UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______________ to ________________
 
Commission file number: 001-37763
 
TURNING POINT BRANDS, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
20-0709285
(State or other jurisdiction of Incorporation or organization)
 
(I.R.S. Employer Identification No.)

5201 Interchange Way, Louisville, KY
 
40229
(Address of principal executive offices)
 
(Zip Code)

(502) 778-4421
(Registrant’s telephone number, including area code)

 Former name, former address and former fiscal year, if changed since last report: not applicable

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
TPB
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes        No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
Emerging growth company
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes       No  

At July 20, 2020, there were 19,221,930 shares outstanding of the registrant’s voting common stock, par value $0.01 per share.





Table of Contents
TURNING POINT BRANDS, INC.
TABLE OF CONTENTS

 
 
 
Page No.
PART I—FINANCIAL INFORMATION
 
 
 
 
ITEM 1
Financial Statements (Unaudited)
 
 
 
 
 
 
 
5
 
 
 
 
 
 
6
 
 
 
 
 
 
7
 
 
 
 
 
 
8
       
   
9
 
 
 
 
 
 
10
 
 
 
 
   
11
       
 
 
12
 
 
 
 
 
ITEM 2
33
 
 
   
 
ITEM 3
46
 
 
 
 
 
ITEM 4
46
 
 
 
 
PART II—OTHER INFORMATION
 
 
 
 
ITEM 1
47
 
 
 
 
 
ITEM 1A
47
 
 
 
 
 
ITEM 2
47
 
 
 
 
 
ITEM 3
48
 
 
 
 
 
ITEM 4
48
 
 
 
 
 
ITEM 5
48
 
 
 
 
 
ITEM 6
48
 
 
 
 
 
 
49

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Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements may generally be identified by the use of words such as “anticipate,” “believe,” “expect,” “intend,” “plan,” and “will” or, in each case, their negative, or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. By their nature, forward-looking statements involve risks and uncertainties because they relate to events, and depend on circumstances, that may or may not occur in the future. As a result, actual events may differ materially from those expressed in, or suggested by, the forward-looking statements. Any forward-looking statement made by Turning Point Brands, Inc. (“TPB”), in this Quarterly Report on Form 10-Q speaks only as of the date hereof. New risks and uncertainties come up from time to time, and it is impossible for TPB to predict these events or how they may affect it. TPB has no obligation, and does not intend, to update any forward-looking statements after the date hereof, except as required by federal securities laws. Factors that could cause these differences include, but are not limited to:

declining sales of tobacco products, and expected continuing decline of sales, in the tobacco industry overall;
our dependence on a small number of third-party suppliers and producers;
the possibility that we will be unable to identify or contract with new suppliers or producers in the event of a supply or product disruption;
our business may be damaged by events outside of our suppliers’ control, such as the impact of epidemics (e.g., coronavirus), political upheavals, or natural disasters;
the possibility that our licenses to use certain brands or trademarks will be terminated, challenged or restricted;
failure to maintain consumer brand recognition and loyalty of our customers;
substantial and increasing U.S. regulation;
regulation of our products by the FDA, which has broad regulatory powers;
our products are subject to developing and unpredictable regulation, for example, current court action moving forward certain substantial Pre Market Tobacco Application obligations;
some of our products contain nicotine which is considered to be a highly addictive substance;
uncertainty related to the regulation and taxation of our NewGen products;
possible significant increases in federal, state and local municipal tobacco- and vapor-related taxes;
possible increasing international control and regulation;
our reliance on relationships with several large retailers and national chains for distribution of our products;
our amount of indebtedness;
the terms of our credit facilities, which may restrict our current and future operations;
intense competition and our ability to compete effectively;
uncertainty and continued evolution of markets containing our NewGen products;
significant product liability litigation;
the scientific community’s lack of information regarding the long-term health effects of certain substances contained in some of our products;
requirement to maintain compliance with master settlement agreement escrow account;
competition from illicit sources;
our reliance on information technology;
security and privacy breaches;
contamination of our tobacco supply or products;
infringement on our intellectual property;
third-party claims that we infringe on their intellectual property;
failure to manage our growth;
failure to successfully integrate our acquisitions or otherwise be unable to benefit from pursuing acquisitions;
fluctuations in our results;
exchange rate fluctuations;
adverse U.S. and global economic conditions;
sensitivity of end-customers to increased sales taxes and economic conditions;
failure to comply with certain regulations;
departure of key management personnel or our inability to attract and retain talent;
imposition of significant tariffs on imports into the U.S.; 
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reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors, potentially decreasing our stock price;
failure to maintain our status as an emerging growth company before the five-year maximum time period a company may retain such status;
our principal stockholders will be able to exert significant influence over matters submitted to our stockholders and may take certain actions to prevent takeovers;
our certificate of incorporation and bylaws, as well as Delaware law and certain regulations, could discourage or prohibit acquisition bids or merger proposals, which may adversely affect the market price of our common stock;
our certificate of incorporation limits the ownership of our common stock by individuals and entities that are Restricted Investors. These restrictions may affect the liquidity of our common stock and may result in Restricted Investors being required to sell or redeem their shares at a loss or relinquish their voting, dividend and distribution rights;
future sales of our common stock in the public market could reduce our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us; and
we may issue preferred stock whose terms could adversely affect the voting power or value of our common stock.

4

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PART I—FINANCIAL INFORMATION
 
Item 1. Financial Statements 

Turning Point Brands, Inc.
Consolidated Balance Sheets
(dollars in thousands except share data)

ASSETS
 
(unaudited)
June 30,
2020
   
December 31,
2019
 
Current assets:
           
Cash
 
$
64,192
   
$
95,250
 
Accounts receivable, net of allowances of $271 in 2020 and $280 in 2019
   
5,112
     
6,906
 
Inventories
   
75,556
     
70,979
 
Other current assets
   
16,701
     
16,115
 
Total current assets
   
161,561
     
189,250
 
Property, plant, and equipment, net
   
13,343
     
13,816
 
Right of use assets
   
13,243
     
12,130
 
Deferred financing costs, net
   
789
     
890
 
Goodwill
   
154,282
     
154,282
 
Other intangible assets, net
   
80,414
     
33,469
 
Master Settlement Agreement (MSA) escrow deposits
   
32,074
     
32,074
 
Other assets
   
11,512
     
10,673
 
Total assets
 
$
467,218
   
$
446,584
 
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
 
$
14,361
   
$
14,126
 
Accrued liabilities
   
25,593
     
26,520
 
Current portion of long-term debt
   
12,000
     
15,240
 
Total current liabilities
   
51,954
     
55,886
 
Notes payable and long-term debt
   
284,624
     
268,951
 
Deferred income taxes
   
2,422
     
1,572
 
Lease liabilities
   
11,813
     
11,067
 
Other long-term liabilities
   
4,663
     
2,523
 
Total liabilities
   
355,476
     
339,999
 
 
               
Commitments and contingencies
   
     
 
 
               
Stockholders’ equity:
               
Preferred stock; $0.01 par value; authorized shares 40,000,000; issued and outstanding shares -0-
   
-
     
-
 
Common stock, voting, $0.01 par value; authorized shares, 190,000,000; 19,724,027 issued shares, 19,467,164 outstanding shares at June 30, 2020, and 19,680,673 issued and outstanding shares at December 31, 2019
   
197
     
197
 
Common stock, nonvoting, $0.01 par value; authorized shares, 10,000,000; issued and outstanding shares -0-
   
-
     
-
 
Additional paid-in capital
   
126,928
     
125,469
 
Cost of repurchased common stock (256,863 shares at June 30, 2020 and 0 shares at December 31, 2019)
   
(5,289
)
   
-
 
Accumulated other comprehensive loss
   
(5,299
)
   
(3,773
)
Accumulated deficit
   
(4,795
)
   
(15,308
)
Total stockholders’ equity
   
111,742
     
106,585
 
Total liabilities and stockholders’ equity
 
$
467,218
   
$
446,584
 

The accompanying notes are an integral part of the consolidated financial statements.

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Turning Point Brands, Inc.
Consolidated Statements of Income
(dollars in thousands except share data)
(unaudited)

 
Three Months Ended
June 30,
 
   
2020
   
2019
 
             
Net sales
 
$
104,963
   
$
93,339
 
Cost of sales
   
56,871
     
52,156
 
Gross profit
   
48,092
     
41,183
 
Selling, general, and administrative expenses
   
30,756
     
21,242
 
Operating income
   
17,336
     
19,941
 
Interest expense, net
   
4,980
     
3,736
 
Investment income
   
(34
)
   
(118
)
Loss on extinguishment of debt
   
-
     
150
 
Net periodic income, excluding service cost
   
(104
)
   
(11
)
Income before income taxes
   
12,494
     
16,184
 
Income tax expense
   
3,267
     
2,979
 
Consolidated net income
   
9,227
     
13,205
 
                 
Basic income per common share:
               
Consolidated net income
 
$
0.47
   
$
0.67
 
Diluted income per common share:
               
Consolidated net income
 
$
0.47
   
$
0.66
 
Weighted average common shares outstanding:
               
Basic
   
19,507,874
     
19,621,695
 
Diluted
   
19,834,345
     
20,131,980
 

The accompanying notes are an integral part of the consolidated financial statements.

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Table of Contents
Turning Point Brands, Inc.
Consolidated Statements of Income
(dollars in thousands except share data)
(unaudited)

 
 
Six Months Ended
June 30,
 
 
 
2020
   
2019
 
 
           
Net sales
 
$
195,652
   
$
184,967
 
Cost of sales
   
106,129
     
103,320
 
Gross profit
   
89,523
     
81,647
 
Selling, general, and administrative expenses
   
63,150
     
49,671
 
Operating income
   
26,373
     
31,976
 
Interest expense, net
   
9,974
     
7,592
 
Investment income
   
(125
)
   
(262
)
Loss on extinguishment of debt
   
-
     
150
 
Net periodic income, excluding service cost
   
(191
)
   
(22
)
Income before income taxes
   
16,715
     
24,518
 
Income tax expense
   
4,213
     
4,753
 
Consolidated net income
   
12,502
     
19,765
 
 
               
Basic income per common share:
               
Consolidated net income
 
$
0.64
   
$
1.01
 
Diluted income per common share:
               
Consolidated net income
 
$
0.63
   
$
0.99
 
Weighted average common shares outstanding:
               
Basic
   
19,598,660
     
19,590,817
 
Diluted
   
19,872,726
     
19,895,959
 
 
The accompanying notes are an integral part of the consolidated financial statements. 

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Turning Point Brands, Inc.
Consolidated Statements of Comprehensive Income
(dollars in thousands)
(unaudited)

 
 
Three Months Ended
June 30,
 
 
 
2020
   
2019
 
Consolidated net income
 
$
9,227
   
$
13,205
 
 
               
Other comprehensive income (loss), net of tax
               
Amortization of unrealized pension and postretirement gain (loss), net of tax of $2 in 2020 and $1 in 2019
   
7
     
(4
)
Unrealized gain on investments, net of tax of $0 in 2020 and $170 in 2019
   
-
     
509
 
Unrealized gain (loss) on interest rate swaps, net of tax of $25 in 2020 and $310 in 2019
   
73
     
(931
)
 
   
80
     
(426
)
 
               
Consolidated comprehensive income
 
$
9,307
   
$
12,779
 

 
 
Six Months Ended
June 30,
 
 
 
2020
   
2019
 
Consolidated net income
 
$
12,502
   
$
19,765
 
 
               
Other comprehensive loss, net of tax
               
Amortization of unrealized pension and postretirement gain (loss), net of tax of $5 in 2020 and $3 in 2019
   
14
     
(8
)
Unrealized gain on investments, net of tax of $0 in 2020 and $263 in 2019
   
-
     
911
 
Unrealized loss on interest rate swaps, net of tax of $600 in 2020 and $493 in 2019
   
(1,540
)
   
(1,407
)
 
   
(1,526
)
   
(504
)
 
               
Consolidated comprehensive income
 
$
10,976
   
$
19,261
 

The accompanying notes are an integral part of the consolidated financial statements

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Turning Point Brands, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
 
 
 
Six Months Ended
June 30,
 
 
 
2020
   
2019
 
Cash flows from operating activities:
           
Consolidated net income
 
$
12,502
   
$
19,765
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Loss on extinguishment of debt
   
-
     
150
 
Impairment loss
   
149
     
-
 
Loss on sale of property, plant, and equipment
   
12
     
22
 
Depreciation expense
   
1,673
     
1,163
 
Amortization of other intangible assets
   
827
     
723
 
Amortization of debt discount and deferred financing costs
   
4,483
     
478
 
Deferred income taxes
   
1,445
     
(109
)
Stock compensation expense
   
1,213
     
1,412
 
Noncash lease expense
   
18
     
-
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
1,794
     
(3,663
)
Inventories
   
(4,577
)
   
(3,346
)
Other current assets
   
(253
)
   
(3,534
)
Other assets
   
(766
)
   
(359
)
Accounts payable
   
235
     
12,927
 
Accrued postretirement liabilities
   
(54
)
   
(83
)
Accrued liabilities and other
   
(1,167
)
   
(3,848
)
Net cash provided by operating activities
 
$
17,534
   
$
21,698
 
 
               
Cash flows from investing activities:
               
Capital expenditures
 
$
(1,956
)
 
$
(1,964
)
Acquisitions, net of cash acquired
   
(37,772
)
   
-
 
Restricted cash, MSA deposits
   
-
     
1,677
 
Net cash used in investing activities
 
$
(39,728
)
 
$
(287
)
 
               
Cash flows from financing activities:
               
Payments of 2018 first lien term loan
 
$
(5,000
)
 
$
(4,000
)
Payments of 2018 second lien term loan
   
-
     
(4,489
)
Payments of 2018 revolving credit facility
   
-
     
(11,000
)
Payment of IVG note
   
(4,240
)
   
-
 
Proceeds from unsecured note
   
7,485
     
-
 
Payment of dividends
   
(1,872
)
   
(1,762
)
Payments of financing costs
   
(194
)
   
(179
)
Exercise of options
   
246
     
610
 
Surrender of restricted stock
   
-
     
(81
)
Redemption of options
   
-
     
(12
)
Common stock repurchased
   
(5,289
)
   
-
 
Net cash used in financing activities
 
$
(8,864
)
 
$
(20,913
)
 
               
Net increase (decrease)  in cash
 
$
(31,058
)
 
$
498
 
 
               
Cash, beginning of period:
               
Unrestricted
   
95,250
     
3,306
 
Restricted
   
32,074
     
2,361
 
Total cash at beginning of period
   
127,324
     
5,667
 
 
               
Cash, end of period:
               
Unrestricted
   
64,192
     
2,127
 
Restricted
   
32,074
     
4,038
 
Total cash at end of period
 
$
96,266
   
$
6,165
 
 
               
Supplemental schedule of noncash financing activities:
               
Dividends declared not paid
 
$
991
   
$
897
 
Issuance of note payable for acquisition
 
$
10,000
   
$
-
 
 
The accompanying notes are an integral part of the consolidated financial statements

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Turning Point Brands, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
For the Three Months Ended June 30, 2020 and 2019
(dollars in thousands except share data)
(unaudited)

                           
Accumulated
             
 
 
Voting
Shares
   
Common
Stock,
Voting
   
Additional
Paid-In
Capital
   
Cost of
Repurchased
Common Stock
   
Other
Comprehensive
Loss
   
Accumulated
Deficit
   
Total
 
 
                                         
Beginning balance April 1, 2020
   
19,588,950
   
$
197
   
$
126,151
   
$
(2,627
)
 
$
(5,379
)
 
$
(13,031
)
 
$
105,311
 
 
                                                       
Unrecognized pension and postretirement cost adjustment, net of tax of $2
   
-
     
-
     
-
     
-
     
7
     
-
     
7
 
Unrealized gain on interest rate swaps, net of tax of $25
   
-
     
-
     
-
     
-
     
73
     
-
     
73
 
Stock compensation expense
   
-
     
-
     
759
     
-
     
-
     
-
     
759
 
Exercise of options
   
947
     
-
     
18
     
-
     
-
     
-
     
18
 
Cost of repurchased common stock
   
(122,733
)
   
-
     
-
     
(2,662
)
   
-
     
-
     
(2,662
)
Dividends
   
-
     
-
     
-
     
-
     
-
     
(991
)
   
(991
)
Net income
   
-
     
-
     
-
     
-
     
-
     
9,227
     
9,227
 
Ending balance June 30, 2020
   
19,467,164
   
$
197
   
$
126,928
   
$
(5,289
)
 
$
(5,299
)
 
$
(4,795
)
 
$
111,742
 
 
                                                       
                                                         
Beginning balance April 1, 2019
   
19,576,398
   
$
196
   
$
111,089
   
$
-
   
$
(2,614
)
 
$
(19,830
)
 
$
88,841
 
 
                                                       
Unrecognized pension and postretirement cost adjustment, net of tax of $1
   
-
     
-
     
-
     
-
     
(4
)
   
-
     
(4
)
Unrealized gain on MSA investments, net of tax of $170
   
-
     
-
     
-
     
-
     
509
     
-
     
509
 
Unrealized loss on interest rate swaps, net of tax of $310
   
-
     
-
     
-
     
-
     
(931
)
   
-
     
(931
)
Stock compensation expense
   
-
     
-
     
938
     
-
     
-
     
-
     
938
 
Restricted stock forfeitures
   
(1,900
)
   
-
     
(83
)
   
-
     
-
     
-
     
(83
)
Exercise of options
   
83,448
     
1
     
422
     
-
     
-
     
-
     
423
 
Dividends
   
-
     
-
     
-
     
-
     
-
     
(897
)
   
(897
)
Net income
   
-
     
-
     
-
     
-
     
-
     
13,205
     
13,205
 
Ending balance June 30, 2019
   
19,657,946
   
$
197
   
$
112,366
   
$
-
   
$
(3,040
)
 
$
(7,522
)
 
$
102,001
 

The accompanying notes are an integral part of the consolidated financial statements

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Table of Contents
Turning Point Brands, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
For the Six Months Ended June 30, 2020 and 2019
(dollars in thousands except share data)
(unaudited)

                           
Accumulated
             
 
 
Voting
Shares
   
Common
Stock,
Voting
   
Additional
Paid-In
Capital
   
Cost of
Repurchased
Common Stock
   
Other
Comprehensive
Loss
   
Accumulated
Deficit
   
Total
 
 
                                         
Beginning balance January 1, 2020
   
19,680,673
   
$
197
   
$
125,469
   
$
-
   
$
(3,773
)
 
$
(15,308
)
 
$
106,585
 
                                                         
Unrecognized pension and postretirement cost adjustment, net of tax of $5
   
-
     
-
     
-
     
-
     
14
     
-
     
14
 
Unrealized loss on interest rate swaps, net of tax of $600
   
-
     
-
     
-
     
-
     
(1,540
)
   
-
     
(1,540
)
Stock compensation expense
   
-
     
-
     
1,214
     
-
     
-
     
-
     
1,214
 
Exercise of options
   
43,354
     
-
     
245
     
-
     
-
     
-
     
245
 
Cost of repurchased common stock
   
(256,863
)
   
-
     
-
     
(5,289
)
   
-
     
-
     
(5,289
)
Dividends
   
-
     
-
     
-
     
-
     
-
     
(1,989
)
   
(1,989
)
Net income
   
-
     
-
     
-
     
-
     
-
     
12,502
     
12,502
 
Ending balance June 30, 2020
   
19,467,164
   
$
197
   
$
126,928
   
$
(5,289
)
 
$
(5,299
)
 
$
(4,795
)
 
$
111,742
 
 
                                                       
                                                         
Beginning balance January 1, 2019
   
19,553,857
   
$
196
   
$
110,466
   
$
-
   
$
(2,536
)
 
$
(25,503
)
 
$
82,623
 
                                                         
Unrecognized pension and postretirement cost adjustment, net of tax of $3
   
-
     
-
     
-
     
-
     
(8
)
   
-
     
(8
)
Unrealized gain on MSA investments, net of tax of $263
   
-
     
-
     
-
     
-
     
911
     
-
     
911
 
Unrealized loss on interest rate swaps, net of tax of $493
   
-
     
-
     
-
     
-
     
(1,407
)
   
-
     
(1,407
)
Stock compensation expense
   
-
     
-
     
1,387
     
-
     
-
     
-
     
1,387
 
Restricted stock forfeitures
   
(1,947
)
   
-
     
(84
)
   
-
     
-
     
-
     
(84
)
Exercise of options
   
106,036
     
1
     
609
     
-
     
-
     
-
     
610
 
Redemption of options
   
-
     
-
     
(12
)
   
-
     
-
     
-
     
(12
)
Dividends
   
-
     
-
     
-
     
-
     
-
     
(1,784
)
   
(1,784
)
Net income
   
-
     
-
     
-
     
-
     
-
     
19,765
     
19,765
 
Ending balance June 30, 2019
   
19,657,946
   
$
197
   
$
112,366
   
$
-
   
$
(3,040
)
 
$
(7,522
)
 
$
102,001
 

The accompanying notes are an integral part of the consolidated financial statements

11

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Turning Point Brands, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except where designated and per share data)

Note 1. Organizations and Basis of Presentation

Organizations

Turning Point Brands, Inc. (the “Company”), is a holding company which owns North Atlantic Trading Company, Inc. (“NATC”) and its subsidiaries, Standard Merger Sub, LLC (“SMS”), North Atlantic Wrap Company, LLC (“NAWC”), TPB Services, LLC (“TPBS”), Turning Point Brands, LLC (“TPLLC”), and its subsidiaries, and Turning Point Brands (Canada), Inc. (“TPBC”). Except where the context indicates otherwise, references to the Company include the Company; NATC and its subsidiaries National Tobacco Company, L.P. (“NTC”), National Tobacco Finance, LLC (“NTFLLC”), North Atlantic Operating Company, Inc. (“NAOC”), North Atlantic Cigarette Company, Inc. (“NACC”), and RBJ Sales, Inc. (“RBJ”); TPLLC and its subsidiaries Intrepid Brands, LLC (“Intrepid”), TPB Beast, LLC (“VaporBeast”), TPB Shark, LLC, and its subsidiaries (collectively, “Vapor Shark”), TPB International, LLC and its subsidiaries (collectively, “IVG”), Nu-X Ventures LLC (“Nu-X”), Nu-Tech Holdings LLC (“Nu-Tech”), and South Beach Holdings, LLC (“South Beach”); SMS, NAWC, TPBS and TPBC.

Basis of Presentation

The accompanying unaudited interim, consolidated financial statements have been prepared in accordance with the accounting practices described in the Company’s audited, consolidated financial statements as of and for the year ended December 31, 2019. In the opinion of management, the unaudited, interim, consolidated financial statements included herein contain all adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company for the periods indicated. Such adjustments, other than nonrecurring adjustments separately disclosed, are of a normal and recurring nature. The operating results for interim periods are not necessarily indicative of results to be expected for a full year or future interim periods. The unaudited, interim, consolidated financial statements should be read in conjunction with the Company’s audited, consolidated financial statements and accompanying notes as of and for the year ended December 31, 2019. The accompanying interim, consolidated financial statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission and, accordingly, do not include all the disclosures required by generally accepted accounting principles in the United States (“GAAP”) with respect to annual financial statements.

Certain prior year amounts have been reclassified to conform to the current year’s presentation. The changes did not have an impact on the Company’s consolidated financial position, results of operations, or cash flows in any of the periods presented.

Note 2. Summary of Significant Accounting Policies

Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany transactions have been eliminated.

Revenue Recognition

The Company recognizes revenues in accordance with Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which includes excise taxes and shipping and handling charges billed to customers, net of cash discounts for prompt payment, sales returns and incentives, upon delivery of goods to the customer – at which time the Company’s performance obligation is satisfied – at an amount that the Company expects to be entitled to in exchange for those goods in accordance with the five-step analysis outlined in Topic 606: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied. The Company excludes 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).

The Company records an allowance for sales returns, based principally on historical volume and return rates, which is included in accrued liabilities on the consolidated balance sheets. The Company records sales incentives, which consist of consumer incentives and trade promotion activities, as a reduction in revenues (a portion of which is based on amounts estimated 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.
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A further requirement of ASU 2014-09 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. Company management views business performance through segments that closely resemble the performance of major product lines. Thus, the primary and most useful disaggregation of the Company’s contract revenue for decision making purposes is the disaggregation by segment which can be found in Note 18 of Notes to Consolidated Financial Statements. An additional disaggregation of contract revenue by sales channel can be found within Note 18 as well.

Shipping Costs

The Company records shipping costs incurred as a component of selling, general, and administrative expenses. Shipping costs incurred were approximately $6.9 million and $4.3 million for the three months ending June 30, 2020 and 2019, respectively. Shipping costs incurred were approximately $12.1 million and $9.2 million for the six months ending June 30, 2020 and 2019, respectively.

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:

Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date.
Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

Derivative Instruments

Foreign Currency Forward Contracts: The Company enters into foreign currency forward contracts to hedge a portion of its exposure to changes in foreign currency exchange rates on inventory purchase commitments. The Company accounts for its forward contracts under the provisions of ASC 815, Derivatives and Hedging. Under the Company’s policy, the Company may hedge up to 100% of its anticipated purchases of inventory in the denominated invoice currency over a forward period not to exceed twelve months. The Company may also, from time to time, hedge up to ninety percent of its non-inventory purchases in the denominated invoice currency. Forward contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by market prices on the measurement date, except any hedge ineffectiveness which is recognized currently in income. Gains and losses on these forward contracts are transferred from other comprehensive income into net income as the related inventories are received. 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.

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

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Risks and Uncertainties

Manufacturers and sellers of tobacco products are subject to regulation at the federal, state, and local levels. Such regulations include, among others, labeling requirements, limitations on advertising, and prohibition of sales to minors. The tobacco industry is likely to continue to be heavily regulated. There can be no assurance as to the ultimate content, timing, or effect of any regulation of tobacco products by any federal, state, or local legislative or regulatory body, nor can there be any assurance that any such legislation or regulation would not have a material adverse effect on the Company’s financial position, results of operations, or cash flows. In a number of states, targeted flavor bans, particularly with regard to vapor products, have been proposed or enacted legislatively or by the administrative process. Depending on the number and location of such bans, that legislation or regulation could have a material adverse effect on the Company’s financial position, results of operations or cash flows.  Food and Drug Administration (“FDA”) continues to consider various restrictive regulations around our products, including targeted flavor bans; however, the details, timing, and ultimate implementation of such measures remain unclear.

The tobacco industry has experienced, and is experiencing, significant product liability litigation. Most tobacco liability lawsuits have been brought against manufacturers and sellers of cigarettes for injuries allegedly caused by smoking or exposure to smoke. However, several lawsuits have been brought against manufacturers and sellers of smokeless products for injuries to health allegedly caused by use of smokeless products. Typically, such claims assert that use of smokeless products is addictive and causes oral cancer. Additionally, several lawsuits have been brought against manufacturers and distributors of NewGen products due to malfunctioning devices. There can be no assurance the Company will not sustain losses in connection with such lawsuits and that such losses will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
 
Master Settlement Agreement (MSA):  Pursuant to the Master Settlement Agreement (the “MSA”) entered into in November 1998 by most states (represented by their attorneys general acting through the National Association of Attorneys General) and subsequent states’ statutes, a “cigarette manufacturer” (which is defined to include a manufacturer of make-your-own (“MYO”) cigarette tobacco) has the option of either becoming a signatory to the MSA or opening, funding, and maintaining an escrow account to have funds available for certain potential tobacco-related liabilities with sub-accounts on behalf of each settling state. Such companies are entitled to direct the investment of the escrowed funds and withdraw any appreciation, but cannot withdraw the principal for twenty-five years from the year of each annual deposit, except to withdraw funds deposited pursuant to an individual state’s escrow statute to pay a final judgement to that state’s plaintiffs in the event of such a final judgement against the Company.  The Company chose to open and fund an escrow account as its method of compliance. It is the Company’s policy to record amounts on deposit in the escrow account for prior years as a non-current asset. Each year’s annual obligation is required to be deposited in the escrow account by April 15 of the following year. In addition to the annual deposit, many states have elected to require quarterly deposits for the previous quarter’s sales. As of June 30, 2020, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $32.1 million. At December 31, 2019, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $32.1 million. Effective in the third quarter of 2017, the Company no longer sells any product covered under the MSA. Thus, absent a change in legislation, the Company will no longer be required to make deposits to the MSA escrow account.

The Company has chosen to invest a portion of the MSA escrow, from time to time, in U.S. Government securities including TIPS, Treasury Notes, and Treasury Bonds. These investments are classified as available-for-sale and carried at fair value. Realized losses are prohibited under the MSA; any investment in an unrealized loss position will be held until the value is recovered, or until maturity. All monies at June 30, 2020 and December 31, 2019 were held in money market savings accounts.

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The following shows the amount of deposits by sales year for the MSA escrow account:

 
Deposits as of
 
 Sales
Year
 
June 30,
2020
   
December 31,
2019
 
 
           
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
   
83
     
83
 
 
               
Total
 
$
32,074
   
$
32,074
 

Food and Drug Administration: On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (the “TCA”) authorized the FDA to immediately regulate the manufacturing, sale, and marketing of four categories of tobacco products – cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless tobacco.

Under the TCA, tobacco product user fees are assessed on six classes of regulated tobacco products. The user fees are computed using a methodology similar to the methodology used by the U.S Department of Agriculture to compute the Tobacco Transition Payment Program assessment. First, the total, annual, congressionally established user fee assessment is allocated among the various classes of tobacco products using the federal excise tax weighted market share of tobacco products subject to regulation. Then, the assessment for each class of tobacco products is divided among individual manufacturers and importers.
 
In August 2016, the FDA’s regulatory authority under the TCA was extended to all tobacco products not previously covered, including: (i) certain NewGen products (such as electronic cigarettes, vaporizers and e-liquids) and their components or parts (such as tanks, coils and batteries); (ii) cigars and their components or parts (such as cigar tobacco); (iii) pipe tobacco; (iv) hookah products; and (v) any other tobacco product “newly deemed” by the FDA. These “deeming regulations” apply to all products made or derived from tobacco intended for human consumption, but excluding accessories of tobacco products (such as lighters). Accordingly, the FDA has since regulated our cigar and cigar wrap products as well as our vapor products containing tobacco-derived nicotine and products intended or reasonably expected to be used to consume such e-liquids.
 
Under the deeming regulations, the FDA has responsibility for conducting premarket review of “new tobacco products”—defined as those products not commercially marketed in the United States as of February 15, 2007. There are three pathways for obtaining premarket authorization, including submission of a premarket tobacco product application (“PMTA”).

When the FDA initially issued the deeming regulations, it recognized that many products in the deemed categories that were already on the market qualified as “new tobacco products” and lacked a marketing order. In August 2017, the FDA issued a compliance policy (the “August 2017 Guidance”) that allowed new tobacco products to remain on the market without an FDA authorization until specified deadlines had passed.  Under the August 2017 Guidance, compliance dates vary depending upon the type of application submitted, but all newly-deemed products require an application no later than August 8, 2021, for “combustible” products (e.g. cigar and pipe), and August 8, 2022, for “non-combustible” products (e.g. vapor products) with the exception of “grandfathered” products (products in commerce as of February 15, 2007) which are already authorized.

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On March 27, 2018, several public health organizations filed a lawsuit (the “Maryland Lawsuit”) challenging the August 2017 Guidance. The plaintiffs asserted, among other arguments, that the modification to the deeming regulations included in the August 2017 Guidance conflicts with the TCA and exceeds FDA’s statutory authority. The plaintiffs also expressed concern that the August 2017 Guidance allows vapor products to remain marketed for a significant period of time without required premarket review.
 
The court found in favor of the plaintiffs in May 2019 and vacated the August 2017 Guidance. On July 12, 2019, the court issued its remedy order (the “Remedy Order”). Specifically, the court ordered that: (1) for all deemed new tobacco products, marketers must file applications within 10 months of the Remedy Order to continue marketing such products; (2) such a product may remain on the market pending FDA review of a timely filed application for a period not to exceed one year from the date of the application’s submission; (3) in its discretion, the FDA may enforce the premarket review requirements against such products for which marketers do not file applications within 10 months; and (4) the FDA will have the ability to exempt deemed new tobacco products from these application submission requirements for good cause, on a case-by-case basis. FDA appealed the Remedy Order and other actions adverse to the FDA; however, on May 4, 2020, the U.S. Court of Appeals for the Fourth Circuit issued a ruling dismissing the appeals in their entirety.
 
On March 30, 2020, citing the impacts of the worldwide COVID-19 pandemic on both FDA and industry, FDA requested a modification to the Remedy Order that would extend the May 12, 2020, deadline for filing premarket applications by 120 days to September 9, 2020. After several procedural steps, the Remedy Order was modified on April 22, 2020, to reflect the new deadline, and since then, FDA has updated relevant Guidance documents to reflect this new timeline.
 
On September 11, 2019, President Donald Trump and the Department of Health and Human Services Secretary, Alex Azar, indicated FDA would adopt a regulatory policy restricting all flavors in vapor products. In January 2020, FDA issued a Guidance document (the “January 2020 Guidance”) that stated it would be prioritizing enforcement of several categories of electronic nicotine delivery systems (“ENDS”) products: (1) flavored, cartridge-based ENDS products (other than tobacco- or menthol-flavored ENDS products); (2) ENDS products for which the manufacturer has failed to take (or is failing to take) adequate measures to prevent minors’ access; (3) ENDS products targeted to minors or whose marketing is likely to promote the use of ENDS by minors; and (4) ENDS products offered for sale after the May 12, 2020, premarket application deadline for which the manufacturer has not submitted a premarket application. The policy outlined several factors the agency would consider in its enforcement of flavored cigars going forward but did not drastically restrict those products as it had considered in its March 2019 Guidance proposal. The FDA’s policy on these and other regulated products may change or expand over time in ways not yet known and may significantly impact our products or our premarket filings. For example, as noted above, the FDA recently acted to modify the deadline for premarket applications from May 12, 2020, to September 9, 2020.
 
As a result of the implementation of the modified Remedy Order, we would not be permitted to continue marketing our existing “deemed” products that the FDA regulates as tobacco products past September 9, 2020, unless the product is grandfathered or we file an application for each such product by that date.  We expect to be able to make appropriate premarket filing by the deadlines and to supplement and complete the applications within FDA’s discretionary timeline. A successful PMTA must demonstrate that the subject product is “appropriate for the protection of public health,” taking into account the effect of the marketing of the product on all sub-populations while a Substantial Equivalence Report must demonstrate that a new product either has the same characteristics as its predicate product or different characteristics, but does not raise different questions of public health. FDA has issued a number of proposed rules related to premarket filings; however, none of these rules are final yet, and their requirements may shift before being finalized. We believe we have products that meet the requisite standards and that we will be able to efficiently produce satisfactory premarket filings. However, there is no assurance that the FDA’s guidance or ultimate regulation will not change, the Remedy Order will not be further altered or that unforeseen circumstances will not arise that prevent us from filing applications or otherwise increase the amount of time and money we are required to spend to successfully file all necessary premarket applications. Even if we successfully file all of our premarket applications in a timely manner, no assurance can be given that the applications will ultimately be successful. Given the shorter time frame mandated by the Remedy Order, which if not amended or successfully appealed, may result in the prioritization of meeting requisite deadlines by selecting high priority SKUs in our inventory position, and future revenues may be adversely impacted.
 
In addition, we currently distribute many third-party manufactured vapor products for which we will be completely dependent on the manufacturer complying with the premarket filing requirements. There can be no assurances that some products that we currently distribute will be able to be sold to end consumers after September 2020. While we will take measures to pursue regulatory compliance for our own privately-branded or proprietary vape products that compete with these third-party products, there is no assurance that such proprietary products would be as successful in the marketplace or can fully displace third-party products that are currently being distributed by us, which could adversely affect our results of operations and liquidity.

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Recent Accounting Pronouncements Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This ASU applies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investments in leases, and trade accounts receivable as well as certain off-balance sheet credit exposures, such as loan commitments. The ASU replaced the previous incurred loss impairment methodology with a methodology to reflect current expected credit losses (“CECL”) and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. The guidance was adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The ASU was effective for the Company beginning in the first quarter of 2020. The ASU did not have an impact to the Company’s financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. The guidance is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The Company adopted ASU 2018-15 effective January 1, 2020. The ASU did not have an impact to the Company’s financial statements and related disclosures.
 
Recent Accounting Pronouncements Not Yet Adopted
 
In December 2019, the FASB issued ASU 2019-12 to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This ASU will be effective beginning in the first quarter of the Company’s fiscal year 2021. Early adoption is permitted. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The Company is currently evaluating the impact this ASU will have on the financial statements and related disclosures, as well as the timing of adoption. 

Note 3. Acquisitions
 
Durfort Holdings

In June 2020, the Company purchased certain tobacco assets and distribution rights from Durfort Holdings S.R.L. (“Durfort”) and Blunt Wrap USA for $47.8 million in total consideration, comprised of $37.8 million in cash, including $1.8 million of capitalized transaction costs, and a $10.0 million Promissory Note. With this transaction, the Company acquired co-ownership in the intellectual property rights of all of Durfort’s and Blunt Wrap USA’s Homogenized Tobacco Leaf (“HTL”) cigar wraps and cones. The Company also entered into an exclusive Master Distribution Agreement to market and sell the original Blunt Wrap® cigar wraps within the USA which is expected to be effective within 120 days of the closing. Durfort is an industry leader in alternative cigar and cigar wrap manufacturing and distribution. Blunt Wrap USA has been an innovator of new products in the smoking alternative market since 1997 and has secured patents in the USA and internationally for novel smoking wrappers and cones. As of June 30, 2020, the Company had not completed the accounting for the acquisition. The transaction was accounted for as an asset purchase with the purchase price of $47.8 million assigned to intellectual property, which has an indefinite life, and is currently deductible for tax purposes.

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Table of Contents
Solace Technologies

In July 2019, the Company purchased the assets of E-Vape 12, Inc and Solace Technologies LLC (“Solace”) for $9.4 million in total consideration, comprised of $7.7 million in cash, $1.1 million earn-out fair value, and $0.5 million holdback for 18 months, which was adjusted by $0.2 million for a working capital deficiency. The earn-out consists of 44,295 shares of the Company’s common stock to be issued to the former owners upon the achievement of certain annual milestones. Immediately following the acquisition, 88,582 performance based restricted stock units with a fair value of $4.62 million were issued to former owners who became employees. See Note 15, “Share Incentive Plans”, for further details. Solace is an innovative product development company that has grown from the creator of one of the leading vape juice brands in the industry into a leader of alternative ingredients product development. The Company intends to incorporate Solace’s innovative products as well as the legacy vapor products into our Nu-X development engine. As of June 30, 2020, the Company had not completed the accounting for the acquisition. The following purchase price and goodwill and other intangibles are based on the excess of the acquisition price over the estimated fair value of the tangible assets acquired and are based on management’s preliminary estimates:

Total consideration transferred
 
$
9,405
 
Adjustments to consideration transferred:
       
Cash acquired
   
(45
)
Working capital
   
(235
)
Adjusted consideration transferred
   
9,125
 
Assets acquired:
       
Working capital (primarily AR and inventory)
   
1,132
 
Fixed assets and Other long term assets
   
414
 
Intangible assets
   
1,352
 
Other liabilities
   
(209
)
Net assets acquired
 
$
2,689
 
 
       
Goodwill
 
$
6,436
 

The goodwill of $6.4 million consists of the synergies and scale expected from combining the operations and is currently deductible for tax purposes.

Note 4. Derivative Instruments

Foreign Currency

The Company’s policy is to manage the risks associated with foreign exchange rate movements. The policy allows hedging up to 100% of its anticipated purchases of inventory over a forward period that will not exceed 12 rolling and consecutive months. The Company may, from time to time, hedge currency for non-inventory purchases, e.g., production equipment, not to exceed 90% of the purchase price. The Company did not execute any forward contracts during the three and six months ended June 30, 2020 and 2019.

Interest Rate Swaps

The Company’s policy is to manage interest rate risk by reducing the volatility of future cash flows associated with debt instruments bearing interest at variable rates. In March 2018, the Company executed various interest rate swap agreements for a notional amount of $70 million with an expiration of December 2022. The swap agreements fix LIBOR at 2.755%. The swap agreements met the hedge accounting requirements; thus, any change in fair value is recorded to other comprehensive income. The Company uses the Shortcut Method to account for the swap agreements. The Shortcut Method assumes the hedge to be perfectly effective; thus, there is no ineffectiveness to be recorded in earnings. The swap agreements’ fair values at June 30, 2020, and December 31, 2019, resulted in a liability of $4.7 million and $2.5 million, respectively, included in other long-term liabilities.

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Note 5. Fair Value of Financial Instruments

The estimated fair value amounts have been determined by the Company using the methods and assumptions described below. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Cash and Cash Equivalents

Cash and cash equivalents are, by definition, short-term. Thus, the carrying amount is a reasonable estimate of fair value.

Accounts Receivable

The fair value of accounts receivable approximates their carrying value due to their short-term nature.

2018 Revolving Credit Facility

The fair value of the 2018 Revolving Credit Facility approximates its carrying value as the interest rate fluctuates with changes in market rates.

Long-Term Debt

The Company’s 2018 Credit Facility bears interest at variable rates that fluctuate with market rates, the carrying values of the long-term debt instruments approximate their respective fair values. As of June 30, 2020, the fair value of the 2018 First Lien Term Loan approximated $141.0 million. As of December 31, 2019, the fair value of the 2018 First Lien Term Loan approximated $146.0 million.

The Convertible Senior Notes bear interest at a rate of 2.50% per year and the fair value approximated $143.1 million, with a carrying value of $172.5 million as of June 30, 2020. As of December 31, 2019, the fair value of the Convertible Senior Notes approximated $140.1 million, with a carrying value of $172.5 million.

Note Payable – Promissory Note

The fair value of the Promissory Note approximates its carrying value of $10,000 due to the recency of the note’s issuance, related to the quarter ended June 30, 2020.

Note Payable – Unsecured Loan

The fair value of the Unsecured Note approximates its carrying value of $7,485 due to the recency of the note’s issuance, related to the quarter ended June 30, 2020.

See Note 11, “Notes Payable and Long-Term Debt”, for further information regarding the Company’s long-term debt.

Interest Rate Swaps

The Company had swap contracts for a total notional amount of $70 million at June 30, 2020 and December 31, 2019. The fair values of the swap contracts are based upon quoted market prices and resulted in a liability of $4.7 million and $2.5 million as of June 30, 2020 and December 31, 2019, respectively.

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Note 6. Inventories

The components of inventories are as follows:

 
 
June 30,
2020
   
December 31,
2019
 
Raw materials and work in process
 
$
7,552
   
$
7,050
 
Leaf tobacco
   
38,550
     
32,763
 
Finished goods - Smokeless products
   
5,595
     
5,680
 
Finished goods - Smoking products
   
7,902
     
13,138
 
Finished goods - NewGen products
   
20,972
     
17,111
 
Other
   
581
     
989
 
Gross Inventory
   
81,152
     
76,731
 
LIFO reserve
   
(5,596
)
   
(5,752
)
Net Inventory
 
$
75,556
   
$
70,979
 
 
The inventory valuation allowance was $18.6 million and $21.5 million as of June 30, 2020, and December 31, 2019, respectively. Inventory reserves increased in the fourth quarter 2019 as a result of additional reserves necessary for products in our NewGen segment primarily from increased regulation.

Note 7. Other Current Assets

Other current assets consists of:

 
 
June 30,
2020
   
December 31,
2019
 
Inventory deposits
 
$
5,445
   
$
4,012
 
Prepaid taxes
   
1,189
     
3,673
 
Other
   
10,067
     
8,430
 
Total
 
$
16,701
   
$
16,115
 

Note 8. Property, Plant, and Equipment

Property, plant, and equipment consists of:

 
 
June 30,
2020
   
December 31,
2019
 
Land
 
$
22
   
$
22
 
Buildings and improvements
   
2,655
     
2,655
 
Leasehold improvements
   
2,470
     
2,567
 
Machinery and equipment
   
15,511
     
14,516
 
Furniture and fixtures
   
8,588
     
8,502
 
Gross property, plant and equipment
   
29,246
     
28,262
 
Accumulated depreciation
   
(15,903
)
   
(14,446
)
Net property, plant and equipment
 
$
13,343
   
$
13,816
 

Note 9. Other Assets

Other assets consists of:

 
 
June 30,
2020
   
December 31,
2019
 
Equity investments
 
$
5,421
   
$
5,421
 
Pension assets
   
1,820
     
1,686
 
Other
   
4,271
     
3,566
 
Total
 
$
11,512
   
$
10,673
 

In July 2019, the Company obtained a 30% stake in Canadian distribution entity, ReCreation Marketing (“ReCreation”), for $1.0 million paid at closing. The Company also received options to acquire up to a 50% ownership position in ReCreation.

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Note 10. Accrued Liabilities

Accrued liabilities consists of:

 
 
June 30,
2020
   
December 31,
2019
 
Accrued payroll and related items
 
$
4,206
   
$
5,267
 
Customer returns and allowances
   
5,446
     
6,160
 
Taxes payable
   
2,480
     
705
 
Lease liabilities
   
2,627
     
2,218
 
Accrued interest
   
2,057
     
1,909
 
Other
   
8,777
     
10,261
 
Total
 
$
25,593
   
$
26,520
 

Note 11. Notes Payable and Long-Term Debt

Notes payable and long-term debt consists of the following in order of preference:

 
June 30,
2020
   
December 31,
2019
 
2018 First Lien Term Loan
 
$
141,000
   
$
146,000
 
Convertible Senior Notes
   
172,500
     
172,500
 
Note payable - Promissory Note
   
10,000
     
-
 
Note payable - Unsecured Loan
   
7,485
     
-
 
Note payable - IVG
   
-
     
4,240
 
Gross notes payable and long-term debt
   
330,985
     
322,740
 
Less deferred finance charges
   
(5,778
)
   
(6,466
)
Less debt discount
   
(28,583
)
   
(32,083
)
Less current maturities
   
(12,000
)
   
(15,240
)
Notes payable and long-term debt
 
$
284,624
   
$
268,951
 

2018 Credit Facility

On March 7, 2018, the Company entered into a $250 million credit facility consisting of a $160 million 2018 First Lien Term Loan with Fifth Third Bank, as administrative agent, and other lenders, and a $50 million 2018 Revolving Credit Facility (collectively, the “2018 First Lien Credit Facility”) in addition to a $40 million 2018 Second Lien Term Loan (the “2018 Second Lien Credit Facility,” and, together with the 2018 First Lien Credit Facility, the “2018 Credit Facility”) with Prospect Capital Corporation, as administrative agent, and other lenders. The 2018 Credit Facility contains a $40 million accordion feature.

The 2018 Credit Facility contains customary events of default including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, and change in control defaults. The 2018 Credit Facility also contains certain negative covenants customary for facilities of these types including covenants that, subject to exceptions described in the 2018 Credit Facility, restrict the ability of the Company and its subsidiary guarantors: (i) to pledge assets, (ii) to incur additional indebtedness, (iii) to pay dividends, (iv) to make distributions, (v) to sell assets, and (vi) to make investments. See Note 19, “Dividends and Share Repurchase”, for further information regarding dividend restrictions.

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2018 First Lien Credit Facility: The 2018 First Lien Term Loan and the 2018 Revolving Credit Facility bear interest at LIBOR plus a spread of 2.75% to 3.50% based on the Company’s senior leverage ratio. The 2018 First Lien Term Loan has quarterly required payments of $2.0 million beginning June 30, 2018, increasing to $3.0 million on June 30, 2020, and increasing to $4.0 million on June 30, 2022. The 2018 First Lien Credit Facility has a maturity date of March 7, 2023. The 2018 First Lien Term Loan is secured by a first priority lien on substantially all of the assets of the borrowers and the guarantors thereunder, including a pledge of the Company’s capital stock, other than certain excluded assets (the “Collateral”).  In connection with the Convertible Senior Notes offering, the Company entered into a First Amendment (“the Amendment”) to the First Lien Credit Agreement, with Fifth Third Bank, as administrative agent, and other lenders and certain other lender parties thereto. The Amendment was entered into primarily to permit the Company to issue up to $200 million of convertible senior notes, enter into certain capped call transactions in connection with the issuance of such notes and to use the proceeds from the issuance of the notes to repay amounts outstanding under the 2018 Second Lien Credit Facility and use the remaining proceeds for acquisitions and investments. In connection with the Amendment, fees of $0.7 million were incurred. The 2018 First Lien Credit Facility contains certain financial covenants, which were amended in connection with the Convertible Senior Notes offering in the third quarter 2019. The covenants include maximum senior leverage ratio of 3.00x with step-downs to 2.50x, a maximum total leverage ratio of 5.50x with step-downs to 5.00x, and a minimum fixed charge coverage ratio of 1.20x. In the first quarter of 2020, the financial covenants were amended to permit certain add-backs related to PMTA in the definition of Consolidated EBITDA for the period of October 1, 2019 until September 30, 2020. In connection with the amendment, fees of $0.2 million were incurred. Based on an excess cash covenant for the facility, a principal payment of $4.5 million was due in the second quarter 2019. All parties agreed to waive the payment, resulting in consent fees of $0.1 million. The weighted average interest rate of the 2018 First Lien Term Loan was 2.93% at June 30, 2020. At June 30, 2020, the Company had no borrowings outstanding under the 2018 Revolving Credit Facility. The $50.0 million unused portion of the 2018 Revolving Credit Facility is reduced by letters of credit from Fifth Third Bank totaling $3.6 million, resulting in $46.4 million of availability under the 2018 Revolving Credit Facility at June 30, 2020.

2018 Second Lien Credit Facility: The 2018 Second Lien Credit Facility bore interest at a rate of LIBOR plus 7.00% and had a maturity date of March 7, 2024. The 2018 Second Lien Term Loan was secured by a second priority interest in the Collateral and was guaranteed by the same entities as the 2018 First Lien Term Loan. Based on an excess cash covenant for the facility, a $4.5 million principal payment was made in the second quarter 2019, resulting in a $0.2 million loss on extinguishment of debt. The Company used a portion of the proceeds from the issuance of the Convertible Senior Notes to prepay all outstanding amounts related to the 2018 Second Lien Credit Facility in the third quarter 2019. The principal paid in the third quarter amounted to $35.5 million, and the transaction resulted in a $1.1 million loss on extinguishment of debt.
 
Convertible Senior Notes
 
In July 2019, the Company 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 of the Company.
 
The Convertible Senior Notes are convertible into approximately 3,202,808 shares of our voting common stock under certain circumstances prior to maturity at a conversion rate of 18.567 shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.86 per share, subject to adjustment under certain conditions, but will not be adjusted for any accrued and unpaid interest. Upon conversion, the Company may pay cash, shares of common stock or a combination of cash and stock, as determined by the Company at its discretion. The conditions required to allow the holders to convert their Convertible Senior Notes were not met as of June 30, 2020.
 
Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the Convertible Senior Notes, the Company separated the Convertible Senior Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the Convertible Senior Notes and the fair value of the liability component of the Convertible Senior Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”), $35.0 million, will be amortized to interest expense using an effective interest rate of 7.5% over the expected life of the Convertible Senior Notes. The equity component is not remeasured as long as it continues to meet the criteria for equity classification. Interest expense includes $1.8 million and $3.5 million of amortization for the three and six months, respectively, ended June 30, 2020.
 
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In accounting for the issuance costs related to the issuance of the Convertible Senior Notes, the Company allocated the total amount incurred to the liability and equity components based on their relative fair values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the Convertible Senior Notes, $4.7 million, and the debt issuance costs attributable to the equity component, $1.2 million, are netted with the equity component of stockholders’ equity (deficit).
 
In connection with the Convertible Senior Notes offering, the Company entered into privately negotiated capped call transactions with certain financial institutions. The capped call transactions have a strike price of $53.86 per and a cap price of $82.86 per, and are exercisable when, and if, the Convertible Senior Notes are converted. The Company paid $20.53 million for these capped calls and charged that amount to additional paid-in capital.

Promissory Note

On June 10, 2020, in connection with the acquisition of certain Durfort assets, the Company issued an unsecured subordinated promissory note (“Promissory Note”) in the principal amount of $10.0 million (the “Principal Amount”), with an annual interest rate of 7.5%, payable quarterly, with the first payment due September 10, 2020. The Principal Amount is payable in two $5.0 million installments, with the first installment due 18 months after the closing date of the acquisition (June 10, 2020), and the second installment due 36 months after the closing date of the acquisition. The second installment is subject to reduction for certain amounts payable by the Company as a holdback.

Unsecured Loan

On April 6, 2020, the 2018 First Lien Credit Facility was amended to allow for an unsecured loan under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES”). On April 17, 2020, NTC entered into a loan agreement with Regions Bank guaranteed by the Small Business Administration for a $7.5 million unsecured loan. The proceeds of the loan were received on April 27, 2020. The loan is scheduled to mature on April 17, 2022 and has a 1.00% interest rate.

Note Payable – IVG

In September 2018, the Company issued a note payable to IVG’s former shareholders (“IVG Note”). The IVG Note was $4.0 million principal with 6.0% interest compounding annually and matured on March 5, 2020. All principal and accrued and unpaid interest under the IVG Note were subject to indemnification obligations of the sellers pursuant to the International Vapor Group Stock Purchase Agreement dated as of September 5, 2018. The carrying amount of the IVG Note, $4.2 million, was deposited into an escrow account pending agreement with the sellers of any indemnification obligations.

Note 12. Leases
 
As of January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). The main impact to the financial statements is the recognition of lease liabilities and right of use assets. The Company’s leases consist primarily of leased property for manufacturing warehouse, head offices and retail space as well as vehicle leases. In general, the Company does not recognize any renewal periods within the lease terms as there are not significant barriers to ending the lease at the initial term. Lease and non-lease components are accounted for as a single lease component.
 
Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for these leases is recognized on a straight-line basis over the lease term.
 
The components of lease expense consisted of the following:
 
 
 
Three Months Ended June 30,
 
 
 
2020
   
2019
 
 
           
Operating lease cost
           
Cost of sales
 
$
225
   
$
232
 
Selling, general and administrative
   
606
     
605
 
Variable lease cost (1)
   
44
     
125
 
Short-term lease cost
   
26
     
35
 
Sublease income
   
(30
)
   
(20
)
Total
 
$
871
   
$
977
 

(1)
Variable lease cost includes elements of a contract that do not represent a good or service but for which the lessee is responsible for paying.

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Six Months Ended June 30,
 
 
 
2020
   
2019
 
 
           
Operating lease cost
           
Cost of sales
 
$
458
   
$
424
 
Selling, general and administrative
   
1,004
     
1,160
 
Variable lease cost (1)
   
356
     
370
 
Short-term lease cost
   
109
     
89
 
Sublease income
   
(60
)
   
(50
)
Total
 
$
1,867
   
$
1,993
 

(1)
Variable lease cost includes elements of a contract that do not represent a good or service but for which the lessee is responsible for paying.

 
 
June 30,
2020
   
December 31,
2019
 
Assets:
           
Right of use assets
 
$
13,243
   
$
12,130
 
Total lease assets
 
$
13,243
   
$
12,130
 
 
               
 
               
Liabilities:
               
Current lease liabilities (2)
 
$
2,627
   
$
2,218
 
Long-term lease liabilities
   
11,813
     
11,067
 
Total lease liabilities
 
$
14,440
   
$
13,285
 

(2)
Reported within accrued liabilities on the balance sheet 

 
 
As of June 30,
 
 
 
2020
   
2019
 
Weighted-average remaining lease term  - operating leases
 
7.6 years
   
8.5 years
 
Weighted-average discount rate - operating leases
   
5.65
%
   
6.53
%
 
Nearly all the lease contracts for the Company do not provide a readily determinable implicit rate. For these contracts, the Company estimated the incremental borrowing rate based on information available upon adoption of ASU 2016-02. The Company applied a consistent method in periods after the adoption of ASU 2016-02 to estimate the incremental borrowing rate.

As of June 30, 2020, and December 31, 2019, maturities of lease liabilities consisted of the following:

 
 
June 30,
2020
   
December 31,
2019
 
2020
 
$
1,648
   
$
2,924
 
2021
   
3,268
     
2,730
 
2022
   
2,828
     
2,165
 
2023
   
2,451
     
1,782
 
2024
   
1,364
     
1,028
 
Years thereafter
   
6,312
     
6,297
 
Total lease payments
 
$
17,871
   
$
16,926
 
Less: Imputed interest
   
3,431
     
3,641
 
Present value of lease liabilities
 
$
14,440
   
$
13,285
 

During the second quarter of the year, the Company entered into two new lease agreements, terminated six lease agreements, primarily retail spaces, and had various new and terminated car leases. These changes resulted in additional lease liabilities of $0.8 million as of June 30, 2020. Additionally, the Company further impaired certain right of use assets, mainly related to store closures, pending final negotiations with the lessor for $0.1 million.

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Note 13. Income Taxes

The Company’s effective income tax rate for the three and six months ended June 30, 2020, was 26.1% and 25.2%, respectively, which includes a discrete tax deduction of $0.0 million and $0.9 million for the three and six months ended June 30, 2020, respectively, relating to stock option exercises. The Company’s effective income tax rate for the three and six months ended June 30, 2019, was 18.4% and 19.4%, respectively, which includes a discrete tax deduction of $3.7 million and $4.5 million for the three and six months ended June 30, 2019, respectively, relating to stock option exercises.

The Company follows the provisions of ASC 740-10-25, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company has determined that the Company did not have any uncertain tax positions requiring recognition under the provisions of ASC 740-10-25. The Company’s policy is to recognize interest and penalties accrued on uncertain tax positions, if any, as part of interest expense. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. In general, the Company is no longer subject to U.S. federal and state tax examinations for years prior to 2016.

Note 14. Pension and Postretirement Benefit Plans

The Company has a defined benefit pension plan. Benefits for hourly employees were based on a stated benefit per year of service, reduced by amounts earned in a previous plan. Benefits for salaried employees were based on years of service and the employees’ final compensation. The defined benefit pension plan is frozen. The Company’s policy is to make the minimum amount of contributions that can be deducted for federal income taxes. The Company expects to make no contributions to the pension plan in 2020. In October 2019, the Company elected to terminate the defined benefit pension plan, effective December 31, 2019 with final distributions to be made in 2020.

The Company sponsored a defined benefit postretirement plan that covered hourly employees. This plan provides medical and dental benefits. This plan is contributory with retiree contributions adjusted annually. The Company’s policy is to make contributions equal to benefits paid during the year. The Company does not expect to contribute to its postretirement plan in 2020 for the payment of benefits. In October 2019, the Company amended the plan to cease benefits effective June 30, 2020.

The following table provides the components of net periodic pension and postretirement benefit costs and total costs for the plans:

 
 
Three Months Ended June 30,
 
 
 
Pension
Benefits
   
Postretirement
Benefits
 
 
 
2020
   
2019
   
2020
   
2019
 
 
                       
Service cost
 
$
-
   
$
26
   
$
-
   
$
-
 
Interest cost
   
95
     
130
     
-
     
25
 
Expected return on plan assets
   
(161
)
   
(161
)
   
-
     
-
 
Amortization of (gains) losses
   
36
     
36
     
(74
)
   
(41
)
Net periodic benefit (income) cost
 
$
(30
)
 
$
31
   
$
(74
)
 
$
(16
)

 
 
Six Months Ended June 30,
 
 
 
Pension
Benefits
   
Postretirement
Benefits
 
 
 
2020
   
2019
   
2020
   
2019
 
 
                       
Service cost
 
$
-
   
$
52
   
$
-
   
$
-
 
Interest cost
   
190
     
260
     
-
     
51
 
Expected return on plan assets
   
(322
)
   
(323
)
   
-
     
-
 
Amortization of (gains) losses
   
72
     
73
     
(131
)
   
(83
)
Net periodic benefit (income) cost
 
$
(60
)
 
$
62
   
$
(131
)
 
$
(32
)

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Table of Contents
Note 15. Share Incentive Plans

On April 28, 2016, the Board of Directors of the Company adopted the Turning Point Brands, Inc., 2015 Equity Incentive Plan (the “2015 Plan”), pursuant to which awards may be granted to employees, non-employee directors, and consultants. In addition, the 2015 Plan provides for the granting of nonqualified stock options to employees of the Company or any subsidiary of the Company. Pursuant to the 2015 Plan, 1,400,000 shares of the Company’s voting common stock are reserved for issuance as awards to employees, non-employee directors, and consultants as compensation for past or future services or the attainment of certain performance goals. The 2015 Plan is scheduled to terminate on April 27, 2026. The 2015 Plan is administered by a committee (the “Committee”) of the Company’s Board of Directors. The Committee determines the vesting criteria for the awards, with such criteria to be specified in the award agreement. As of  June 30, 2020, net of forfeitures, there were 16,159 shares of restricted stock, 440,132 performance-based restricted stock units, and 613,279 options granted under the 2015 Plan. There are 330,430 shares available for grant under the 2015 Plan.

On February 8, 2006, the Board of Directors of the Company adopted the 2006 Equity Incentive Plan (the “2006 Plan”) of North Atlantic Holding Company, Inc., pursuant to which awards may be granted to employees. The 2006 Plan provides for the granting of nonqualified stock options and restricted stock awards to employees. Upon the adoption of the Company’s 2015 Equity Incentive Plan in connection with its IPO, the Company determined no additional grants would be made under the 2006 Plan. However, all awards issued under the 2006 Plan that have not been previously terminated or forfeited remain outstanding and continue unaffected.

There are no shares available for grant under the 2006 Plan. Stock option activity for the 2006 and 2015 Plans is summarized below:

 
 
Stock
Option
Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Grant Date
Fair Value
 
Outstanding, December 31, 2018
   
659,574
   
$
9.00
   
$
3.34
 
 
                       
Granted
   
180,780
     
43.89
     
14.34
 
Exercised
   
(129,067
)
   
5.72
     
2.58
 
Forfeited
   
(14,571
)
   
34.55
     
11.10
 
Outstanding, December 31, 2019
   
696,716
     
18.13
     
6.17
 
 
                       
Granted
   
155,000
     
14.85
     
4.41
 
Exercised
   
(43,354
)
   
5.66
     
2.57
 
Forfeited
   
(1,289
)
   
30.07
     
9.63
 
Outstanding, June 30, 2020
   
807,073
   
$
18.15
   
$
6.02
 

Under the 2006 and 2015 Plans, the total intrinsic value of options exercised during the six months ended June 30, 2020 and 2019, was $0.9 million, and $4.5 million, respectively.

At June 30, 2020, under the 2006 Plan, the outstanding stock options’ exercise price for 273,247 options is $3.83 per share, all of which are exercisable. The weighted average of the remaining lives of the outstanding stock options with an exercise price of $3.83 is approximately 3.11 years. The Company estimates the expected life of these stock options is ten years  from the date of grant. For the $3.83 per share options, the weighted average fair value of options was determined using the Black-Scholes model assuming a ten-year life from grant date, a current share price and exercise price of $3.83, a risk-free interest rate of 3.57%, volatility of 40%, and no assumed dividend yield.  Based on these assumptions, the fair value of these options is approximately $2.17 per share option granted.

At June 30, 2020, under the 2015 Plan, the risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. The expected volatility is based on the average long-term historical volatilities of peer companies. We intend to continue to consistently use the same group of publicly traded peer companies to determine expected volatility until sufficient information regarding volatility of our share price becomes available or until the selected companies are no longer suitable for this purpose. Due to our limited trading history, we are using the simplified method presented by SEC Staff Accounting Bulletin No. 107 to calculate expected holding periods, which represent the periods of time for which options granted are expected to be outstanding. We will continue to use this method until we have sufficient historical exercise experience to give us confidence in the reliability of our calculations. The fair values of these options were determined using the Black-Scholes option pricing model.
 
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The following table outlines the assumptions based on the number of options granted under the 2015 Plan.
 
 
February 10,
2017
   
May 17,
2017
   
March 7,
2018
   
March 13,
2018
   
March 20,
2019
   
October 24,
2019
   
March 18,
2020
 
Number of options granted
   
40,000
     
93,819
     
98,100
     
26,000
     
155,780
     
25,000
     
155,000
 
Options outstanding at June 30, 2020
   
28,700
     
65,907
     
86,180
     
26,000
     
147,239
     
25,000
     
154,800
 
Number exercisable at June 30, 2020
   
28,700
     
65,907
     
57,686
     
26,000
     
50,140
     
8,250
     
-
 
Exercise price
 
$
13.00
   
$
15.41
   
$
21.21
   
$
21.49
   
$
47.58
   
$
20.89
   
$
14.85
 
Remaining lives
   
6.62
     
6.88
     
7.69
     
7.71
     
8.73
     
9.32
     
9.72
 
Risk free interest rate
   
1.89
%
   
1.76
%
   
2.65
%
   
2.62
%
   
2.34
%
   
1.58
%
   
0.79
%
Expected volatility
   
27.44
%
   
26.92
%
   
28.76
%
   
28.76
%
   
30.95
%
   
31.93
%
   
35.72
%
Expected life
   
6.000
     
6.000
     
6.000
     
5.495
     
6.000
     
6.000
     
6.000
 
Dividend yield
   
-
     
-
     
0.83
%
   
0.82
%
   
0.42
%
   
0.95
%
   
1.49
%
Fair value at grant date
 
$
3.98
   
$
4.60
   
$
6.37
   
$
6.18
   
$
15.63
   
$
6.27
   
$
4.41
 
 
The Company has recorded compensation expense related to the options based on the provisions of ASC 718 under which the fixed portion of such expense is determined as the fair value of the options on the date of grant and amortized over the vesting period. The Company recorded compensation expense related to the options of approximately $0.2 million and $0.5 million for the three months ended June 30, 2020 and 2019, respectively. The Company recorded compensation expense related to the options of approximately $0.6 million and $0.7 million for the six months ended June 30, 2020 and 2019, respectively. Total unrecognized compensation expense related to options at June 30, 2020, is $1.2 million, which will be expensed over 1.90 years.

Performance-Based Restricted Stock Units (“PRSUs”)
 
PRSUs are restricted stock units subject to both performance-based and service-based vesting conditions. The number of common stock shares a recipient will receive upon vesting of a PRSU will be calculated by reference to certain performance metrics related to the Company’s performance over a five-year period. PRSUs will vest on the measurement date, which is no more than 65 days after the performance period (provided the applicable service and performance conditions are satisfied. As of June 30, 2020, there are 440,132 PRSUs outstanding, all of which are unvested. The following table outlines the PRSUs granted and outstanding as of June 30, 2020.

 
 
March 31,
2017
   
March 7,
2018
   
March 20,
2019
   
March 20,
2019
   
July 19,
2019
   
March 18,
2020
 
Number of PRSUs granted
   
94,000
     
96,000
     
92,500
     
4,901
     
88,582
     
90,000
 
PRSUs outstanding at June 30, 2020
   
83,000
     
93,000
     
85,550
     
-
     
88,582
     
90,000
 
Fair value as of grant date
 
$
15.60
   
$
21.21
   
$
47.58
   
$
47.58
   
$
52.15
   
$
14.85
 
Remaining lives
   
1.50
     
2.50
     
3.50
     
-
     
2.50
     
4.50
 

The Company recorded compensation expense related to the PRSUs of approximately $0.4 million and $0.5 million in the consolidated statements of income for the three months ended June 30, 2020 and 2019, respectively, based on the probability of achieving the performance condition. The Company recorded compensation expense related to the PRSUs of approximately $0.7 million and $0.7 million in the consolidated statements of income for the six months ended June 30, 2020 and 2019, respectively, based on the probability of achieving the performance condition. Total unrecognized compensation expense related to these awards at June 30, 2020, is $9.8 million which will be expensed over the service periods based on the probability of achieving the performance condition.

Note 16. Contingencies

Other major tobacco companies are defendants in product liability claims. In a number of these cases, the amounts of punitive and compensatory damages sought are significant and could have a material adverse effect on our business and results of operations.

The Company is subject to several lawsuits alleging personal injuries resulting from malfunctioning vaporizer devices or consumption of e-liquids and may be subject to claims in the future relating to other NewGen products. The Company is still evaluating these claims and the potential defenses to them.  For example, the Company did not design or manufacture the products at issue; rather, the Company was merely the distributor.  Nonetheless, there can be no assurance that the Company will prevail in these cases, and they could have a material adverse effect on the financial position, results of operations, or cash flows of the Company.

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Franchisors are defendants from time to time in the ordinary course of business. In certain of these cases, the amounts of punitive and compensatory damages sought are significant. One of the Company’s subsidiaries is a defendant in a lawsuit brought by a franchisee. In that case, the franchisee is seeking compensatory and punitive damages and rescission of their franchise agreement, alleging that the Company’s subsidiary failed to make certain disclosures in the Franchise Disclosure Document. The subsidiary is evaluating these claims, the potential defenses to them as well as available counterclaims. The subsidiary believes that termination of the franchise agreement was proper, no damages are due and the franchisee is bound by an arbitration agreement pursuant to the terms of their franchise agreement (and therefore it was improper to pursue litigation). The former franchisee has also named various other parties, including the Company and another subsidiary asserting the same claims, as well as a claim for a declaratory judgment, that the Company and the subsidiary should be found liable as successor entities, or under the doctrines of “de facto merger”, or alter ego.  The Company and the subsidiary have moved to stay the case pending the arbitration noted above.  Both motions remain pending.  While the Company and its subsidiaries believe they have good and valid defenses to the claims, there can be no assurance that the Company and its subsidiaries will prevail in this case, and it could have a material adverse effect on the Company’s business and results of operations.

The Company has several subsidiaries engaged in making, distributing, and retailing (online and in bricks-and-mortar) vapor products. As a result of the overall publicity and controversy surrounding the vapor industry generally, many companies have received informational subpoenas from various regulatory bodies and in some jurisdictions regulatory lawsuits have been filed regarding marketing practices and possible underage sales. The Company has subsidiaries that are subject to some information requests. In the acquisition of the vapor businesses, the Company negotiated financial “hold-backs”, which it expects to be able to use to defray expenses associated with the information production and the cost of defending any such lawsuits as well as the  franchisee lawsuit. To the extent that litigation becomes necessary, the Company believes that the subsidiaries have strong factual and legal defenses against claims that it unfairly marketed vapor products.

Note 17. Income Per Share

The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations of net income:

 
 
Three Months Ended June 30,
 
 
 
2020
   
2019
 
 
 
Income
   
Shares
   
Per
Share
   
Income
   
Shares
   
Per
Share
 
Consolidated net income
 
$
9,227
               
$
13,205
             
 
                                       
Basic EPS:
                                       
Weighted average
           
19,507,874
   
$
0.47
             
19,621,695
   
$
0.67
 
 
                                               
Diluted EPS:
                                               
Effect of dilutive securities:
                                               
Stock options
           
326,471
                     
510,285
         
 
           
19,834,345
   
$
0.47
             
20,131,980
   
$
0.66
 

 
 
Six Months Ended June 30,
 
 
 
2020
   
2019
 
 
 
Income
   
Shares
   
Per
Share
   
Income
   
Shares
   
Per
Share
 
Consolidated net income
 
$
12,502
               
$
19,765
             
 
                                       
Basic EPS:
                                       
Weighted average
           
19,598,660
   
$
0.64
             
19,590,817
   
$
1.01
 
 
                                               
Diluted EPS:
                                               
Effect of dilutive securities:
                                               
Stock options
           
274,066
                     
305,142
         
 
           
19,872,726
   
$
0.63
             
19,895,959
   
$
0.99
 

For the three and six months ended June 30, 2020, the effect of the 3,202,808 shares issuable upon conversion of the Convertible Senior Notes were excluded from the diluted net income per share calculation because the Company’s average stock price did not exceed $53.86 during those periods.

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Note 18. Segment Information

In accordance with ASC 280, Segment Reporting, the Company has three reportable segments: Smokeless products, Smoking products, and NewGen products. The Smokeless products segment (i) manufactures and markets moist snuff and (ii) contracts for and markets chewing tobacco products. The Smoking products segment (i) markets cigarette papers, tubes, and related products; (ii) contracts for, markets and distributes finished cigars and MYO cigar wraps; and (iii) processes, packages, markets, and distributes traditional pipe tobaccos. The NewGen products segment (i) markets and distributes e-cigarettes, e-liquids, vaporizers, and certain other products without tobacco and/or nicotine; (ii) markets and distributes a wide assortment of vaping and CBD related products to non-traditional retail outlets via VaporBeast, Vapor Shark, IVG and Solace; and (iii) markets and distributes a wide assortment of vapor and CBD related products to individual consumers via Vapor Shark and VaporFi branded retail outlets in addition to online platforms. Smokeless and Smoking products are distributed primarily through wholesale distributors in the United States while NewGen products are distributed primarily through e-commerce to non-traditional retail outlets and direct to consumers in the United States. The Other segment includes the costs and assets of the Company not assigned to one of the three reportable segments such as intercompany transfers, deferred taxes, deferred financing fees, and investments in subsidiaries.

The accounting policies of these segments are the same as those of the Company. Corporate costs are not directly charged to the three reportable segments in the ordinary course of operations. The Company evaluates the performance of its segments and allocates resources to them based on operating income.

The tables below present financial information about reported segments:

 
 
Three Months Ended
June 30,
 
 
 
2020
   
2019
 
 
           
Net sales
           
Smokeless products
 
$
30,822
   
$
26,176
 
Smoking products
   
27,403
     
25,363
 
NewGen products
   
46,738
     
41,800
 
Total
 
$
104,963
   
$
93,339
 
 
               
Gross profit
               
Smokeless products
 
$
16,664
   
$
14,063
 
Smoking products
   
15,671
     
13,738
 
NewGen products
   
15,757
     
13,382
 
Total
 
$
48,092
   
$
41,183
 
 
               
Operating income (loss)
               
Smokeless products
 
$
12,240
   
$
9,731
 
Smoking products
   
12,227
     
10,374
 
NewGen products (2)
   
3,271
     
7,451
 
Corporate unallocated (1)
   
(10,402
)
   
(7,615
)
Total
 
$
17,336
   
$
19,941
 
 
               
Interest expense, net
   
4,980
     
3,736
 
Investment income
   
(34
)
   
(118
)
Loss on extinguishment of debt
   
-
     
150
 
Net periodic income, excluding service cost
   
(104
)
   
(11
)
 
               
Income before income taxes
 
$
12,494
   
$
16,184
 
 
               
Capital expenditures
               
Smokeless products
 
$
838
   
$
525
 
Smoking products
   
-
     
-
 
NewGen products
   
241
     
553
 
Total
 
$
1,079
   
$
1,078
 
 
               
Depreciation and amortization
               
Smokeless products
 
$
524
   
$
365
 
Smoking products
   
-
     
-
 
NewGen products
   
700
     
631
 
Total
 
$
1,224
   
$
996
 


(1)
Includes corporate costs that are not allocated to any of the three reportable segments.
(2)
Includes VMR settlement gain of $5.5 million for the three months ended June 30, 2020.

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Six Months Ended
June 30,
 
 
 
2020
   
2019
 
 
           
Net sales
           
Smokeless products
 
$
57,317
   
$
48,720
 
Smoking products
   
56,317
     
50,882
 
NewGen products
   
82,018
     
85,365
 
Total
 
$
195,652
   
$
184,967
 
 
               
Gross profit
               
Smokeless products
 
$
30,538
   
$
26,136
 
Smoking products
   
31,803
     
27,222
 
NewGen products
   
27,182
     
28,289
 
Total
 
$
89,523
   
$
81,647
 
 
               
Operating income (loss)
               
Smokeless products
 
$
21,986
   
$
17,218
 
Smoking products
   
24,644
     
20,320
 
NewGen products (2)
   
3,748
     
10,289
 
Corporate unallocated (1)
   
(24,005
)
   
(15,851
)
Total
 
$
26,373
   
$
31,976
 
 
               
Interest expense, net
   
9,974
     
7,592
 
Investment income
   
(125
)
   
(262
)
Loss on extinguishment of debt
   
-
     
150
 
Net periodic income, excluding service cost
   
(191
)
   
(22
)
 
               
Income before income taxes
 
$
16,715
   
$
24,518
 
 
               
Capital expenditures
               
Smokeless products
 
$
1,698
   
$
1,102
 
Smoking products
   
-
     
-
 
NewGen products
   
258
     
862
 
Total
 
$
1,956
   
$
1,964
 
 
               
Depreciation and amortization
               
Smokeless products
 
$
1,043
   
$
722
 
Smoking products
   
-
     
-
 
NewGen products
   
1,457
     
1,164
 
Total
 
$
2,500
   
$
1,886
 


(1)
Includes corporate costs that are not allocated to any of the three reportable segments.
(2)
Includes VMR settlement gain of $5.5 million for the six months ended June 30, 2020.

 
June 30,
2020
   
December 31,
2019
 
Assets
           
Smokeless products
 
$
126,464
   
$
120,723
 
Smoking products
   
189,558
     
145,831
 
NewGen products
   
92,628
     
90,899
 
Corporate unallocated (1)
   
58,568
     
89,131
 
Total
 
$
467,218
   
$
446,584
 


(1)
Includes assets not assigned to the three reportable segments. All goodwill has been allocated to the reportable segments.

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Revenue Disaggregation—Sales Channel

Revenues of the Smokeless and Smoking segments are primarily comprised of sales made to wholesalers while NewGen sales are made business to business and business to consumer, both online and through our corporate retail stores. NewGen net sales are broken out by sales channel below.

 
 
NewGen Segment
 
 
 
Three Months Ended
June 30,
 
 
 
2020
   
2019
 
 
           
Business to Business
 
$
30,368
   
$
30,737
 
Business to Consumer - Online
   
15,052
     
8,466
 
Business to Consumer - Corporate store
   
1,318
     
2,566
 
Other
   
-
     
31
 
Total
 
$
46,738
   
$
41,800
 

 
 
NewGen Segment
 
 
 
Six Months Ended
June 30,
 
 
 
2020
   
2019
 
 
           
Business to Business
 
$
55,647
   
$
63,200
 
Business to Consumer - Online
   
23,186
     
16,685
 
Business to Consumer - Corporate store
   
3,111
     
5,365
 
Other
   
74
     
115
 
Total
 
$
82,018
   
$
85,365
 

Net Sales—Domestic vs. Foreign

The following table shows a breakdown of consolidated net sales between domestic and foreign customers.

 
 
Three Months Ended
June 30,
 
 
 
2020
   
2019
 
Domestic
 
$
101,990
   
$
91,516
 
Foreign
   
2,973
     
1,823
 
Total
 
$
104,963
   
$
93,339
 
 
 
 
Six Months Ended
June 30,
 
 
 
2020
   
2019
 
Domestic
 
$
189,558
   
$
180,285
 
Foreign
   
6,094
     
4,682
 
Total
 
$
195,652
   
$
184,967
 


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Note 19. Dividends and Share Repurchase

The most recent dividend of $0.05 per common share was paid on July 10, 2020, to shareholders of record at the close of business on June 19, 2020.

Dividends are classified as restricted payments within the 2018 Credit Facility. The Company is generally permitted to make restricted payments provided that, at the time of payment, or as a result of payment, the Company is not in default on its debt covenants. Additional restrictions limit the aggregate amount of restricted, quarterly dividends during a fiscal year to the aggregate amount of mandatory and voluntary principal payments made on the priority term loans during the fiscal year.

On February 25, 2020, the Company’s Board of Directors approved a $50.0 million share repurchase authorization, which is intended for opportunistic execution based upon a variety of factors including market dynamics. The authorization is subject to the ongoing discretion of the Board. The total number of shares repurchased for the six months ended was 256,863 shares for a total cost of $5.3 million and an average price per share of $20.59.

Note 20. Subsequent Events
 
Standard Diversified Inc. (“SDI”) Reorganization
 
On July 16, 2020, the Company completed its merger with SDI, whereby SDI was merged into a wholly-owned subsidiary of the Company in a tax-free downstream merger. Under the terms of the agreement, the holders of SDI’s Class A Common Stock and SDI’s Class B Common Stock (collectively, “SDI Common Stock”) received in the aggregate, in return for their SDI Common Stock, TPB Voting Common Stock (“TPB Common Stock”) at a ratio of 0.52095 shares of TPB Common Stock for each share of SDI Common Stock at the time of the merger. SDI divested its assets, other than the Company’s stock, prior to close such that the net liabilities at closing did not exceed $25,000 (whole dollars) and the only assets that it retained was the remaining TPB Common Stock holdings. The Company no longer has a controlling shareholder and 245,234 shares of TPB Common Stock were retired.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of the historical financial condition and results of operations in conjunction with our historical consolidated financial statements and accompanying notes, which are included elsewhere in this 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.

Organizational Structure

We, Turning Point Brands, Inc., are a holding company which owns North Atlantic Trading Company, Inc. (“NATC”), and its subsidiaries, Turning Point Brands, LLC (“TPLLC”), and its subsidiaries, Standard Merger Sub, LLC (“SMS”), North Atlantic Wrap Company, LLC (“NAWC”), TPB Services, LLC (“TPBS”), and Turning Point Brands (Canada) Inc. (“TPBC”).  NATC includes subsidiaries National Tobacco Company, L.P. (“NTC”), National Tobacco Finance, LLC (“NTFLLC”), North Atlantic Operating Company, Inc. (“NAOC”), North Atlantic Cigarette Company, Inc. (“NACC”), and RBJ Sales, Inc. (“RBJ”). TPLLC includes subsidiaries Intrepid Brands, LLC (“Intrepid”), TPB Beast, LLC (“VaporBeast”), TPB Shark, LLC, and its subsidiaries (collectively, “Vapor Shark”), TPB International, LLC and its subsidiaries (collectively, “IVG”), Nu-X Ventures LLC (“Nu-X”), Nu-Tech Holdings LLC (“Nu-Tech”), and South Beach Holdings, LLC (“South Beach”).

Overview

Turning Point Brands, Inc. (the “Company,” “we,” “our,” or “us”) is a leading, independent provider of Other Tobacco Products (“OTP”) and adult consumer alternatives. We estimate the OTP industry generated approximately $11.5 billion of manufacturer revenue in 2019. In contrast to manufactured cigarettes, which have been experiencing declining volumes for decades based on data published by the Alcohol and Tobacco Tax and Trade Bureau (“TTB”), the OTP industry is demonstrating increased consumer appeal with low to mid-single digit consumer unit growth as reported by Management Science Associates, Inc. (“MSAi”), a third-party analytics and information company. We were the 6th largest competitor in terms of total OTP consumer units sold during 2019. We sell a wide range of products across the OTP spectrum; however, we do not sell cigarettes. Our portfolio of brands includes some of the most widely recognized names in the OTP industry, such as Zig-Zag®, Beech-Nut®, Stoker’s®, Trophy®, VaporBeast® and VaporFi®. We currently ship to approximately 900 distributors with an additional 100 secondary, indirect wholesalers in the U.S. that carry and sell our products. We operate in three segments: (i) Smokeless products, (ii) Smoking products, and (iii) NewGen products. Under the leadership of a senior management team with an average of 24 years of experience in the tobacco industry, we have grown and diversified our business through new product launches, category expansions, and acquisitions while concurrently improving operational efficiency.
We have identified additional growth opportunities in the emerging alternatives market. In January 2019, we established our subsidiary, Nu-X, a new company and wholly-owned subsidiary dedicated to the development, production and sale of alternative products and acquisitions in related spaces. The creation of Nu-X allows TPB to leverage its expertise in traditional OTP management to alternative products. The TPB management team has over 100 years of experience navigating federal, state and local regulations that are directly applicable to the growing alternatives market. In July 2019, we acquired the assets of Solace Technology (“Solace”). Solace is an innovative product development company which established one of the top e-liquid brands and has since grown into a leader in alternative products. Solace’s legacy and innovation will enhance Nu-X’s strong and nimble development engine. In July 2019, we acquired a 30% stake in ReCreation Marketing (“ReCreation). ReCreation is a specialty marketing and distribution firm focused on building brands in the Canadian smoking, vaping and alternative products categories. The investment will leverage ReCreation’s significant expertise in marketing and distributing tobacco and cannabis products throughout Canada. The investment is part of Nu-X and we plan to make additional investments, partnerships and acquisitions to drive the business of Nu-X. These endeavors will enable us to continue to identify unmet customer needs and provide quality products that we believe will result in genuine customer satisfaction and foster the growth of revenue.

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We believe there are meaningful opportunities to grow our business organically and through acquisitions and joint ventures across all product categories. As of December 31, 2019, our products are available in approximately 185,000 U.S. retail locations which, with the addition of retail stores in Canada, brings our total North American retail presence to an estimated 210,000 points of distribution. Our sales team targets widespread distribution to all traditional retail channels, including convenience stores.

Products

We operate in three segments: Smokeless products, Smoking products and NewGen products. In our Smokeless products segment, we (i) manufacture and market moist snuff and (ii) contract for and market loose leaf chewing tobacco products. In our Smoking products segment, we principally (i) market and distribute cigarette papers, tubes, and related products; and (ii) contract for, market and distribute finished cigars and MYO cigar wraps. In our NewGen products segment, we (i) market and distribute CBD, 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. Our portfolio of brands includes some of the most widely recognized names in the OTP industry such as Stoker’s® in the Smokeless segment, Zig-Zag® in the Smoking segment, and VaporBeast®, VaporFi® and Solace© in the NewGen segment.

Operations

Our core tobacco business (Smokeless and Smoking segments) primarily generates 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 business-to-consumer 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. More than 80% of our production, as measured by net sales, is outsourced to suppliers. The remaining production consists of our moist snuff tobacco operations located in Dresden, Tennessee, and Louisville, Kentucky and the proprietary e-liquids operations located in 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;
Price sensitivity in our end-markets;
Marketing and promotional initiatives, which cause variability in our results;
General economic conditions, including consumer access to disposable income;
Cost and increasing regulation of promotional and advertising activities;
Cost of complying with regulation, including the “deeming regulations”;
Counterfeit and other illegal products in our end-markets;
Currency fluctuations;
Our ability to identify attractive acquisition opportunities in OTP; and
Our ability to integrate acquisitions.

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Recent Developments

Durfort Holdings

In June 2020, we purchased certain tobacco assets and distribution rights from Durfort Holdings S.R.L. (“Durfort”) and Blunt Wrap USA for $47.8 million in total consideration, comprised of $37.8 million in cash, including $1.8 million of capitalized transaction costs, and a $10.0 million Promissory Note. With this transaction, we acquired co-ownership in the intellectual property rights of all of Durfort’s and Blunt Wrap USA’s HTL cigar wraps and cones. We also entered into an exclusive Master Distribution Agreement to market and sell the original Blunt Wrap® cigar wraps within the USA which is expected to be effective within 120 days of the closing. Durfort is an industry leader in alternative cigar and cigar wrap manufacturing and distribution. Blunt Wrap USA has been an innovator of new products in the smoking alternative market since 1997 and has secured patents in the USA and internationally for novel smoking wrappers and cones.

COVID-19 Impact

 As a result of the extraordinary situation we are facing, our focus is on the safety and well-being of our colleagues and the communities and customers we serve. As an organization, we have implemented several changes to enhance safety and mitigate health risk in our work environment. For our warehouse and manufacturing operations, these include split shifts, temperature scans, additional contactless hand sanitizing stations, protective equipment, social distancing guidelines, and increased cleaning and sanitization. These changes resulted in higher operational costs related to maintaining a safer work environment and fulfilling orders.

We canceled all unnecessary travel and facilitated telecommuting where possible. Like many companies, we have changed the way we communicate through increased use of videoconferencing and have implemented tele-selling initiatives through our sales force. Some of these changes that are proving to be efficient are likely to remain in-place even after this crisis and lead to on-going cost savings. We have also put a hold on new spending commitments as we cautiously manage through this environment.

We hired additional employees in our Louisville facility and implemented temporary wage increases for our hourly employees to meet increased demand. We shifted production capacity to manufacture hand sanitizers and have donated bottles to hospitals, nursing homes and first responders in our local communities.

COVID-19 may impact our results. Our third-party cigar wrap manufacturer in the Dominican Republic was temporarily shut down. Our supply chain has remained operational otherwise. In-person selling has been dramatically dampened, which may affect new product launches. Select budgeted annual price increases will be delayed. Our B2C platforms have seen elevated sales levels from consumer shifts to online purchasing and we gained market share. We continue to monitor this challenging environment closely and will make necessary adjustments as needed to make sure we are serving our employees and customers, while also protecting the safety of employees and communities.

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Standard Diversified Inc. (“SDI”) Reorganization

On July 16, 2020, we completed our merger with SDI, whereby SDI was merged into a wholly-owned subsidiary of TPB in a tax-free downstream merger. Under the terms of the agreement, the holders of SDI’s Class A Common Stock and SDI’s Class B Common Stock (collectively, “SDI Common Stock”) received in the aggregate, in return for their SDI Common Stock, TPB Voting Common Stock (“TPB Common Stock”) at a ratio of 0.52095 shares of TPB Common Stock for each share SDI Common Stock. SDI divested its assets prior to close such that the net liabilities at closing did not exceed $25,000 (whole dollars) and the only assets that it retained was the remaining TPB Common Stock holdings. We no longer have a controlling shareholder and 245,234 shares of TPB Common Stock were retired. The transaction significantly improved the public float of shares outstanding and eliminated the overhang of a controlling holding company structure.

Premarket Tobacco Application Deadline Extension

The United States District Court for the District of Maryland agreed to an FDA request filed for a 120-day extension of the premarket tobacco application deadline for many e-cigarettes, cigars and other tobacco products. FDA stated that the extension was needed because of the impacts of the coronavirus on both the agency and the industry. The Court-modified Remedy Order had the effect of moving the premarket filing deadline from May 12, 2020 to September 9, 2020. FDA subsequently issued Guidance in line with the modified Remedy Order.

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 2019 Annual Report on Form 10-K.

Recent Accounting Pronouncements

Refer to Note 2, “Summary of Significant Accounting Policies”, of Notes to Consolidated Financial Statements included in this Quarterly Report for a description of recently issued accounting pronouncements, including those recently adopted.

Results of Operations

Comparison of the Three Months Ended June 30, 2020, to the Three Months Ended June 30, 2019

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

 
Three Months Ended June 30,
 
   
2020
   
2019
   
% Change
 
Consolidated Results of Operations Data:
                 
Net sales
                 
Smokeless products
 
$
30,822
   
$
26,176
     
17.7
%
Smoking products
   
27,403
     
25,363
     
8.0
%
NewGen products
   
46,738
     
41,800
     
11.8
%
Total net sales
   
104,963
     
93,339
     
12.5
%
Cost of sales
   
56,871
     
52,156
     
9.0
%
Gross profit
                       
Smokeless products
   
16,664
     
14,063
     
18.5
%
Smoking products
   
15,671
     
13,738
     
14.1
%
NewGen products
   
15,757
     
13,382
     
17.7
%
Total gross profit
   
48,092
     
41,183
     
16.8
%
                         
Selling, general, and administrative expenses
   
30,756
     
21,242
     
44.8
%
Operating income
   
17,336
     
19,941
     
-13.1
%
Interest expense, net
   
4,980
     
3,736
     
33.3
%
Investment income
   
(34
)
   
(118
)
   
-71.2
%
Loss on extinguishment of debt
   
-
     
150
         
Net periodic income, excluding service cost
   
(104
)
   
(11
)
   
845.5
%
Income before income taxes
   
12,494
     
16,184
     
-22.8
%
Income tax expense
   
3,267
     
2,979
     
9.7
%
Consolidated net income
 
$
9,227
   
$
13,205
     
-30.1
%

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Net Sales:  For the three months ended June 30, 2020, consolidated net sales increased to $105.0 million from $93.3 million for the three months ended June 30, 2019, an increase of $11.6 million or 12.5%. The increase in net sales was driven by increased volume across all segments in 2020.

For the three months ended June 30, 2020, net sales in the Smokeless products segment increased to $30.8 million from $26.2 million for the three months ended June 30, 2019, an increase of $4.6 million or 17.7%. For the three months ended June 30, 2020, volume increased 13.9% and price/mix increased 3.8%. The increase in net sales was driven by the continuing double-digit volume growth of Stoker’s® MST. Sales in chewing tobacco products were up mid-single digits as compared to prior year.

For the three months ended June 30, 2020, net sales in the Smoking products segment increased to $27.4 million from $25.4 million for the three months ended June 30, 2019, an increase of $2.0 million or 8.0%. For the three months ended June 30, 2020, volume increased 7.5% and price/mix increased 0.5%. The increase in net sales is primarily related to double digit growth in US rolling papers and Canada papers, partially offset by a $2.4 million decline in MYO cigar wraps due to COVID-19 related supply disruption and a $0.4 million decline in non-focus cigars and MYO.

For the three months ended June 30, 2020, net sales in the NewGen products segment increased to $46.7 million from $41.8 million for the three months ended June 30, 2019, an increase of $4.9 million or 11.8%. The increase in net sales is the result of strong market share gains in our vape distribution business and positive contributions from Solace and other Nu-X products.

Gross Profit:  For the three months ended June 30, 2020, consolidated gross profit increased to $48.1 million from $41.2 million for the three months ended June 30, 2019, an increase of $6.9 million or 16.8%. Gross profit as a percentage of revenue increased to 45.8% for the three months ended June 30, 2020, compared to 44.1% for the three months ended June 30, 2019.

For the three months ended June 30, 2020, gross profit in the Smokeless products segment increased to $16.7 million from $14.1 million for the three months ended June 30, 2019, an increase of $2.6 million or 18.5%. Gross profit as a percentage of net sales increased to 54.1% of net sales for the three months ended June 30, 2020, from 53.7% of net sales for the three months ended June 30, 2019, primarily as a as a result of strong incremental margin contribution of MST.
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For the three months ended June 30, 2020, gross profit in the Smoking products segment increased to $15.7 million from $13.7 million for the three months ended June 30, 2019, an increase of $1.9 million or 14.1%. Gross profit as a percentage of net sales increased to 57.2% of net sales for the three months ended June 30, 2020, from 54.2% of net sales for the three months ended June 30, 2019, as a result of increased US rolling paper sales and a continued decline in the low margin cigar business. For the three months ended June 30, 2020 non-focus cigar and MYO pipe sales declined $0.4 million as compared to the three months ended June 30, 2019.

For the three months ended June 30, 2020, gross profit in the NewGen products segment increased to $15.8 million from $13.4 million for the three months ended June 30, 2019, an increase of $2.4 million or 17.7%. Gross profit as a percentage of net sales increased to 33.7% of net sales for the three months ended June 30, 2020, from 32.0% of net sales for the three months ended June 30, 2019 primarily due to an increase in mix of proprietary products and strong growth from our higher gross margin B2C business. For the three months ended June 30, 2020, gross profit included $3.6 million of tariff expenses compared to $2.0 million for the three months ended June 30, 2019.

Selling, General, and Administrative Expenses:  For the three months ended June 30, 2020, selling, general, and administrative expenses increased to $30.8 million from $21.2 million for the three months ended June 30, 2019, an increase of $9.5 million or 44.8%. Selling, general and administrative expenses in the three months ended June 30, 2020 included $0.8 million of stock options, restricted stock and incentives expense, $0.3 million of transaction expenses and $3.3 million of expense related to PMTA. Selling, general and administrative expenses in the three months ended June 30, 2019 included $1.2 million of stock option, restricted stock and incentives expense, $0.2 million of transaction costs, $0.2 million in corporate and vapor restructuring and $1.3 million of new product launch costs for Nu-X products. These costs were partially offset by a net $5.5 million gain related to the settlement of the VMR Distribution and Supply agreement during the second quarter 2019.

Interest Expense, net:  For the three months ended June 30, 2020, as a result of the amortization of the debt discount on the Convertible Senior Notes of $1.8 million, interest expense, net increased to $5.0 million, from $3.7 million for the three months ended June 30, 2019.

Investment Income:  Investment income relating to investment of the MSA deposits was less than $0.1 million for the three months ended June 30, 2020, compared to approximately $0.1 million for the three months ended June 30, 2019.

Loss on Extinguishment of Debt: There was no loss on extinguishment of debt for the three months ended June 30, 2020, compared to $0.2 million for the three months ended June 30, 2019 related to the payment on the 2018 Second Lien Credit Facility.

Net Periodic Income: Net periodic income was $0.1 million for the three months ended June 30, 2020 and less than $0.1 million for the three months ended June 30, 2019.

Income Tax Expense:  Our income tax expense of $3.3 million was 26.1% of income before income taxes for the three months ended June 30, 2020. Our effective income tax rate of 18.4% for the three months ended June 30, 2019 included a discrete tax deduction $0.9 million relating to stock option exercises.

Consolidated Net Income:  Due to the factors described above, consolidated net income for the three months ended June 30, 2020 and 2019, was $9.2 million and $13.2 million, respectively.

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Comparison of the Six Months Ended June 30, 2020, to the Six Months Ended June 30, 2019

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

 
Six Months Ended June 30,
 
   
2020
   
2019
   
% Change
 
Consolidated Results of Operations Data:
                 
Net sales
                 
Smokeless products
 
$
57,317
   
$
48,720
     
17.6
%
Smoking products
   
56,317
     
50,882
     
10.7
%
NewGen products
   
82,018
     
85,365
     
-3.9
%
Total net sales
   
195,652
     
184,967
     
5.8
%
Cost of sales
   
106,129
     
103,320
     
2.7
%
Gross profit
                       
Smokeless products
   
30,538
     
26,136
     
16.8
%
Smoking products
   
31,803
     
27,222
     
16.8
%
NewGen products
   
27,182
     
28,289
     
-3.9
%
Total gross profit
   
89,523
     
81,647
     
9.6
%
                         
Selling, general, and administrative expenses
   
63,150
     
49,671
     
27.1
%
Operating income
   
26,373
     
31,976
     
-17.5
%
Interest expense, net
   
9,974
     
7,592
     
31.4
%
Investment income
   
(125
)
   
(262
)
   
-52.3
%
Loss on extinguishment of debt
   
-
     
150
         
Net periodic income, excluding service cost
   
(191
)
   
(22
)
   
768.2
%
Income before income taxes
   
16,715
     
24,518
     
-31.8
%
Income tax expense
   
4,213
     
4,753
     
-11.4
%
Consolidated net income
 
$
12,502
   
$
19,765
     
-36.7
%

Net Sales:  For the six months ended June 30, 2020, consolidated net sales increased to $195.7 million from $185.0 million for the six months ended June 30, 2019, an increase of $10.7 million or 5.8%. The increase in net sales was primarily driven by increased sales volume in the Smoking and Smokeless segments, partially offset by lower sales in the NewGen segment.

For the six months ended June 30, 2020, net sales in the Smokeless products segment increased to $57.3 million from $48.7 million for the six months ended June 30, 2019, an increase of $8.6 million or 17.6%. For the six months ended June 30, 2020, volume increased 15.2% and price/mix increased 2.4%. The increase in net sales was primarily driven by the continuing double-digit volume growth of Stoker’s® MST.

For the six months ended June 30, 2020, net sales in the Smoking products segment increased to $56.3 million from $50.9 million for the six months ended June 30, 2019, an increase of $5.4 million or 10.7%. For the six months ended June 30, 2020, volume increased 9.2% and price/mix increased 1.5%. The increase in net sales is primarily related to double digit growth in US and Canada papers, partially offset by a $0.9 million decline in non-focus cigars and MYO pipe.

For the six months ended June 30, 2020, net sales in the NewGen products segment decreased to $82.0 million from $85.4 million for the six months ended June 30, 2019, a decrease of $3.3 million or 3.9%. The decrease in net sales is primarily the result of the discontinuance of V2 at the end of the second quarter 2019.

Gross Profit:  For the six months ended June 30, 2020, consolidated gross profit increased to $89.5 million from $81.6 million for the six months ended June 30, 2019, an increase of $7.9 million or 9.6%. Gross profit as a percentage of revenue increased to 45.8% for the six months ended June 30, 2020, compared to 44.1% for the six months ended June 30, 2019.

For the six months ended June 30, 2020, gross profit in the Smokeless products segment increased to $30.5 million from $26.1 million for the six months ended June 30, 2019, an increase of $4.4 million or 16.8%. Gross profit as a percentage of net sales decreased to 53.3% of net sales for the six months ended June 30, 2020, from 53.6% of net sales for the six months ended June 30, 2019, primarily as a result of strong incremental margin contribution of MST.
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For the six months ended June 30, 2020, gross profit in the Smoking products segment increased to $31.8 million from $27.2 million for the six months ended June 30, 2019, an increase of $4.6 million or 16.8%. Gross profit as a percentage of net sales increased to 56.5% of net sales for the six months ended June 30, 2020, from 53.5% of net sales for the six months ended June 30, 2019, as a result of increased US and Canada paper sales and a continued decline in the low margin cigar business. For the six months ended June 30, 2020 non-focus cigar and MYO pipe sales declined $0.9 million as compared to the six months ended June 30, 2019.

For the six months ended June 30, 2020, gross profit in the NewGen products segment decreased to $27.2 million from $28.3 million for the six months ended June 30, 2019, a decrease of $1.1 million or 3.9%. Gross profit as a percentage of net sales remained flat at 33.1% of net sales for the six months ended June 30, 2020 and June 30, 2019. For the six months ended June 30, 2020, gross profit included $6.4 million of tariff expenses compared to $4.0 million for the six months ended June 30, 2019.

Selling, General, and Administrative Expenses:  For the six months ended June 30, 2020, selling, general, and administrative expenses increased to $63.2 million from $49.7 million for the six months ended June 30, 2019, an increase of $13.5 million or 27.1%. Selling, general and administrative expenses in the six months ended June 30, 2020 included $1.2 million of stock options, restricted stock and incentives expense, $1.3 million of transaction expenses and $9.2 million of expense related to PMTA. Selling, general and administrative expenses in the six months ended June 30, 2019 included $1.9 million of stock option, restricted stock and incentives expense, $1.1 million of transaction costs, $1.2 million in corporate and vapor restructuring and $1.7 million of new product launch costs for Nu-X products. These costs were partially offset by a net $5.5 million gain related to the settlement of the VMR Distribution and Supply agreement during the second quarter 2019.

Interest Expense, net:  For the six months ended June 30, 2020, as a result of the amortization of the debt discount on the Convertible Senior Notes of $3.5 million, interest expense, net increased to $10.0 million, from $7.6 million for the six months ended June 30, 2019.

Investment Income:  Investment income relating to investment of the MSA deposits was $0.1 million for the six months ended June 30, 2020, compared to $0.3 million for the six months ended June 30, 2019.

Loss on Extinguishment of Debt: There was no loss on extinguishment of debt for the six months ended June 30, 2020, compared to $0.2 million for the six months ended June 30, 2019 related to the payment on the 2018 Second Lien Credit Facility.

Net Periodic Income: Net periodic income was $0.2 million for the six months ended June 30, 2020 and less than $0.1 million for the six months ended June 30, 2019.

Income Tax Expense:  Our income tax expense of $4.2 million was 25.2% of income before income taxes for the six months ended June 30, 2020 and included a discrete tax deduction of $3.7 million relating to stock option exercises. Our effective income tax rate of 19.4% for the six months ended June 30, 2019 included a discrete tax deduction of $4.5 million relating to stock option exercises.

Consolidated Net Income:  Due to the factors described above, consolidated net income for the six months ended June 30, 2020 and 2019, was $12.5 million and $19.8 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 credit agreements contain financial 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 on extinguishment of debt, provision for income taxes, depreciation, amortization, other non-cash items, and other items we do not consider ordinary course in our evaluation of ongoing operating performance.
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Non-U.S. GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with U.S. GAAP. Adjusted EBITDA excludes significant expenses required to be recorded in our financial statements by U.S. GAAP and is subject to inherent limitations. Other companies in our industry may calculate this non-U.S. GAAP measure differently than we do or may not calculate it at all, limiting its usefulness as a comparative measure. The tables below provide reconciliations between net income and Adjusted EBITDA.

 
Three Months Ended
 
(in thousands)
 
June 30,
 
   
2020
   
2019
 
Consolidated net income
 
$
9,227
   
$
13,205
 
Add:
               
Interest expense, net
   
4,980
     
3,736
 
Loss on extinguishment of debt
   
-
     
150
 
Income tax expense
   
3,267
     
2,979
 
Depreciation expense
   
822
     
632
 
Amortization expense
   
402
     
364
 
EBITDA
 
$
18,698
   
$
21,066
 
Components of Adjusted EBITDA
               
Other (a)
   
(260
)
   
(97
)
Stock options, restricted stock, and incentives expense (b)
   
760
     
1,198
 
Transaction expenses (c)
   
290
     
187
 
New product launch costs (d)
   
-
     
1,270
 
Corporate and vapor restructuring (e)
   
-
     
150
 
FDA PMTA (f)
   
3,290
     
-
 
Vendor settlement (g)
   
-
     
(5,522
)
Adjusted EBITDA
 
$
22,778
   
$
18,252
 

       
(a)  Represents LIFO adjustment, non-cash pension expense (income) and foreign exchange hedging.
(b)  Represents non-cash stock options, restricted stock, incentives expense and Solace PRSUs.
(c)  Represents the fees incurred for transaction expenses.
(d)  Represents product launch costs for our new product lines.
(e)  Represents costs associated with corporate and vapor restructuring including severance and inventory reserves.
(f)  Represents costs associated with applications related to FDA PMTA.
(g)  Represents net gain associated with the settlement of a vendor contract.

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Six Months Ended
 
(in thousands)
 
June 30,
 
   
2020
   
2019
 
Consolidated net income
 
$
12,502
   
$
19,765
 
Add:
               
Interest expense, net
   
9,974
     
7,592
 
Loss on extinguishment of debt
   
-
     
150
 
Income tax expense
   
4,213
     
4,753
 
Depreciation expense
   
1,673
     
1,163
 
Amortization expense
   
827
     
723
 
EBITDA
 
$
29,189
   
$
34,146
 
Components of Adjusted EBITDA
               
Other (a)
   
(347
)
   
(176
)
Stock options, restricted stock, and incentives expense (b)
   
1,215
     
1,913
 
Transaction expenses (c)
   
1,339
     
1,097
 
New product launch costs (d)
   
-
     
1,712
 
Corporate and vapor restructuring (e)
   
-
     
1,154
 
FDA PMTA (f)
   
9,164
     
-
 
Vendor settlement (g)
   
-
     
(5,522
)
Adjusted EBITDA
 
$
40,560
   
$
34,324
 

       
(a)  Represents LIFO adjustment, non-cash pension expense (income) and foreign exchange hedging.
(b)  Represents non-cash stock options, restricted stock, incentives expense and Solace PRSUs.
(c)  Represents the fees incurred for transaction expenses.
(d)  Represents product launch costs for our new product lines.
(e)  Represents costs associated with corporate and vapor restructuring including severance and inventory reserves.
(f)  Represents costs associated with applications related to FDA PMTA.
(g)  Represents costs associated with settlement of a vendor contract.

Liquidity and Capital Reserves

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 2018 Revolving Credit Facility are adequate to satisfy our operating cash requirements for the foreseeable future. We have $46.4 million of availability under the 2018 Revolving Credit Facility at June 30, 2020.

Our working capital, which we define as current assets less current liabilities, decreased $23.8 million to $109.6 million at June 30, 2020, compared with $133.4 million at December 31, 2019. The decrease is mainly related to the decrease in cash as a result of the June 2020 Durfort acquisition.

 
As of
 
(in thousands)
 
June 30,
   
December 31,
 
   
2020
   
2019
 
             
Current assets
 
$
161,561
   
$
189,250
 
Current liabilities
   
51,954
     
55,886
 
Working capital
 
$
109,607
   
$
133,364
 

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Table of Contents
Cash Flows from Operating Activities

For the six months ended June 30, 2020, net cash provided by operating activities was $17.5 million compared to net cash provided by operating activities of $21.7 million for the six months ended June 30, 2019, a decrease of $4.2 million, primarily due to lower net income due to the PMTA expenses in the current year, offset by increased amortization of debt discount and deferred financing costs.

Cash Flows from Investing Activities

For the six months ended June 30, 2020, net cash used in investing activities was $39.7 million compared to net cash used in investing activities of $0.3 million for the six months ended June 30, 2019, a decrease of $39.4 million, primarily due to the acquisition of certain assets from Durfort.

Cash Flows from Financing Activities

For the six months ended June 30, 2020, net cash used in financing activities was $8.9 million compared to net cash used in financing activities of $20.9 million for the six months ended June 30, 2019, an increase in cash flow of $12.0 million, primarily due to the payment of the revolving credit facility and second lien term loan in 2019.

Dividends and Share Repurchase

The most recent dividend of $0.05 per common share was paid on July 10, 2020, to shareholders of record at the close of business on June 19, 2020.

On February 25, 2020, our Board of Directors approved a $50.0 million share repurchase authorization, which is intended for opportunistic execution based upon a variety of factors including market dynamics. The authorization is subject to the ongoing discretion of the Board. The total number of shares repurchased for the six months ended June 30, 2020, was 256,863 shares for a total cost of $5.3 million and an average price per share of $20.59.

Long-Term Debt

As of June 30, 2020, we were in compliance with the financial and restrictive covenants of the 2018 Credit Facility. The following table provides outstanding balances of our debt instruments.


 
June 30,
   
December 31,
 
   
2020
   
2019
 
2018 First Lien Term Loan
 
$
141,000
   
$
146,000
 
Convertible Senior Notes
   
172,500
     
172,500
 
Note payable - Promissory Note
   
10,000
     
-
 
Note payable - Unsecured Loan
   
7,485
     
-
 
Note payable - IVG
   
-
     
4,240
 
Gross notes payable and long-term debt
   
330,985
     
322,740
 
Less deferred finance charges
   
(5,778
)
   
(6,466
)
Less debt discount
   
(28,583
)
   
(32,083
)
Less current maturities
   
(12,000
)
   
(15,240
)
Notes payable and long-term debt
 
$
284,624
   
$
268,951
 

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2018 Credit Facility

On March 7, 2018, we entered into a $250 million credit facility consisting of a $160 million 2018 First Lien Term Loan with Fifth Third Bank, as administrative agent, and other lenders, and a $50 million 2018 Revolving Credit Facility (collectively, the “2018 First Lien Credit Facility”) in addition to a $40 million 2018 Second Lien Term Loan ( the “2018 Second Lien Credit Facility,” and, together with the 2018 First Lien Credit Facility, the “2018 Credit Facility”) with Prospect Capital Corporation, as administrative agent, and other lenders. The 2018 Credit Facility retained the $40 million accordion feature of the 2017 Credit Facility.

The 2018 Credit Facility contains customary events of default including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, and change in control defaults. The 2018 Credit Facility also contains certain negative covenants customary for facilities of these types including covenants that, subject to exceptions described in the 2018 Credit Facility, restrict our ability: (i) to pledge assets, (ii) to incur additional indebtedness, (iii) to pay dividends, (iv) to make distributions, (v) to sell assets, and (vi) to make investments. Refer to Note 19, “Dividends and Share Repurchases”, of Notes to Consolidated Financial Statements for further information regarding dividend restrictions.

2018 First Lien Credit Facility: The 2018 First Lien Term Loan and the 2018 Revolving Credit Facility bear interest at LIBOR plus a spread of 2.75% to 3.50% based on our senior leverage ratio. The 2018 First Lien Term Loan has quarterly required payments of $2.0 million beginning June 30, 2018, increasing to $3.0 million on June 30, 2020, and increasing to $4.0 million on June 30, 2022. The 2018 First Lien Credit Facility has a maturity date of March 7, 2023. The 2018 First Lien Term Loan is secured by a first priority lien on substantially all of the assets of the borrowers and the guarantors thereunder, including a pledge of our capital stock, other than certain excluded assets (the “Collateral”). In connection with the Senior Notes offering, we entered into a First Amendment (“the Amendment”) to the First Lien Credit Agreement, with Fifth Third Bank, as administrative agent, and other lenders and certain other lending other lending parties thereto. The Amendment was entered into primarily to permit us to issue up to $200 million of convertible senior notes, enter into certain capped call transactions in connection with the issuance of such notes and to use the proceeds from the issuance of the notes to repay amounts outstanding under our 2018 Second Lien Credit Facility and use the remaining proceeds for acquisitions and investments. In connection with the Amendment, fees of $0.7 million were incurred. The 2018 First Lien Credit Facility contains certain financial covenants, which were amended in connection with the Convertible Senior Notes offering in the third quarter 2019. The covenants include maximum senior leverage ratio of 3.00x with step-downs to 2.50x, a maximum total leverage ratio of 5.50x with step-downs to 5.00x, and a minimum fixed charge coverage ratio of 1.20x. In the first quarter of 2020, the financial covenants were amended to permit certain add-backs related to PMTA in the definition of Consolidated EBITDA for the period of October 1, 2019 until September 30, 2020. In connection with the amendment, fees of $0.2 million were incurred. Based on an excess cash covenant for the facility, a principal payment of $4.5 million was due in the second quarter 2019. All parties agreed to waive the payment, resulting in consent fees of $0.1 million. The weighted average interest rate of the 2018 First Lien Term Loan was 2.93% at June 30, 2020. At June 30, 2020, we had no borrowings outstanding under the 2018 Revolving Credit Facility. The $50.0 million unused portion of the 2018 Revolving Credit Facility is reduced by letters of credit from Fifth Third Bank totaling $3.6 million, resulting in $46.4 million of availability under the 2018 Revolving Credit Facility at June 30, 2020.

2018 Second Lien Credit Facility: The 2018 Second Lien Credit Facility bore interest at a rate of LIBOR plus 7.00% and had a maturity date of March 7, 2024. The 2018 Second Lien Term Loan was secured by a second priority interest in the Collateral and was guaranteed by the same entities as the 2018 First Lien Term Loan. Based on an excess cash covenant for the facility, a $4.5 million principal payment was made in the second quarter 2019, resulting in $0.2 million loss on extinguishment of debt. We used a portion of the proceeds from the issuance of the Convertible Senior Notes to prepay all outstanding amounts related to the 2018 Second Lien Credit Facility in the third quarter 2019. The principal paid in the third quarter 2019 amounted to $35.5 million, and the transaction resulted in a $1.2 million loss on extinguishment of debt.

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.

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The Convertible Senior Notes are convertible into approximately 3,202,808 shares of our voting common stock under certain circumstances prior to maturity at a conversion rate of 18.567 shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.86 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 June 30, 2020.

Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the Convertible Senior Notes, we separated the Convertible Senior Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated conversion feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the Convertible Senior Notes and the fair value of the liability component of the Convertible Senior Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”), $35.0 million, will be amortized to interest expense using an effective interest rate of 7.5% over the expected life of the Convertible Senior Notes. The equity component is not remeasured as long as it continues to meet the criteria for equity classification. Interest expense includes $1.8 million of amortization for the three months ended June 30, 2020.

In accounting for the debt issuance costs related to the issuance of the Convertible Senior Notes, we allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to the interest expense using the effective interest method over the expected life of the Convertible Senior Notes, $4.7 million, and the debt issuance costs attributable to the equity component, $1.2 million, are netted with the equity component of stockholders’ equity (deficit).

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 $53.86 per and a cap price of $82.86 per, and are exercisable when, and if, the Convertible Senior Notes are converted. We paid $20.53 million for these capped calls and charged that amount to additional paid-in capital.

Promissory Note

On June 10, 2020, in connection with the acquisition of certain Durfort assets, we issued an unsecured subordinated promissory note (“Promissory Note”) in the principal amount of $10.0 million (the “Principal Amount”), with an annual interest rate of 7.5%, payable quarterly, with the first payment due September 10, 2020. The Principal Amount is payable in two $5.0 million installments, with the first installment due 18 months after the closing date of the acquisition (June 10, 2020), and the second installment due 36 months after the closing date of the acquisition. The second installment is subject to reduction for certain amounts payable by us as a holdback.

Unsecured Loan

On April 6, 2020, the 2018 First Lien Credit Facility was amended to allow for an unsecured loan under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES”). On April 17, 2020, National Tobacco Company, L.P., a 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. The proceeds of the loan were received on April 27, 2020. The loan is scheduled to mature on April 17, 2022 and has a 1.00% interest rate.

Note Payable – IVG

In September 2018, we issued a note payable to IVG’s former shareholders (“IVG Note”). The IVG Note was $4.0 million principal with 6.0% interest compounding annually and matured on March 5, 2020. All principal and accrued and unpaid interest under the IVG Note were subject to indemnification obligations of the sellers pursuant to the International Vapor Group Stock Purchase Agreement dated as of September 5, 2018. The carrying amount of the IVG Note, $4.2 million, was deposited into an escrow account pending agreement with the sellers of any indemnification obligations.

Off-balance Sheet Arrangements

During the three months and six months ended June 30, 2020 and the year ended December 31, 2019 we did not execute any forward contracts. At June 30, 2020, and December 31, 2019, we did not have any forward contracts. The Company had interest rate swap contracts for a notional amount of $70 million at June 30, 2020 and December 31, 2019. The fair values of the interest rate swap contracts are based upon quoted market prices and resulted in a liability of $4.7 million and $2.5 million, respectively, as of June 30, 2020 and December 31, 2019, included in other long-term liabilities.
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Inflation

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Sensitivity

There have been no material changes in our exposure to exchange rate fluctuation risk, as reported within our 2019 Annual Report on Form 10-K, during the period. Please refer to our ‘Quantitative and Qualitative Disclosures about Market Risk’ included in our 2019 Annual Report on Form 10-K filed with the SEC.

Credit Risk

There have been no material changes in our exposure to credit risk, as reported within our 2019 Annual Report on Form 10-K, during the three months ended June 30, 2020. Please refer to our ‘Quantitative and Qualitative Disclosures about Market Risk’ included in our 2019 Annual Report on Form 10-K filed with the SEC.

Interest Rate Sensitivity

We have exposure to interest rate volatility principally related to interest rate changes applicable to loans under our 2018 Credit Facility. As of June 30, 2020, our 2018 Credit Facility bears interest at variable rates. However, we had swap contracts for a total notional amount of $70 million at June 30, 2020. The fair values of the swap contracts are based upon quoted market prices and resulted in a liability of $4.7 million as of June 30, 2020. We believe the effect, if any, of reasonably possible near-term changes in interest rates on our consolidated financial position, results of operations, or cash flows would not be significant. A 1% increase in interest rates would change pre-tax income by approximately $0.7 million per year. Refer to Note 4, “Derivative Instruments”, of Notes to Consolidated Financial Statements for additional information regarding the interest rate swaps.

In July 2019, we issued Convertible Senior Notes with an aggregate principal amount of $172.5 million. We carry the Convertible Senior Notes at face value less amortized discount on the balance sheet. Since the Convertible Senior Notes bear interest at a fixed rate, we have no financial statement risk associated with changes in interest rates. However, the fair value of the Convertible Senior Notes changes when the market price of our stock fluctuates, or interest rates change. Our remaining debt instruments bear interest at fixed rates and are not subject to interest rate volatility.

Item 4. Controls and Procedures

We have carried out an evaluation under the supervision, and with the participation of, our management including our Chief Executive Officer (“CEO”), Chief Financial Officer (“CFO”), and Chief Accounting Officer (“CAO”), of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the “Act”)) as of June 30, 2020. Based upon the evaluation, our CEO, CFO, and CAO concluded our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Act is: (i) recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.

There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended June 30, 2020 which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Table of Contents

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

We are a party from time to time to various proceedings in the ordinary course of business. For a description of the Master Settlement Agreement, to which we are a party, see “Notes to Consolidated Financial Statements - Note 2 Summary of Significant Accounting Policies: Risk and Uncertainties.” Other than the proceedings mentioned below, there is no material litigation, arbitration or governmental proceeding currently pending against us or any of our officers or directors in their capacity as such, and we and our officers and directors have not been subject to any such proceeding.

Other major tobacco companies are defendants in product liability claims. In a number of these cases, the amounts of punitive and compensatory damages sought are significant and could have a material adverse effect on our business and results of operations. The Company is subject to several lawsuits alleging personal injuries resulting from malfunctioning vaporizer devices or consumption of e-liquids and may be subject to claims in the future relating to our other NewGen products. The Company is still evaluating these claims and the potential defenses to them.  For example, the Company did not design or manufacture the products at issue; rather, we were merely the distributor.  Nonetheless, there can be no assurance that we will prevail in these cases, and they could have a material adverse effect on our financial position, results of operations, or cash flows.

Franchisors are defendants from time to time in the ordinary course of business. In certain of these cases, the amounts of punitive and compensatory damages sought are significant. One of the Company’s subsidiaries is a defendant in a lawsuit brought by a franchisee. In that case, the franchisee is seeking compensatory and punitive damages and rescission of their franchise agreement, alleging that the Company’s subsidiary failed to make certain disclosures in the Franchise Disclosure Document. The subsidiary is evaluating these claims, the potential defenses to them as well as available counterclaims. The subsidiary believes that termination of the franchise agreement was proper, no damages are due and the franchisee is bound by an arbitration agreement pursuant to the terms of their franchise agreement (and therefore it was improper to pursue litigation). The former franchisee has also named various other parties, including the Company and another subsidiary asserting the same claims, as well as a claim for a declaratory judgment, that the Company and the subsidiary should be found liable as successor entities, or under the doctrines of “de facto merger”, or alter ego. The Company and the subsidiary have moved to stay the case pending the arbitration noted above.  Both motions remain pending. While the Company and its subsidiaries believe they have good and valid defenses to the claims, there can be no assurance that the Company and its subsidiaries will prevail in this case, and it could have a material adverse effect on the Company’s business and results of operations.

We have several subsidiaries engaged in making, distributing, and retailing (online and in bricks-and-mortar) vapor products. As a result of the overall publicity and controversy surrounding the vapor industry generally, many companies have received informational subpoenas from various regulatory bodies and in some jurisdictions regulatory lawsuits have been filed regarding marketing practices and possible underage sales. Our subsidiaries are subject to some information requests. In the acquisition of the vapor businesses, we negotiated financial “hold-backs”, which we expect to be able to use to defray expenses associated with the information production and the cost of defending any such lawsuits as well as the franchisee lawsuit. To the extent that litigation becomes necessary, we believe that the subsidiaries have strong factual and legal defenses against claims that they unfairly marketed vapor products.

See ‘Risk Factors—We may become subject to significant product liability litigation’ within our 2019 Annual Report on Form 10-K for additional details.

Item 1A. Risk Factors

In addition to the other information set forth in this report, carefully consider the factors discussed in the ‘Risk Factors’ section contained in our 2019 Annual Report on Form 10-K. There have been no material changes to the Risk Factors set forth in the 2019 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.
47

Table of Contents
Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

.
Description
   
Agreement and Plan of Merger and Reorganization, dated as of April 7, 2020, by and among TPB, SDI and Merger Sub (incorporated by reference to Exhibit 2.1 to the Company's Current Report on Form 8-K filed on April 8, 2020).
   
Third Amendment to the First Lien Credit Agreement dated as of April 6, 2020 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2020).
   
Rule 13a-14(a)/15d-14(a) Certification of Lawrence S. Wexler.*
   
Rule 13a-14(a)/15d-14(a) Certification of Robert Lavan.*
   
Rule 13a-14(a)/15d-14(a) Certification of Brian Wigginton.*
   
Section 1350 Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
   
101
XBRL (eXtensible Business Reporting Language). The following materials from Turning Point Brands, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, filed on July 28, 2020, formatted in Inline XBRL (iXBRL): (i) consolidated balance sheets, (ii) consolidated statements of income, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of cash flows, and (v) the notes to consolidated financial statements.*
   
104
Cover Page Interactive Data File (formatted in iXBRL and included in Exhibit 101).*

*
Filed or furnished herewith

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 
TURNING POINT BRANDS, INC.
       
   
By: /s/ Lawrence S. Wexler
   
Name: Lawrence S. Wexler
     
Title:  President and Chief Executive Officer
       
   
By: /s/ Robert Lavan
   
Name: Robert Lavan
     
Title:  Chief Financial Officer
       
   
By: /s/ Brian Wigginton
   
Name: Brian Wigginton
     
Title:  Chief Accounting Officer

Date: July 28, 2020



49

Exhibit 31.1

CERTIFICATIONS

I, Lawrence Wexler, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Turning Point Brands, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 28, 2020
By:
/s/ Lawrence S. Wexler
   
Lawrence S. Wexler
   
President and Chief Executive Officer
   
(Principal Executive Officer)




Exhibit 31.2

CERTIFICATIONS

I, Robert Lavan, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Turning Point Brands, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 28, 2020
By:
/s/ Robert Lavan
   
Robert Lavan
   
Chief Financial Officer
   
(Principal Financial Officer)




Exhibit 31.3

CERTIFICATIONS

I, Brian Wigginton, certify that:

1.
I have reviewed this Quarterly Report on Form 10-Q of Turning Point Brands, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:


(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;


(b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;


(c)
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and


(d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):


(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and


(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: July 28, 2020
By:
/s/ Brian Wigginton
   
Brian Wigginton
   
Chief Accounting Officer




Exhibit 32.1

CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Turning Point Brands, Inc. (the "Company") for the quarterly period ended June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Lawrence S. Wexler, President and Chief Executive Officer, Robert Lavan, Chief Financial Officer, and Brian Wigginton, Chief Accounting Officer, of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
 
(1)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
(2)
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods presented therein.

Date: July 28, 2020
 
By:
/s/ Lawrence S. Wexler
     
Lawrence S. Wexler
     
President and Chief Executive Officer
     
(Principal Executive Officer)

Date: July 28, 2020
 
By:
/s/ Robert Lavan
     
Robert Lavan
     
Chief Financial Officer
     
(Principal Financial Officer)

Date: July 28, 2020
 
By:
/s/ Brian Wigginton
     
Brian Wigginton
     
Chief Accounting Officer




v3.20.2
Document and Entity Information - shares
6 Months Ended
Jun. 30, 2020
Jul. 20, 2020
Cover [Abstract]    
Entity Registrant Name TURNING POINT BRANDS, INC.  
Entity Central Index Key 0001290677  
Current Fiscal Year End Date --12-31  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Shell Company false  
Entity Filer Category Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company true  
Entity Ex Transition Period true  
Entity Common Stock, Shares Outstanding   19,221,930
Document Type 10-Q  
Amendment Flag false  
Document Period End Date Jun. 30, 2020  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q2  
Document Quarterly Report true  
Document Transition Report false  
Entity File Number 001-37763  
Entity Tax Identification Number 20-0709285  
Entity Incorporation, State or Country Code DE  
Entity Address, Address Line One 5201 Interchange Way  
Entity Address, City or Town Louisville  
Entity Address, State or Province KY  
Entity Address, Postal Zip Code 40229  
City Area Code 502  
Local Phone Number 778-4421  
Title of 12(b) Security Common Stock, $0.01 par value  
Trading Symbol TPB  
Security Exchange Name NYSE  
v3.20.2
Consolidated Balance Sheets (unaudited) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Current assets:    
Cash $ 64,192 $ 95,250
Accounts receivable, net of allowances of $271 in 2020 and $280 in 2019 5,112 6,906
Inventories 75,556 70,979
Other current assets 16,701 16,115
Total current assets 161,561 189,250
Property, plant, and equipment, net 13,343 13,816
Right of use assets 13,243 12,130
Deferred financing costs, net 789 890
Goodwill 154,282 154,282
Other intangible assets, net 80,414 33,469
Master Settlement Agreement (MSA) escrow deposits 32,074 32,074
Other assets 11,512 10,673
Total assets 467,218 446,584
Current liabilities:    
Accounts payable 14,361 14,126
Accrued liabilities 25,593 26,520
Current portion of long-term debt 12,000 15,240
Total current liabilities 51,954 55,886
Notes payable and long-term debt 284,624 268,951
Deferred income taxes 2,422 1,572
Lease liabilities 11,813 11,067
Other long-term liabilities 4,663 2,523
Total liabilities 355,476 339,999
Commitments and contingencies
Stockholders' equity:    
Preferred stock; $0.01 par value; authorized shares 40,000,000; issued and outstanding shares -0- 0 0
Additional paid-in capital 126,928 125,469
Cost of repurchased common stock (256,863 shares at June 30, 2020 and 0 shares at December 31, 2019) (5,289) 0
Accumulated other comprehensive loss (5,299) (3,773)
Accumulated deficit (4,795) (15,308)
Total stockholders' equity 111,742 106,585
Total liabilities and stockholders' equity 467,218 446,584
Common Stock, Voting [Member]    
Stockholders' equity:    
Common stock 197 197
Common Stock, Nonvoting [Member]    
Stockholders' equity:    
Common stock $ 0 $ 0
v3.20.2
Consolidated Balance Sheets (unaudited) (Parenthetical) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Current assets:    
Accounts receivable, allowance $ 271 $ 280
Stockholders' equity:    
Preferred stock, par value (in dollars per share) $ 0.01 $ 0.01
Preferred stock, shares authorized (in shares) 40,000,000 40,000,000
Preferred stock, shares issued (in shares) 0 0
Preferred stock, shares outstanding (in shares) 0 0
Repurchased common stock (in shares) 256,863 0
Common Stock, Voting [Member]    
Stockholders' equity:    
Common stock, par value (in dollars per share) $ 0.01 $ 0.01
Common stock, shares authorized (in shares) 190,000,000 190,000,000
Common stock, shares issued (in shares) 19,724,027 19,680,673
Common stock, shares outstanding (in shares) 19,467,164 19,680,673
Common Stock, Nonvoting [Member]    
Stockholders' equity:    
Common stock, par value (in dollars per share) $ 0.01 $ 0.01
Common stock, shares authorized (in shares) 10,000,000 10,000,000
Common stock, shares issued (in shares) 0 0
Common stock, shares outstanding (in shares) 0 0
v3.20.2
Consolidated Statements of Income (unaudited) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Consolidated Statements of Income (unaudited) [Abstract]        
Net sales $ 104,963 $ 93,339 $ 195,652 $ 184,967
Cost of sales 56,871 52,156 106,129 103,320
Gross profit 48,092 41,183 89,523 81,647
Selling, general, and administrative expenses 30,756 21,242 63,150 49,671
Operating income 17,336 19,941 26,373 31,976
Interest expense, net 4,980 3,736 9,974 7,592
Investment income (34) (118) (125) (262)
Loss on extinguishment of debt 0 150 0 150
Net periodic income, excluding service cost (104) (11) (191) (22)
Income before income taxes 12,494 16,184 16,715 24,518
Income tax expense 3,267 2,979 4,213 4,753
Consolidated net income $ 9,227 $ 13,205 $ 12,502 $ 19,765
Basic income per common share:        
Consolidated net income (in dollars per share) $ 0.47 $ 0.67 $ 0.64 $ 1.01
Diluted income per common share:        
Consolidated net income (in dollars per share) $ 0.47 $ 0.66 $ 0.63 $ 0.99
Weighted average common shares outstanding:        
Basic (in shares) 19,507,874 19,621,695 19,598,660 19,590,817
Diluted (in shares) 19,834,345 20,131,980 19,872,726 19,895,959
v3.20.2
Consolidated Statements of Comprehensive Income (unaudited) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Consolidated Statements of Comprehensive Income (unaudited) [Abstract]        
Consolidated net income $ 9,227 $ 13,205 $ 12,502 $ 19,765
Other comprehensive income (loss), net of tax        
Amortization of unrealized pension and postretirement gain (loss), net of tax 7 (4) 14 (8)
Unrealized gain on investments, net of tax 0 509 0 911
Unrealized gain (loss) on interest rate swaps, net of tax 73 (931) (1,540) (1,407)
Other comprehensive income (loss), net of tax 80 (426) (1,526) (504)
Consolidated comprehensive income $ 9,307 $ 12,779 $ 10,976 $ 19,261
v3.20.2
Consolidated Statements of Comprehensive Income (unaudited) (Parenthetical) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Other comprehensive income (loss), net of tax        
Amortization of unrealized pension and postretirement gain (loss), tax $ 2 $ 1 $ 5 $ 3
Unrealized gain on investments, tax 0 170 0 263
Unrealized loss on interest rate swaps, tax $ 25 $ 310 $ 600 $ 493
v3.20.2
Consolidated Statements of Cash Flows (unaudited) - USD ($)
$ in Thousands
6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Cash flows from operating activities:    
Consolidated net income $ 12,502 $ 19,765
Adjustments to reconcile net income to net cash provided by operating activities:    
Loss on extinguishment of debt 0 150
Impairment loss 149 0
Loss on sale of property, plant, and equipment 12 22
Depreciation expense 1,673 1,163
Amortization of other intangible assets 827 723
Amortization of debt discount and deferred financing costs 4,483 478
Deferred income taxes 1,445 (109)
Stock compensation expense 1,213 1,412
Noncash lease expense 18 0
Changes in operating assets and liabilities:    
Accounts receivable 1,794 (3,663)
Inventories (4,577) (3,346)
Other current assets (253) (3,534)
Other assets (766) (359)
Accounts payable 235 12,927
Accrued postretirement liabilities (54) (83)
Accrued liabilities and other (1,167) (3,848)
Net cash provided by operating activities 17,534 21,698
Cash flows from investing activities:    
Capital expenditures (1,956) (1,964)
Acquisitions, net of cash acquired (37,772) 0
Restricted cash, MSA deposits 0 1,677
Net cash used in investing activities (39,728) (287)
Cash flows from financing activities:    
Payments of 2018 revolving credit facility 0 (11,000)
Proceeds from unsecured note 7,485 0
Payment of dividends (1,872) (1,762)
Payments of financing costs (194) (179)
Exercise of options 246 610
Surrender of restricted stock 0 (81)
Redemption of options 0 (12)
Common stock repurchased (5,289) 0
Net cash used in financing activities (8,864) (20,913)
Net increase (decrease) in cash (31,058) 498
Cash, beginning of period:    
Unrestricted 95,250 3,306
Restricted 32,074 2,361
Total cash at beginning of period 127,324 5,667
Cash, end of period:    
Unrestricted 64,192 2,127
Restricted 32,074 4,038
Total cash at end of period 96,266 6,165
Supplemental schedule of noncash financing activities:    
Dividends declared not paid 991 897
Issuance of note payable for acquisition 10,000 0
2018 First Lien Term Loan [Member]    
Cash flows from financing activities:    
Payments of term loan (5,000) (4,000)
Payments of financing costs (200)  
2018 Second Lien Term Loan [Member]    
Cash flows from financing activities:    
Payments of term loan 0 (4,489)
IVG Note [Member]    
Cash flows from financing activities:    
Payments of term loan $ (4,240) $ 0
v3.20.2
Consolidated Statements of Changes in Stockholders' Equity (Deficit) (unaudited) - USD ($)
$ in Thousands
Common Stock [Member]
Voting [Member]
Additional Paid-In Capital [Member]
Cost of Repurchased Common Stock [Member]
Accumulated Other Comprehensive Loss [Member]
Accumulated Deficit [Member]
Total
Beginning balance at Dec. 31, 2018 $ 196 $ 110,466 $ 0 $ (2,536) $ (25,503) $ 82,623
Beginning balance (in shares) at Dec. 31, 2018           19,553,857
Unrecognized pension and postretirement cost adjustment, net of tax 0 0 0 (8) 0 $ (8)
Unrealized gain on MSA investments, net of tax 0 0 0 911 0 911
Unrealized gain (loss) on interest rate swaps, net of tax 0 0 0 (1,407) 0 (1,407)
Stock compensation expense 0 1,387 0 0 0 1,387
Restricted stock forfeitures $ 0 (84) 0 0 0 (84)
Restricted stock forfeitures (in shares) (1,947)          
Exercise of options $ 1 609 0 0 0 610
Exercise of options (in shares) 106,036          
Redemption of options $ 0 (12) 0 0 0 (12)
Dividends 0 0 0 0 (1,784) (1,784)
Net income 0 0 0 0 19,765 19,765
Ending balance at Jun. 30, 2019 197 112,366 0 (3,040) (7,522) $ 102,001
Ending balance (in shares) at Jun. 30, 2019           19,657,946
Beginning balance at Dec. 31, 2018 196 110,466 0 (2,536) (25,503) $ 82,623
Beginning balance (in shares) at Dec. 31, 2018           19,553,857
Ending balance at Dec. 31, 2019 197 125,469 0 (3,773) (15,308) $ 106,585
Ending balance (in shares) at Dec. 31, 2019           19,680,673
Beginning balance at Mar. 31, 2019 196 111,089 0 (2,614) (19,830) $ 88,841
Beginning balance (in shares) at Mar. 31, 2019           19,576,398
Unrecognized pension and postretirement cost adjustment, net of tax 0 0 0 (4) 0 $ (4)
Unrealized gain on MSA investments, net of tax 0 0 0 509 0 509
Unrealized gain (loss) on interest rate swaps, net of tax 0 0 0 (931) 0 (931)
Stock compensation expense 0 938 0 0 0 938
Restricted stock forfeitures $ 0 (83) 0 0 0 (83)
Restricted stock forfeitures (in shares) (1,900)          
Exercise of options $ 1 422 0 0 0 423
Exercise of options (in shares) 83,448          
Dividends $ 0 0 0 0 (897) (897)
Net income 0 0 0 0 13,205 13,205
Ending balance at Jun. 30, 2019 197 112,366 0 (3,040) (7,522) $ 102,001
Ending balance (in shares) at Jun. 30, 2019           19,657,946
Beginning balance at Dec. 31, 2019 197 125,469 0 (3,773) (15,308) $ 106,585
Beginning balance (in shares) at Dec. 31, 2019           19,680,673
Unrecognized pension and postretirement cost adjustment, net of tax 0 0 0 14 0 $ 14
Unrealized gain (loss) on interest rate swaps, net of tax 0 0 0 (1,540) 0 (1,540)
Stock compensation expense 0 1,214 0 0 0 1,214
Exercise of options $ 0 245 0 0 0 245
Exercise of options (in shares) 43,354          
Cost of repurchased common stock $ 0 0 $ (5,289) 0 0 $ (5,289)
Cost of repurchased common stock (in shares)     (256,863)     (256,863)
Dividends 0 0 $ 0 0 (1,989) $ (1,989)
Net income 0 0 0 0 12,502 12,502
Ending balance at Jun. 30, 2020 197 126,928 (5,289) (5,299) (4,795) $ 111,742
Ending balance (in shares) at Jun. 30, 2020           19,467,164
Beginning balance at Mar. 31, 2020 197 126,151 (2,627) (5,379) (13,031) $ 105,311
Beginning balance (in shares) at Mar. 31, 2020           19,588,950
Unrecognized pension and postretirement cost adjustment, net of tax 0 0 0 7 0 $ 7
Unrealized gain (loss) on interest rate swaps, net of tax 0 0 0 73 0 73
Stock compensation expense 0 759 0 0 0 759
Exercise of options $ 0 18 0 0 0 18
Exercise of options (in shares) 947          
Cost of repurchased common stock $ 0 0 $ (2,662) 0 0 (2,662)
Cost of repurchased common stock (in shares)     (122,733)      
Dividends 0 0 $ 0 0 (991) (991)
Net income 0 0 0 0 9,227 9,227
Ending balance at Jun. 30, 2020 $ 197 $ 126,928 $ (5,289) $ (5,299) $ (4,795) $ 111,742
Ending balance (in shares) at Jun. 30, 2020           19,467,164
v3.20.2
Consolidated Statements of Changes in Stockholders' Equity (Deficit) (unaudited) (Parenthetical) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2019
Jun. 30, 2019
Consolidated Statements of Changes in Stockholders' Equity (Deficit) (unaudited) [Abstract]    
Unrecognized pension and postretirement cost adjustment, tax $ 1 $ 3
Unrealized gain on MSA investments, tax 170 263
Unrealized loss on interest rate swaps, tax $ 310 $ 493
v3.20.2
Organizations and Basis of Presentation
6 Months Ended
Jun. 30, 2020
Organizations and Basis of Presentation [Abstract]  
Organizations and Basis of Presentation
Note 1. Organizations and Basis of Presentation

Organizations

Turning Point Brands, Inc. (the “Company”), is a holding company which owns North Atlantic Trading Company, Inc. (“NATC”) and its subsidiaries, Standard Merger Sub, LLC (“SMS”), North Atlantic Wrap Company, LLC (“NAWC”), TPB Services, LLC (“TPBS”), Turning Point Brands, LLC (“TPLLC”), and its subsidiaries, and Turning Point Brands (Canada), Inc. (“TPBC”). Except where the context indicates otherwise, references to the Company include the Company; NATC and its subsidiaries National Tobacco Company, L.P. (“NTC”), National Tobacco Finance, LLC (“NTFLLC”), North Atlantic Operating Company, Inc. (“NAOC”), North Atlantic Cigarette Company, Inc. (“NACC”), and RBJ Sales, Inc. (“RBJ”); TPLLC and its subsidiaries Intrepid Brands, LLC (“Intrepid”), TPB Beast, LLC (“VaporBeast”), TPB Shark, LLC, and its subsidiaries (collectively, “Vapor Shark”), TPB International, LLC and its subsidiaries (collectively, “IVG”), Nu-X Ventures LLC (“Nu-X”), Nu-Tech Holdings LLC (“Nu-Tech”), and South Beach Holdings, LLC (“South Beach”); SMS, NAWC, TPBS and TPBC.

Basis of Presentation

The accompanying unaudited interim, consolidated financial statements have been prepared in accordance with the accounting practices described in the Company’s audited, consolidated financial statements as of and for the year ended December 31, 2019. In the opinion of management, the unaudited, interim, consolidated financial statements included herein contain all adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company for the periods indicated. Such adjustments, other than nonrecurring adjustments separately disclosed, are of a normal and recurring nature. The operating results for interim periods are not necessarily indicative of results to be expected for a full year or future interim periods. The unaudited, interim, consolidated financial statements should be read in conjunction with the Company’s audited, consolidated financial statements and accompanying notes as of and for the year ended December 31, 2019. The accompanying interim, consolidated financial statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission and, accordingly, do not include all the disclosures required by generally accepted accounting principles in the United States (“GAAP”) with respect to annual financial statements.

Certain prior year amounts have been reclassified to conform to the current year’s presentation. The changes did not have an impact on the Company’s consolidated financial position, results of operations, or cash flows in any of the periods presented.
v3.20.2
Summary of Significant Accounting Policies
6 Months Ended
Jun. 30, 2020
Summary of Significant Accounting Policies [Abstract]  
Summary of Significant Accounting Policies
Note 2. Summary of Significant Accounting Policies

Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany transactions have been eliminated.

Revenue Recognition

The Company recognizes revenues in accordance with Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which includes excise taxes and shipping and handling charges billed to customers, net of cash discounts for prompt payment, sales returns and incentives, upon delivery of goods to the customer – at which time the Company’s performance obligation is satisfied – at an amount that the Company expects to be entitled to in exchange for those goods in accordance with the five-step analysis outlined in Topic 606: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied. The Company excludes 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).

The Company records an allowance for sales returns, based principally on historical volume and return rates, which is included in accrued liabilities on the consolidated balance sheets. The Company records sales incentives, which consist of consumer incentives and trade promotion activities, as a reduction in revenues (a portion of which is based on amounts estimated 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 ASU 2014-09 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. Company management views business performance through segments that closely resemble the performance of major product lines. Thus, the primary and most useful disaggregation of the Company’s contract revenue for decision making purposes is the disaggregation by segment which can be found in Note 18 of Notes to Consolidated Financial Statements. An additional disaggregation of contract revenue by sales channel can be found within Note 18 as well.

Shipping Costs

The Company records shipping costs incurred as a component of selling, general, and administrative expenses. Shipping costs incurred were approximately $6.9 million and $4.3 million for the three months ending June 30, 2020 and 2019, respectively. Shipping costs incurred were approximately $12.1 million and $9.2 million for the six months ending June 30, 2020 and 2019, respectively.

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:

Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date.
Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

Derivative Instruments

Foreign Currency Forward Contracts: The Company enters into foreign currency forward contracts to hedge a portion of its exposure to changes in foreign currency exchange rates on inventory purchase commitments. The Company accounts for its forward contracts under the provisions of ASC 815, Derivatives and Hedging. Under the Company’s policy, the Company may hedge up to 100% of its anticipated purchases of inventory in the denominated invoice currency over a forward period not to exceed twelve months. The Company may also, from time to time, hedge up to ninety percent of its non-inventory purchases in the denominated invoice currency. Forward contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by market prices on the measurement date, except any hedge ineffectiveness which is recognized currently in income. Gains and losses on these forward contracts are transferred from other comprehensive income into net income as the related inventories are received. 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.

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

Risks and Uncertainties

Manufacturers and sellers of tobacco products are subject to regulation at the federal, state, and local levels. Such regulations include, among others, labeling requirements, limitations on advertising, and prohibition of sales to minors. The tobacco industry is likely to continue to be heavily regulated. There can be no assurance as to the ultimate content, timing, or effect of any regulation of tobacco products by any federal, state, or local legislative or regulatory body, nor can there be any assurance that any such legislation or regulation would not have a material adverse effect on the Company’s financial position, results of operations, or cash flows. In a number of states, targeted flavor bans, particularly with regard to vapor products, have been proposed or enacted legislatively or by the administrative process. Depending on the number and location of such bans, that legislation or regulation could have a material adverse effect on the Company’s financial position, results of operations or cash flows.  Food and Drug Administration (“FDA”) continues to consider various restrictive regulations around our products, including targeted flavor bans; however, the details, timing, and ultimate implementation of such measures remain unclear.

The tobacco industry has experienced, and is experiencing, significant product liability litigation. Most tobacco liability lawsuits have been brought against manufacturers and sellers of cigarettes for injuries allegedly caused by smoking or exposure to smoke. However, several lawsuits have been brought against manufacturers and sellers of smokeless products for injuries to health allegedly caused by use of smokeless products. Typically, such claims assert that use of smokeless products is addictive and causes oral cancer. Additionally, several lawsuits have been brought against manufacturers and distributors of NewGen products due to malfunctioning devices. There can be no assurance the Company will not sustain losses in connection with such lawsuits and that such losses will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
 
Master Settlement Agreement (MSA):  Pursuant to the Master Settlement Agreement (the “MSA”) entered into in November 1998 by most states (represented by their attorneys general acting through the National Association of Attorneys General) and subsequent states’ statutes, a “cigarette manufacturer” (which is defined to include a manufacturer of make-your-own (“MYO”) cigarette tobacco) has the option of either becoming a signatory to the MSA or opening, funding, and maintaining an escrow account to have funds available for certain potential tobacco-related liabilities with sub-accounts on behalf of each settling state. Such companies are entitled to direct the investment of the escrowed funds and withdraw any appreciation, but cannot withdraw the principal for twenty-five years from the year of each annual deposit, except to withdraw funds deposited pursuant to an individual state’s escrow statute to pay a final judgement to that state’s plaintiffs in the event of such a final judgement against the Company.  The Company chose to open and fund an escrow account as its method of compliance. It is the Company’s policy to record amounts on deposit in the escrow account for prior years as a non-current asset. Each year’s annual obligation is required to be deposited in the escrow account by April 15 of the following year. In addition to the annual deposit, many states have elected to require quarterly deposits for the previous quarter’s sales. As of June 30, 2020, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $32.1 million. At December 31, 2019, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $32.1 million. Effective in the third quarter of 2017, the Company no longer sells any product covered under the MSA. Thus, absent a change in legislation, the Company will no longer be required to make deposits to the MSA escrow account.

The Company has chosen to invest a portion of the MSA escrow, from time to time, in U.S. Government securities including TIPS, Treasury Notes, and Treasury Bonds. These investments are classified as available-for-sale and carried at fair value. Realized losses are prohibited under the MSA; any investment in an unrealized loss position will be held until the value is recovered, or until maturity. All monies at June 30, 2020 and December 31, 2019 were held in money market savings accounts.

The following shows the amount of deposits by sales year for the MSA escrow account:

 
Deposits as of
 
 Sales
Year
 
June 30,
2020
   
December 31,
2019
 
 
           
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
   
83
     
83
 
 
               
Total
 
$
32,074
   
$
32,074
 

Food and Drug Administration: On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (the “TCA”) authorized the FDA to immediately regulate the manufacturing, sale, and marketing of four categories of tobacco products – cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless tobacco.

Under the TCA, tobacco product user fees are assessed on six classes of regulated tobacco products. The user fees are computed using a methodology similar to the methodology used by the U.S Department of Agriculture to compute the Tobacco Transition Payment Program assessment. First, the total, annual, congressionally established user fee assessment is allocated among the various classes of tobacco products using the federal excise tax weighted market share of tobacco products subject to regulation. Then, the assessment for each class of tobacco products is divided among individual manufacturers and importers.
 
In August 2016, the FDA’s regulatory authority under the TCA was extended to all tobacco products not previously covered, including: (i) certain NewGen products (such as electronic cigarettes, vaporizers and e-liquids) and their components or parts (such as tanks, coils and batteries); (ii) cigars and their components or parts (such as cigar tobacco); (iii) pipe tobacco; (iv) hookah products; and (v) any other tobacco product “newly deemed” by the FDA. These “deeming regulations” apply to all products made or derived from tobacco intended for human consumption, but excluding accessories of tobacco products (such as lighters). Accordingly, the FDA has since regulated our cigar and cigar wrap products as well as our vapor products containing tobacco-derived nicotine and products intended or reasonably expected to be used to consume such e-liquids.
 
Under the deeming regulations, the FDA has responsibility for conducting premarket review of “new tobacco products”—defined as those products not commercially marketed in the United States as of February 15, 2007. There are three pathways for obtaining premarket authorization, including submission of a premarket tobacco product application (“PMTA”).

When the FDA initially issued the deeming regulations, it recognized that many products in the deemed categories that were already on the market qualified as “new tobacco products” and lacked a marketing order. In August 2017, the FDA issued a compliance policy (the “August 2017 Guidance”) that allowed new tobacco products to remain on the market without an FDA authorization until specified deadlines had passed.  Under the August 2017 Guidance, compliance dates vary depending upon the type of application submitted, but all newly-deemed products require an application no later than August 8, 2021, for “combustible” products (e.g. cigar and pipe), and August 8, 2022, for “non-combustible” products (e.g. vapor products) with the exception of “grandfathered” products (products in commerce as of February 15, 2007) which are already authorized.

On March 27, 2018, several public health organizations filed a lawsuit (the “Maryland Lawsuit”) challenging the August 2017 Guidance. The plaintiffs asserted, among other arguments, that the modification to the deeming regulations included in the August 2017 Guidance conflicts with the TCA and exceeds FDA’s statutory authority. The plaintiffs also expressed concern that the August 2017 Guidance allows vapor products to remain marketed for a significant period of time without required premarket review.
 
The court found in favor of the plaintiffs in May 2019 and vacated the August 2017 Guidance. On July 12, 2019, the court issued its remedy order (the “Remedy Order”). Specifically, the court ordered that: (1) for all deemed new tobacco products, marketers must file applications within 10 months of the Remedy Order to continue marketing such products; (2) such a product may remain on the market pending FDA review of a timely filed application for a period not to exceed one year from the date of the application’s submission; (3) in its discretion, the FDA may enforce the premarket review requirements against such products for which marketers do not file applications within 10 months; and (4) the FDA will have the ability to exempt deemed new tobacco products from these application submission requirements for good cause, on a case-by-case basis. FDA appealed the Remedy Order and other actions adverse to the FDA; however, on May 4, 2020, the U.S. Court of Appeals for the Fourth Circuit issued a ruling dismissing the appeals in their entirety.
 
On March 30, 2020, citing the impacts of the worldwide COVID-19 pandemic on both FDA and industry, FDA requested a modification to the Remedy Order that would extend the May 12, 2020, deadline for filing premarket applications by 120 days to September 9, 2020. After several procedural steps, the Remedy Order was modified on April 22, 2020, to reflect the new deadline, and since then, FDA has updated relevant Guidance documents to reflect this new timeline.
 
On September 11, 2019, President Donald Trump and the Department of Health and Human Services Secretary, Alex Azar, indicated FDA would adopt a regulatory policy restricting all flavors in vapor products. In January 2020, FDA issued a Guidance document (the “January 2020 Guidance”) that stated it would be prioritizing enforcement of several categories of electronic nicotine delivery systems (“ENDS”) products: (1) flavored, cartridge-based ENDS products (other than tobacco- or menthol-flavored ENDS products); (2) ENDS products for which the manufacturer has failed to take (or is failing to take) adequate measures to prevent minors’ access; (3) ENDS products targeted to minors or whose marketing is likely to promote the use of ENDS by minors; and (4) ENDS products offered for sale after the May 12, 2020, premarket application deadline for which the manufacturer has not submitted a premarket application. The policy outlined several factors the agency would consider in its enforcement of flavored cigars going forward but did not drastically restrict those products as it had considered in its March 2019 Guidance proposal. The FDA’s policy on these and other regulated products may change or expand over time in ways not yet known and may significantly impact our products or our premarket filings. For example, as noted above, the FDA recently acted to modify the deadline for premarket applications from May 12, 2020, to September 9, 2020.
 
As a result of the implementation of the modified Remedy Order, we would not be permitted to continue marketing our existing “deemed” products that the FDA regulates as tobacco products past September 9, 2020, unless the product is grandfathered or we file an application for each such product by that date.  We expect to be able to make appropriate premarket filing by the deadlines and to supplement and complete the applications within FDA’s discretionary timeline. A successful PMTA must demonstrate that the subject product is “appropriate for the protection of public health,” taking into account the effect of the marketing of the product on all sub-populations while a Substantial Equivalence Report must demonstrate that a new product either has the same characteristics as its predicate product or different characteristics, but does not raise different questions of public health. FDA has issued a number of proposed rules related to premarket filings; however, none of these rules are final yet, and their requirements may shift before being finalized. We believe we have products that meet the requisite standards and that we will be able to efficiently produce satisfactory premarket filings. However, there is no assurance that the FDA’s guidance or ultimate regulation will not change, the Remedy Order will not be further altered or that unforeseen circumstances will not arise that prevent us from filing applications or otherwise increase the amount of time and money we are required to spend to successfully file all necessary premarket applications. Even if we successfully file all of our premarket applications in a timely manner, no assurance can be given that the applications will ultimately be successful. Given the shorter time frame mandated by the Remedy Order, which if not amended or successfully appealed, may result in the prioritization of meeting requisite deadlines by selecting high priority SKUs in our inventory position, and future revenues may be adversely impacted.
 
In addition, we currently distribute many third-party manufactured vapor products for which we will be completely dependent on the manufacturer complying with the premarket filing requirements. There can be no assurances that some products that we currently distribute will be able to be sold to end consumers after September 2020. While we will take measures to pursue regulatory compliance for our own privately-branded or proprietary vape products that compete with these third-party products, there is no assurance that such proprietary products would be as successful in the marketplace or can fully displace third-party products that are currently being distributed by us, which could adversely affect our results of operations and liquidity.

Recent Accounting Pronouncements Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This ASU applies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investments in leases, and trade accounts receivable as well as certain off-balance sheet credit exposures, such as loan commitments. The ASU replaced the previous incurred loss impairment methodology with a methodology to reflect current expected credit losses (“CECL”) and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. The guidance was adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The ASU was effective for the Company beginning in the first quarter of 2020. The ASU did not have an impact to the Company’s financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. The guidance is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The Company adopted ASU 2018-15 effective January 1, 2020. The ASU did not have an impact to the Company’s financial statements and related disclosures.
 
Recent Accounting Pronouncements Not Yet Adopted
 
In December 2019, the FASB issued ASU 2019-12 to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This ASU will be effective beginning in the first quarter of the Company’s fiscal year 2021. Early adoption is permitted. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The Company is currently evaluating the impact this ASU will have on the financial statements and related disclosures, as well as the timing of adoption. 
v3.20.2
Acquisitions
6 Months Ended
Jun. 30, 2020
Acquisitions [Abstract]  
Acquisitions
Note 3. Acquisitions
 
Durfort Holdings

In June 2020, the Company purchased certain tobacco assets and distribution rights from Durfort Holdings S.R.L. (“Durfort”) and Blunt Wrap USA for $47.8 million in total consideration, comprised of $37.8 million in cash, including $1.8 million of capitalized transaction costs, and a $10.0 million Promissory Note. With this transaction, the Company acquired co-ownership in the intellectual property rights of all of Durfort’s and Blunt Wrap USA’s Homogenized Tobacco Leaf (“HTL”) cigar wraps and cones. The Company also entered into an exclusive Master Distribution Agreement to market and sell the original Blunt Wrap® cigar wraps within the USA which is expected to be effective within 120 days of the closing. Durfort is an industry leader in alternative cigar and cigar wrap manufacturing and distribution. Blunt Wrap USA has been an innovator of new products in the smoking alternative market since 1997 and has secured patents in the USA and internationally for novel smoking wrappers and cones. As of June 30, 2020, the Company had not completed the accounting for the acquisition. The transaction was accounted for as an asset purchase with the purchase price of $47.8 million assigned to intellectual property, which has an indefinite life, and is currently deductible for tax purposes.

Solace Technologies

In July 2019, the Company purchased the assets of E-Vape 12, Inc and Solace Technologies LLC (“Solace”) for $9.4 million in total consideration, comprised of $7.7 million in cash, $1.1 million earn-out fair value, and $0.5 million holdback for 18 months, which was adjusted by $0.2 million for a working capital deficiency. The earn-out consists of 44,295 shares of the Company’s common stock to be issued to the former owners upon the achievement of certain annual milestones. Immediately following the acquisition, 88,582 performance based restricted stock units with a fair value of $4.62 million were issued to former owners who became employees. See Note 15, “Share Incentive Plans”, for further details. Solace is an innovative product development company that has grown from the creator of one of the leading vape juice brands in the industry into a leader of alternative ingredients product development. The Company intends to incorporate Solace’s innovative products as well as the legacy vapor products into our Nu-X development engine. As of June 30, 2020, the Company had not completed the accounting for the acquisition. The following purchase price and goodwill and other intangibles are based on the excess of the acquisition price over the estimated fair value of the tangible assets acquired and are based on management’s preliminary estimates:

Total consideration transferred
 
$
9,405
 
Adjustments to consideration transferred:
       
Cash acquired
   
(45
)
Working capital
   
(235
)
Adjusted consideration transferred
   
9,125
 
Assets acquired:
       
Working capital (primarily AR and inventory)
   
1,132
 
Fixed assets and Other long term assets
   
414
 
Intangible assets
   
1,352
 
Other liabilities
   
(209
)
Net assets acquired
 
$
2,689
 
 
       
Goodwill
 
$
6,436
 

The goodwill of $6.4 million consists of the synergies and scale expected from combining the operations and is currently deductible for tax purposes.
v3.20.2
Derivative Instruments
6 Months Ended
Jun. 30, 2020
Derivative Instruments [Abstract]  
Derivative Instruments
Note 4. Derivative Instruments

Foreign Currency

The Company’s policy is to manage the risks associated with foreign exchange rate movements. The policy allows hedging up to 100% of its anticipated purchases of inventory over a forward period that will not exceed 12 rolling and consecutive months. The Company may, from time to time, hedge currency for non-inventory purchases, e.g., production equipment, not to exceed 90% of the purchase price. The Company did not execute any forward contracts during the three and six months ended June 30, 2020 and 2019.

Interest Rate Swaps

The Company’s policy is to manage interest rate risk by reducing the volatility of future cash flows associated with debt instruments bearing interest at variable rates. In March 2018, the Company executed various interest rate swap agreements for a notional amount of $70 million with an expiration of December 2022. The swap agreements fix LIBOR at 2.755%. The swap agreements met the hedge accounting requirements; thus, any change in fair value is recorded to other comprehensive income. The Company uses the Shortcut Method to account for the swap agreements. The Shortcut Method assumes the hedge to be perfectly effective; thus, there is no ineffectiveness to be recorded in earnings. The swap agreements’ fair values at June 30, 2020, and December 31, 2019, resulted in a liability of $4.7 million and $2.5 million, respectively, included in other long-term liabilities.
v3.20.2
Fair Value of Financial Instruments
6 Months Ended
Jun. 30, 2020
Fair Value of Financial Instruments [Abstract]  
Fair Value of Financial Instruments
Note 5. Fair Value of Financial Instruments

The estimated fair value amounts have been determined by the Company using the methods and assumptions described below. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Cash and Cash Equivalents

Cash and cash equivalents are, by definition, short-term. Thus, the carrying amount is a reasonable estimate of fair value.

Accounts Receivable

The fair value of accounts receivable approximates their carrying value due to their short-term nature.

2018 Revolving Credit Facility

The fair value of the 2018 Revolving Credit Facility approximates its carrying value as the interest rate fluctuates with changes in market rates.

Long-Term Debt

The Company’s 2018 Credit Facility bears interest at variable rates that fluctuate with market rates, the carrying values of the long-term debt instruments approximate their respective fair values. As of June 30, 2020, the fair value of the 2018 First Lien Term Loan approximated $141.0 million. As of December 31, 2019, the fair value of the 2018 First Lien Term Loan approximated $146.0 million.

The Convertible Senior Notes bear interest at a rate of 2.50% per year and the fair value approximated $143.1 million, with a carrying value of $172.5 million as of June 30, 2020. As of December 31, 2019, the fair value of the Convertible Senior Notes approximated $140.1 million, with a carrying value of $172.5 million.

Note Payable – Promissory Note

The fair value of the Promissory Note approximates its carrying value of $10,000 due to the recency of the note’s issuance, related to the quarter ended June 30, 2020.

Note Payable – Unsecured Loan

The fair value of the Unsecured Note approximates its carrying value of $7,485 due to the recency of the note’s issuance, related to the quarter ended June 30, 2020.

See Note 11, “Notes Payable and Long-Term Debt”, for further information regarding the Company’s long-term debt.

Interest Rate Swaps

The Company had swap contracts for a total notional amount of $70 million at June 30, 2020 and December 31, 2019. The fair values of the swap contracts are based upon quoted market prices and resulted in a liability of $4.7 million and $2.5 million as of June 30, 2020 and December 31, 2019, respectively.
v3.20.2
Inventories
6 Months Ended
Jun. 30, 2020
Inventories [Abstract]  
Inventories
Note 6. Inventories

The components of inventories are as follows:

 
 
June 30,
2020
   
December 31,
2019
 
Raw materials and work in process
 
$
7,552
   
$
7,050
 
Leaf tobacco
   
38,550
     
32,763
 
Finished goods - Smokeless products
   
5,595
     
5,680
 
Finished goods - Smoking products
   
7,902
     
13,138
 
Finished goods - NewGen products
   
20,972
     
17,111
 
Other
   
581
     
989
 
Gross Inventory
   
81,152
     
76,731
 
LIFO reserve
   
(5,596
)
   
(5,752
)
Net Inventory
 
$
75,556
   
$
70,979
 
 
The inventory valuation allowance was $18.6 million and $21.5 million as of June 30, 2020, and December 31, 2019, respectively. Inventory reserves increased in the fourth quarter 2019 as a result of additional reserves necessary for products in our NewGen segment primarily from increased regulation.
v3.20.2
Other Current Assets
6 Months Ended
Jun. 30, 2020
Other Current Assets [Abstract]  
Other Current Assets
Note 7. Other Current Assets

Other current assets consists of:

 
 
June 30,
2020
   
December 31,
2019
 
Inventory deposits
 
$
5,445
   
$
4,012
 
Prepaid taxes
   
1,189
     
3,673
 
Other
   
10,067
     
8,430
 
Total
 
$
16,701
   
$
16,115
 
v3.20.2
Property, Plant, and Equipment
6 Months Ended
Jun. 30, 2020
Property, Plant, and Equipment [Abstract]  
Property, Plant and Equipment
Note 8. Property, Plant, and Equipment

Property, plant, and equipment consists of:

 
 
June 30,
2020
   
December 31,
2019
 
Land
 
$
22
   
$
22
 
Buildings and improvements
   
2,655
     
2,655
 
Leasehold improvements
   
2,470
     
2,567
 
Machinery and equipment
   
15,511
     
14,516
 
Furniture and fixtures
   
8,588
     
8,502
 
Gross property, plant and equipment
   
29,246
     
28,262
 
Accumulated depreciation
   
(15,903
)
   
(14,446
)
Net property, plant and equipment
 
$
13,343
   
$
13,816
 
v3.20.2
Other Assets
6 Months Ended
Jun. 30, 2020
Other Assets [Abstract]  
Other Assets
Note 9. Other Assets

Other assets consists of:

 
 
June 30,
2020
   
December 31,
2019
 
Equity investments
 
$
5,421
   
$
5,421
 
Pension assets
   
1,820
     
1,686
 
Other
   
4,271
     
3,566
 
Total
 
$
11,512
   
$
10,673
 

In July 2019, the Company obtained a 30% stake in Canadian distribution entity, ReCreation Marketing (“ReCreation”), for $1.0 million paid at closing. The Company also received options to acquire up to a 50% ownership position in ReCreation.
v3.20.2
Accrued Liabilities
6 Months Ended
Jun. 30, 2020
Accrued Liabilities [Abstract]  
Accrued Liabilities
Note 10. Accrued Liabilities

Accrued liabilities consists of:

 
 
June 30,
2020
   
December 31,
2019
 
Accrued payroll and related items
 
$
4,206
   
$
5,267
 
Customer returns and allowances
   
5,446
     
6,160
 
Taxes payable
   
2,480
     
705
 
Lease liabilities
   
2,627
     
2,218
 
Accrued interest
   
2,057
     
1,909
 
Other
   
8,777
     
10,261
 
Total
 
$
25,593
   
$
26,520
 
v3.20.2
Notes Payable and Long-Term Debt
6 Months Ended
Jun. 30, 2020
Notes Payable and Long-Term Debt [Abstract]  
Notes Payable and Long-Term Debt
Note 11. Notes Payable and Long-Term Debt

Notes payable and long-term debt consists of the following in order of preference:

 
June 30,
2020
   
December 31,
2019
 
2018 First Lien Term Loan
 
$
141,000
   
$
146,000
 
Convertible Senior Notes
   
172,500
     
172,500
 
Note payable - Promissory Note
   
10,000
     
-
 
Note payable - Unsecured Loan
   
7,485
     
-
 
Note payable - IVG
   
-
     
4,240
 
Gross notes payable and long-term debt
   
330,985
     
322,740
 
Less deferred finance charges
   
(5,778
)
   
(6,466
)
Less debt discount
   
(28,583
)
   
(32,083
)
Less current maturities
   
(12,000
)
   
(15,240
)
Notes payable and long-term debt
 
$
284,624
   
$
268,951
 

2018 Credit Facility

On March 7, 2018, the Company entered into a $250 million credit facility consisting of a $160 million 2018 First Lien Term Loan with Fifth Third Bank, as administrative agent, and other lenders, and a $50 million 2018 Revolving Credit Facility (collectively, the “2018 First Lien Credit Facility”) in addition to a $40 million 2018 Second Lien Term Loan (the “2018 Second Lien Credit Facility,” and, together with the 2018 First Lien Credit Facility, the “2018 Credit Facility”) with Prospect Capital Corporation, as administrative agent, and other lenders. The 2018 Credit Facility contains a $40 million accordion feature.

The 2018 Credit Facility contains customary events of default including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, and change in control defaults. The 2018 Credit Facility also contains certain negative covenants customary for facilities of these types including covenants that, subject to exceptions described in the 2018 Credit Facility, restrict the ability of the Company and its subsidiary guarantors: (i) to pledge assets, (ii) to incur additional indebtedness, (iii) to pay dividends, (iv) to make distributions, (v) to sell assets, and (vi) to make investments. See Note 19, “Dividends and Share Repurchase”, for further information regarding dividend restrictions.

2018 First Lien Credit Facility: The 2018 First Lien Term Loan and the 2018 Revolving Credit Facility bear interest at LIBOR plus a spread of 2.75% to 3.50% based on the Company’s senior leverage ratio. The 2018 First Lien Term Loan has quarterly required payments of $2.0 million beginning June 30, 2018, increasing to $3.0 million on June 30, 2020, and increasing to $4.0 million on June 30, 2022. The 2018 First Lien Credit Facility has a maturity date of March 7, 2023. The 2018 First Lien Term Loan is secured by a first priority lien on substantially all of the assets of the borrowers and the guarantors thereunder, including a pledge of the Company’s capital stock, other than certain excluded assets (the “Collateral”).  In connection with the Convertible Senior Notes offering, the Company entered into a First Amendment (“the Amendment”) to the First Lien Credit Agreement, with Fifth Third Bank, as administrative agent, and other lenders and certain other lender parties thereto. The Amendment was entered into primarily to permit the Company to issue up to $200 million of convertible senior notes, enter into certain capped call transactions in connection with the issuance of such notes and to use the proceeds from the issuance of the notes to repay amounts outstanding under the 2018 Second Lien Credit Facility and use the remaining proceeds for acquisitions and investments. In connection with the Amendment, fees of $0.7 million were incurred. The 2018 First Lien Credit Facility contains certain financial covenants, which were amended in connection with the Convertible Senior Notes offering in the third quarter 2019. The covenants include maximum senior leverage ratio of 3.00x with step-downs to 2.50x, a maximum total leverage ratio of 5.50x with step-downs to 5.00x, and a minimum fixed charge coverage ratio of 1.20x. In the first quarter of 2020, the financial covenants were amended to permit certain add-backs related to PMTA in the definition of Consolidated EBITDA for the period of October 1, 2019 until September 30, 2020. In connection with the amendment, fees of $0.2 million were incurred. Based on an excess cash covenant for the facility, a principal payment of $4.5 million was due in the second quarter 2019. All parties agreed to waive the payment, resulting in consent fees of $0.1 million. The weighted average interest rate of the 2018 First Lien Term Loan was 2.93% at June 30, 2020. At June 30, 2020, the Company had no borrowings outstanding under the 2018 Revolving Credit Facility. The $50.0 million unused portion of the 2018 Revolving Credit Facility is reduced by letters of credit from Fifth Third Bank totaling $3.6 million, resulting in $46.4 million of availability under the 2018 Revolving Credit Facility at June 30, 2020.

2018 Second Lien Credit Facility: The 2018 Second Lien Credit Facility bore interest at a rate of LIBOR plus 7.00% and had a maturity date of March 7, 2024. The 2018 Second Lien Term Loan was secured by a second priority interest in the Collateral and was guaranteed by the same entities as the 2018 First Lien Term Loan. Based on an excess cash covenant for the facility, a $4.5 million principal payment was made in the second quarter 2019, resulting in a $0.2 million loss on extinguishment of debt. The Company used a portion of the proceeds from the issuance of the Convertible Senior Notes to prepay all outstanding amounts related to the 2018 Second Lien Credit Facility in the third quarter 2019. The principal paid in the third quarter amounted to $35.5 million, and the transaction resulted in a $1.1 million loss on extinguishment of debt.
 
Convertible Senior Notes
 
In July 2019, the Company 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 of the Company.
 
The Convertible Senior Notes are convertible into approximately 3,202,808 shares of our voting common stock under certain circumstances prior to maturity at a conversion rate of 18.567 shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.86 per share, subject to adjustment under certain conditions, but will not be adjusted for any accrued and unpaid interest. Upon conversion, the Company may pay cash, shares of common stock or a combination of cash and stock, as determined by the Company at its discretion. The conditions required to allow the holders to convert their Convertible Senior Notes were not met as of June 30, 2020.
 
Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the Convertible Senior Notes, the Company separated the Convertible Senior Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the Convertible Senior Notes and the fair value of the liability component of the Convertible Senior Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”), $35.0 million, will be amortized to interest expense using an effective interest rate of 7.5% over the expected life of the Convertible Senior Notes. The equity component is not remeasured as long as it continues to meet the criteria for equity classification. Interest expense includes $1.8 million and $3.5 million of amortization for the three and six months, respectively, ended June 30, 2020.
 
In accounting for the issuance costs related to the issuance of the Convertible Senior Notes, the Company allocated the total amount incurred to the liability and equity components based on their relative fair values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the Convertible Senior Notes, $4.7 million, and the debt issuance costs attributable to the equity component, $1.2 million, are netted with the equity component of stockholders’ equity (deficit).
 
In connection with the Convertible Senior Notes offering, the Company entered into privately negotiated capped call transactions with certain financial institutions. The capped call transactions have a strike price of $53.86 per and a cap price of $82.86 per, and are exercisable when, and if, the Convertible Senior Notes are converted. The Company paid $20.53 million for these capped calls and charged that amount to additional paid-in capital.

Promissory Note

On June 10, 2020, in connection with the acquisition of certain Durfort assets, the Company issued an unsecured subordinated promissory note (“Promissory Note”) in the principal amount of $10.0 million (the “Principal Amount”), with an annual interest rate of 7.5%, payable quarterly, with the first payment due September 10, 2020. The Principal Amount is payable in two $5.0 million installments, with the first installment due 18 months after the closing date of the acquisition (June 10, 2020), and the second installment due 36 months after the closing date of the acquisition. The second installment is subject to reduction for certain amounts payable by the Company as a holdback.

Unsecured Loan

On April 6, 2020, the 2018 First Lien Credit Facility was amended to allow for an unsecured loan under the Coronavirus Aid, Relief, and Economic Security Act of 2020 (“CARES”). On April 17, 2020, NTC entered into a loan agreement with Regions Bank guaranteed by the Small Business Administration for a $7.5 million unsecured loan. The proceeds of the loan were received on April 27, 2020. The loan is scheduled to mature on April 17, 2022 and has a 1.00% interest rate.

Note Payable – IVG

In September 2018, the Company issued a note payable to IVG’s former shareholders (“IVG Note”). The IVG Note was $4.0 million principal with 6.0% interest compounding annually and matured on March 5, 2020. All principal and accrued and unpaid interest under the IVG Note were subject to indemnification obligations of the sellers pursuant to the International Vapor Group Stock Purchase Agreement dated as of September 5, 2018. The carrying amount of the IVG Note, $4.2 million, was deposited into an escrow account pending agreement with the sellers of any indemnification obligations.
v3.20.2
Leases
6 Months Ended
Jun. 30, 2020
Leases [Abstract]  
Leases
Note 12. Leases
 
As of January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). The main impact to the financial statements is the recognition of lease liabilities and right of use assets. The Company’s leases consist primarily of leased property for manufacturing warehouse, head offices and retail space as well as vehicle leases. In general, the Company does not recognize any renewal periods within the lease terms as there are not significant barriers to ending the lease at the initial term. Lease and non-lease components are accounted for as a single lease component.
 
Leases with an initial term of 12 months or less are not recorded on the balance sheet. Lease expense for these leases is recognized on a straight-line basis over the lease term.
 
The components of lease expense consisted of the following:
 
 
 
Three Months Ended June 30,
 
 
 
2020
   
2019
 
 
           
Operating lease cost
           
Cost of sales
 
$
225
   
$
232
 
Selling, general and administrative
   
606
     
605
 
Variable lease cost (1)
   
44
     
125
 
Short-term lease cost
   
26
     
35
 
Sublease income
   
(30
)
   
(20
)
Total
 
$
871
   
$
977
 

(1)
Variable lease cost includes elements of a contract that do not represent a good or service but for which the lessee is responsible for paying.


 
 
Six Months Ended June 30,
 
 
 
2020
   
2019
 
 
           
Operating lease cost
           
Cost of sales
 
$
458
   
$
424
 
Selling, general and administrative
   
1,004
     
1,160
 
Variable lease cost (1)
   
356
     
370
 
Short-term lease cost
   
109
     
89
 
Sublease income
   
(60
)
   
(50
)
Total
 
$
1,867
   
$
1,993
 

(1)
Variable lease cost includes elements of a contract that do not represent a good or service but for which the lessee is responsible for paying.

 
 
June 30,
2020
   
December 31,
2019
 
Assets:
           
Right of use assets
 
$
13,243
   
$
12,130
 
Total lease assets
 
$
13,243
   
$
12,130
 
 
               
 
               
Liabilities:
               
Current lease liabilities (2)
 
$
2,627
   
$
2,218
 
Long-term lease liabilities
   
11,813
     
11,067
 
Total lease liabilities
 
$
14,440
   
$
13,285
 

(2)
Reported within accrued liabilities on the balance sheet 

 
 
As of June 30,
 
 
 
2020
   
2019
 
Weighted-average remaining lease term  - operating leases
 
7.6 years
   
8.5 years
 
Weighted-average discount rate - operating leases
   
5.65
%
   
6.53
%
 
Nearly all the lease contracts for the Company do not provide a readily determinable implicit rate. For these contracts, the Company estimated the incremental borrowing rate based on information available upon adoption of ASU 2016-02. The Company applied a consistent method in periods after the adoption of ASU 2016-02 to estimate the incremental borrowing rate.

As of June 30, 2020, and December 31, 2019, maturities of lease liabilities consisted of the following:

 
 
June 30,
2020
   
December 31,
2019
 
2020
 
$
1,648
   
$
2,924
 
2021
   
3,268
     
2,730
 
2022
   
2,828
     
2,165
 
2023
   
2,451
     
1,782
 
2024
   
1,364
     
1,028
 
Years thereafter
   
6,312
     
6,297
 
Total lease payments
 
$
17,871
   
$
16,926
 
Less: Imputed interest
   
3,431
     
3,641
 
Present value of lease liabilities
 
$
14,440
   
$
13,285
 

During the second quarter of the year, the Company entered into two new lease agreements, terminated six lease agreements, primarily retail spaces, and had various new and terminated car leases. These changes resulted in additional lease liabilities of $0.8 million as of June 30, 2020. Additionally, the Company further impaired certain right of use assets, mainly related to store closures, pending final negotiations with the lessor for $0.1 million.
v3.20.2
Income Taxes
6 Months Ended
Jun. 30, 2020
Income Taxes [Abstract]  
Income Taxes
Note 13. Income Taxes

The Company’s effective income tax rate for the three and six months ended June 30, 2020, was 26.1% and 25.2%, respectively, which includes a discrete tax deduction of $0.0 million and $0.9 million for the three and six months ended June 30, 2020, respectively, relating to stock option exercises. The Company’s effective income tax rate for the three and six months ended June 30, 2019, was 18.4% and 19.4%, respectively, which includes a discrete tax deduction of $3.7 million and $4.5 million for the three and six months ended June 30, 2019, respectively, relating to stock option exercises.

The Company follows the provisions of ASC 740-10-25, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company has determined that the Company did not have any uncertain tax positions requiring recognition under the provisions of ASC 740-10-25. The Company’s policy is to recognize interest and penalties accrued on uncertain tax positions, if any, as part of interest expense. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. In general, the Company is no longer subject to U.S. federal and state tax examinations for years prior to 2016.
v3.20.2
Pension and Postretirement Benefit Plans
6 Months Ended
Jun. 30, 2020
Pension and Postretirement Benefit Plans [Abstract]  
Pension and Postretirement Benefit Plans
Note 14. Pension and Postretirement Benefit Plans

The Company has a defined benefit pension plan. Benefits for hourly employees were based on a stated benefit per year of service, reduced by amounts earned in a previous plan. Benefits for salaried employees were based on years of service and the employees’ final compensation. The defined benefit pension plan is frozen. The Company’s policy is to make the minimum amount of contributions that can be deducted for federal income taxes. The Company expects to make no contributions to the pension plan in 2020. In October 2019, the Company elected to terminate the defined benefit pension plan, effective December 31, 2019 with final distributions to be made in 2020.

The Company sponsored a defined benefit postretirement plan that covered hourly employees. This plan provides medical and dental benefits. This plan is contributory with retiree contributions adjusted annually. The Company’s policy is to make contributions equal to benefits paid during the year. The Company does not expect to contribute to its postretirement plan in 2020 for the payment of benefits. In October 2019, the Company amended the plan to cease benefits effective June 30, 2020.

The following table provides the components of net periodic pension and postretirement benefit costs and total costs for the plans:

 
 
Three Months Ended June 30,
 
 
 
Pension
Benefits
   
Postretirement
Benefits
 
 
 
2020
   
2019
   
2020
   
2019
 
 
                       
Service cost
 
$
-
   
$
26
   
$
-
   
$
-
 
Interest cost
   
95
     
130
     
-
     
25
 
Expected return on plan assets
   
(161
)
   
(161
)
   
-
     
-
 
Amortization of (gains) losses
   
36
     
36
     
(74
)
   
(41
)
Net periodic benefit (income) cost
 
$
(30
)
 
$
31
   
$
(74
)
 
$
(16
)

 
 
Six Months Ended June 30,
 
 
 
Pension
Benefits
   
Postretirement
Benefits
 
 
 
2020
   
2019
   
2020
   
2019
 
 
                       
Service cost
 
$
-
   
$
52
   
$
-
   
$
-
 
Interest cost
   
190
     
260
     
-
     
51
 
Expected return on plan assets
   
(322
)
   
(323
)
   
-
     
-
 
Amortization of (gains) losses
   
72
     
73
     
(131
)
   
(83
)
Net periodic benefit (income) cost
 
$
(60
)
 
$
62
   
$
(131
)
 
$
(32
)
v3.20.2
Share Incentive Plans
6 Months Ended
Jun. 30, 2020
Share Incentive Plans [Abstract]  
Share Incentive Plans
Note 15. Share Incentive Plans

On April 28, 2016, the Board of Directors of the Company adopted the Turning Point Brands, Inc., 2015 Equity Incentive Plan (the “2015 Plan”), pursuant to which awards may be granted to employees, non-employee directors, and consultants. In addition, the 2015 Plan provides for the granting of nonqualified stock options to employees of the Company or any subsidiary of the Company. Pursuant to the 2015 Plan, 1,400,000 shares of the Company’s voting common stock are reserved for issuance as awards to employees, non-employee directors, and consultants as compensation for past or future services or the attainment of certain performance goals. The 2015 Plan is scheduled to terminate on April 27, 2026. The 2015 Plan is administered by a committee (the “Committee”) of the Company’s Board of Directors. The Committee determines the vesting criteria for the awards, with such criteria to be specified in the award agreement. As of  June 30, 2020, net of forfeitures, there were 16,159 shares of restricted stock, 440,132 performance-based restricted stock units, and 613,279 options granted under the 2015 Plan. There are 330,430 shares available for grant under the 2015 Plan.

On February 8, 2006, the Board of Directors of the Company adopted the 2006 Equity Incentive Plan (the “2006 Plan”) of North Atlantic Holding Company, Inc., pursuant to which awards may be granted to employees. The 2006 Plan provides for the granting of nonqualified stock options and restricted stock awards to employees. Upon the adoption of the Company’s 2015 Equity Incentive Plan in connection with its IPO, the Company determined no additional grants would be made under the 2006 Plan. However, all awards issued under the 2006 Plan that have not been previously terminated or forfeited remain outstanding and continue unaffected.

There are no shares available for grant under the 2006 Plan. Stock option activity for the 2006 and 2015 Plans is summarized below:

 
 
Stock
Option
Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Grant Date
Fair Value
 
Outstanding, December 31, 2018
   
659,574
   
$
9.00
   
$
3.34
 
 
                       
Granted
   
180,780
     
43.89
     
14.34
 
Exercised
   
(129,067
)
   
5.72
     
2.58
 
Forfeited
   
(14,571
)
   
34.55
     
11.10
 
Outstanding, December 31, 2019
   
696,716
     
18.13
     
6.17
 
 
                       
Granted
   
155,000
     
14.85
     
4.41
 
Exercised
   
(43,354
)
   
5.66
     
2.57
 
Forfeited
   
(1,289
)
   
30.07
     
9.63
 
Outstanding, June 30, 2020
   
807,073
   
$
18.15
   
$
6.02
 

Under the 2006 and 2015 Plans, the total intrinsic value of options exercised during the six months ended June 30, 2020 and 2019, was $0.9 million, and $4.5 million, respectively.

At June 30, 2020, under the 2006 Plan, the outstanding stock options’ exercise price for 273,247 options is $3.83 per share, all of which are exercisable. The weighted average of the remaining lives of the outstanding stock options with an exercise price of $3.83 is approximately 3.11 years. The Company estimates the expected life of these stock options is ten years  from the date of grant. For the $3.83 per share options, the weighted average fair value of options was determined using the Black-Scholes model assuming a ten-year life from grant date, a current share price and exercise price of $3.83, a risk-free interest rate of 3.57%, volatility of 40%, and no assumed dividend yield.  Based on these assumptions, the fair value of these options is approximately $2.17 per share option granted.

At June 30, 2020, under the 2015 Plan, the risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. The expected volatility is based on the average long-term historical volatilities of peer companies. We intend to continue to consistently use the same group of publicly traded peer companies to determine expected volatility until sufficient information regarding volatility of our share price becomes available or until the selected companies are no longer suitable for this purpose. Due to our limited trading history, we are using the simplified method presented by SEC Staff Accounting Bulletin No. 107 to calculate expected holding periods, which represent the periods of time for which options granted are expected to be outstanding. We will continue to use this method until we have sufficient historical exercise experience to give us confidence in the reliability of our calculations. The fair values of these options were determined using the Black-Scholes option pricing model.
 
The following table outlines the assumptions based on the number of options granted under the 2015 Plan.
 
 
February 10,
2017
   
May 17,
2017
   
March 7,
2018
   
March 13,
2018
   
March 20,
2019
   
October 24,
2019
   
March 18,
2020
 
Number of options granted
   
40,000
     
93,819
     
98,100
     
26,000
     
155,780
     
25,000
     
155,000
 
Options outstanding at June 30, 2020
   
28,700
     
65,907
     
86,180
     
26,000
     
147,239
     
25,000
     
154,800
 
Number exercisable at June 30, 2020
   
28,700
     
65,907
     
57,686
     
26,000
     
50,140
     
8,250
     
-
 
Exercise price
 
$
13.00
   
$
15.41
   
$
21.21
   
$
21.49
   
$
47.58
   
$
20.89
   
$
14.85
 
Remaining lives
   
6.62
     
6.88
     
7.69
     
7.71
     
8.73
     
9.32
     
9.72
 
Risk free interest rate
   
1.89
%
   
1.76
%
   
2.65
%
   
2.62
%
   
2.34
%
   
1.58
%
   
0.79
%
Expected volatility
   
27.44
%
   
26.92
%
   
28.76
%
   
28.76
%
   
30.95
%
   
31.93
%
   
35.72
%
Expected life
   
6.000
     
6.000
     
6.000
     
5.495
     
6.000
     
6.000
     
6.000
 
Dividend yield
   
-
     
-
     
0.83
%
   
0.82
%
   
0.42
%
   
0.95
%
   
1.49
%
Fair value at grant date
 
$
3.98
   
$
4.60
   
$
6.37
   
$
6.18
   
$
15.63
   
$
6.27
   
$
4.41
 
 
The Company has recorded compensation expense related to the options based on the provisions of ASC 718 under which the fixed portion of such expense is determined as the fair value of the options on the date of grant and amortized over the vesting period. The Company recorded compensation expense related to the options of approximately $0.2 million and $0.5 million for the three months ended June 30, 2020 and 2019, respectively. The Company recorded compensation expense related to the options of approximately $0.6 million and $0.7 million for the six months ended June 30, 2020 and 2019, respectively. Total unrecognized compensation expense related to options at June 30, 2020, is $1.2 million, which will be expensed over 1.90 years.

Performance-Based Restricted Stock Units (“PRSUs”)
 
PRSUs are restricted stock units subject to both performance-based and service-based vesting conditions. The number of common stock shares a recipient will receive upon vesting of a PRSU will be calculated by reference to certain performance metrics related to the Company’s performance over a five-year period. PRSUs will vest on the measurement date, which is no more than 65 days after the performance period (provided the applicable service and performance conditions are satisfied. As of June 30, 2020, there are 440,132 PRSUs outstanding, all of which are unvested. The following table outlines the PRSUs granted and outstanding as of June 30, 2020.

 
 
March 31,
2017
   
March 7,
2018
   
March 20,
2019
   
March 20,
2019
   
July 19,
2019
   
March 18,
2020
 
Number of PRSUs granted
   
94,000
     
96,000
     
92,500
     
4,901
     
88,582
     
90,000
 
PRSUs outstanding at June 30, 2020
   
83,000
     
93,000
     
85,550
     
-
     
88,582
     
90,000
 
Fair value as of grant date
 
$
15.60
   
$
21.21
   
$
47.58
   
$
47.58
   
$
52.15
   
$
14.85
 
Remaining lives
   
1.50
     
2.50
     
3.50
     
-
     
2.50
     
4.50
 

The Company recorded compensation expense related to the PRSUs of approximately $0.4 million and $0.5 million in the consolidated statements of income for the three months ended June 30, 2020 and 2019, respectively, based on the probability of achieving the performance condition. The Company recorded compensation expense related to the PRSUs of approximately $0.7 million and $0.7 million in the consolidated statements of income for the six months ended June 30, 2020 and 2019, respectively, based on the probability of achieving the performance condition. Total unrecognized compensation expense related to these awards at June 30, 2020, is $9.8 million which will be expensed over the service periods based on the probability of achieving the performance condition.
v3.20.2
Contingencies
6 Months Ended
Jun. 30, 2020
Contingencies [Abstract]  
Contingencies
Note 16. Contingencies

Other major tobacco companies are defendants in product liability claims. In a number of these cases, the amounts of punitive and compensatory damages sought are significant and could have a material adverse effect on our business and results of operations.

The Company is subject to several lawsuits alleging personal injuries resulting from malfunctioning vaporizer devices or consumption of e-liquids and may be subject to claims in the future relating to other NewGen products. The Company is still evaluating these claims and the potential defenses to them.  For example, the Company did not design or manufacture the products at issue; rather, the Company was merely the distributor.  Nonetheless, there can be no assurance that the Company will prevail in these cases, and they could have a material adverse effect on the financial position, results of operations, or cash flows of the Company.

Franchisors are defendants from time to time in the ordinary course of business. In certain of these cases, the amounts of punitive and compensatory damages sought are significant. One of the Company’s subsidiaries is a defendant in a lawsuit brought by a franchisee. In that case, the franchisee is seeking compensatory and punitive damages and rescission of their franchise agreement, alleging that the Company’s subsidiary failed to make certain disclosures in the Franchise Disclosure Document. The subsidiary is evaluating these claims, the potential defenses to them as well as available counterclaims. The subsidiary believes that termination of the franchise agreement was proper, no damages are due and the franchisee is bound by an arbitration agreement pursuant to the terms of their franchise agreement (and therefore it was improper to pursue litigation). The former franchisee has also named various other parties, including the Company and another subsidiary asserting the same claims, as well as a claim for a declaratory judgment, that the Company and the subsidiary should be found liable as successor entities, or under the doctrines of “de facto merger”, or alter ego.  The Company and the subsidiary have moved to stay the case pending the arbitration noted above.  Both motions remain pending.  While the Company and its subsidiaries believe they have good and valid defenses to the claims, there can be no assurance that the Company and its subsidiaries will prevail in this case, and it could have a material adverse effect on the Company’s business and results of operations.

The Company has several subsidiaries engaged in making, distributing, and retailing (online and in bricks-and-mortar) vapor products. As a result of the overall publicity and controversy surrounding the vapor industry generally, many companies have received informational subpoenas from various regulatory bodies and in some jurisdictions regulatory lawsuits have been filed regarding marketing practices and possible underage sales. The Company has subsidiaries that are subject to some information requests. In the acquisition of the vapor businesses, the Company negotiated financial “hold-backs”, which it expects to be able to use to defray expenses associated with the information production and the cost of defending any such lawsuits as well as the  franchisee lawsuit. To the extent that litigation becomes necessary, the Company believes that the subsidiaries have strong factual and legal defenses against claims that it unfairly marketed vapor products.
v3.20.2
Income Per Share
6 Months Ended
Jun. 30, 2020
Income Per Share [Abstract]  
Income Per Share
Note 17. Income Per Share

The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations of net income:

 
 
Three Months Ended June 30,
 
 
 
2020
   
2019
 
 
 
Income
   
Shares
   
Per
Share
   
Income
   
Shares
   
Per
Share
 
Consolidated net income
 
$
9,227
               
$
13,205
             
 
                                       
Basic EPS:
                                       
Weighted average
           
19,507,874
   
$
0.47
             
19,621,695
   
$
0.67
 
 
                                               
Diluted EPS:
                                               
Effect of dilutive securities:
                                               
Stock options
           
326,471
                     
510,285
         
 
           
19,834,345
   
$
0.47
             
20,131,980
   
$
0.66
 

 
 
Six Months Ended June 30,
 
 
 
2020
   
2019
 
 
 
Income
   
Shares
   
Per
Share
   
Income
   
Shares
   
Per
Share
 
Consolidated net income
 
$
12,502
               
$
19,765
             
 
                                       
Basic EPS:
                                       
Weighted average
           
19,598,660
   
$
0.64
             
19,590,817
   
$
1.01
 
 
                                               
Diluted EPS:
                                               
Effect of dilutive securities:
                                               
Stock options
           
274,066
                     
305,142
         
 
           
19,872,726
   
$
0.63
             
19,895,959
   
$
0.99
 

For the three and six months ended June 30, 2020, the effect of the 3,202,808 shares issuable upon conversion of the Convertible Senior Notes were excluded from the diluted net income per share calculation because the Company’s average stock price did not exceed $53.86 during those periods.
v3.20.2
Segment Information
6 Months Ended
Jun. 30, 2020
Segment Information [Abstract]  
Segment Information
Note 18. Segment Information

In accordance with ASC 280, Segment Reporting, the Company has three reportable segments: Smokeless products, Smoking products, and NewGen products. The Smokeless products segment (i) manufactures and markets moist snuff and (ii) contracts for and markets chewing tobacco products. The Smoking products segment (i) markets cigarette papers, tubes, and related products; (ii) contracts for, markets and distributes finished cigars and MYO cigar wraps; and (iii) processes, packages, markets, and distributes traditional pipe tobaccos. The NewGen products segment (i) markets and distributes e-cigarettes, e-liquids, vaporizers, and certain other products without tobacco and/or nicotine; (ii) markets and distributes a wide assortment of vaping and CBD related products to non-traditional retail outlets via VaporBeast, Vapor Shark, IVG and Solace; and (iii) markets and distributes a wide assortment of vapor and CBD related products to individual consumers via Vapor Shark and VaporFi branded retail outlets in addition to online platforms. Smokeless and Smoking products are distributed primarily through wholesale distributors in the United States while NewGen products are distributed primarily through e-commerce to non-traditional retail outlets and direct to consumers in the United States. The Other segment includes the costs and assets of the Company not assigned to one of the three reportable segments such as intercompany transfers, deferred taxes, deferred financing fees, and investments in subsidiaries.

The accounting policies of these segments are the same as those of the Company. Corporate costs are not directly charged to the three reportable segments in the ordinary course of operations. The Company evaluates the performance of its segments and allocates resources to them based on operating income.

The tables below present financial information about reported segments:

 
 
Three Months Ended
June 30,
 
 
 
2020
   
2019
 
 
           
Net sales
           
Smokeless products
 
$
30,822
   
$
26,176
 
Smoking products
   
27,403
     
25,363
 
NewGen products
   
46,738
     
41,800
 
Total
 
$
104,963
   
$
93,339
 
 
               
Gross profit
               
Smokeless products
 
$
16,664
   
$
14,063
 
Smoking products
   
15,671
     
13,738
 
NewGen products
   
15,757
     
13,382
 
Total
 
$
48,092
   
$
41,183
 
 
               
Operating income (loss)
               
Smokeless products
 
$
12,240
   
$
9,731
 
Smoking products
   
12,227
     
10,374
 
NewGen products (2)
   
3,271
     
7,451
 
Corporate unallocated (1)
   
(10,402
)
   
(7,615
)
Total
 
$
17,336
   
$
19,941
 
 
               
Interest expense, net
   
4,980
     
3,736
 
Investment income
   
(34
)
   
(118
)
Loss on extinguishment of debt
   
-
     
150
 
Net periodic income, excluding service cost
   
(104
)
   
(11
)
 
               
Income before income taxes
 
$
12,494
   
$
16,184
 
 
               
Capital expenditures
               
Smokeless products
 
$
838
   
$
525
 
Smoking products
   
-
     
-
 
NewGen products
   
241
     
553
 
Total
 
$
1,079
   
$
1,078
 
 
               
Depreciation and amortization
               
Smokeless products
 
$
524
   
$
365
 
Smoking products
   
-
     
-
 
NewGen products
   
700
     
631
 
Total
 
$
1,224
   
$
996
 


(1)
Includes corporate costs that are not allocated to any of the three reportable segments.
(2)
Includes VMR settlement gain of $5.5 million for the three months ended June 30, 2020.


 
 
Six Months Ended
June 30,
 
 
 
2020
   
2019
 
 
           
Net sales
           
Smokeless products
 
$
57,317
   
$
48,720
 
Smoking products
   
56,317
     
50,882
 
NewGen products
   
82,018
     
85,365
 
Total
 
$
195,652
   
$
184,967
 
 
               
Gross profit
               
Smokeless products
 
$
30,538
   
$
26,136
 
Smoking products
   
31,803
     
27,222
 
NewGen products
   
27,182
     
28,289
 
Total
 
$
89,523
   
$
81,647
 
 
               
Operating income (loss)
               
Smokeless products
 
$
21,986
   
$
17,218
 
Smoking products
   
24,644
     
20,320
 
NewGen products (2)
   
3,748
     
10,289
 
Corporate unallocated (1)
   
(24,005
)
   
(15,851
)
Total
 
$
26,373
   
$
31,976
 
 
               
Interest expense, net
   
9,974
     
7,592
 
Investment income
   
(125
)
   
(262
)
Loss on extinguishment of debt
   
-
     
150
 
Net periodic income, excluding service cost
   
(191
)
   
(22
)
 
               
Income before income taxes
 
$
16,715
   
$
24,518
 
 
               
Capital expenditures
               
Smokeless products
 
$
1,698
   
$
1,102
 
Smoking products
   
-
     
-
 
NewGen products
   
258
     
862
 
Total
 
$
1,956
   
$
1,964
 
 
               
Depreciation and amortization
               
Smokeless products
 
$
1,043
   
$
722
 
Smoking products
   
-
     
-
 
NewGen products
   
1,457
     
1,164
 
Total
 
$
2,500
   
$
1,886
 


(1)
Includes corporate costs that are not allocated to any of the three reportable segments.
(2)
Includes VMR settlement gain of $5.5 million for the six months ended June 30, 2020.

 
June 30,
2020
   
December 31,
2019
 
Assets
           
Smokeless products
 
$
126,464
   
$
120,723
 
Smoking products
   
189,558
     
145,831
 
NewGen products
   
92,628
     
90,899
 
Corporate unallocated (1)
   
58,568
     
89,131
 
Total
 
$
467,218
   
$
446,584
 


(1)
Includes assets not assigned to the three reportable segments. All goodwill has been allocated to the reportable segments.

Revenue Disaggregation—Sales Channel

Revenues of the Smokeless and Smoking segments are primarily comprised of sales made to wholesalers while NewGen sales are made business to business and business to consumer, both online and through our corporate retail stores. NewGen net sales are broken out by sales channel below.

 
 
NewGen Segment
 
 
 
Three Months Ended
June 30,
 
 
 
2020
   
2019
 
 
           
Business to Business
 
$
30,368
   
$
30,737
 
Business to Consumer - Online
   
15,052
     
8,466
 
Business to Consumer - Corporate store
   
1,318
     
2,566
 
Other
   
-
     
31
 
Total
 
$
46,738
   
$
41,800
 

 
 
NewGen Segment
 
 
 
Six Months Ended
June 30,
 
 
 
2020
   
2019
 
 
           
Business to Business
 
$
55,647
   
$
63,200
 
Business to Consumer - Online
   
23,186
     
16,685
 
Business to Consumer - Corporate store
   
3,111
     
5,365
 
Other
   
74
     
115
 
Total
 
$
82,018
   
$
85,365
 

Net Sales—Domestic vs. Foreign

The following table shows a breakdown of consolidated net sales between domestic and foreign customers.

 
 
Three Months Ended
June 30,
 
 
 
2020
   
2019
 
Domestic
 
$
101,990
   
$
91,516
 
Foreign
   
2,973
     
1,823
 
Total
 
$
104,963
   
$
93,339
 
 
 
 
Six Months Ended
June 30,
 
 
 
2020
   
2019
 
Domestic
 
$
189,558
   
$
180,285
 
Foreign
   
6,094
     
4,682
 
Total
 
$
195,652
   
$
184,967
 
v3.20.2
Dividends and Share Repurchase
6 Months Ended
Jun. 30, 2020
Dividends and Share Repurchase [Abstract]  
Dividends and Share Repurchase
Note 19. Dividends and Share Repurchase

The most recent dividend of $0.05 per common share was paid on July 10, 2020, to shareholders of record at the close of business on June 19, 2020.

Dividends are classified as restricted payments within the 2018 Credit Facility. The Company is generally permitted to make restricted payments provided that, at the time of payment, or as a result of payment, the Company is not in default on its debt covenants. Additional restrictions limit the aggregate amount of restricted, quarterly dividends during a fiscal year to the aggregate amount of mandatory and voluntary principal payments made on the priority term loans during the fiscal year.

On February 25, 2020, the Company’s Board of Directors approved a $50.0 million share repurchase authorization, which is intended for opportunistic execution based upon a variety of factors including market dynamics. The authorization is subject to the ongoing discretion of the Board. The total number of shares repurchased for the six months ended was 256,863 shares for a total cost of $5.3 million and an average price per share of $20.59.
v3.20.2
Subsequent Events
6 Months Ended
Jun. 30, 2020
Subsequent Events [Abstract]  
Subsequent Events
Note 20. Subsequent Events
 
Standard Diversified Inc. (“SDI”) Reorganization
 
On July 16, 2020, the Company completed its merger with SDI, whereby SDI was merged into a wholly-owned subsidiary of the Company in a tax-free downstream merger. Under the terms of the agreement, the holders of SDI’s Class A Common Stock and SDI’s Class B Common Stock (collectively, “SDI Common Stock”) received in the aggregate, in return for their SDI Common Stock, TPB Voting Common Stock (“TPB Common Stock”) at a ratio of 0.52095 shares of TPB Common Stock for each share of SDI Common Stock at the time of the merger. SDI divested its assets, other than the Company’s stock, prior to close such that the net liabilities at closing did not exceed $25,000 (whole dollars) and the only assets that it retained was the remaining TPB Common Stock holdings. The Company no longer has a controlling shareholder and 245,234 shares of TPB Common Stock were retired.
v3.20.2
Organizations and Basis of Presentation (Policies)
6 Months Ended
Jun. 30, 2020
Organizations and Basis of Presentation [Abstract]  
Basis of Presentation
The accompanying unaudited interim, consolidated financial statements have been prepared in accordance with the accounting practices described in the Company’s audited, consolidated financial statements as of and for the year ended December 31, 2019. In the opinion of management, the unaudited, interim, consolidated financial statements included herein contain all adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company for the periods indicated. Such adjustments, other than nonrecurring adjustments separately disclosed, are of a normal and recurring nature. The operating results for interim periods are not necessarily indicative of results to be expected for a full year or future interim periods. The unaudited, interim, consolidated financial statements should be read in conjunction with the Company’s audited, consolidated financial statements and accompanying notes as of and for the year ended December 31, 2019. The accompanying interim, consolidated financial statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission and, accordingly, do not include all the disclosures required by generally accepted accounting principles in the United States (“GAAP”) with respect to annual financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year’s presentation. The changes did not have an impact on the Company’s consolidated financial position, results of operations, or cash flows in any of the periods presented.
v3.20.2
Summary of Significant Accounting Policies (Policies)
6 Months Ended
Jun. 30, 2020
Summary of Significant Accounting Policies [Abstract]  
Consolidation
Consolidation

The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany transactions have been eliminated.
Revenue Recognition
Revenue Recognition

The Company recognizes revenues in accordance with Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which includes excise taxes and shipping and handling charges billed to customers, net of cash discounts for prompt payment, sales returns and incentives, upon delivery of goods to the customer – at which time the Company’s performance obligation is satisfied – at an amount that the Company expects to be entitled to in exchange for those goods in accordance with the five-step analysis outlined in Topic 606: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied. The Company excludes 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).

The Company records an allowance for sales returns, based principally on historical volume and return rates, which is included in accrued liabilities on the consolidated balance sheets. The Company records sales incentives, which consist of consumer incentives and trade promotion activities, as a reduction in revenues (a portion of which is based on amounts estimated 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 ASU 2014-09 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. Company management views business performance through segments that closely resemble the performance of major product lines. Thus, the primary and most useful disaggregation of the Company’s contract revenue for decision making purposes is the disaggregation by segment which can be found in Note 18 of Notes to Consolidated Financial Statements. An additional disaggregation of contract revenue by sales channel can be found within Note 18 as well.
Shipping Costs
Shipping Costs

The Company records shipping costs incurred as a component of selling, general, and administrative expenses. Shipping costs incurred were approximately $6.9 million and $4.3 million for the three months ending June 30, 2020 and 2019, respectively. Shipping costs incurred were approximately $12.1 million and $9.2 million for the six months ending June 30, 2020 and 2019, respectively.
Fair Value
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:

Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date.
Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
Derivative Instruments
Derivative Instruments

Foreign Currency Forward Contracts: The Company enters into foreign currency forward contracts to hedge a portion of its exposure to changes in foreign currency exchange rates on inventory purchase commitments. The Company accounts for its forward contracts under the provisions of ASC 815, Derivatives and Hedging. Under the Company’s policy, the Company may hedge up to 100% of its anticipated purchases of inventory in the denominated invoice currency over a forward period not to exceed twelve months. The Company may also, from time to time, hedge up to ninety percent of its non-inventory purchases in the denominated invoice currency. Forward contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by market prices on the measurement date, except any hedge ineffectiveness which is recognized currently in income. Gains and losses on these forward contracts are transferred from other comprehensive income into net income as the related inventories are received. 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.

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

Manufacturers and sellers of tobacco products are subject to regulation at the federal, state, and local levels. Such regulations include, among others, labeling requirements, limitations on advertising, and prohibition of sales to minors. The tobacco industry is likely to continue to be heavily regulated. There can be no assurance as to the ultimate content, timing, or effect of any regulation of tobacco products by any federal, state, or local legislative or regulatory body, nor can there be any assurance that any such legislation or regulation would not have a material adverse effect on the Company’s financial position, results of operations, or cash flows. In a number of states, targeted flavor bans, particularly with regard to vapor products, have been proposed or enacted legislatively or by the administrative process. Depending on the number and location of such bans, that legislation or regulation could have a material adverse effect on the Company’s financial position, results of operations or cash flows.  Food and Drug Administration (“FDA”) continues to consider various restrictive regulations around our products, including targeted flavor bans; however, the details, timing, and ultimate implementation of such measures remain unclear.

The tobacco industry has experienced, and is experiencing, significant product liability litigation. Most tobacco liability lawsuits have been brought against manufacturers and sellers of cigarettes for injuries allegedly caused by smoking or exposure to smoke. However, several lawsuits have been brought against manufacturers and sellers of smokeless products for injuries to health allegedly caused by use of smokeless products. Typically, such claims assert that use of smokeless products is addictive and causes oral cancer. Additionally, several lawsuits have been brought against manufacturers and distributors of NewGen products due to malfunctioning devices. There can be no assurance the Company will not sustain losses in connection with such lawsuits and that such losses will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.
 
Master Settlement Agreement (MSA):  Pursuant to the Master Settlement Agreement (the “MSA”) entered into in November 1998 by most states (represented by their attorneys general acting through the National Association of Attorneys General) and subsequent states’ statutes, a “cigarette manufacturer” (which is defined to include a manufacturer of make-your-own (“MYO”) cigarette tobacco) has the option of either becoming a signatory to the MSA or opening, funding, and maintaining an escrow account to have funds available for certain potential tobacco-related liabilities with sub-accounts on behalf of each settling state. Such companies are entitled to direct the investment of the escrowed funds and withdraw any appreciation, but cannot withdraw the principal for twenty-five years from the year of each annual deposit, except to withdraw funds deposited pursuant to an individual state’s escrow statute to pay a final judgement to that state’s plaintiffs in the event of such a final judgement against the Company.  The Company chose to open and fund an escrow account as its method of compliance. It is the Company’s policy to record amounts on deposit in the escrow account for prior years as a non-current asset. Each year’s annual obligation is required to be deposited in the escrow account by April 15 of the following year. In addition to the annual deposit, many states have elected to require quarterly deposits for the previous quarter’s sales. As of June 30, 2020, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $32.1 million. At December 31, 2019, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $32.1 million. Effective in the third quarter of 2017, the Company no longer sells any product covered under the MSA. Thus, absent a change in legislation, the Company will no longer be required to make deposits to the MSA escrow account.

The Company has chosen to invest a portion of the MSA escrow, from time to time, in U.S. Government securities including TIPS, Treasury Notes, and Treasury Bonds. These investments are classified as available-for-sale and carried at fair value. Realized losses are prohibited under the MSA; any investment in an unrealized loss position will be held until the value is recovered, or until maturity. All monies at June 30, 2020 and December 31, 2019 were held in money market savings accounts.

The following shows the amount of deposits by sales year for the MSA escrow account:

 
Deposits as of
 
 Sales
Year
 
June 30,
2020
   
December 31,
2019
 
 
           
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
   
83
     
83
 
 
               
Total
 
$
32,074
   
$
32,074
 

Food and Drug Administration: On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (the “TCA”) authorized the FDA to immediately regulate the manufacturing, sale, and marketing of four categories of tobacco products – cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless tobacco.

Under the TCA, tobacco product user fees are assessed on six classes of regulated tobacco products. The user fees are computed using a methodology similar to the methodology used by the U.S Department of Agriculture to compute the Tobacco Transition Payment Program assessment. First, the total, annual, congressionally established user fee assessment is allocated among the various classes of tobacco products using the federal excise tax weighted market share of tobacco products subject to regulation. Then, the assessment for each class of tobacco products is divided among individual manufacturers and importers.
 
In August 2016, the FDA’s regulatory authority under the TCA was extended to all tobacco products not previously covered, including: (i) certain NewGen products (such as electronic cigarettes, vaporizers and e-liquids) and their components or parts (such as tanks, coils and batteries); (ii) cigars and their components or parts (such as cigar tobacco); (iii) pipe tobacco; (iv) hookah products; and (v) any other tobacco product “newly deemed” by the FDA. These “deeming regulations” apply to all products made or derived from tobacco intended for human consumption, but excluding accessories of tobacco products (such as lighters). Accordingly, the FDA has since regulated our cigar and cigar wrap products as well as our vapor products containing tobacco-derived nicotine and products intended or reasonably expected to be used to consume such e-liquids.
 
Under the deeming regulations, the FDA has responsibility for conducting premarket review of “new tobacco products”—defined as those products not commercially marketed in the United States as of February 15, 2007. There are three pathways for obtaining premarket authorization, including submission of a premarket tobacco product application (“PMTA”).

When the FDA initially issued the deeming regulations, it recognized that many products in the deemed categories that were already on the market qualified as “new tobacco products” and lacked a marketing order. In August 2017, the FDA issued a compliance policy (the “August 2017 Guidance”) that allowed new tobacco products to remain on the market without an FDA authorization until specified deadlines had passed.  Under the August 2017 Guidance, compliance dates vary depending upon the type of application submitted, but all newly-deemed products require an application no later than August 8, 2021, for “combustible” products (e.g. cigar and pipe), and August 8, 2022, for “non-combustible” products (e.g. vapor products) with the exception of “grandfathered” products (products in commerce as of February 15, 2007) which are already authorized.

On March 27, 2018, several public health organizations filed a lawsuit (the “Maryland Lawsuit”) challenging the August 2017 Guidance. The plaintiffs asserted, among other arguments, that the modification to the deeming regulations included in the August 2017 Guidance conflicts with the TCA and exceeds FDA’s statutory authority. The plaintiffs also expressed concern that the August 2017 Guidance allows vapor products to remain marketed for a significant period of time without required premarket review.
 
The court found in favor of the plaintiffs in May 2019 and vacated the August 2017 Guidance. On July 12, 2019, the court issued its remedy order (the “Remedy Order”). Specifically, the court ordered that: (1) for all deemed new tobacco products, marketers must file applications within 10 months of the Remedy Order to continue marketing such products; (2) such a product may remain on the market pending FDA review of a timely filed application for a period not to exceed one year from the date of the application’s submission; (3) in its discretion, the FDA may enforce the premarket review requirements against such products for which marketers do not file applications within 10 months; and (4) the FDA will have the ability to exempt deemed new tobacco products from these application submission requirements for good cause, on a case-by-case basis. FDA appealed the Remedy Order and other actions adverse to the FDA; however, on May 4, 2020, the U.S. Court of Appeals for the Fourth Circuit issued a ruling dismissing the appeals in their entirety.
 
On March 30, 2020, citing the impacts of the worldwide COVID-19 pandemic on both FDA and industry, FDA requested a modification to the Remedy Order that would extend the May 12, 2020, deadline for filing premarket applications by 120 days to September 9, 2020. After several procedural steps, the Remedy Order was modified on April 22, 2020, to reflect the new deadline, and since then, FDA has updated relevant Guidance documents to reflect this new timeline.
 
On September 11, 2019, President Donald Trump and the Department of Health and Human Services Secretary, Alex Azar, indicated FDA would adopt a regulatory policy restricting all flavors in vapor products. In January 2020, FDA issued a Guidance document (the “January 2020 Guidance”) that stated it would be prioritizing enforcement of several categories of electronic nicotine delivery systems (“ENDS”) products: (1) flavored, cartridge-based ENDS products (other than tobacco- or menthol-flavored ENDS products); (2) ENDS products for which the manufacturer has failed to take (or is failing to take) adequate measures to prevent minors’ access; (3) ENDS products targeted to minors or whose marketing is likely to promote the use of ENDS by minors; and (4) ENDS products offered for sale after the May 12, 2020, premarket application deadline for which the manufacturer has not submitted a premarket application. The policy outlined several factors the agency would consider in its enforcement of flavored cigars going forward but did not drastically restrict those products as it had considered in its March 2019 Guidance proposal. The FDA’s policy on these and other regulated products may change or expand over time in ways not yet known and may significantly impact our products or our premarket filings. For example, as noted above, the FDA recently acted to modify the deadline for premarket applications from May 12, 2020, to September 9, 2020.
 
As a result of the implementation of the modified Remedy Order, we would not be permitted to continue marketing our existing “deemed” products that the FDA regulates as tobacco products past September 9, 2020, unless the product is grandfathered or we file an application for each such product by that date.  We expect to be able to make appropriate premarket filing by the deadlines and to supplement and complete the applications within FDA’s discretionary timeline. A successful PMTA must demonstrate that the subject product is “appropriate for the protection of public health,” taking into account the effect of the marketing of the product on all sub-populations while a Substantial Equivalence Report must demonstrate that a new product either has the same characteristics as its predicate product or different characteristics, but does not raise different questions of public health. FDA has issued a number of proposed rules related to premarket filings; however, none of these rules are final yet, and their requirements may shift before being finalized. We believe we have products that meet the requisite standards and that we will be able to efficiently produce satisfactory premarket filings. However, there is no assurance that the FDA’s guidance or ultimate regulation will not change, the Remedy Order will not be further altered or that unforeseen circumstances will not arise that prevent us from filing applications or otherwise increase the amount of time and money we are required to spend to successfully file all necessary premarket applications. Even if we successfully file all of our premarket applications in a timely manner, no assurance can be given that the applications will ultimately be successful. Given the shorter time frame mandated by the Remedy Order, which if not amended or successfully appealed, may result in the prioritization of meeting requisite deadlines by selecting high priority SKUs in our inventory position, and future revenues may be adversely impacted.
 
In addition, we currently distribute many third-party manufactured vapor products for which we will be completely dependent on the manufacturer complying with the premarket filing requirements. There can be no assurances that some products that we currently distribute will be able to be sold to end consumers after September 2020. While we will take measures to pursue regulatory compliance for our own privately-branded or proprietary vape products that compete with these third-party products, there is no assurance that such proprietary products would be as successful in the marketplace or can fully displace third-party products that are currently being distributed by us, which could adversely affect our results of operations and liquidity.
Recent Accounting Pronouncements
Recent Accounting Pronouncements Adopted

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. This ASU applies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investments in leases, and trade accounts receivable as well as certain off-balance sheet credit exposures, such as loan commitments. The ASU replaced the previous incurred loss impairment methodology with a methodology to reflect current expected credit losses (“CECL”) and requires consideration of a broader range of reasonable and supportable information to explain credit loss estimates. The guidance was adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The ASU was effective for the Company beginning in the first quarter of 2020. The ASU did not have an impact to the Company’s financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. The guidance is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted. The Company adopted ASU 2018-15 effective January 1, 2020. The ASU did not have an impact to the Company’s financial statements and related disclosures.
 
Recent Accounting Pronouncements Not Yet Adopted
 
In December 2019, the FASB issued ASU 2019-12 to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This ASU will be effective beginning in the first quarter of the Company’s fiscal year 2021. Early adoption is permitted. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The Company is currently evaluating the impact this ASU will have on the financial statements and related disclosures, as well as the timing of adoption.
v3.20.2
Summary of Significant Accounting Policies (Tables)
6 Months Ended
Jun. 30, 2020
Summary of Significant Accounting Policies [Abstract]  
Deposits by Sales Year for MSA Escrow Account
The following shows the amount of deposits by sales year for the MSA escrow account:

 
Deposits as of
 
 Sales
Year
 
June 30,
2020
   
December 31,
2019
 
 
           
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
   
83
     
83
 
 
               
Total
 
$
32,074
   
$
32,074
 
v3.20.2
Acquisitions (Tables)
6 Months Ended
Jun. 30, 2020
Acquisitions [Abstract]  
Acquisition of Solace
In July 2019, the Company purchased the assets of E-Vape 12, Inc and Solace Technologies LLC (“Solace”) for $9.4 million in total consideration, comprised of $7.7 million in cash, $1.1 million earn-out fair value, and $0.5 million holdback for 18 months, which was adjusted by $0.2 million for a working capital deficiency. The earn-out consists of 44,295 shares of the Company’s common stock to be issued to the former owners upon the achievement of certain annual milestones. Immediately following the acquisition, 88,582 performance based restricted stock units with a fair value of $4.62 million were issued to former owners who became employees. See Note 15, “Share Incentive Plans”, for further details. Solace is an innovative product development company that has grown from the creator of one of the leading vape juice brands in the industry into a leader of alternative ingredients product development. The Company intends to incorporate Solace’s innovative products as well as the legacy vapor products into our Nu-X development engine. As of June 30, 2020, the Company had not completed the accounting for the acquisition. The following purchase price and goodwill and other intangibles are based on the excess of the acquisition price over the estimated fair value of the tangible assets acquired and are based on management’s preliminary estimates:

Total consideration transferred
 
$
9,405
 
Adjustments to consideration transferred:
       
Cash acquired
   
(45
)
Working capital
   
(235
)
Adjusted consideration transferred
   
9,125
 
Assets acquired:
       
Working capital (primarily AR and inventory)
   
1,132
 
Fixed assets and Other long term assets
   
414
 
Intangible assets
   
1,352
 
Other liabilities
   
(209
)
Net assets acquired
 
$
2,689
 
 
       
Goodwill
 
$
6,436
 
v3.20.2
Inventories (Tables)
6 Months Ended
Jun. 30, 2020
Inventories [Abstract]  
Inventories
The components of inventories are as follows:

 
 
June 30,
2020
   
December 31,
2019
 
Raw materials and work in process
 
$
7,552
   
$
7,050
 
Leaf tobacco
   
38,550
     
32,763
 
Finished goods - Smokeless products
   
5,595
     
5,680
 
Finished goods - Smoking products
   
7,902
     
13,138
 
Finished goods - NewGen products
   
20,972
     
17,111
 
Other
   
581
     
989
 
Gross Inventory
   
81,152
     
76,731
 
LIFO reserve
   
(5,596
)
   
(5,752
)
Net Inventory
 
$
75,556
   
$
70,979
 
v3.20.2
Other Current Assets (Tables)
6 Months Ended
Jun. 30, 2020
Other Current Assets [Abstract]  
Other Current Assets
Other current assets consists of:

 
 
June 30,
2020
   
December 31,
2019
 
Inventory deposits
 
$
5,445
   
$
4,012
 
Prepaid taxes
   
1,189
     
3,673
 
Other
   
10,067
     
8,430
 
Total
 
$
16,701
   
$
16,115
 
v3.20.2
Property, Plant, and Equipment (Tables)
6 Months Ended
Jun. 30, 2020
Property, Plant, and Equipment [Abstract]  
Property, Plant and Equipment
Property, plant, and equipment consists of:

 
 
June 30,
2020
   
December 31,
2019
 
Land
 
$
22
   
$
22
 
Buildings and improvements
   
2,655
     
2,655
 
Leasehold improvements
   
2,470
     
2,567
 
Machinery and equipment
   
15,511
     
14,516
 
Furniture and fixtures
   
8,588
     
8,502
 
Gross property, plant and equipment
   
29,246
     
28,262
 
Accumulated depreciation
   
(15,903
)
   
(14,446
)
Net property, plant and equipment
 
$
13,343
   
$
13,816
 
v3.20.2
Other Assets (Tables)
6 Months Ended
Jun. 30, 2020
Other Assets [Abstract]  
Other Assets
Other assets consists of:

 
 
June 30,
2020
   
December 31,
2019
 
Equity investments
 
$
5,421
   
$
5,421
 
Pension assets
   
1,820
     
1,686
 
Other
   
4,271
     
3,566
 
Total
 
$
11,512
   
$
10,673
 
v3.20.2
Accrued Liabilities (Tables)
6 Months Ended
Jun. 30, 2020
Accrued Liabilities [Abstract]  
Accrued Liabilities
Accrued liabilities consists of:

 
 
June 30,
2020
   
December 31,
2019
 
Accrued payroll and related items
 
$
4,206
   
$
5,267
 
Customer returns and allowances
   
5,446
     
6,160
 
Taxes payable
   
2,480
     
705
 
Lease liabilities
   
2,627
     
2,218
 
Accrued interest
   
2,057
     
1,909
 
Other
   
8,777
     
10,261
 
Total
 
$
25,593
   
$
26,520
 
v3.20.2
Notes Payable and Long-Term Debt (Tables)
6 Months Ended
Jun. 30, 2020
Notes Payable and Long-Term Debt [Abstract]  
Notes Payable and Long-Term Debt
Notes payable and long-term debt consists of the following in order of preference:

 
June 30,
2020
   
December 31,
2019
 
2018 First Lien Term Loan
 
$
141,000
   
$
146,000
 
Convertible Senior Notes
   
172,500
     
172,500
 
Note payable - Promissory Note
   
10,000
     
-
 
Note payable - Unsecured Loan
   
7,485
     
-
 
Note payable - IVG
   
-
     
4,240
 
Gross notes payable and long-term debt
   
330,985
     
322,740
 
Less deferred finance charges
   
(5,778
)
   
(6,466
)
Less debt discount
   
(28,583
)
   
(32,083
)
Less current maturities
   
(12,000
)
   
(15,240
)
Notes payable and long-term debt
 
$
284,624
   
$
268,951
 
v3.20.2
Leases (Tables)
6 Months Ended
Jun. 30, 2020
Leases [Abstract]  
Components of Lease Expense
The components of lease expense consisted of the following:
 
 
 
Three Months Ended June 30,
 
 
 
2020
   
2019
 
 
           
Operating lease cost
           
Cost of sales
 
$
225
   
$
232
 
Selling, general and administrative
   
606
     
605
 
Variable lease cost (1)
   
44
     
125
 
Short-term lease cost
   
26
     
35
 
Sublease income
   
(30
)
   
(20
)
Total
 
$
871
   
$
977
 

(1)
Variable lease cost includes elements of a contract that do not represent a good or service but for which the lessee is responsible for paying.


 
 
Six Months Ended June 30,
 
 
 
2020
   
2019
 
 
           
Operating lease cost
           
Cost of sales
 
$
458
   
$
424
 
Selling, general and administrative
   
1,004
     
1,160
 
Variable lease cost (1)
   
356
     
370
 
Short-term lease cost
   
109
     
89
 
Sublease income
   
(60
)
   
(50
)
Total
 
$
1,867
   
$
1,993
 

(1)
Variable lease cost includes elements of a contract that do not represent a good or service but for which the lessee is responsible for paying.
Operating Lease Assets and Liabilities
 
 
June 30,
2020
   
December 31,
2019
 
Assets:
           
Right of use assets
 
$
13,243
   
$
12,130
 
Total lease assets
 
$
13,243
   
$
12,130
 
 
               
 
               
Liabilities:
               
Current lease liabilities (2)
 
$
2,627
   
$
2,218
 
Long-term lease liabilities
   
11,813
     
11,067
 
Total lease liabilities
 
$
14,440
   
$
13,285
 

(2)
Reported within accrued liabilities on the balance sheet 
Operating Lease Weighted-Average Remaining Lease Term and Discount Rate
 
 
As of June 30,
 
 
 
2020
   
2019
 
Weighted-average remaining lease term  - operating leases
 
7.6 years
   
8.5 years
 
Weighted-average discount rate - operating leases
   
5.65
%
   
6.53
%
Maturities of Lease Liabilities
As of June 30, 2020, and December 31, 2019, maturities of lease liabilities consisted of the following:

 
 
June 30,
2020
   
December 31,
2019
 
2020
 
$
1,648
   
$
2,924
 
2021
   
3,268
     
2,730
 
2022
   
2,828
     
2,165
 
2023
   
2,451
     
1,782
 
2024
   
1,364
     
1,028
 
Years thereafter
   
6,312
     
6,297
 
Total lease payments
 
$
17,871
   
$
16,926
 
Less: Imputed interest
   
3,431
     
3,641
 
Present value of lease liabilities
 
$
14,440
   
$
13,285
 
v3.20.2
Pension and Postretirement Benefit Plans (Tables)
6 Months Ended
Jun. 30, 2020
Pension and Postretirement Benefit Plans [Abstract]  
Net Periodic Benefit Cost
The following table provides the components of net periodic pension and postretirement benefit costs and total costs for the plans:

 
 
Three Months Ended June 30,
 
 
 
Pension
Benefits
   
Postretirement
Benefits
 
 
 
2020
   
2019
   
2020
   
2019
 
 
                       
Service cost
 
$
-
   
$
26
   
$
-
   
$
-
 
Interest cost
   
95
     
130
     
-
     
25
 
Expected return on plan assets
   
(161
)
   
(161
)
   
-
     
-
 
Amortization of (gains) losses
   
36
     
36
     
(74
)
   
(41
)
Net periodic benefit (income) cost
 
$
(30
)
 
$
31
   
$
(74
)
 
$
(16
)

 
 
Six Months Ended June 30,
 
 
 
Pension
Benefits
   
Postretirement
Benefits
 
 
 
2020
   
2019
   
2020
   
2019
 
 
                       
Service cost
 
$
-
   
$
52
   
$
-
   
$
-
 
Interest cost
   
190
     
260
     
-
     
51
 
Expected return on plan assets
   
(322
)
   
(323
)
   
-
     
-
 
Amortization of (gains) losses
   
72
     
73
     
(131
)
   
(83
)
Net periodic benefit (income) cost
 
$
(60
)
 
$
62
   
$
(131
)
 
$
(32
)
v3.20.2
Share Incentive Plans (Tables)
6 Months Ended
Jun. 30, 2020
Share Incentive Plans [Abstract]  
Stock Option Activity
There are no shares available for grant under the 2006 Plan. Stock option activity for the 2006 and 2015 Plans is summarized below:

 
 
Stock
Option
Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Grant Date
Fair Value
 
Outstanding, December 31, 2018
   
659,574
   
$
9.00
   
$
3.34
 
 
                       
Granted
   
180,780
     
43.89
     
14.34
 
Exercised
   
(129,067
)
   
5.72
     
2.58
 
Forfeited
   
(14,571
)
   
34.55
     
11.10
 
Outstanding, December 31, 2019
   
696,716
     
18.13
     
6.17
 
 
                       
Granted
   
155,000
     
14.85
     
4.41
 
Exercised
   
(43,354
)
   
5.66
     
2.57
 
Forfeited
   
(1,289
)
   
30.07
     
9.63
 
Outstanding, June 30, 2020
   
807,073
   
$
18.15
   
$
6.02
 
Assumptions for Options Granted Under 2015 Plan
The following table outlines the assumptions based on the number of options granted under the 2015 Plan.
 
 
February 10,
2017
   
May 17,
2017
   
March 7,
2018
   
March 13,
2018
   
March 20,
2019
   
October 24,
2019
   
March 18,
2020
 
Number of options granted
   
40,000
     
93,819
     
98,100
     
26,000
     
155,780
     
25,000
     
155,000
 
Options outstanding at June 30, 2020
   
28,700
     
65,907
     
86,180
     
26,000
     
147,239
     
25,000
     
154,800
 
Number exercisable at June 30, 2020
   
28,700
     
65,907
     
57,686
     
26,000
     
50,140
     
8,250
     
-
 
Exercise price
 
$
13.00
   
$
15.41
   
$
21.21
   
$
21.49
   
$
47.58
   
$
20.89
   
$
14.85
 
Remaining lives
   
6.62
     
6.88
     
7.69
     
7.71
     
8.73
     
9.32
     
9.72
 
Risk free interest rate
   
1.89
%
   
1.76
%
   
2.65
%
   
2.62
%
   
2.34
%
   
1.58
%
   
0.79
%
Expected volatility
   
27.44
%
   
26.92
%
   
28.76
%
   
28.76
%
   
30.95
%
   
31.93
%
   
35.72
%
Expected life
   
6.000
     
6.000
     
6.000
     
5.495
     
6.000
     
6.000
     
6.000
 
Dividend yield
   
-
     
-
     
0.83
%
   
0.82
%
   
0.42
%
   
0.95
%
   
1.49
%
Fair value at grant date
 
$
3.98
   
$
4.60
   
$
6.37
   
$
6.18
   
$
15.63
   
$
6.27
   
$
4.41
 
PRSUs Activity
PRSUs are restricted stock units subject to both performance-based and service-based vesting conditions. The number of common stock shares a recipient will receive upon vesting of a PRSU will be calculated by reference to certain performance metrics related to the Company’s performance over a five-year period. PRSUs will vest on the measurement date, which is no more than 65 days after the performance period (provided the applicable service and performance conditions are satisfied. As of June 30, 2020, there are 440,132 PRSUs outstanding, all of which are unvested. The following table outlines the PRSUs granted and outstanding as of June 30, 2020.

 
 
March 31,
2017
   
March 7,
2018
   
March 20,
2019
   
March 20,
2019
   
July 19,
2019
   
March 18,
2020
 
Number of PRSUs granted
   
94,000
     
96,000
     
92,500
     
4,901
     
88,582
     
90,000
 
PRSUs outstanding at June 30, 2020
   
83,000
     
93,000
     
85,550
     
-
     
88,582
     
90,000
 
Fair value as of grant date
 
$
15.60
   
$
21.21
   
$
47.58
   
$
47.58
   
$
52.15
   
$
14.85
 
Remaining lives
   
1.50
     
2.50
     
3.50
     
-
     
2.50
     
4.50
 
v3.20.2
Income Per Share (Tables)
6 Months Ended
Jun. 30, 2020
Income Per Share [Abstract]  
Basic and Diluted Net Income per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations of net income:

 
 
Three Months Ended June 30,
 
 
 
2020
   
2019
 
 
 
Income
   
Shares
   
Per
Share
   
Income
   
Shares
   
Per
Share
 
Consolidated net income
 
$
9,227
               
$
13,205
             
 
                                       
Basic EPS:
                                       
Weighted average
           
19,507,874
   
$
0.47
             
19,621,695
   
$
0.67
 
 
                                               
Diluted EPS:
                                               
Effect of dilutive securities:
                                               
Stock options
           
326,471
                     
510,285
         
 
           
19,834,345
   
$
0.47
             
20,131,980
   
$
0.66
 

 
 
Six Months Ended June 30,
 
 
 
2020
   
2019
 
 
 
Income
   
Shares
   
Per
Share
   
Income
   
Shares
   
Per
Share
 
Consolidated net income
 
$
12,502
               
$
19,765
             
 
                                       
Basic EPS:
                                       
Weighted average
           
19,598,660
   
$
0.64
             
19,590,817
   
$
1.01
 
 
                                               
Diluted EPS:
                                               
Effect of dilutive securities:
                                               
Stock options
           
274,066
                     
305,142
         
 
           
19,872,726
   
$
0.63
             
19,895,959
   
$
0.99
 
v3.20.2
Segment Information (Tables)
6 Months Ended
Jun. 30, 2020
Segment Information [Abstract]  
Financial Information of Reported Segments
The tables below present financial information about reported segments:

 
 
Three Months Ended
June 30,
 
 
 
2020
   
2019
 
 
           
Net sales
           
Smokeless products
 
$
30,822
   
$
26,176
 
Smoking products
   
27,403
     
25,363
 
NewGen products
   
46,738
     
41,800
 
Total
 
$
104,963
   
$
93,339
 
 
               
Gross profit
               
Smokeless products
 
$
16,664
   
$
14,063
 
Smoking products
   
15,671
     
13,738
 
NewGen products
   
15,757
     
13,382
 
Total
 
$
48,092
   
$
41,183
 
 
               
Operating income (loss)
               
Smokeless products
 
$
12,240
   
$
9,731
 
Smoking products
   
12,227
     
10,374
 
NewGen products (2)
   
3,271
     
7,451
 
Corporate unallocated (1)
   
(10,402
)
   
(7,615
)
Total
 
$
17,336
   
$
19,941
 
 
               
Interest expense, net
   
4,980
     
3,736
 
Investment income
   
(34
)
   
(118
)
Loss on extinguishment of debt
   
-
     
150
 
Net periodic income, excluding service cost
   
(104
)
   
(11
)
 
               
Income before income taxes
 
$
12,494
   
$
16,184
 
 
               
Capital expenditures
               
Smokeless products
 
$
838
   
$
525
 
Smoking products
   
-
     
-
 
NewGen products
   
241
     
553
 
Total
 
$
1,079
   
$
1,078
 
 
               
Depreciation and amortization
               
Smokeless products
 
$
524
   
$
365
 
Smoking products
   
-
     
-
 
NewGen products
   
700
     
631
 
Total
 
$
1,224
   
$
996
 


(1)
Includes corporate costs that are not allocated to any of the three reportable segments.
(2)
Includes VMR settlement gain of $5.5 million for the three months ended June 30, 2020.


 
 
Six Months Ended
June 30,
 
 
 
2020
   
2019
 
 
           
Net sales
           
Smokeless products
 
$
57,317
   
$
48,720
 
Smoking products
   
56,317
     
50,882
 
NewGen products
   
82,018
     
85,365
 
Total
 
$
195,652
   
$
184,967
 
 
               
Gross profit
               
Smokeless products
 
$
30,538
   
$
26,136
 
Smoking products
   
31,803
     
27,222
 
NewGen products
   
27,182
     
28,289
 
Total
 
$
89,523
   
$
81,647
 
 
               
Operating income (loss)
               
Smokeless products
 
$
21,986
   
$
17,218
 
Smoking products
   
24,644
     
20,320
 
NewGen products (2)
   
3,748
     
10,289
 
Corporate unallocated (1)
   
(24,005
)
   
(15,851
)
Total
 
$
26,373
   
$
31,976
 
 
               
Interest expense, net
   
9,974
     
7,592
 
Investment income
   
(125
)
   
(262
)
Loss on extinguishment of debt
   
-
     
150
 
Net periodic income, excluding service cost
   
(191
)
   
(22
)
 
               
Income before income taxes
 
$
16,715
   
$
24,518
 
 
               
Capital expenditures
               
Smokeless products
 
$
1,698
   
$
1,102
 
Smoking products
   
-
     
-
 
NewGen products
   
258
     
862
 
Total
 
$
1,956
   
$
1,964
 
 
               
Depreciation and amortization
               
Smokeless products
 
$
1,043
   
$
722
 
Smoking products
   
-
     
-
 
NewGen products
   
1,457
     
1,164
 
Total
 
$
2,500
   
$
1,886
 


(1)
Includes corporate costs that are not allocated to any of the three reportable segments.
(2)
Includes VMR settlement gain of $5.5 million for the six months ended June 30, 2020.

 
June 30,
2020
   
December 31,
2019
 
Assets
           
Smokeless products
 
$
126,464
   
$
120,723
 
Smoking products
   
189,558
     
145,831
 
NewGen products
   
92,628
     
90,899
 
Corporate unallocated (1)
   
58,568
     
89,131
 
Total
 
$
467,218
   
$
446,584
 


(1)
Includes assets not assigned to the three reportable segments. All goodwill has been allocated to the reportable segments.
Revenue Disaggregation - Sales Channel
Revenues of the Smokeless and Smoking segments are primarily comprised of sales made to wholesalers while NewGen sales are made business to business and business to consumer, both online and through our corporate retail stores. NewGen net sales are broken out by sales channel below.

 
 
NewGen Segment
 
 
 
Three Months Ended
June 30,
 
 
 
2020
   
2019
 
 
           
Business to Business
 
$
30,368
   
$
30,737
 
Business to Consumer - Online
   
15,052
     
8,466
 
Business to Consumer - Corporate store
   
1,318
     
2,566
 
Other
   
-
     
31
 
Total
 
$
46,738
   
$
41,800
 

 
 
NewGen Segment
 
 
 
Six Months Ended
June 30,
 
 
 
2020
   
2019
 
 
           
Business to Business
 
$
55,647
   
$
63,200
 
Business to Consumer - Online
   
23,186
     
16,685
 
Business to Consumer - Corporate store
   
3,111
     
5,365
 
Other
   
74
     
115
 
Total
 
$
82,018
   
$
85,365
 
Net Sales - Domestic vs. Foreign
The following table shows a breakdown of consolidated net sales between domestic and foreign customers.

 
 
Three Months Ended
June 30,
 
 
 
2020
   
2019
 
Domestic
 
$
101,990
   
$
91,516
 
Foreign
   
2,973
     
1,823
 
Total
 
$
104,963
   
$
93,339
 
 
 
 
Six Months Ended
June 30,
 
 
 
2020
   
2019
 
Domestic
 
$
189,558
   
$
180,285
 
Foreign
   
6,094
     
4,682
 
Total
 
$
195,652
   
$
184,967
 
v3.20.2
Summary of Significant Accounting Policies, Shipping Costs (Details) - USD ($)
$ in Millions
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Shipping Costs [Abstract]        
Shipping costs $ 6.9 $ 4.3 $ 12.1 $ 9.2
v3.20.2
Summary of Significant Accounting Policies, Derivative Instruments (Details) - Maximum [Member]
6 Months Ended
Jun. 30, 2020
Derivative Instruments [Abstract]  
Percentage of anticipated purchases of inventory that may be hedged 100.00%
Term of hedge 12 months
Percentage of non-inventory purchases that may be hedged 90.00%
v3.20.2
Summary of Significant Accounting Policies, Master Settlement Agreement (Details) - USD ($)
$ in Thousands
6 Months Ended
Jun. 30, 2020
Dec. 31, 2019
Master Settlement Agreement [Abstract]    
Term for restricted withdrawal of principal from MSA escrow account 25 years  
Cost $ 32,100 $ 32,100
Estimated fair value 32,100 32,100
Master Settlement Agreement Escrow Account by Sales Year [Abstract]    
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 83 83
Total $ 32,074 $ 32,074
v3.20.2
Summary of Significant Accounting Policies, Food and Drug Administration (Details)
6 Months Ended
Jun. 30, 2020
Category
Class
Pathway
Food and Drug Administration [Abstract]  
Number of categories of tobacco products regulated by the FDA | Category 4
Number of classes of regulated tobacco products on which user fees are assessed | Class 6
Number of pathways for obtaining premarket authorization | Pathway 3
Period deemed new tobacco products may remain on the market pending FDA review 1 year
Application period for deemed new tobacco products 10 months
Proposed extension period for filing premarket applications 120 days
v3.20.2
Acquisitions (Details) - USD ($)
$ in Thousands
1 Months Ended 6 Months Ended
Jun. 30, 2020
Jul. 31, 2019
Jun. 30, 2020
Dec. 31, 2019
Assets Acquired [Abstract]        
Goodwill $ 154,282   $ 154,282 $ 154,282
Durfort [Member]        
Acquisitions [Abstract]        
Cash paid for acquisition 37,800      
Capitalized transaction costs 1,800   $ 1,800  
Issuance of promissory note 10,000      
Period after closing for Master Distribution Agreement to be effective     120 days  
Purchase Price [Abstract]        
Total consideration transferred 47,800      
Assets Acquired [Abstract]        
Goodwill deductible for tax purposes 47,800   $ 47,800  
Durfort [Member] | Intellectual Property [Member]        
Acquisitions [Abstract]        
Indefinite-lived intangible asset acquired 47,800      
Solace [Member]        
Acquisitions [Abstract]        
Cash paid for acquisition   $ 7,700    
Earn-out fair value   1,100    
Holdback for acquisition   $ 500    
Holdback period     18 months  
Shares to be issued upon achievement of milestones (in shares)   44,295    
Purchase Price [Abstract]        
Total consideration transferred   $ 9,405    
Adjustments to Consideration Transferred [Abstract]        
Cash acquired   (45)    
Working capital   (235)    
Adjusted consideration transferred   9,125    
Assets Acquired [Abstract]        
Working capital (primarily AR and inventory)   1,132    
Fixed assets and other long term assets   414    
Intangible assets   1,352    
Other liabilities   (209)    
Net assets acquired   2,689    
Goodwill   $ 6,436    
Goodwill deductible for tax purposes $ 6,400   $ 6,400  
Solace [Member] | Performance-Based Restricted Stock Units [Member]        
Acquisitions [Abstract]        
Performance based restricted stock units issued (in shares)   88,582    
Fair value of performance based restricted stock units issued   $ 4,620    
v3.20.2
Derivative Instruments (Details)
$ in Millions
3 Months Ended 6 Months Ended
Jun. 30, 2020
USD ($)
Contract
Jun. 30, 2019
Contract
Jun. 30, 2020
USD ($)
Contract
Jun. 30, 2019
Contract
Dec. 31, 2019
USD ($)
Mar. 31, 2018
USD ($)
Maximum [Member]            
Derivative Instruments [Abstract]            
Percentage of anticipated purchases of inventory that may be hedged     100.00%      
Term of hedge     12 months      
Percentage of non-inventory purchases that may be hedged     90.00%      
Foreign Currency [Member]            
Derivative Instruments [Abstract]            
Number of contracts executed | Contract 0 0 0 0    
Interest Rate Swap [Member]            
Derivative Instruments [Abstract]            
Notional amount $ 70.0   $ 70.0   $ 70.0 $ 70.0
Fair value $ 4.7   $ 4.7   $ 2.5  
Interest Rate Swap [Member] | LIBOR [Member]            
Derivative Instruments [Abstract]            
Interest rate percentage 2.755%   2.755%      
v3.20.2
Fair Value of Financial Instruments (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Jun. 10, 2020
Dec. 31, 2019
Mar. 31, 2018
Fair Value of Financial Instruments [Abstract]        
Note payable $ 330,985   $ 322,740  
Interest Rate Swap [Member]        
Fair Value of Financial Instruments [Abstract]        
Notional amount 70,000   70,000 $ 70,000
Fair value 4,700   2,500  
2018 First Lien Term Loan [Member]        
Fair Value of Financial Instruments [Abstract]        
Note payable $ 141,000   146,000  
2.5% Convertible Senior Notes [Member]        
Fair Value of Financial Instruments [Abstract]        
Interest rate 2.50%      
Note payable $ 172,500   172,500  
Promissory Note [Member]        
Fair Value of Financial Instruments [Abstract]        
Interest rate   7.50%    
Note payable $ 10,000   0  
Unsecured Loan [Member]        
Fair Value of Financial Instruments [Abstract]        
Interest rate 1.00%      
Note payable $ 7,485   0  
Fair Value [Member] | 2018 First Lien Term Loan [Member]        
Fair Value of Financial Instruments [Abstract]        
Long-term debt 141,000   146,000  
Fair Value [Member] | 2.5% Convertible Senior Notes [Member]        
Fair Value of Financial Instruments [Abstract]        
Long-term debt $ 143,100   $ 140,100  
v3.20.2
Inventories (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Inventories [Abstract]    
Raw materials and work in process $ 7,552 $ 7,050
Leaf tobacco 38,550 32,763
Other 581 989
Gross Inventory 81,152 76,731
LIFO reserve (5,596) (5,752)
Net Inventory 75,556 70,979
Inventory valuation allowance 18,600 21,500
Smokeless Products [Member]    
Inventories [Abstract]    
Finished goods 5,595 5,680
Smoking Products [Member]    
Inventories [Abstract]    
Finished goods 7,902 13,138
NewGen Products [Member]    
Inventories [Abstract]    
Finished goods $ 20,972 $ 17,111
v3.20.2
Other Current Assets (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Other Current Assets [Abstract]    
Inventory deposits $ 5,445 $ 4,012
Prepaid taxes 1,189 3,673
Other 10,067 8,430
Total $ 16,701 $ 16,115
v3.20.2
Property, Plant, and Equipment (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Property, Plant and Equipment [Abstract]    
Gross property, plant and equipment $ 29,246 $ 28,262
Accumulated depreciation (15,903) (14,446)
Net property, plant and equipment 13,343 13,816
Land [Member]    
Property, Plant and Equipment [Abstract]    
Gross property, plant and equipment 22 22
Buildings and Improvements [Member]    
Property, Plant and Equipment [Abstract]    
Gross property, plant and equipment 2,655 2,655
Leasehold Improvements [Member]    
Property, Plant and Equipment [Abstract]    
Gross property, plant and equipment 2,470 2,567
Machinery and Equipment [Member]    
Property, Plant and Equipment [Abstract]    
Gross property, plant and equipment 15,511 14,516
Furniture and Fixtures [Member]    
Property, Plant and Equipment [Abstract]    
Gross property, plant and equipment $ 8,588 $ 8,502
v3.20.2
Other Assets (Details) - USD ($)
$ in Thousands
1 Months Ended
Jul. 31, 2019
Jun. 30, 2020
Dec. 31, 2019
Other Assets [Abstract]      
Equity investments   $ 5,421 $ 5,421
Pension assets   1,820 1,686
Other   4,271 3,566
Total   $ 11,512 $ 10,673
ReCreation [Member]      
Other Assets [Abstract]      
Ownership interest 30.00%    
Payment for investment $ 1,000    
ReCreation [Member] | Maximum [Member]      
Other Assets [Abstract]      
Ownership interest that can be acquired 50.00%    
v3.20.2
Accrued Liabilities (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Accrued Liabilities [Abstract]    
Accrued payroll and related items $ 4,206 $ 5,267
Customer returns and allowances 5,446 6,160
Taxes payable 2,480 705
Lease liabilities [1] 2,627 2,218
Accrued interest 2,057 1,909
Other 8,777 10,261
Total accrued liabilities $ 25,593 $ 26,520
[1] Reported within accrued liabilities on the balance sheet 
v3.20.2
Notes Payable and Long-Term Debt, Summary of Notes Payable and Long-Term Debt (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Jul. 31, 2019
Notes Payable and Long-Term Debt [Abstract]      
Gross notes payable and long-term debt $ 330,985 $ 322,740  
Less deferred finance charges (5,778) (6,466)  
Less debt discount (28,583) (32,083)  
Less current maturities (12,000) (15,240)  
Net notes payable and long-term debt 284,624 268,951  
2018 First Lien Term Loan [Member]      
Notes Payable and Long-Term Debt [Abstract]      
Gross notes payable and long-term debt 141,000 146,000  
Convertible Senior Notes [Member]      
Notes Payable and Long-Term Debt [Abstract]      
Gross notes payable and long-term debt 172,500 172,500  
Less debt discount     $ (35,000)
Promissory Note [Member]      
Notes Payable and Long-Term Debt [Abstract]      
Gross notes payable and long-term debt 10,000 0  
Unsecured Loan [Member]      
Notes Payable and Long-Term Debt [Abstract]      
Gross notes payable and long-term debt 7,485 0  
Note Payable - IVG [Member]      
Notes Payable and Long-Term Debt [Abstract]      
Gross notes payable and long-term debt $ 0 $ 4,240  
v3.20.2
Notes Payable and Long-Term Debt, 2018 Credit Facility (Details)
$ in Millions
Mar. 07, 2018
USD ($)
2018 Credit Facility [Member]  
Notes Payable and Long-Term Debt [Abstract]  
Secured credit facility $ 250
Additional borrowing capacity under accordion feature 40
2018 First Lien Term Loan [Member]  
Notes Payable and Long-Term Debt [Abstract]  
Face amount 160
2018 Revolving Credit Facility [Member]  
Notes Payable and Long-Term Debt [Abstract]  
Maximum borrowing capacity 50
2018 Second Lien Term Loan [Member]  
Notes Payable and Long-Term Debt [Abstract]  
Face amount $ 40
v3.20.2
Notes Payable and Long-Term Debt, 2018 First Lien Credit Facility (Details)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2019
USD ($)
Jun. 30, 2020
USD ($)
Jun. 30, 2019
USD ($)
Mar. 07, 2018
USD ($)
Notes Payable and Long-Term Debt [Abstract]        
Financing costs of amending facility   $ 194 $ 179  
Letter of Credit [Member]        
Notes Payable and Long-Term Debt [Abstract]        
Maximum borrowing capacity   $ 3,600    
2018 First Lien Credit Facility [Member]        
Notes Payable and Long-Term Debt [Abstract]        
Maturity date   Mar. 07, 2023    
Financing costs of amending facility   $ 700    
2018 First Lien Credit Facility [Member] | Minimum [Member]        
Notes Payable and Long-Term Debt [Abstract]        
Senior leverage ratio   2.50    
Total leverage ratio   5.00    
Fixed charge coverage ratio   1.20    
2018 First Lien Credit Facility [Member] | Maximum [Member]        
Notes Payable and Long-Term Debt [Abstract]        
Senior leverage ratio   3.00    
Total leverage ratio   5.50    
2018 Revolving Credit Facility [Member]        
Notes Payable and Long-Term Debt [Abstract]        
Outstanding borrowings   $ 0    
Unused portion of credit facility   50,000    
Maximum borrowing capacity       $ 50,000
Availability under credit facility   $ 46,400    
2018 Revolving Credit Facility [Member] | LIBOR [Member] | Minimum [Member]        
Notes Payable and Long-Term Debt [Abstract]        
Margin on variable rate   2.75%    
2018 Revolving Credit Facility [Member] | LIBOR [Member] | Maximum [Member]        
Notes Payable and Long-Term Debt [Abstract]        
Margin on variable rate   3.50%    
2018 First Lien Term Loan [Member]        
Notes Payable and Long-Term Debt [Abstract]        
Frequency of required payment   quarterly    
Financing costs of amending facility   $ 200    
Principal payment due under excess cash covenant $ 4,500      
Consent fees $ 100      
Weighted average interest rate   2.93%    
2018 First Lien Term Loan [Member] | June 30, 2018 through March 31, 2020 [Member]        
Notes Payable and Long-Term Debt [Abstract]        
Required payment   $ 2,000    
2018 First Lien Term Loan [Member] | June 30, 2020 through March 31, 2022 [Member]        
Notes Payable and Long-Term Debt [Abstract]        
Required payment   3,000    
2018 First Lien Term Loan [Member] | June 30, 2022 and after [Member]        
Notes Payable and Long-Term Debt [Abstract]        
Required payment   $ 4,000    
2018 First Lien Term Loan [Member] | LIBOR [Member] | Minimum [Member]        
Notes Payable and Long-Term Debt [Abstract]        
Margin on variable rate   2.75%    
2018 First Lien Term Loan [Member] | LIBOR [Member] | Maximum [Member]        
Notes Payable and Long-Term Debt [Abstract]        
Margin on variable rate   3.50%    
Convertible Senior Notes [Member]        
Notes Payable and Long-Term Debt [Abstract]        
Maturity date   Jul. 15, 2024    
Maximum notes to be issued   $ 200,000    
v3.20.2
Notes Payable and Long-Term Debt, 2018 Second Lien Credit Facility (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Sep. 30, 2019
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Notes Payable and Long-Term Debt [Abstract]          
Loss on extinguishment of debt $ 0   $ (150) $ 0 $ (150)
2018 Second Lien Term Loan [Member]          
Notes Payable and Long-Term Debt [Abstract]          
Maturity date       Mar. 07, 2024  
Payment of term loan   $ 35,500 4,500    
Loss on extinguishment of debt   $ (1,100) $ (200)    
2018 Second Lien Term Loan [Member] | LIBOR [Member]          
Notes Payable and Long-Term Debt [Abstract]          
Margin on variable rate       7.00%  
v3.20.2
Notes Payable and Long-Term Debt, Convertible Senior Notes (Details)
1 Months Ended 3 Months Ended 6 Months Ended
Jul. 31, 2019
USD ($)
Jun. 30, 2020
USD ($)
$ / shares
Jun. 30, 2020
USD ($)
shares
$ / shares
Dec. 31, 2019
USD ($)
Notes Payable and Long-Term Debt [Abstract]        
Debt discount   $ 28,583,000 $ 28,583,000 $ 32,083,000
Strike price (in dollars per share) | $ / shares   53.86 53.86  
Cap price (in dollars per share) | $ / shares   82.86 82.86  
Payment for cost of capped call transactions $ 20,530,000      
2.5% Convertible Senior Notes [Member]        
Notes Payable and Long-Term Debt [Abstract]        
Face amount 172,500,000      
Interest rate   2.50% 2.50%  
Maturity date     Jul. 15, 2024  
Shares issued upon conversion (in shares) | shares     3,202,808  
Conversion rate     18.567  
Principal amount of notes to be converted     $ 1,000  
Conversion price (in dollars per share) | $ / shares   $ 53.86 $ 53.86  
Debt discount 35,000,000.0      
Effective interest rate   7.50% 7.50%  
Amortization of debt discount   $ 1,800,000 $ 3,500,000  
Debt issuance costs attributable to liability component 4,700,000      
Debt issuance costs attributable to equity component $ 1,200,000      
v3.20.2
Notes Payable and Long-Term Debt, Promissory Note (Details) - Promissory Note [Member]
$ in Millions
6 Months Ended
Jun. 30, 2020
USD ($)
Intallment
Jun. 10, 2020
USD ($)
Notes Payable and Long-Term Debt [Abstract]    
Face amount   $ 10.0
Interest rate   7.50%
Frequency of required payment quarterly  
Maturity date Sep. 10, 2020  
Number of installments | Intallment 2  
Required payment $ 5.0  
Minimum [Member]    
Notes Payable and Long-Term Debt [Abstract]    
Term of note payable 18 months  
Maximum [Member]    
Notes Payable and Long-Term Debt [Abstract]    
Term of note payable 36 months  
v3.20.2
Notes Payable and Long-Term Debt, Unsecured Loan (Details) - Unsecured Loan [Member] - USD ($)
$ in Millions
6 Months Ended
Jun. 30, 2020
Apr. 17, 2020
Notes Payable and Long-Term Debt [Abstract]    
Face amount   $ 7.5
Maturity date Apr. 17, 2022  
Interest rate 1.00%  
v3.20.2
Notes Payable and Long-Term Debt, Note Payable - IVG (Details) - Note Payable - IVG [Member] - USD ($)
$ in Thousands
6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Dec. 31, 2019
Notes Payable and Long-Term Debt [Abstract]      
Face amount     $ 4,000
Interest rate     6.00%
Maturity date Mar. 05, 2020    
Payment of term loan $ 4,240 $ 0  
v3.20.2
Leases (Details)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
USD ($)
Agreement
Jun. 30, 2019
USD ($)
Jun. 30, 2020
USD ($)
Jun. 30, 2019
USD ($)
Dec. 31, 2019
USD ($)
Components of Lease Expense [Abstract]          
Variable lease cost [1] $ 44 $ 125 $ 356 $ 370  
Short-term lease cost 26 35 109 89  
Sublease income (30) (20) (60) (50)  
Total operating lease cost 871 $ 977 1,867 $ 1,993  
Assets [Abstract]          
Right of use assets 13,243   13,243   $ 12,130
Liabilities [Abstract]          
Current lease liabilities [2] 2,627   2,627   2,218
Long-term lease liabilities 11,813   11,813   11,067
Total lease liabilities $ 14,440   $ 14,440   13,285
Weighted-Average Remaining Lease Term and Discount Rate [Abstract]          
Weighted-average remaining lease term - operating leases 7 years 7 months 6 days 8 years 6 months 7 years 7 months 6 days 8 years 6 months  
Weighted-average discount rate - operating leases 5.65% 6.53% 5.65% 6.53%  
Maturities of Lease Liabilities [Abstract]          
2020 $ 1,648   $ 1,648    
2021/2020 3,268   3,268   2,924
2022/2021 2,828   2,828   2,730
2023/2022 2,451   2,451   2,165
2024/2023 1,364   1,364   1,782
2024         1,028
Years thereafter 6,312   6,312    
Years thereafter         6,297
Total lease payments 17,871   17,871   16,926
Less: Imputed interest 3,431   3,431   3,641
Present value of lease liabilities $ 14,440   14,440   $ 13,285
Number of new lease agreements | Agreement 2        
Number of lease agreements terminated | Agreement 6        
Additional lease liabilities $ 800   800    
Impairment loss 100   149 $ 0  
Cost of Sales [Member]          
Components of Lease Expense [Abstract]          
Operating lease cost 225 $ 232 458 424  
Selling, General and Administrative [Member]          
Components of Lease Expense [Abstract]          
Operating lease cost $ 606 $ 605 $ 1,004 $ 1,160  
[1] Variable lease cost includes elements of a contract that do not represent a good or service but for which the lessee is responsible for paying.
[2] Reported within accrued liabilities on the balance sheet 
v3.20.2
Income Taxes (Details) - USD ($)
$ in Millions
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Income Taxes [Abstract]        
Effective income tax rate 26.10% 18.40% 25.20% 19.40%
Discrete tax deduction related to stock option exercises $ 0.0 $ 3.7 $ 0.9 $ 4.5
v3.20.2
Pension and Postretirement Benefit Plans (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Pension Benefits [Member]        
Plan Contributions [Abstract]        
Expected contributions in 2020 $ 0   $ 0  
Net Periodic Benefit Cost [Abstract]        
Service cost 0 $ 26 0 $ 52
Interest cost 95 130 190 260
Expected return on plan assets (161) (161) (322) (323)
Amortization of (gains) losses 36 36 72 73
Net periodic benefit (income) cost (30) 31 (60) 62
Postretirement Benefits [Member]        
Net Periodic Benefit Cost [Abstract]        
Service cost 0 0 0 0
Interest cost 0 25 0 51
Expected return on plan assets 0 0 0 0
Amortization of (gains) losses (74) (41) (131) (83)
Net periodic benefit (income) cost $ (74) $ (16) $ (131) $ (32)
v3.20.2
Share Incentive Plans, Equity Incentive Plans (Details) - shares
Jun. 30, 2020
Apr. 28, 2016
2015 Plan [Member]    
Share Incentive Plans [Abstract]    
Number of shares available for grant (in shares) 330,430  
2015 Plan [Member] | Restricted Stock [Member]    
Share Incentive Plans [Abstract]    
Number of awards granted (in shares) 16,159  
2015 Plan [Member] | Performance-Based Restricted Stock Units [Member]    
Share Incentive Plans [Abstract]    
Number of awards granted (in shares) 440,132  
2015 Plan [Member] | Stock Options [Member]    
Share Incentive Plans [Abstract]    
Number of awards granted (in shares) 613,279  
2015 Plan [Member] | Voting Common Stock [Member]    
Share Incentive Plans [Abstract]    
Number of shares authorized for issuance (in shares)   1,400,000
2006 Plan [Member]    
Share Incentive Plans [Abstract]    
Number of shares available for grant (in shares) 0  
v3.20.2
Share Incentive Plans, Stock Option Activity (Details) - 2006 and 2015 Plans [Member] - Stock Options [Member] - USD ($)
$ / shares in Units, $ in Millions
6 Months Ended 12 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Dec. 31, 2019
Incentive Shares [Roll Forward]      
Outstanding, beginning balance (in shares) 696,716 659,574 659,574
Granted (in shares) 155,000   180,780
Exercised (in shares) (43,354)   (129,067)
Forfeited (in shares) (1,289)   (14,571)
Outstanding, ending balance (in shares) 807,073   696,716
Weighted Average Exercise Price [Abstract]      
Outstanding, beginning balance (in dollars per share) $ 18.13 $ 9.00 $ 9.00
Granted (in dollars per share) 14.85   43.89
Exercised (in dollars per share) 5.66   5.72
Forfeited (in dollars per share) 30.07   34.55
Outstanding, ending balance (in dollars per share) 18.15   18.13
Weighted Average Grant Date Fair Value [Abstract]      
Outstanding, beginning balance (in dollars per share) 6.17 $ 3.34 3.34
Granted (in dollars per share) 4.41   14.34
Exercised (in dollars per share) 2.57   2.58
Forfeited (in dollars per share) 9.63   11.10
Outstanding, ending balance (in dollars per share) $ 6.02   $ 6.17
Intrinsic value of options exercised $ 0.9 $ 4.5  
v3.20.2
Share Incentive Plans, Assumptions for Options Granted Under 2006 Plan (Details) - 2006 Plan [Member] - Stock Options [Member]
6 Months Ended
Jun. 30, 2020
$ / shares
shares
Share Incentive Plans [Abstract]  
Expected life 10 years
Exercise Price $3.83 [Member]  
Share Incentive Plans [Abstract]  
Number of options (in shares) | shares 273,247
Exercise price (in dollars per share) $ 3.83
Number of options exercisable (in shares) | shares 273,247
Remaining lives 3 years 1 month 9 days
Expected life 10 years
Exercise price (in dollars per share) $ 3.83
Risk free interest rate 3.57%
Expected volatility 40.00%
Dividend yield 0.00%
Fair value at grant date (in dollars per share) $ 2.17
v3.20.2
Share Incentive Plans, Assumptions for Options Granted Under 2015 Plan (Details) - 2015 Plan [Member] - Stock Options [Member] - $ / shares
6 Months Ended
Mar. 18, 2020
Oct. 24, 2019
Mar. 20, 2019
Mar. 13, 2018
Mar. 07, 2018
May 17, 2017
Feb. 10, 2017
Jun. 30, 2020
February 10, 2017 [Member]                
Share Incentive Plans [Abstract]                
Number of options granted (in shares)             40,000  
Options outstanding (in shares)               28,700
Number exercisable (in shares)               28,700
Exercise price (in dollars per share)               $ 13.00
Remaining lives               6 years 7 months 13 days
Risk free interest rate               1.89%
Expected volatility               27.44%
Expected life               6 years
Dividend yield               0.00%
Fair value at grant date (in dollars per share)               $ 3.98
May 17, 2017 [Member]                
Share Incentive Plans [Abstract]                
Number of options granted (in shares)           93,819    
Options outstanding (in shares)               65,907
Number exercisable (in shares)               65,907
Exercise price (in dollars per share)               $ 15.41
Remaining lives               6 years 10 months 17 days
Risk free interest rate               1.76%
Expected volatility               26.92%
Expected life               6 years
Dividend yield               0.00%
Fair value at grant date (in dollars per share)               $ 4.60
March 7, 2018 [Member]                
Share Incentive Plans [Abstract]                
Number of options granted (in shares)         98,100      
Options outstanding (in shares)               86,180
Number exercisable (in shares)               57,686
Exercise price (in dollars per share)               $ 21.21
Remaining lives               7 years 8 months 8 days
Risk free interest rate               2.65%
Expected volatility               28.76%
Expected life               6 years
Dividend yield               0.83%
Fair value at grant date (in dollars per share)               $ 6.37
March 13, 2018 [Member]                
Share Incentive Plans [Abstract]                
Number of options granted (in shares)       26,000        
Options outstanding (in shares)               26,000
Number exercisable (in shares)               26,000
Exercise price (in dollars per share)               $ 21.49
Remaining lives               7 years 8 months 15 days
Risk free interest rate               2.62%
Expected volatility               28.76%
Expected life               5 years 5 months 28 days
Dividend yield               0.82%
Fair value at grant date (in dollars per share)               $ 6.18
March 20, 2019 [Member]                
Share Incentive Plans [Abstract]                
Number of options granted (in shares)     155,780          
Options outstanding (in shares)               147,239
Number exercisable (in shares)               50,140
Exercise price (in dollars per share)               $ 47.58
Remaining lives               8 years 8 months 23 days
Risk free interest rate               2.34%
Expected volatility               30.95%
Expected life               6 years
Dividend yield               0.42%
Fair value at grant date (in dollars per share)               $ 15.63
October 24, 2019 [Member]                
Share Incentive Plans [Abstract]                
Number of options granted (in shares)   25,000            
Options outstanding (in shares)               25,000
Number exercisable (in shares)               8,250
Exercise price (in dollars per share)               $ 20.89
Remaining lives               9 years 3 months 25 days
Risk free interest rate               1.58%
Expected volatility               31.93%
Expected life               6 years
Dividend yield               0.95%
Fair value at grant date (in dollars per share)               $ 6.27
March 18, 2020 [Member]                
Share Incentive Plans [Abstract]                
Number of options granted (in shares) 155,000              
Options outstanding (in shares)               154,800
Number exercisable (in shares)               0
Exercise price (in dollars per share)               $ 14.85
Remaining lives               9 years 8 months 19 days
Risk free interest rate               0.79%
Expected volatility               35.72%
Expected life               6 years
Dividend yield               1.49%
Fair value at grant date (in dollars per share)               $ 4.41
v3.20.2
Share Incentive Plans, Compensation Expense Related to Options (Details) - USD ($)
$ in Millions
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Compensation Expense [Abstract]        
Compensation expense related to options $ 0.2 $ 0.5 $ 0.6 $ 0.7
Unrecognized compensation expense related to options $ 1.2   $ 1.2  
Period over which unrecognized compensation expense will be expensed     1 year 10 months 24 days  
v3.20.2
Share Incentive Plans, Performance-Based Restricted Stock Units (Details) - Performance-Based Restricted Stock Units [Member] - USD ($)
$ / shares in Units, $ in Millions
3 Months Ended 6 Months Ended
Mar. 18, 2020
Jul. 19, 2019
Mar. 20, 2019
Mar. 07, 2018
Mar. 31, 2017
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Share Incentive Plans [Abstract]                  
Period between performance period and measurement date               65 days  
PRSUs outstanding at June 30, 2020 (in shares)           440,132   440,132  
Compensation expense           $ 0.4 $ 0.5 $ 0.7 $ 0.7
Unrecognized compensation expense           $ 9.8   $ 9.8  
Employees [Member]                  
Share Incentive Plans [Abstract]                  
Performance period               5 years  
March 31, 2017 [Member] | Employees [Member]                  
Share Incentive Plans [Abstract]                  
Number of PRSUs granted (in shares)         94,000        
PRSUs outstanding at June 30, 2020 (in shares)           83,000   83,000  
Fair value as of grant date (in dollars per share)         $ 15.60        
Remaining lives               1 year 6 months  
March 7, 2018 [Member] | Employees [Member]                  
Share Incentive Plans [Abstract]                  
Number of PRSUs granted (in shares)       96,000          
PRSUs outstanding at June 30, 2020 (in shares)           93,000   93,000  
Fair value as of grant date (in dollars per share)       $ 21.21          
Remaining lives               2 years 6 months  
March 20, 2019 [Member]                  
Share Incentive Plans [Abstract]                  
Number of PRSUs granted (in shares)     4,901            
PRSUs outstanding at June 30, 2020 (in shares)           0   0  
Fair value as of grant date (in dollars per share)     $ 47.58            
March 20, 2019 [Member] | Employees [Member]                  
Share Incentive Plans [Abstract]                  
Number of PRSUs granted (in shares)     92,500            
PRSUs outstanding at June 30, 2020 (in shares)           85,550   85,550  
Fair value as of grant date (in dollars per share)     $ 47.58            
Remaining lives               3 years 6 months  
July 19, 2019 [Member] | Employees [Member]                  
Share Incentive Plans [Abstract]                  
Number of PRSUs granted (in shares)   88,582              
PRSUs outstanding at June 30, 2020 (in shares)           88,582   88,582  
Fair value as of grant date (in dollars per share)   $ 52.15              
Remaining lives               2 years 6 months  
March 18, 2020 [Member] | Employees [Member]                  
Share Incentive Plans [Abstract]                  
Number of PRSUs granted (in shares) 90,000                
PRSUs outstanding at June 30, 2020 (in shares)           90,000   90,000  
Fair value as of grant date (in dollars per share) $ 14.85                
Remaining lives               4 years 6 months  
v3.20.2
Income Per Share (Details) - USD ($)
$ / shares in Units, $ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Income Per Share [Abstract]        
Consolidated net income $ 9,227 $ 13,205 $ 12,502 $ 19,765
Basic EPS [Abstract]        
Basic weighted average shares (in shares) 19,507,874 19,621,695 19,598,660 19,590,817
Basic EPS (in dollars per share) $ 0.47 $ 0.67 $ 0.64 $ 1.01
Effect of Dilutive Securities [Abstract]        
Stock options (in shares) 326,471 510,285 274,066 305,142
Diluted weighted average shares (in shares) 19,834,345 20,131,980 19,872,726 19,895,959
Diluted EPS (in dollars per share) $ 0.47 $ 0.66 $ 0.63 $ 0.99
Income per Share [Abstract]        
Average stock price (in dollars per share) $ 53.86   $ 53.86  
Convertible Senior Notes [Member]        
Income per Share [Abstract]        
Shares excluded from calculation of diluted net income per share (in shares) 3,202,808   3,202,808  
v3.20.2
Segment Information, Financial Information of Reportable Segments (Details)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
USD ($)
Jun. 30, 2019
USD ($)
Jun. 30, 2020
USD ($)
Segment
Jun. 30, 2019
USD ($)
Dec. 31, 2019
USD ($)
Segment Information [Abstract]          
Number of reportable segments | Segment     3    
Segment Information [Abstract]          
Net sales $ 104,963 $ 93,339 $ 195,652 $ 184,967  
Gross profit 48,092 41,183 89,523 81,647  
Operating income (loss) 17,336 19,941 26,373 31,976  
Interest expense, net 4,980 3,736 9,974 7,592  
Investment income (34) (118) (125) (262)  
Loss on extinguishment of debt 0 150 0 150  
Net periodic benefit income, excluding service cost (104) (11) (191) (22)  
Income before income taxes 12,494 16,184 16,715 24,518  
Capital expenditures 1,079 1,078 1,956 1,964  
Depreciation and amortization 1,224 996 2,500 1,886  
VMR settlement gain 5,500   5,500    
Assets 467,218   467,218   $ 446,584
NewGen Products [Member]          
Segment Information [Abstract]          
Net sales 46,738 41,800 82,018 85,365  
Corporate Unallocated [Member]          
Segment Information [Abstract]          
Operating income (loss) (10,402) [1] (7,615) [1] (24,005) [2] (15,851) [2]  
Assets [3] 58,568   58,568   89,131
Reportable Segments [Member] | Smokeless Products [Member]          
Segment Information [Abstract]          
Net sales 30,822 26,176 57,317 48,720  
Gross profit 16,664 14,063 30,538 26,136  
Operating income (loss) 12,240 9,731 21,986 17,218  
Capital expenditures 838 525 1,698 1,102  
Depreciation and amortization 524 365 1,043 722  
Assets 126,464   126,464   120,723
Reportable Segments [Member] | Smoking Products [Member]          
Segment Information [Abstract]          
Net sales 27,403 25,363 56,317 50,882  
Gross profit 15,671 13,738 31,803 27,222  
Operating income (loss) 12,227 10,374 24,644 20,320  
Capital expenditures 0 0 0 0  
Depreciation and amortization 0 0 0 0  
Assets 189,558   189,558   145,831
Reportable Segments [Member] | NewGen Products [Member]          
Segment Information [Abstract]          
Net sales 46,738 41,800 82,018 85,365  
Gross profit 15,757 13,382 27,182 28,289  
Operating income (loss) 3,271 [4] 7,451 [4] 3,748 [5] 10,289 [5]  
Capital expenditures 241 553 258 862  
Depreciation and amortization 700 $ 631 1,457 $ 1,164  
Assets $ 92,628   $ 92,628   $ 90,899
[1] Includes corporate costs that are not allocated to any of the three reportable segments.
[2] Includes corporate costs that are not allocated to any of the three reportable segments.
[3] Includes assets not assigned to the three reportable segments. All goodwill has been allocated to the reportable segments.
[4] Includes VMR settlement gain of $5.5 million for the three months ended June 30, 2020.
[5] Includes VMR settlement gain of $5.5 million for the six months ended June 30, 2020.
v3.20.2
Segment Information, Revenue Disaggregation - Sales Channel (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Net Sales by Sales Channel [Abstract]        
Net sales $ 104,963 $ 93,339 $ 195,652 $ 184,967
NewGen Products [Member]        
Net Sales by Sales Channel [Abstract]        
Net sales 46,738 41,800 82,018 85,365
NewGen Products [Member] | Business to Business [Member]        
Net Sales by Sales Channel [Abstract]        
Net sales 30,368 30,737 55,647 63,200
NewGen Products [Member] | Business to Consumer - Online [Member]        
Net Sales by Sales Channel [Abstract]        
Net sales 15,052 8,466 23,186 16,685
NewGen Products [Member] | Business to Consumer - Corporate Store [Member]        
Net Sales by Sales Channel [Abstract]        
Net sales 1,318 2,566 3,111 5,365
NewGen Products [Member] | Other [Member]        
Net Sales by Sales Channel [Abstract]        
Net sales $ 0 $ 31 $ 74 $ 115
v3.20.2
Segment Information, Net Sales - Domestic vs. Foreign (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Segment Information [Abstract]        
Net sales $ 104,963 $ 93,339 $ 195,652 $ 184,967
Reportable Geographical Component [Member] | Domestic [Member]        
Segment Information [Abstract]        
Net sales 101,990 91,516 189,558 180,285
Reportable Geographical Component [Member] | Foreign [Member]        
Segment Information [Abstract]        
Net sales $ 2,973 $ 1,823 $ 6,094 $ 4,682
v3.20.2
Dividends and Share Repurchase (Details) - USD ($)
$ / shares in Units, $ in Thousands
3 Months Ended 6 Months Ended
Jul. 10, 2020
Jun. 30, 2020
Jun. 30, 2020
Feb. 25, 2020
Share Repurchase [Abstract]        
Share repurchase program authorized amount       $ 50,000
Total number of shares repurchased (in shares)     256,863  
Cost of shares repurchased   $ 2,662 $ 5,289  
Average price per share (in dollars per share)     $ 20.59  
Dividend Declared Q2-2020 [Member]        
Dividends [Abstract]        
Dividend payable, date to be paid     Jul. 10, 2020  
Dividend payable, date of record     Jun. 19, 2020  
Dividend Declared Q2-2020 [Member] | Subsequent Event [Member]        
Dividends [Abstract]        
Cash dividend paid (in dollars per share) $ 0.05      
v3.20.2
Subsequent Events (Details) - Subsequent Event [Member]
Jul. 16, 2020
USD ($)
shares
Subsequent Events [Abstract]  
Common Stock conversation ratio 0.52095
Common Stock retired (in shares) | shares 245,234
Standard Diversified Inc. [Member]  
Subsequent Events [Abstract]  
Net liabilities | $ $ 25,000