30,
                                                            2022             2021        % Change
Consolidated Results of Operations Data:
Net sales
Zig-Zag products                                        $     52,061       $  42,234          23.3 %
Stoker's products                                             33,525          30,472          10.0 %
NewGen products                                               22,216          37,198         -40.3 %
Total net sales                                              107,802         109,904          -1.9 %
Cost of sales                                                 55,090          55,635          -1.0 %
Gross profit
Zig-Zag products                                              28,035          23,703          18.3 %
Stoker's products                                             18,279          17,104           6.9 %
NewGen products                                                6,398          13,462         -52.5 %
Total gross profit                                            52,712          54,269          -2.9 %

Selling, general, and administrative expenses                 32,891          31,894           3.1 %
Operating income                                              19,821          22,375         -11.4 %
Interest expense, net                                          4,802           5,397         -11.0 %
Investment income                                                (75 )          (157 )       -52.2 %
Gain on extinguishment of debt                                     -            (375 )      -100.0 %
Income before income taxes                                    15,094          17,510         -13.8 %
Income tax expense                                             3,797           4,073          -6.8 %
Consolidated net income                                       11,297          13,437         -15.9 %
Net loss attributable to non-controlling interest               (239 )           (31 )       671.0 %

Net income attributable to Turning Point Brands, Inc. $ 11,536 $ 13,468 -14.3 %





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Net Sales: For the three months ended September 30, 2022, consolidated net sales decreased to $107.8 million from $109.9 million for the three months ended September 30, 2021, a decrease of $2.1 million or 1.9%. The decrease in net sales was primarily driven by decreased sales volume in the NewGen Products segment.

For the three months ended September 30, 2022, net sales in the Zig-Zag Products segment increased to $52.1 million from $42.2 million for the three months ended September 30, 2021, an increase of $9.8 million or 23.3%. For the three months ended September 30, 2022, volume increased 21.7% and price/mix increased 1.6%. Our U.S. rolling papers business grew double-digits, primarily through our e-commerce channels. Continued strength in paper cones, strong receptivity to promotional programs, the launch of CLIPPER lighters, and timing shifts in Canadian deliveries contributed to strong performance during the quarter. In total, we believe approximately $5 million of sales were pulled forward from the fourth quarter across the Zig Zag Products segment.

For the three months ended September 30, 2022, net sales in the Stoker's Products segment increased to $33.5 million from $30.5 million for the three months ended September 30, 2021, an increase of $3.1 million or 10%. For the three months ended September 30, 2022, volume increased 2.4% and price/mix increased 7.6%. The increase in net sales was driven by double-digit growth of Stoker's® MST partially offset by a mid-single digit decline in loose-leaf chewing tobacco. FRE nicotine pouch products was a marginal contributor to segment sales.

For the three months ended September 30, 2022, net sales in the NewGen products segment decreased to $22.2 million from $37.2 million for the three months ended September 30, 2021, a decrease of $15.0 million or 40.3%. The decrease in net sales was primarily the result of declines in the vape distribution businesses which continues to be impacted by the regulatory environment. Net sales have been relatively steady sequentially within the current year period.

Gross Profit: For the three months ended September 30, 2022, consolidated gross profit decreased to $52.7 million from $54.3 million for the three months ended September 30, 2021, a decrease of $1.6 million or 2.9%. Gross profit as a percentage of revenue decreased to 48.9% for the three months ended September 30, 2022, compared to 49.4% for the three months ended September 30, 2021 driven by mix.

For the three months ended September 30, 2022, gross profit in the Zig-Zag Products segment increased to $28.0 million from $23.7 million for the three months ended September 30, 2021, an increase of $4.3 million or 18.3%. Gross profit as a percentage of net sales decreased to 53.9% of net sales for the three months ended September 30, 2022, from 56.1% of net sales for the three months ended September 30, 2021, as a result of strong growth in lower gross margin products including the launch of our lighters business.

For the three months ended September 30, 2022, gross profit in the Stoker's Products segment increased to $18.3 million from $17.1 million for the three months ended September 30, 2021, an increase of $1.2 million or 6.9%. Gross profit as a percentage of net sales decreased to 54.5% of net sales for the three months ended September 30, 2022, from 56.1% of net sales for the three months ended September 30, 2021, primarily as a result of the mix impact of FRE and stronger growth in discount looseleaf products.

For the three months ended September 30, 2022, gross profit in the NewGen products segment decreased to $6.4 million from $13.5 million for the three months ended September 30, 2021, a decrease of $7.1 million or 52.5%. Gross profit as a percentage of net sales decreased to 28.8% of net sales for the three months ended September 30, 2022, from 36.2% of net sales for the three months ended September 30, 2021, primarily as a result of product mix and the competitive environment.

Selling, General, and Administrative Expenses: For the three months ended September 30, 2022, selling, general, and administrative expenses increased to $32.9 million from $31.9 million for the three months ended September 30, 2021, an increase of $1.0 million or 3.1%. Selling, general and administrative expenses in the three months ended September 30, 2022, included $1.4 million of stock options, restricted stock and incentives expense, $1.2 million of expense related to PMTA and $0.4 million of consulting expense related to the scoping and mobilization of the new ERP and CRM systems. Selling, general and administrative expenses in the three months ended September 30, 2021, included $1.8 million of stock option, restricted stock and incentives expense, $0.2 million of transaction income and $1.0 million of expense related to PMTA.

Interest Expense, net: For the three months ended September 30, 2022, interest expense, net decreased to $4.8 million, from $5.4 million for the three months ended September 30, 2021 as a result of the repayment of the Promissory Note and forgiveness of the Unsecured Loan each discussed in Note 11 Notes Payable and Long-Term Debt in the Consolidated Financial Statements. In addition interest income earned on our cash balance offset interest expense.

Investment Income: For the three months ended September 30, 2022, investment income decreased to $0.1 million, compared to $0.2 million of investment income for the three months ended September 30, 2021.



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Gain on Extinguishment of Debt There was no gain on extinguishment of debt for the three months ended September 30, 2022 compared to $0.4 million for the three months ended September 30, 2021 related to the repayment of the Promissory Note.

Income Tax Expense: Our income tax expense of $3.8 million was 25.2% of income before income taxes for the three months ended September 30, 2022 and included a discrete tax benefit of $0.0 million relating to stock option exercises. Our effective income tax rate was 23.3% for the three months ended September 30, 2021 and included a discrete tax benefit $1.0 million relating to stock option exercises.

Net Loss Attributable to Non-Controlling Interest: Net loss attributable to non-controlling interest was $0.2 million for the three months ended September 30, 2022 compared to $0.0 million for the three months ended September 30, 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 three months ended September 30, 2022 and 2021, was $11.5 million and $13.5 million, respectively.

Comparison of the Nine Months Ended September 30, 2022, to the Nine Months Ended September 30, 2021

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



                                                            Nine Months Ended September 30,
                                                           2022            2021        % Change
Consolidated Results of Operations Data:
Net sales
Zig-Zag products                                        $   143,959      $ 130,440          10.4 %
Stoker's products                                            98,816         93,096           6.1 %
NewGen products                                              68,846        116,652         -41.0 %
Total net sales                                             311,621        340,188          -8.4 %
Cost of sales                                               155,646        172,685          -9.9 %
Gross profit
Zig-Zag products                                             80,808         76,342           5.8 %
Stoker's products                                            54,044         51,142           5.7 %
NewGen products                                              21,123         40,019         -47.2 %
Total gross profit                                          155,975        167,503          -6.9 %

Selling, general, and administrative expenses                98,779         95,900           3.0 %
Operating income                                             57,196         71,603         -20.1 %
Interest expense, net                                        15,142         15,406          -1.7 %
Investment loss (income)                                      6,074           (292 )     -2180.1 %
Loss on extinguishment of debt                                    -          5,331        -100.0 %
Income before income taxes                                   35,980         51,158         -29.7 %
Income tax expense                                            8,706         11,151         -21.9 %
Consolidated net income                                      27,274         40,007         -31.8 %
Net loss attributable to non-controlling interest              (684 )         (598 )        14.4 %

Net income attributable to Turning Point Brands, Inc. $ 27,958 $ 40,605 -31.1 %

Net Sales: For the nine months ended September 30, 2022, consolidated net sales decreased to $311.6 million from $340.2 million for the nine months ended September 30, 2021, a decrease of $28.6 million or 8.4%. The decrease in net sales was driven by decreased sales volume in the NewGen Products segment.

For the nine months ended September 30, 2022, net sales in the Zig-Zag Products segment increased to $144.0 million from $130.4 million for the nine months ended September 30, 2021, an increase of $13.5 million or 10.4%. For the nine months ended September 30, 2022, volume increased 8.4% and price/mix increased 2.0%. The increase in net sales was driven by double-digit growth in U.S. rolling papers primarily through our e-commerce channels. Continued strength in paper cones, strong receptivity to promotional programs, the launch of CLIPPER lighters, and timing shifts in Canadian deliveries contributed to strong performance during the quarter. In total, we believe approximately $5 million of sales were pulled forward from the fourth quarter across the Zig Zag Products segment. However, these increases were offset by declines in the cigar wraps business driven partially by a trade inventory reduction in the current period compared with a trade inventory load in the prior year period.



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For the nine months ended September 30, 2022, net sales in the Stoker's Products segment increased to $98.8 million from $93.1 million for the nine months ended September 30, 2021, an increase of $5.7 million or 6.1%. For the nine months ended September 30, 2022, volume decreased 1.4% and price/mix increased 7.5%. The increase in net sales was driven by double digit growth of Stoker's® MST partially offset by a mid-single digit decline in loose-leaf chewing tobacco. FRE nicotine pouch products was a marginal contributor to segment sales.

For the nine months ended September 30, 2022, net sales in the NewGen products segment decreased to $68.8 million from $116.7 million for the nine months ended September 30, 2021, a decrease of $47.8 million or 41.0%. The decrease in net sales was primarily the result of declines in the vape distribution businesses which continue to be impacted by the regulatory environment.

Gross Profit: For the nine months ended September 30, 2022, consolidated gross profit decreased to $156.0 million from $167.5 million for the nine months ended September 30, 2021, a decrease of $11.5 million or 6.9%. Gross profit as a percentage of revenue increased to 50.1% for the nine months ended September 30, 2022, compared to 49.2% for the nine months ended September 30, 2021 driven by mix as the NewGen Products segment generates lower margins.

For the nine months ended September 30, 2022, gross profit in the Zig-Zag Products segment increased to $80.8 million from $76.3 million for the nine months ended September 30, 2021, an increase of $4.5 million or 5.8%. Gross profit as a percentage of net sales decreased to 56.1% of net sales for the nine months ended September 30, 2022, from 58.5% of net sales for the nine months ended September 30, 2021, as a result of strong growth in lower gross margin products including the launch of our lighters business.

For the nine months ended September 30, 2022, gross profit in the Stoker's Products segment increased to $54.0 million from $51.1 million for the nine months ended September 30, 2022, an increase of $2.9 million or 5.7%. Gross profit as a percentage of net sales decreased to 54.7% of net sales for the nine months ended September 30, 2022, from 54.9% of net sales for the nine months ended September 30, 2021.

For the nine months ended September 30, 2022, gross profit in the NewGen products segment decreased to $21.1 million from $40.0 million for the nine months ended September 30, 2021, a decrease of $19.0 million or 47.2%. Gross profit as a percentage of net sales decreased to 30.7% of net sales for the nine months ended September 30, 2022, from 34.3% of net sales for the nine months ended September 30, 2021, as a result of product mix and the competitive environment.

Selling, General, and Administrative Expenses: For the nine months ended September 30, 2022, selling, general, and administrative expenses increased to $98.8 million from $95.9 million for the nine months ended September 30, 2021, an increase of $2.9 million or 3.0%. Selling, general and administrative expenses for the nine months ended September 30, 2022, included $4.1 million of stock options, restricted stock and incentives expense, $0.8 million of transaction expense, $4.3 million of expense related to PMTA, $1.6 million of expense related to corporate restructuring and $1.6 million of consulting expense related to the scoping and mobilization of the new ERP and CRM systems. Selling, general and administrative expenses in the nine months ended September 30, 2021, included $6.0 million of stock option, restricted stock and incentives expense (including $1.1 million for accelerated vesting of options for a departing executive), $1.1 million of transaction costs and $1.9 million of expense related to PMTA.

Interest Expense, net: For the nine months ended September 30, 2022, interest expense, net decreased to $15.1 million, from $15.4 million for the nine months ended September 30, 2021 as a result of the increase in the Company's outstanding debt in February 2021 offset by interest earned on our cash balance.

Investment Loss (Income): For the nine months ended September 30, 2022, investment loss increased to $6.1 million, compared to $0.3 million of investment income for the nine months ended September 30, 2021, primarily as a result of $6.3 million impairment of our investment in dosist. See Note 9 Other Assets in the Consolidated Financial Statements for information on the dosist impairment.

Loss on Extinguishment of Debt: There was no loss on extinguishment of debt for the nine months ended September 30, 2022 compared to $5.3 million for the nine months ended September 30, 2021 related to the repayment of the 2018 First Lien Credit Facility.

Income Tax Expense: Our income tax expense of $8.7 million was 24.2% of income before income taxes for the nine months ended September 30, 2022 and included a discrete tax benefit of $0.7 million relating to stock option exercises. Our effective income tax rate was 21.8% for the nine months ended September 30, 2021 and included a discrete tax benefit $6.2 million relating to stock option exercises.

Net Loss Attributable to Non-Controlling Interest: Net loss attributable to non-controlling interest was $0.7 million for the nine months ended September 30, 2022 compared to $0.6 million for the nine months ended September 30, 2021.



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Net Income Attributable to Turning Point Brands, Inc.: Due to the factors described above, net income attributable to Turning Point Brands, Inc. for the nine months ended September 30, 2022 and 2021, was $28.0 million and $40.6 million, respectively.

EBITDA and Adjusted EBITDA

To supplement our financial information presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, we use non-U.S. GAAP financial measures including EBITDA and Adjusted EBITDA. We believe Adjusted EBITDA provides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Adjusted EBITDA is used by management to compare our performance to that of prior periods for trend analyses and planning purposes and is presented to our Board of Directors. We believe that EBITDA and Adjusted EBITDA are appropriate measures of operating performance because they eliminate the impact of expenses that do not relate to operating performance. In addition, our debt instruments contain covenants which use Adjusted EBITDA calculations.

We define "EBITDA" as net income before interest expense, net, gain (loss) on extinguishment of debt, provision for income taxes, depreciation, and amortization. We define "Adjusted EBITDA" as net income before interest expense, net, gain (loss) 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 noted in the reconciliation below.

Non-U.S. GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with U.S. GAAP. Adjusted EBITDA excludes significant expenses required to be recorded in our financial statements by U.S. GAAP and is subject to inherent limitations. Other companies in our industry may calculate this non-U.S. GAAP measure differently than we do or may not calculate it at all, limiting its usefulness as a comparative measure. The tables below provide reconciliations between net income and Adjusted EBITDA.



                                                                Three Months Ended
(in thousands)                                                     September 30,
                                                                 2022          2021

Net income attributable to Turning Point Brands, Inc. $ 11,536 $ 13,468 Add: Interest expense, net

                                              4,802        5,397
Gain on extinguishment of debt                                         -         (375 )
Income tax expense                                                 3,797        4,073
Depreciation expense                                                 861          767
Amortization expense                                                 454          477
EBITDA                                                        $   21,450     $ 23,807
Components of Adjusted EBITDA
Corporate restructuring (a)                                           17            -
ERP/CRM (b)                                                          435            -
Stock options, restricted stock, and incentives expense (c)        1,442        1,752
Transactional expenses (d)                                             -         (232 )
FDA PMTA (e)                                                       1,169          960
Adjusted EBITDA                                               $   24,513     $ 26,287

--------------------------------------------------------------------------------

(a) Represents costs associated with corporate restructuring, including

severance.

(b) Represents cost associated with scoping and mobilization of new ERP and CRM

systems and cost of duplicative ERP licenses.

(c) Represents non-cash stock options, restricted stock, incentives expense and

Solace performance stock units.

(d) Represents the fees incurred for transaction expenses.

(e) Represents costs associated with applications related to FDA premarket


    tobacco product application ("PMTA").



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                                                                Nine Months Ended
(in thousands)                                                    September 30,
                                                                2022          2021

Net income attributable to Turning Point Brands, Inc. $ 27,958 $ 40,605 Add: Interest expense, net

                                            15,142       15,406
Loss on extinguishment of debt                                        -        5,331
Income tax expense                                                8,706       11,151
Depreciation expense                                              2,611        2,313
Amortization expense                                              1,373        1,431
EBITDA                                                        $  55,790     $ 76,237
Components of Adjusted EBITDA
Corporate restructuring (a)                                       1,619            -
ERP/CRM (b)                                                       1,626            -
Stock options, restricted stock, and incentives expense (c)       4,103        6,015
Transactional expenses (d)                                          789        1,077
FDA PMTA (e)                                                      4,265          960
Non-cash asset impairment (f)                                     6,300            -
Adjusted EBITDA                                               $  74,492     $ 84,289

--------------------------------------------------------------------------------

(a) Represents costs associated with corporate restructuring, including

severance.

(b) Represents cost associated with scoping and mobilization of new ERP and CRM

systems and cost of duplicative ERP licenses.

(c) Represents non-cash stock options, restricted stock, incentives expense and

Solace performance stock units.

(d) Represents the fees incurred for transaction expenses.

(e) Represents costs associated with applications related to FDA premarket

tobacco product application ("PMTA").

(f) Represents impairment of investment in dosist.

Liquidity and Capital Reserves

Our principal uses for cash are working capital, debt service, and capital expenditures. We believe our cash on hand, cash flows from operations and borrowing availability under our 2021 Revolving Credit Facility are adequate to satisfy our operating cash requirements for the foreseeable future. As of September 30, 2022, we had $105.7 million of cash on hand and have $21.4 million of availability under the 2021 Revolving Credit Facility.

Our working capital, which we define as current assets less cash and current liabilities, increased $27.7 million to $108.2 million at September 30, 2022, compared with $80.5 million at December 31, 2021 primarily due to increase in inventory as a result of our annual tobacco purchase.



                                    As of
(in thousands)         September 30,       December 31,
                           2022                2021

Current assets        $       150,110     $      120,849
Current liabilities            41,881             40,336
Working capital       $       108,229     $       80,513



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Cash Flows from Operating Activities

For the nine months ended September 30, 2022, net cash provided by operating activities was $16.4 million compared to net cash provided by operating activities of $49.6 million for the nine months ended September 30, 2021, a decrease of $33.2 million, primarily due to lower net income due to decreased sales in the NewGen Segment combined with the timing of changes to working capital, primarily as a result of annual tobacco inventory purchase.

Cash Flows from Investing Activities

For the nine months ended September 30, 2022, net cash used in investing activities was $17.8 million compared to net cash used in investing activities of $52.2 million for the nine months ended September 30, 2021, a decrease of $34.5 million, primarily due to the lower purchases of investments in our MSA escrow account as well as no acquisitions and a small investments made in the current year period.

Cash Flows from Financing Activities

For the nine months ended September 30, 2022, net cash used in financing activities was $31.2 million compared to net cash provided by financing activities of $76.3 million for the nine months ended September 30, 2021, a decrease of $107.5 million. The decrease was primarily due to an increase in cash used to repurchase common stock during 2022 while in 2021 the Company received net proceeds received 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.

Dividends and Share and Repurchases

The most recent dividend of $0.06 per common share was paid on October 7, 2022, to shareholders of record at the close of business on September 16, 2022.

On February 25, 2020, our Board of Directors approved a $50.0 million share repurchase program, which is intended for opportunistic execution based upon a variety of factors including market dynamics. On October 25, 2021, the Board increased the approved share repurchase program by $30.7 million. On February 24, 2022, the Board increased the approved share repurchase program by $24.6 million. The program is subject to the ongoing discretion of the Board. The total number of shares repurchased for the nine months ended September 30, 2022, was 307,207 shares for a total cost of $7.6 million and an average price per share of $24.78. $29.4 million remains available for share repurchases under the program at September 30, 2022.

Subject to market conditions, we will from time to time opportunistically repurchase our Senior Secured Notes and Convertible Senior Notes and any other securities we may have outstanding.

Repurchases of common stock, Senior Secured Notes and Convertible Senior Notes may be made through bilateral transactions, open market transactions, 10b5-1 trading plans or otherwise.

Long-Term Debt



As of September 30, 2022, we were in compliance with the financial and
restrictive covenants of the Senior Secured Notes and 2021 Revolving Credit
Facility. The following table provides the outstanding balances of our debt
instruments.

                                          September 30,       December 31,
                                              2022                2021
Senior Secured Notes                     $       250,000     $      250,000
Convertible Senior Notes                         172,500            172,500
Gross notes payable and long-term debt           422,500            422,500
Less deferred finance charges                     (6,471 )           (8,328 )

Notes payable and long-term debt $ 416,029 $ 414,172





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Senior Secured Notes

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

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

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, restrict the ability of the Company and its restricted subsidiaries to: (i) grant or incur liens; (ii) incur, assume or guarantee additional indebtedness; (iii) sell or otherwise dispose of assets, including capital stock of subsidiaries; (iv) make certain investments; (v) pay dividends, make distributions or redeem or repurchase capital stock; (vi) engage in certain transactions with affiliates; and (vii) consolidate or merge with or into, or sell substantially all of our assets to another entity. These covenants are subject to a number of limitations and exceptions set forth in the Indenture. The Indenture provides for customary events of default. We were in compliance with all covenants as of September 30, 2022.

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

2021 Revolving Credit Facility

In connection with the Offering, we also entered into a new $25.0 million senior secured revolving credit facility (the "2021 Revolving Credit Facility") with the lenders party thereto (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 as of September 30, 2022. 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.



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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 $5.0 million) in the aggregate outstanding exceeds 35% of the total commitments under the 2021 Revolving Credit Facility. The 2021 Revolving Credit Agreement provides for customary events of default. We were in compliance with all covenants as of September 30, 2022.

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.

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. See Note 11, "Notes Payable and Long-Term Debt," in the Notes to Consolidated Financial Statements included in this Quarterly Report for further discussion.

Convertible Senior Notes

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

The Convertible Senior Notes are convertible into approximately 3,213,589 shares of our voting common stock under certain circumstances prior to maturity at a conversion rate of 18.630 shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.68 per share, subject to adjustment under certain conditions, but will not be adjusted for any accrued and unpaid interest. The conversion price is adjusted periodically as a result of dividends paid by the us in excess of pre-determined thresholds of $0.04 per share. 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 September 30, 2022.

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 $53.68 per and a cap price of $82.86 per share, and are exercisable when, and if, the Convertible Senior Notes are converted. We paid $20.53 million for these capped calls at the time they were entered into and charged that amount to additional paid-in capital.

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 interest payment due September 10, 2020. 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.



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Off-balance Sheet Arrangements

During the nine months ended September 30, 2022, we executed various option contracts, which met hedge accounting requirements for the purchase of €18.5 million with maturity dates ranging from August 2022 to March 2023. At September 30, 2022, we had option contracts for the purchase of €15.2 million outstanding. The foreign currency contracts' fair value at September 30, 2022, resulted in an asset of $0.2 million included in Other current assets and a liability of $0.5 million included in Accrued liabilities. During 2021, we did not execute any foreign currency contracts. We had no foreign currency contracts at December 31, 2021. The Company had no interest rate swap contracts at September 30, 2022. The Company terminated its interest rate swap agreement in conjunction with the prepayment of all outstanding amounts under to the 2018 First Lien Credit Facility in the first quarter of 2021 in the amount of $3.6 million, and the transaction resulted in a $5.7 million loss recorded in the loss on extinguishment of debt. See Note 11, "Notes Payable and Long-Term Debt," in the Notes to Consolidated Financial Statements included in this Quarterly Report for further discussion.

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 customers, 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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