10-Q

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.

TURNING POINT BRANDS, INC.

TABLE OF CONTENTS

			Page No.
PART I—FINANCIAL INFORMATION
	ITEM 1	Financial Statements (Unaudited)
		Consolidated Balance Sheets as of June 30, 2020, and December 31, 2019	5
		Consolidated Statements of Income for the three months ended June 30, 2020 and 2019	6
		Consolidated Statements of Income for the six months ended June 30, 2020 and 2019	7
		Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019	8
		Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019	9
		Consolidated Statements of Changes in Stockholder’s Equity (Deficit) for the three months ended June 30, 2020 and 2019	10
		Consolidated Statements of Changes in Stockholder’s Equity (Deficit) for the six months ended June 30, 2020 and 2019	11
		Notes to Consolidated Financial Statements	12
	ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
	ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	46
	ITEM 4	Controls and Procedures	46
PART II—OTHER INFORMATION
	ITEM 1	Legal Proceedings	47
	ITEM 1A	Risk Factors	47
	ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	47
	ITEM 3	Defaults Upon Senior Securities	48
	ITEM 4	Mine Safety Disclosures	48
	ITEM 5	Other Information	48
	ITEM 6	Exhibits	48
	Signatures		49

2

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.; 

3

● 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

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.

5

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.

6

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. 

7

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

8

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

9

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

10

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

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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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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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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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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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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.

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Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

.	Description
2.1	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).
10.1	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).
31.1	Rule 13a-14(a)/15d-14(a) Certification of Lawrence S. Wexler.*
31.2	Rule 13a-14(a)/15d-14(a) Certification of Robert Lavan.*
31.3	Rule 13a-14(a)/15d-14(a) Certification of Brian Wigginton.*
32.1	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

48

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

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EX-31.1

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)

EX-31.2

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)

EX-31.3

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

EX-32.1

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

XML

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

XML

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

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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

XML

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

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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

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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

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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

XML

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

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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

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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.

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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. 

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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.

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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.

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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.

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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.

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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

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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

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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.

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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

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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.

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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.

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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.

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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	)

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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.

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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	)

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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

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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

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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

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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

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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%

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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

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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

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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

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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%

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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

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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

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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

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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

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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%

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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 

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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

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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

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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

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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%

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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

XML

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

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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%

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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

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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 

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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

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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)

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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

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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

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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

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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

XML

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

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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

XML

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

XML

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.

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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

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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

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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

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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