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 March 31, 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	☐ (Do not check if a smaller reporting company)	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 April 20, 2020, there were 19,556,158 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 March 31, 2020, and December 31, 2019	5
		Consolidated Statements of Income for the three months ended March 31,2020 and 2019	6
		Consolidated Statements of Comprehensive Income for the three ended March 31, 2020 and 2019	7
		Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019	8
		Consolidated Statements of Changes in Stockholder’s Equity (Deficit) for the three months ended March 31, 2020 and 2019	9
		Notes to Consolidated Financial Statements	10
	ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
	ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	37
	ITEM 4	Controls and Procedures	38
PART II—OTHER INFORMATION
	ITEM 1	Legal Proceedings	39
	ITEM 1A	Risk Factors	39
	ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	39
	ITEM 3	Defaults Upon Senior Securities	39
	ITEM 4	Mine Safety Disclosures	39
	ITEM 5	Other Information	40
	ITEM 6	Exhibits	40
	Signatures		41

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Cautionary Note Regarding Forward-Looking Statements

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

• declining sales of tobacco products, and expected continuing decline of sales, in the tobacco industry overall;

• our dependence on a small number of third-party suppliers and producers;

• the possibility that we will be unable to identify or contract with new suppliers or producers in the event of a supply or product disruption;

• our business may be damaged by events outside of our suppliers’ control, such as the impact of epidemics (e.g., coronavirus), political upheavals, or natural disasters;

• the possibility that our licenses to use certain brands or trademarks will be terminated, challenged or restricted;

• failure to maintain consumer brand recognition and loyalty of our customers;

• substantial and increasing U.S. regulation;

• regulation of our products by the FDA, which has broad regulatory powers;

• our products are subject to developing and unpredictable regulation, for example, current court action moving forward certain substantial Pre Market Tobacco Application obligations;

• some of our products contain nicotine which is considered to be a highly addictive substance;

• uncertainty related to the regulation and taxation of our NewGen products;

• possible significant increases in federal, state and local municipal tobacco- and vapor-related taxes;

• possible increasing international control and regulation;

• our reliance on relationships with several large retailers and national chains for distribution of our products;

• our amount of indebtedness;

• the terms of our credit facilities, which may restrict our current and future operations;

• intense competition and our ability to compete effectively;

• uncertainty and continued evolution of markets containing our NewGen products;

• significant product liability litigation;

• the scientific community’s lack of information regarding the long-term health effects of certain substances contained in some of our products;

• requirement to maintain compliance with master settlement agreement escrow account;

• competition from illicit sources;

• our reliance on information technology;

• security and privacy breaches;

• contamination of our tobacco supply or products;

• infringement on our intellectual property;

• third-party claims that we infringe on their intellectual property;

• failure to manage our growth;

• failure to successfully integrate our acquisitions or otherwise be unable to benefit from pursuing acquisitions;

• fluctuations in our results;

• exchange rate fluctuations;

• adverse U.S. and global economic conditions;

• sensitivity of end-customers to increased sales taxes and economic conditions;

• failure to comply with certain regulations;

• departure of key management personnel or our inability to attract and retain talent;

• imposition of significant tariffs on imports into the U.S.;

• reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors, potentially decreasing our stock price;

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• 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;

• we may issue preferred stock whose terms could adversely affect the voting power or value of our common stock; and

• our status as a “controlled company” could make our common stock less attractive to some investors or otherwise harm our stock price.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Turning Point Brands, Inc.

Consolidated Balance Sheets

(dollars in thousands except share data)

ASSETS	(unaudited) March 31, 2020			December 31, 2019
Current assets:
Cash	$	99,406		$	95,250
Accounts receivable, net of allowances of $256 in 2020 and $280 in 2019		4,310			6,906
Inventories		69,195			70,979
Other current assets		18,868			16,115
Total current assets		191,779			189,250
Property, plant, and equipment, net		13,404			13,816
Right of use assets		13,036			12,130
Deferred financing costs, net		860			890
Goodwill		154,282			154,282
Other intangible assets, net		33,044			33,469
Master Settlement Agreement (MSA) escrow deposits		32,074			32,074
Other assets		10,841			10,673
Total assets	$	449,320		$	446,584
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	17,348		$	14,126
Accrued liabilities		28,754			26,520
Current portion of long-term debt		12,000			15,240
Revolving credit facility		-			-
Total current liabilities		58,102			55,886
Notes payable and long-term debt		267,977			268,951
Deferred income taxes		1,495			1,572
Lease liabilities		11,673			11,067
Other long-term liabilities		4,762			2,523
Total liabilities		344,009			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; 19,723,080 issued shares, 19,588,950 outstanding shares at March 31, 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		126,151			125,469
Cost of repurchased common stock (134,130 shares at March 31, 2020 and 0 shares at December 31, 2019)		(2,627	)		-
Accumulated other comprehensive loss		(5,379	)		(3,773	)
Accumulated deficit		(13,031	)		(15,308	)
Total stockholders’ equity		105,311			106,585
Total liabilities and stockholders’ equity	$	449,320		$	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 March 31,
	2020			2019
Net sales	$	90,689		$	91,628
Cost of sales		49,258			51,164
Gross profit		41,431			40,464
Selling, general, and administrative expenses		32,394			28,429
Operating income		9,037			12,035
Interest expense, net		4,994			3,856
Investment income		(91	)		(144	)
Net periodic income, excluding service cost		(87	)		(11	)
Income before income taxes		4,221			8,334
Income tax expense		946			1,774
Consolidated net income		3,275			6,560
Basic income per common share:
Consolidated net income	$	0.17		$	0.34
Diluted income per common share:
Consolidated net income	$	0.16		$	0.33
Weighted average common shares outstanding:
Basic		19,689,446			19,559,596
Diluted		20,106,800			20,045,964

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

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Turning Point Brands, Inc.

Consolidated Statements of Comprehensive Income

(dollars in thousands)

(unaudited)

	Three Months Ended March 31,
	2020			2019
Consolidated net income	$	3,275		$	6,560
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		9			(4	)
Unrealized gain on investments, net of tax of $0 in 2020 and $93 in 2019		-			402
Unrealized loss on interest rate swaps, net of tax of $624 in 2020 and $182 in 2019		(1,615	)		(476	)
		(1,606	)		(78	)
Consolidated comprehensive income	$	1,669		$	6,482

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

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Turning Point Brands, Inc.

Consolidated Statements of Cash Flows

(dollars in thousands)

(unaudited)

	Three Months Ended March 31,
	2020			2019
Cash flows from operating activities:
Consolidated net income	$	3,275		$	6,560
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on sale of property, plant, and equipment		-			23
Depreciation expense		851			531
Amortization of other intangible assets		425			359
Amortization of debt discount and deferred financing costs		2,237			237
Deferred income taxes		545			(29	)
Stock compensation expense		455			466
Noncash lease expense		13			-
Changes in operating assets and liabilities:
Accounts receivable		2,596			(1,726	)
Inventories		1,784			366
Other current assets		(2,420	)		2,984
Other assets		(130	)		(427	)
Accounts payable		3,210			8,229
Accrued postretirement liabilities		(27	)		(9	)
Accrued liabilities and other		1,913			(3,539	)
Net cash provided by operating activities	$	14,727		$	14,025
Cash flows from investing activities:
Capital expenditures	$	(877	)	$	(886	)
Restricted cash, MSA escrow deposits		-			1,702
Net cash provided by (used in) investing activities	$	(877	)	$	816
Cash flows from financing activities:
Payments of 2018 first lien term loan	$	(2,000	)	$	(2,000	)
Payments of 2018 revolving credit facility		-			(12,000	)
Payment of IVG note		(4,240	)		-
Payment of dividends		(886	)		(880	)
Payments of financing costs		(168	)		-
Exercise of options		227			187
Redemption of options		-			(12	)
Common stock repurchased		(2,627	)		-
Net cash used in financing activities	$	(9,694	)	$	(14,705	)
Net increase in cash	$	4,156		$	136
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		99,406			1,741
Restricted		32,074			4,062
Total cash at end of period	$	131,480		$	5,803
Supplemental schedule of noncash financing activities:
Accrued expenses incurred for financing costs	$	13		$	-
Dividends declared not paid	$	998		$	887

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

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Turning Point Brands, Inc., and Subsidiaries

Consolidated Statements of Change in Stockholders’ Deficit

for the years ended December 31, 2019, 2018, and 2017

(dollars in thousands)

	Voting Shares			Common Stock, Voting		Additional Paid-In Capital			Cost of Repurchased Common Stock			Accumulated 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 $2		-			-		-			-			9			-			9
Unrealized loss on interest rate swaps, net of tax of $624		-			-		-			-			(1,615	)		-			(1,615	)
Stock compensation expense		-			-		455			-			-			-			455
Exercise of options		42,407			-		227			-			-			-			227
Cost of repurchased common stock		(134,130	)		-		-			(2,627	)		-			-			(2,627	)
Dividends		-			-		-			-			-			(998	)		(998	)
Net income		-			-		-			-			-			3,275			3,275
Ending balance March 31, 2020		19,588,950		$	197	$	126,151		$	(2,627	)	$	(5,379	)	$	(13,031	)	$	105,311
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 $1		-			-		-			-			(4	)		-			(4	)
Unrealized loss on MSA investments, net of tax of $93		-			-		-			-			402			-			402
Unrealized loss on interest rate swaps, net of tax of $182		-			-		-			-			(476	)		-			(476	)
Stock compensation expense		-			-		449			-			-			-			449
Restricted stock forfeitures		(47	)		-		(1	)		-			-			-			(1	)
Exercise of options		22,588			-		187			-			-			-			187
Redemption of options		-			-		(12	)		-			-			-			(12	)
Dividends		-			-		-			-			-			(887	)		(887	)
Net income		-			-		-			-			-			6,560			6,560
Ending balance March 31, 2019		19,576,398		$	196	$	111,089		$	-		$	(2,614	)	$	(19,830	)	$	88,841

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

9

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, 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”); 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 $5.3 million and $4.3 million for the three months ending March 31, 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. Recently, several state governors have reacted to perceived issues around nicotine vapor products by unilaterally, without regard to the legislative process, proclaiming bans on vapor products, particularly those that are flavored.  Many of these executive actions have been challenged and temporarily restrained, but no assurance can be given that such state or local flavor bans will not be enacted or ultimately upheld. Indeed, in a number of states, targeted flavor bans, particularly with regard to vapor products, have been enacted legislatively. 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 March 31, 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 March 31, 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	March 31, 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 (“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 (“TTPP,” also known as the “Tobacco Buyout”) 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 pipe tobacco, 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 an 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.  On October 24, 2019, FDA filed a Notice of Appeal from the Remedy Order and other actions adverse to FDA. The court-ordered modification to the compliance policy remains subject to change as a result of potential appeals or litigation brought or pending in other venues.

In January 2020, the FDA indicated it intended to maintain this deadline irrespective of the outcome of the pending appeal in the Maryland Lawsuit. On March 30, 2020, however, 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 stated it will update 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 PMTA 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 line of vapor products that the FDA regulates as tobacco products past September 9, 2020, unless we file an application for each such product by that date.  We expect to be able to make appropriate PMTA applications 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.  On September 25, 2019, FDA published a proposed rule outlining certain required elements of PMTA filings. This rule is not yet final, and its requirements may shift before being finalized. We believe we have products that meet the requisite standard and that we will be able to efficiently produce satisfactory PMTA 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 PMTAs. Even if we successfully file all of our PMTAs 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

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 March 31, 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:

15

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 months ended March 31, 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 March 31, 2020, and December 31, 2019, resulted in a liability of $4.8 million and $2.5 million, respectively, included in other long-term liabilities.

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.

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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 March 31, 2020, the fair value of the 2018 First Lien Term Loan approximated $144.0 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 $141.6 million, with a carrying value of $172.5 million as of March 31, 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.

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 March 31, 2020 and December 31, 2019. The fair values of the swap contracts are based upon quoted market prices and resulted in a liability of $4.8 million and $2.5 million as of March 31, 2020 and December 31, 2019, respectively.

Note 6. Inventories

The components of inventories are as follows:

	March 31, 2020			December 31, 2019
Raw materials and work in process	$	6,574		$	7,050
Leaf tobacco		36,900			32,763
Finished goods - Smokeless products		5,907			5,680
Finished goods - Smoking products		11,081			13,138
Finished goods - NewGen products		13,535			17,111
Other		950			989
Gross Inventory		74,947			76,731
LIFO reserve		(5,752	)		(5,752	)
Net Inventory	$	69,195		$	70,979

The inventory valuation allowance was $19.2 million and $21.5 million as of March 31, 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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Note 7. Other Current Assets

Other current assets consists of:

	March 31, 2020		December 31, 2019
Inventory deposits	$	5,616	$	4,012
Prepaid taxes		3,250		3,673
Other		10,002		8,430
Total	$	18,868	$	16,115

Note 8. Property, Plant, and Equipment

Property, plant, and equipment consists of:

	March 31, 2020			December 31, 2019
Land	$	22		$	22
Buildings and improvements		2,655			2,655
Leasehold improvements		2,511			2,567
Machinery and equipment		15,087			14,516
Furniture and fixtures		8,307			8,502
Gross property, plant and equipment		28,582			28,262
Accumulated depreciation		(15,178	)		(14,446	)
Net property, plant and equipment	$	13,404		$	13,816

Note 9. Other Assets

Other assets consists of:

	March 31, 2020		December 31, 2019
Equity investments	$	5,421	$	5,421
Pension assets		1,753		1,686
Other		3,667		3,566
Total	$	10,841	$	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.

Note 10. Accrued Liabilities

Accrued liabilities consists of:

	March 31, 2020		December 31, 2019
Accrued payroll and related items	$	6,144	$	5,267
Customer returns and allowances		5,537		6,160
Taxes payable		1,508		705
Lease liabilities		2,531		2,218
Accrued interest		928		1,909
Other		12,106		10,261
Total	$	28,754	$	26,520

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Note 11. Notes Payable and Long-Term Debt

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

	March 31, 2020			December 31, 2019
2018 First Lien Term Loan	$	144,000		$	146,000
Convertible Senior Notes		172,500			172,500
Note payable - IVG		-			4,240
Gross notes payable and long-term debt		316,500			322,740
Less deferred finance charges		(6,190	)		(6,466	)
Less debt discount		(30,333	)		(32,083	)
Less current maturities		(12,000	)		(15,240	)
Net notes payable and long-term debt	$	267,977		$	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 3.74% at March 31, 2020. At March 31, 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 $3.7 million, resulting in $46.3 million of availability under the 2018 Revolving Credit Facility at March 31, 2020.

19

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 March 31, 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 of amortization for the three months ended March 31, 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.

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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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 March 31,
	2020			2019
Operating lease cost
Cost of sales	$	233		$	192
Selling, general and administrative		398			555
Variable lease cost (1)		312			245
Short-term lease cost		83			54
Sublease income		(30	)		(30	)
Total	$	996		$	1,016
(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.

	March 31, 2020		December 31, 2019
Assets:
Right of use assets	$	13,036	$	12,130
Total lease assets	$	13,036	$	12,130
Liabilities:
Current lease liabilities (2)	$	2,531	$	2,218
Long-term lease liabilities		11,673		11,067
Total lease liabilities	$	14,204	$	13,285
(2) Reported within accrued liabilities on the balance sheet

	As of March 31,
	2020			2019
Weighted-average remaining lease term  - operating leases	7.8 years			9.0 years
Weighted-average discount rate - operating leases		5.84	%		6.49	%

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.

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

	March 31, 2020		December 31, 2019
2020	$	2,431	$	2,924
2021		3,174		2,730
2022		2,595		2,165
2023		2,199		1,782
2024		1,063		1,028
Years thereafter		6,297		6,297
Total lease payments	$	17,759	$	16,926
Less: Imputed interest		3,555		3,641
Present value of lease liabilities	$	14,204	$	13,285

During the first quarter, the Company entered into a number of additional operating leases related to vehicles for business use. These changes resulted in additional lease liabilities of $1.6 million as of March 31, 2020.

Note 13. Income Taxes

The Company’s effective income tax rate for the three months ended March 31, 2020, was 22.4% which includes a discrete tax deduction of $0.7 million for the three months ended March 31, 2020, relating to stock option exercises. The Company’s effective income tax rate for the three months ended March 31, 2019, was 21.3%, which includes a discrete tax deduction of $0.9 million for the three months ended March 31, 2019, 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.

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

	Three Months Ended March 31,
				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			37			(57	)		(42	)
Net periodic benefit (income) cost	$	(30	)	$	32		$	(57	)	$	(17	)

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 March 31, 2020, net of forfeitures, there were 16,159 shares of restricted stock, 440,232 performance-based restricted stock units, and 613,832 options granted under the 2015 Plan. There are 329,777 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		(42,407	)		5.36		2.50
Forfeited		(406	)		34.27		11.07
Outstanding, March 31, 2020		808,903		$	18.16	$	6.03

Under the 2006 and 2015 Plans, the total intrinsic value of options exercised during the three months ended March 31, 2020 and 2019, was $0.9 million, and $0.8 million, respectively.

At March 31, 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 3.28 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.

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At March 31, 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 March 31, 2020		28,700			66,572			86,792			26,000			147,592			25,000			155,000
Number exercisable at March 31, 2020		28,700			66,572			58,298			26,000			50,262			8,250			-
Exercise price	$	13.00		$	15.41		$	21.21		$	21.49		$	47.58		$	20.89		$	14.85
Remaining lives		6.87			7.13			7.94			7.96			8.98			9.57			9.97
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 $0.2 million for the three months ended March 31, 2020 and 2019, respectively. Total unrecognized compensation expense related to options at March 31, 2020, is $1.5 million, which will be expensed over 2.14 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 March 31, 2020, there are 440,232 PRSUs outstanding, all of which are unvested. The following table outlines the PRSUs granted and outstanding as of March 31, 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 March 31, 2020		83,000		93,000		85,650		-		88,582		90,000
Fair value as of grant date	$	15.60	$	21.21	$	47.58	$	47.58	$	52.15	$	14.85
Remaining lives		1.75		2.75		3.75		-		2.75		4.75

The Company recorded compensation expense related to the PRSUs of approximately $0.2 million and $0.2 million in the consolidated statements of income for the three months ended March 31, 2020 and 2019, respectively, based on the probability of achieving the performance condition. Total unrecognized compensation expense related to these awards at March 31, 2020, is $9.0 million which will be expensed over the service periods based on the probability of achieving the performance condition.

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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, which claim has been filed but not yet served. 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 the Franchise Disclosure Document (and therefore it was improper to pursue litigation). There can be no assurance that the subsidiary 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 March 31,
	2020						2019
	Income		Shares		Per Share		Income		Shares		Per Share
Consolidated net income	$	3,275					$	6,560
Basic EPS:
Weighted average				19,689,446	$	0.17				19,559,596	$	0.34
Diluted EPS:
Effect of dilutive securities:
Stock options				417,354						486,368
				20,106,800	$	0.16				20,045,964	$	0.33

For the three months ended March 31, 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) 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 March 31,
	2020			2019
Net sales
Smokeless products	$	26,495		$	22,544
Smoking products		28,914			25,519
NewGen products		35,280			43,565
Total	$	90,689		$	91,628
Gross profit
Smokeless products	$	13,874		$	12,073
Smoking products		16,132			13,484
NewGen products		11,425			14,907
Total	$	41,431		$	40,464
Operating income (loss)
Smokeless products	$	9,746		$	7,487
Smoking products		12,417			9,946
NewGen products		477			2,838
Corporate unallocated (1)		(13,603	)		(8,236	)
Total	$	9,037		$	12,035
Interest expense, net		4,994			3,856
Investment income		(91	)		(144	)
Net periodic income, excluding service cost		(87	)		(11	)
Income before income taxes	$	4,221		$	8,334
Capital expenditures
Smokeless products	$	860		$	577
Smoking products		-			-
NewGen products		17			309
Total	$	877		$	886
Depreciation and amortization
Smokeless products	$	519		$	357
Smoking products		-			-
NewGen products		757			533
Total	$	1,276		$	890
(1) Includes corporate costs that are not allocated to any of the three reportable segments.

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	March 31, 2020		December 31, 2019
Assets
Smokeless products	$	128,406	$	120,723
Smoking products		142,850		145,831
NewGen products		86,650		90,899
Corporate unallocated (1)		91,414		89,131
Total	$	449,320	$	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 March 31,
	2020		2019
Business to Business	$	25,279	$	32,463
Business to Consumer - Online		8,134		8,219
Business to Consumer - Corporate store		1,793		2,799
Other		74		84
Total	$	35,280	$	43,565

Net Sales—Domestic vs. Foreign

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

	Three Months Ended March 31,
	2020		2019
Domestic	$	87,568	$	88,769
Foreign		3,121		2,859
Total	$	90,689	$	91,628

Note 19. Dividends and Share Repurchase

The most recent dividend of $0.05 per common share was paid on April 10, 2020, to shareholders of record at the close of business on March 20, 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.

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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 three months ended was 134,130 shares for a total cost of $2.6 million and an average price per share of $19.59.

Note 20. Subsequent Events

Standard Diversified Inc. (“SDI”) Reorganization

On April 8, 2020, the Company and SDI announced a definitive agreement under which SDI will be 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, the “SDI Common Stock”) will receive in the aggregate, in return for their SDI Common Stock, TPB Voting Common Stock (“TPB Common Stock”) at a ratio of 0.97 of a share of TPB Common Stock for each share of TPB Common Stock held by SDI at the time of the merger. SDI will divest its assets prior to close such that the net liabilities at closing will not exceed $25,000 and the only assets that it shall retain is the remaining TPB stock holdings. The merger of SDI is subject to customary closing conditions, including approval by holders of a majority of the aggregate voting power of the SDI Common Stock and the receipt of any applicable statutory approvals. The Company expects the transaction to close in the summer of 2020.

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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, 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 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) 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 VaporFi B2C online platforms. 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

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.

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 deferred annual compensation increases for corporate employees other than those contractually required. We have also put a hold on new spending commitments as we cautiously manage through this environment.

The dedication of our workforce to serve this demand has been remarkable. We have hired additional employees in our Louisville facility and implemented 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.

We do expect COVID-19 to impact results in the future. Our third-party cigar wrap manufacture in the Dominican Republic temporarily closed for three weeks and is slowly ramping back up. In-person selling has been dramatically dampened, which will slow new product launches. Select budgeted annual price increases will be delayed. We expect these issues will be offset by our growing B2C platforms. 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.

Standard Diversified Inc. (“SDI”) Reorganization

On April 8, 2020, we and SDI announced a definitive agreement under which SDI will be merged into a wholly-owned subsidiary of TPB in a tax-free downstream merger, in a transaction first announced by the companies in November 2019. Under the terms of the agreement, the holders of SDI’s Class A Common Stock and SDI’s Class B Common Stock (collectively, the “SDI Common Stock”) will receive in the aggregate, in return for their SDI Common Stock, TPB Voting Common Stock (“TPB Common Stock”) at a ratio of 0.97 of a share of TPB Common Stock for each share of TPB Common Stock held by SDI at the time of the merger. SDI will divest its assets prior to close such that the net liabilities at closing will not exceed $25,000 and the only assets that it shall retain is the remaining TPB stock holdings.

Premarket Tobacco Application Deadline Extension

On April 3, 2020, the United States District Court for the District of Maryland agreed to an FDA request filed on March 30, 2020, for a 120-day extension of the premarket tobacco application (“PMTA”) deadline for many e-cigarettes, cigars and other tobacco products. FDA stated that the extension was needed because of the coronavirus outbreak. The U.S. Circuit Court of Appeals for the Fourth Circuit must still issue an order allowing the modification of the original order. An extension would move the deadline from May 12, 2020 to September 9, 2020. We will work during this additional time period to bolster our premarket filings.

Share Repurchase Authorization

On February 25, 2020, the TPB Board of Directors approved a $50 million share repurchase authorization, which is intended for opportunistic execution based upon a variety of factors including marketing dynamics. The program will be subject to the ongoing discretion of the Board.

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.

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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 March 31, 2020, to the Three Months Ended March 31, 2019

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

	Three Months Ended March 31,
	2020			2019			% Change
Consolidated Results of Operations Data:
Net sales
Smokeless products	$	26,495		$	22,544			17.5	%
Smoking products		28,914			25,519			13.3	%
NewGen products		35,280			43,565			-19.0	%
Total net sales		90,689			91,628			-1.0	%
Cost of sales		49,258			51,164			-3.7	%
Gross profit
Smokeless products		13,874			12,073			14.9	%
Smoking products		16,132			13,484			19.6	%
NewGen products		11,425			14,907			-23.4	%
Total gross profit		41,431			40,464			2.4	%
Selling, general, and administrative expenses		32,394			28,429			13.9	%
Operating income		9,037			12,035			-24.9	%
Interest expense, net		4,994			3,856			29.5	%
Investment income		(91	)		(144	)		-36.8	%
Net periodic income, excluding service cost		(87	)		(11	)		690.9	%
Income before income taxes		4,221			8,334			-49.4	%
Income tax expense		946			1,774			-46.7	%
Consolidated net income	$	3,275		$	6,560			-50.1	%

Net Sales:  For the three months ended March 31, 2020, consolidated net sales decreased to $90.7 million from $91.6 million for the three months ended March 31, 2019, a decrease of $0.9 million or 1.0%. The decrease in net sales was primarily driven by lower volume in the NewGen segment in 2020.

For the three months ended March 31, 2020, net sales in the Smokeless products segment increased to $26.5 million from $22.5 million for the three months ended March 31, 2019, an increase of $4.0 million or 17.5%. For the three months ended March 31, 2020, volume increased 16.7% and price/mix increased 0.8%. The increase in net sales was primarily driven by the continuing double-digit volume growth of Stoker’s^® MST partially offset by declining sales in chewing tobacco, largely attributable to long-term segment erosion, and a continuing shift to lower price products.

For the three months ended March 31, 2020, net sales in the Smoking products segment increased to $28.9 million from $25.5 million for the three months ended March 31, 2019, an increase of $3.4 million or 13.3%. For the three months ended March 31, 2020, volume increased 10.9% and price/mix increased 2.4%. The increase in net sales is primarily related to double digit growth in US rolling papers, partially offset by a $0.5 million decline in non-focus cigars and MYO pipe.

For the three months ended March 31, 2020, net sales in the NewGen products segment decreased to $35.3 million from $43.6 million for the three months ended March 31, 2019, a decrease of $8.3 million or 19.0%. The decrease in net sales is the result of the continued impact of vapor market disruption and wind-down of the V2 business, partially offset by positive contributions from CBD, Solace and other Nu-X products.

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Gross Profit:  For the three months ended March 31, 2020, consolidated gross profit increased to $41.4 million from $40.5 million for the three months ended March 31, 2019, an increase of $1.0 million or 2.4%. Gross profit as a percentage of revenue increased to 45.7% for the three months ended March 31, 2020, compared to 44.2% for the three months ended March 31, 2019.

For the three months ended March 31, 2020, gross profit in the Smokeless products segment increased to $13.9 million from $12.1 million for the three months ended March 31, 2019, an increase of $1.8 million or 14.9%. Gross profit as a percentage of net sales decreased to 52.4% of net sales for the three months ended March 31, 2020, from 53.6% of net sales for the three months ended March 31, 2019, primarily as a as a result of mix.

For the three months ended March 31, 2020, gross profit in the Smoking products segment increased to $16.1 million from $13.5 million for the three months ended March 31, 2019, an increase of $2.6 million or 19.6%. Gross profit as a percentage of net sales increased to 55.8% of net sales for the three months ended March 31, 2020, from 52.8% of net sales for the three months ended March 31, 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 March 31, 2020 cigar sales were $0.7 million compared to $1.1 million for the three months ended March 31, 2019.

For the three months ended March 31, 2020, gross profit in the NewGen products segment decreased to $11.4 million from $14.9 million for the three months ended March 31, 2019, a decrease of $3.5 million or 23.4%. Gross profit as a percentage of net sales decreased to 32.4% of net sales for the three months ended March 31, 2020, from 34.2% of net sales for the three months ended March 31, 2019 as a result of the decline in net sales. For the three months ended March 31, 2020, gross profit included $2.8 million of tariff expenses compared to $2.0 million for the three months ended March 31, 2019.

Selling, General, and Administrative Expenses:  For the three months ended March 31, 2020, selling, general, and administrative expenses increased to $32.4 million from $28.4 million for the three months ended March 31, 2019, an increase of $4.0 million or 13.9%. Selling, general and administrative expenses in the three months ended March 31, 2020 included $0.5 million of stock options, restricted stock and incentives expense, $1.0 million of transaction expenses and $5.9 million of expense related to PMTA. Selling, general and administrative expenses in the three months ended March 31, 2019 included $0.7 million of stock option, restricted stock and incentives expense, $0.9 million of transaction costs, $1.0 million in corporate and vapor restructuring and $0.4 million of new product launch costs for Nu-X products.

Interest Expense, net:  For the three months ended March 31, 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 $3.9 million for the three months ended March 31, 2019.

Investment Income:  Investment income relating to investment of the MSA deposits was approximately $0.1 million for the three months ended March 31, 2020 and 2019.

Net Periodic Income: Net periodic income was $0.1 million for the three months ended March 31, 2020 and less than $0.1 million for the three months ended March 31, 2019.

Income Tax Expense:  Our income tax expense of $0.9 million was 22.4% of income before income taxes for the three months ended March 31, 2020, compared to 21.3% for the three months ended March 31, 2019.

Consolidated Net Income:  Due to the factors described above, consolidated net income for the three months ended March 31, 2020 and 2019, was $3.3 million and $6.6 million, respectively.

EBITDA and Adjusted EBITDA

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

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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.

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.

(in thousands)	Three Months Ended March 31,
	2020			2019
Consolidated net income	$	3,275		$	6,560
Add:
Interest expense, net		4,994			3,856
Income tax expense		946			1,774
Depreciation expense		851			531
Amortization expense		425			359
EBITDA	$	10,491		$	13,080
Components of Adjusted EBITDA
Other (a)		(87	)		(79	)
Stock options, restricted stock, and incentives expense (b)		455			715
Transactional expenses and strategic initiatives (c)		1,049			910
New product launch costs (d)		-			442
Corporate and vapor restructuring (e)		-			1,004
FDA PMTA (f)		5,874			-
Adjusted EBITDA	$	17,782		$	16,072
(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 and strategic initiatives.
(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.

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.

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Our working capital, which we define as current assets less current liabilities, increased $0.3 million to $133.7 million at March 31, 2020, compared with $133.4 million at December 31, 2019.

	As of
(in thousands)	March 31, 2019		December 31, 2019
Current assets	$	191,779	$	189,250
Current liabilities		58,102		55,886
Working capital	$	133,677	$	133,364

Cash Flows from Operating Activities

For the three months ended March 31, 2020, net cash provided by operating activities was $14.7 million compared to net cash provided by operating activities of $14.0 million for the three months ended March 31, 2019, an increase of $0.7 million, primarily due to changes in working capital accounts.

Cash Flows from Investing Activities

For the three months ended March 31, 2020, net cash used in investing activities was $0.9 million compared to net cash provided by investing activities of $0.8 million for the three months ended March 31, 2019, a decrease of $1.7 million, primarily due to the change in MSA escrow deposits from investments to cash holdings.

Cash Flows from Financing Activities

For the three months ended March 31, 2020, net cash used in financing activities was $9.7 million compared to net cash used in financing activities of $14.7 million for the three months ended March 31, 2019, an increase of $5.0 million, primarily due to the payment of the revolving credit facility in 2019.

Dividends and Share Repurchase

The most recent dividend of $0.05 per common share was paid on April 10, 2020, to shareholders of record at the close of business on March 20, 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 three months ended was 134,130 shares for a total cost of $2.6 million and an average price per share of $19.59.

Long-Term Debt

As of March 31, 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.

	March 31, 2020			December 31, 2019
2018 First Lien Term Loan	$	144,000		$	146,000
Convertible Senior Notes		172,500			172,500
Note payable - IVG		-			4,240
Gross notes payable and long-term debt		316,500			322,740
Less deferred finance charges		(6,190	)		(6,466	)
Less debt discount		(30,333	)		(32,083	)
Less current maturities		(12,000	)		(15,240	)
Net notes payable and long-term debt	$	267,977		$	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 3.74% at March 31, 2020. At March 31, 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 $3.7 million, resulting in $46.3 million of availability under the 2018 Revolving Credit Facility at March 31, 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.

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 March 31, 2020.

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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 March 31, 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.

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.

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.

Off-balance Sheet Arrangements

During the three months ended March 31, 2020 and the year ended December 31, 2019 we did not execute any forward contracts. At March 31, 2020, and December 31, 2019, we did not have any forward contracts. The Company had swap contracts for a notional amount of $70 million at March 31, 2020 and December 31, 2019. The fair values of the swap contracts are based upon quoted market prices and resulted in a liability of $4.8 million and $2.5 million, respectively, as of March 31, 2020 and December 31, 2019, included in other long-term liabilities.

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.

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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 March 31, 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 March 31, 2020, our 2018 Credit Facility bears interest at variable rates. However, we had swap contracts for a total notional amount of $70 million at March 31, 2020. The fair values of the swap contracts are based upon quoted market prices and resulted in a liability of $4.8 million as of March 31, 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.

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 March 31, 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.

Other than the steps taken to remediate the material weakness described in the Company’s 2019 Annual Report on Form 10-K under “Management’s Report on Internal Control over Financial Reporting”, there have been no changes in the Company’s internal control over financial reporting during the fiscal quarter ended March 31, 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 our subsidiaries is a defendant in a lawsuit brought by a franchisee, which claim has been filed but not yet served. In that case, the franchisee is seeking compensatory and punitive damages and rescission of their franchise agreement, alleging that our 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 the Franchise Disclosure Document (and therefore it was improper to pursue litigation). There can be no assurance that we will prevail in this case, and it could have a material adverse effect on our 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.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

39

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.	Description
10.1	Third Amendment to the First Lien Credit Agreement. *
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 March 31, 2020, filed on April 28, 2020, formatted in XBRL: (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.*

*  Filed or furnished herewith

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Signatures

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

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

Date: April 28, 2020

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EX-10.1

Execution Version

Exhibit 10.1

Third Amendment to Amended and Restated First Lien Credit Agreement

This Third Amendment to Amended and Restated First Lien Credit Agreement (this “Amendment”) is entered into as of April 6, 2020 (the “Third Amendment Closing Date”), by and among Turning Point Brands, Inc., a Delaware corporation (the “Borrower”), the Guarantors party hereto, the Lenders party hereto, and Fifth Third Bank, National Association, as Administrative Agent and L/C Issuer.

Recitals:

A.          The Borrower, the Guarantors party thereto, the Lenders party thereto, and the Administrative Agent are party to an Amended and Restated First Lien Credit Agreement dated as of March 7, 2018 (as amended, modified, restated, or supplemented from time to time, the “Credit Agreement”).

B.          The Borrower has requested that the Administrative Agent and the Required Lenders make certain amendments to the Credit Agreement to permit NTC to incur indebtedness pursuant to the Paycheck Protection Program established under CARES Act, and the Administrative Agent and the Required Lenders have agreed to such requests pursuant to the terms and conditions set forth herein.

Now, Therefore, for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:

Section 1.        Incorporation of Recitals; Defined Terms.

The Borrower and the Guarantors acknowledge that the Recitals set forth above are true and correct.  This Amendment shall constitute a Loan Document, and the Recitals shall be construed as part of this Amendment.  Each capitalized term used but not otherwise defined herein, including capitalized terms used in the introductory paragraph hereof and the Recitals, has the meaning assigned to it in the Credit Agreement.

Section 2.        Amendments.

Upon satisfaction of the conditions precedent set forth in Section 3 hereof, the Credit Agreement shall be and hereby is amended as follows:

2.1.       Section 1.1 of the Credit Agreement shall be amended by inserting new definitions of “CARES Act”, “Origination Date”, “Paycheck Protection Program”, “SBA”, “SBA Paycheck Protection Program Loan” in alphabetical order in each case to read as follows:

“CARES Act” means the Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020, as interpreted and applied by the SBA.

“Origination Date” means on or around April 6, 2020.

“Paycheck Protection Program” means the Paycheck Protection Program established under Division A, Title I of the CARES Act.

“SBA” means the U.S. Small Business Administration or any successor agency.

“SBA Paycheck Protection Program Loan” means that certain unsecured, non-recourse covered loan incurred by NTC under the Paycheck Protection Program on the Origination Date, in an aggregate amount equal to $7,485,047.

“Third Amendment Effective Date” means April 6, 2020.

2.2.       Section 6.2 of the Credit Agreement (Certificates; Other Reports) is hereby amended by amending and restating clause (g) in its entirety to read as follows:

(g) (i) promptly after any occurrence thereof, a statement summarizing any non-compliance in any material respect with the terms and conditions of the SBA Paycheck Protection Program Loan and (ii) as soon as available, but in no event no later than two (2) Business Days after receipt or completion thereof, as applicable, (A) any and all application materials, notices, and other documents delivered or required to be delivered by NTC or any of its Affiliates to the SBA Paycheck Protection Program Loan lender and (B) copies of any notices or other documents received by NTC or any of its Affiliates in respect of the SBA Paycheck Protection Program Loan;

2.3.       Section 6 of the Credit Agreement is further amended by adding a new Section 6.24 in numerical order therein, such new Section 6.24 to read as follows:

Section 6.24.  SBA Compliance.  The Loan Parties do not presently engage in (and will not hereafter engage in) any activities prohibited by the CARES Act, and no Loan Party will use (directly or indirectly) the proceeds from the SBA Paycheck Protection Program Loan for any purpose for which a recipient of a covered loan received under the CARES Act is prohibited under the CARES Act.  The Loan Parties shall take all actions necessary to maintain eligibility under the Paycheck Protection Program and shall comply in all material respects with the terms and conditions of the SBA Paycheck Protection Program Loan.

-2-

2.4.        Section 7.1 of the Credit Agreement (Indebtedness) is hereby amended by (i) deleting the word “and” at the end of clause (m), (ii) inserting “; and” at the end of clause (n), and (iii) adding a new clause (o) to the end thereof to read in its entirety as follows:

(o)          the SBA Paycheck Protection Program Loan.

Section 3.        Conditions Precedent.

The effectiveness of this Amendment is subject to the satisfaction of all of the following conditions precedent:

3.1.       The Administrative Agent shall have received copies (executed or certified, as may be appropriate) of all legal documents or proceedings taken in connection with the SBA Paycheck Protection Program Loan and the execution and delivery of this Amendment to the extent the Administrative Agent or its counsel may reasonably request.

3.2.        The Borrower, the Guarantors, the Required Lenders and the Administrative Agent shall have executed and delivered this Amendment.

Section 4.        Affirmation of Guarantors.

Each Guarantor hereby confirms that, after giving effect to this Amendment, each Loan Document to which such Guarantor is a party continues in full force and effect and is the legal, valid and binding obligation of such Guarantor, enforceable against such Guarantor in accordance with its terms except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors’ rights generally or by equitable principles relating to enforceability.  The Borrower and each Guarantor acknowledge and agree that (a) nothing in the Credit Agreement, this Amendment, or any other Loan Document shall be deemed to require the consent of such Guarantor to any future amendments to the Credit Agreement and (b) the Lenders are relying on the assurances provided in this Section in entering into this Amendment and maintaining credit outstanding to the Borrower.

Section 5.        Acknowledgement of Liens. 

The Borrower and the Guarantors hereby acknowledge, confirm and agree that the Administrative Agent has a valid, enforceable and perfected first‑priority lien upon and security interest in the Collateral granted to the Administrative Agent pursuant to the Loan Documents (subject only to Permitted Liens), and nothing herein contained shall in any manner affect or impair the priority of the Liens created and provided for thereby as to the indebtedness, obligations, and liabilities which would be secured thereby prior to giving effect to this Amendment.

-3-

Section 6.        Representations and Warranties of Borrower and Guarantors.

To induce the Administrative Agent and the Lenders to enter into this Amendment, the Borrower and the Guarantors hereby represent and warrant to the Administrative Agent and the Lenders that, as of the date hereof, (a) after giving effect to this Amendment, the representations and warranties set forth in Section 5 of the Credit Agreement and in the other Loan Documents, including this Amendment, are and shall remain true and correct (or, in the case of any representation or warranty not qualified as to materiality, true and correct in all material respects), except to the extent the same expressly relate to an earlier date (and in such case shall be true and correct (or, in the case of any representation or warranty not qualified as to materiality, true and correct in all material respects) as of such earlier date), (b)  no Default or Event of Default exists or shall result after giving effect to this Amendment, and (c) the Borrower and each Guarantor has the power and authority to execute, deliver, and perform this Amendment and has taken all necessary action to authorize their execution, delivery, and performance of this Amendment.

Section 7.       Miscellaneous.

7.1.        This Amendment shall be binding on and shall inure to the benefit of the Borrower, the Guarantors, the Administrative Agent, the Lenders, and the L/C Issuer, and their respective successors and assigns.  The terms and provisions of this Amendment are for the purpose of defining the relative rights and obligations of the Borrower, the Guarantors, the Administrative Agent, the Lenders, and the L/C Issuer with respect to the transactions contemplated hereby, and there shall be no third-party beneficiaries of any of the terms and provisions of this Amendment.

7.2.     This Amendment constitutes the entire agreement of the parties with respect to the subject matter hereof and supersedes all other understandings, oral or written, with respect to the subject matter hereof.  Except as specifically amended hereby, all of the terms and conditions set forth in the Credit Agreement shall stand and remain unchanged and in full force and effect.

7.3.        Section and sub-section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose.

7.4.       Wherever possible, each provision of this Amendment shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Amendment shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Amendment.

7.5.       Except as otherwise provided in this Amendment, if any provision contained in this Amendment is in conflict with, or inconsistent with, any provision in any of the Loan Documents, the provision contained in this Amendment shall govern and control.

7.6.       This Amendment may be executed in any number of separate counterparts, each of which shall collectively and separately constitute one agreement.  Delivery of an executed signature page to this Amendment by facsimile transmission or by e‑mail transmission of an Adobe portable document format file (also known as a “PDF” file) shall be effective as delivery of a manually executed counterpart hereof.

7.7.        The provisions contained in Sections 11.7 (Governing Law; Jurisdiction; Etc.) and 11.8 (Waiver of Jury Trial) of the Credit Agreement are incorporated herein by reference to the same extent as if reproduced herein in their entirety, except with reference to this Amendment rather than the Credit Agreement.

[Signature Pages to Follow]

-4-

In Witness Whereof, the parties hereto have caused their duly authorized officers to execute and deliver this Amendment as of the date first set forth above.

“Borrower”
Turning Point Brands, Inc.
By:	/s/ Robert Lavan
		Name:	Robert Lavan
		Title:	Chief Financial Officer
“Guarantors”
North Atlantic Trading Company, Inc.
Intrepid Brands, LLC
National Tobacco Company, L.P.
National Tobacco Finance, LLC
North Atlantic Operating Company, Inc.
North Atlantic Cigarette Company, Inc.
RBJ Sales, Inc.
Turning Point Brands, LLC
TPB Beast LLC
TPB Shark, LLC
TPB International, LLC
VaporFi Franchising, LLC
Nu-X Ventures, LLC
By:	/s/ Robert Lavan
		Name:	Robert Lavan
		Title:	Chief Financial Officer

[Signature Page to Third Amendment to Amended and Restated First Lien Credit Agreement

—Turning Point Brands, Inc.]

“Lenders”
Fifth Third Bank, National Association,  as a Lender, as L/C Issuer, and as Administrative Agent
By:	/s/ James D Belte
		Name:	James D Belte
		Title:	Vice President

[Signature Page to Third Amendment to Amended and Restated First Lien Credit Agreement

—Turning Point Brands, Inc.]

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: April 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: April 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: April 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 March 31, 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: April 28, 2020	By:	/s/ Lawrence S. Wexler
		Lawrence S. Wexler
		President and Chief Executive Officer
		(Principal Executive Officer)

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

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

XML

Segment Information, Net Sales - Domestic vs. Foreign (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Segment Information [Abstract]
Net sales	$ 90,689	$ 91,628
Reportable Geographical Component [Member] | Domestic [Member]
Segment Information [Abstract]
Net sales	87,568	88,769
Reportable Geographical Component [Member] | Foreign [Member]
Segment Information [Abstract]
Net sales	$ 3,121	$ 2,859

XML

Share Incentive Plans, Performance-Based Restricted Stock Units (Details) - Performance-Based Restricted Stock Units [Member] - USD ($) $ / shares in Units, $ in Millions						3 Months Ended
	Mar. 18, 2020	Jul. 19, 2019	Mar. 20, 2019	Mar. 07, 2018	Mar. 31, 2017	Mar. 31, 2020	Mar. 31, 2019
Share Incentive Plans [Abstract]
Period between performance period and measurement date						65 days
PRSUs outstanding at March 31, 2020 (in shares)						440,232
Compensation expense						$ 0.2	$ 0.2
Unrecognized compensation expense						$ 9.0
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 March 31, 2020 (in shares)						83,000
Fair value as of grant date (in dollars per share)					$ 15.60
Remaining lives						1 year 9 months
March 7, 2018 [Member] | Employees [Member]
Share Incentive Plans [Abstract]
Number of PRSUs granted (in shares)				96,000
PRSUs outstanding at March 31, 2020 (in shares)						93,000
Fair value as of grant date (in dollars per share)				$ 21.21
Remaining lives						2 years 9 months
March 20, 2019 [Member]
Share Incentive Plans [Abstract]
Number of PRSUs granted (in shares)			4,901
PRSUs outstanding at March 31, 2020 (in shares)						0
Fair value as of grant date (in dollars per share)			$ 47.58
Remaining lives						0 years
March 20, 2019 [Member] | Employees [Member]
Share Incentive Plans [Abstract]
Number of PRSUs granted (in shares)			92,500
PRSUs outstanding at March 31, 2020 (in shares)						85,650
Fair value as of grant date (in dollars per share)			$ 47.58
Remaining lives						3 years 9 months
July 19, 2019 [Member] | Employees [Member]
Share Incentive Plans [Abstract]
Number of PRSUs granted (in shares)		88,582
PRSUs outstanding at March 31, 2020 (in shares)						88,582
Fair value as of grant date (in dollars per share)		$ 52.15
Remaining lives						2 years 9 months
March 18, 2020 [Member] | Employees [Member]
Share Incentive Plans [Abstract]
Number of PRSUs granted (in shares)	90,000
PRSUs outstanding at March 31, 2020 (in shares)						90,000
Fair value as of grant date (in dollars per share)	$ 14.85
Remaining lives						4 years 9 months

XML

Inventories (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Inventories [Abstract]
Raw materials and work in process	$ 6,574	$ 7,050
Leaf tobacco	36,900	32,763
Other	950	989
Gross Inventory	74,947	76,731
LIFO reserve	(5,752)	(5,752)
Net Inventory	69,195	70,979
Inventory valuation allowance	19,200	21,500
Smokeless Products [Member]
Inventories [Abstract]
Finished goods	5,907	5,680
Smoking Products [Member]
Inventories [Abstract]
Finished goods	11,081	13,138
NewGen Products [Member]
Inventories [Abstract]
Finished goods	$ 13,535	$ 17,111

XML

Accrued Liabilities (Details) - USD ($) $ in Thousands	Mar. 31, 2020		Dec. 31, 2019	Mar. 31, 2019	[1]
Accrued Liabilities [Abstract]
Accrued payroll and related items	$ 6,144		$ 5,267
Customer returns and allowances	5,537		6,160
Taxes payable	1,508		705
Lease liabilities	2,531	[1]	2,218	$ 2,218
Accrued interest	928		1,909
Other	12,106		10,261
Total accrued liabilities	$ 28,754		$ 26,520

[1] Reported within accrued liabilities on the balance sheet.

XML

Consolidated Statements of Comprehensive Income (unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Consolidated Statements of Comprehensive Income (unaudited) [Abstract]
Consolidated net income	$ 3,275	$ 6,560
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	9	(4)
Unrealized gain on investments, net of tax of $0 in 2020 and $93 in 2019	0	402
Unrealized loss on interest rate swaps, net of tax of $624 in 2020 and $182 in 2019	(1,615)	(476)
Other comprehensive income (loss), net of tax	(1,606)	(78)
Consolidated comprehensive income	$ 1,669	$ 6,482

XML

Document and Entity Information - shares	3 Months Ended
	Mar. 31, 2020	Apr. 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		19,556,158
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Mar. 31, 2020
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	Q1
Entity Address, State or Province	KY

XML

Other Assets (Tables)

3 Months Ended

Mar. 31, 2020

Other Assets [Abstract]

Other Assets

Other assets consists of:

	March 31, 2020		December 31, 2019
Equity investments	$	5,421	$	5,421
Pension assets		1,753		1,686
Other		3,667		3,566
Total	$	10,841	$	10,673

XML

Consolidated Statements of Change in Stockholders' Deficit (unaudited) (Parenthetical) $ in Thousands	3 Months Ended
	Mar. 31, 2019 USD ($)
Consolidated Statements of Change in Stockholders' Deficit (unaudited) [Abstract]
Unrecognized pension and postretirement cost adjustment, tax	$ 1
Unrealized gain (loss) on MSA investments, tax	93
Unrealized loss on interest rate swaps, tax	$ 182

XML

Acquisitions (Tables)

3 Months Ended

Mar. 31, 2020

Solace [Member]

Acquisitions [Abstract]

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

XML

Other Assets

3 Months Ended

Mar. 31, 2020

Other Assets [Abstract]

Other Assets

Note 9. Other Assets

Other assets consists of:

	March 31, 2020		December 31, 2019
Equity investments	$	5,421	$	5,421
Pension assets		1,753		1,686
Other		3,667		3,566
Total	$	10,841	$	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.

XML

Organizations and Basis of Presentation

3 Months Ended

Mar. 31, 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, 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”); 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.

XML

Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 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 March 31, 2020, the fair value of the 2018 First Lien Term Loan approximated $144.0 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 $141.6 million, with a carrying value of $172.5 million as of March 31, 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.

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 March 31, 2020 and December 31, 2019. The fair values of the swap contracts are based upon quoted market prices and resulted in a liability of $4.8 million and $2.5 million as of March 31, 2020 and December 31, 2019, respectively.

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Income Taxes

3 Months Ended

Mar. 31, 2020

Income Taxes [Abstract]

Income Taxes

Note 13. Income Taxes

The Company’s effective income tax rate for the three months ended March 31, 2020, was 22.4% which includes a discrete tax deduction of $0.7 million for the three months ended March 31, 2020, relating to stock option exercises. The Company’s effective income tax rate for the three months ended March 31, 2019, was 21.3%, which includes a discrete tax deduction of $0.9 million for the three months ended March 31, 2019, 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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Income Per Share

3 Months Ended

Mar. 31, 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 March 31,
	2020						2019
	Income		Shares		Per Share		Income		Shares		Per Share
Consolidated net income	$	3,275					$	6,560
Basic EPS:
Weighted average				19,689,446	$	0.17				19,559,596	$	0.34
Diluted EPS:
Effect of dilutive securities:
Stock options				417,354						486,368
				20,106,800	$	0.16				20,045,964	$	0.33

For the three months ended March 31, 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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Share Incentive Plans, Assumptions for Options Granted Under 2006 Plan (Details) - 2006 Plan [Member] - Stock Options [Member]	3 Months Ended
	Mar. 31, 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 3 months 11 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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Notes Payable and Long-Term Debt, 2018 Second Lien Credit Facility (Details) - 2018 Second Lien Term Loan [Member] - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2020	Sep. 30, 2019	Jun. 30, 2019
Notes Payable and Long-Term Debt [Abstract]
Maturity date	Mar. 07, 2024
Payment of term loan		$ 35.5	$ 4.5
Loss on extinguishment of debt		$ (1.1)	$ (0.2)
LIBOR [Member]
Notes Payable and Long-Term Debt [Abstract]
Margin on variable rate	7.00%

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Income Taxes (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Income Taxes [Abstract]
Effective income tax rate	22.40%	21.30%
Discrete tax deduction related to stock option exercises	$ 0.7	$ 0.9

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Summary of Significant Accounting Policies, Master Settlement Agreement (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 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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Income Per Share (Tables)

3 Months Ended

Mar. 31, 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 March 31,
	2020						2019
	Income		Shares		Per Share		Income		Shares		Per Share
Consolidated net income	$	3,275					$	6,560
Basic EPS:
Weighted average				19,689,446	$	0.17				19,559,596	$	0.34
Diluted EPS:
Effect of dilutive securities:
Stock options				417,354						486,368
				20,106,800	$	0.16				20,045,964	$	0.33

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Pension and Postretirement Benefit Plans

3 Months Ended

Mar. 31, 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 March 31,
	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			37			(57	)		(42	)
Net periodic benefit (income) cost	$	(30	)	$	32		$	(57	)	$	(17	)

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Segment Information

3 Months Ended

Mar. 31, 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) 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 March 31,
	2020			2019
Net sales
Smokeless products	$	26,495		$	22,544
Smoking products		28,914			25,519
NewGen products		35,280			43,565
Total	$	90,689		$	91,628
Gross profit
Smokeless products	$	13,874		$	12,073
Smoking products		16,132			13,484
NewGen products		11,425			14,907
Total	$	41,431		$	40,464
Operating income (loss)
Smokeless products	$	9,746		$	7,487
Smoking products		12,417			9,946
NewGen products		477			2,838
Corporate unallocated (1)		(13,603	)		(8,236	)
Total	$	9,037		$	12,035
Interest expense, net		4,994			3,856
Investment income		(91	)		(144	)
Net periodic income, excluding service cost		(87	)		(11	)
Income before income taxes	$	4,221		$	8,334
Capital expenditures
Smokeless products	$	860		$	577
Smoking products		-			-
NewGen products		17			309
Total	$	877		$	886
Depreciation and amortization
Smokeless products	$	519		$	357
Smoking products		-			-
NewGen products		757			533
Total	$	1,276		$	890
(1) Includes corporate costs that are not allocated to any of the three reportable segments.

	March 31, 2020		December 31, 2019
Assets
Smokeless products	$	128,406	$	120,723
Smoking products		142,850		145,831
NewGen products		86,650		90,899
Corporate unallocated (1)		91,414		89,131
Total	$	449,320	$	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 March 31,
	2020		2019
Business to Business	$	25,279	$	32,463
Business to Consumer - Online		8,134		8,219
Business to Consumer - Corporate store		1,793		2,799
Other		74		84
Total	$	35,280	$	43,565

Net Sales—Domestic vs. Foreign

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

	Three Months Ended March 31,
	2020		2019
Domestic	$	87,568	$	88,769
Foreign		3,121		2,859
Total	$	90,689	$	91,628

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Notes Payable and Long-Term Debt, Convertible Senior Notes (Details) $ / shares in Units, $ in Thousands	1 Months Ended	3 Months Ended
	Jul. 31, 2019 USD ($)	Mar. 31, 2020 USD ($) shares $ / shares	Dec. 31, 2019 USD ($)
Notes Payable and Long-Term Debt [Abstract]
Debt discount		$ 30,333	$ 32,083
Strike price (in dollars per share) | $ / shares		53.86
Cap price (in dollars per share) | $ / shares		82.86
Payment for cost of capped call transactions	$ 20,530
2.5% Convertible Senior Notes [Member]
Notes Payable and Long-Term Debt [Abstract]
Face amount	172,500
Interest rate		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
Conversion price (in dollars per share) | $ / shares		$ 53.86
Debt discount	35,000
Effective interest rate		7.50%
Amortization of debt discount		$ 1,800
Debt issuance costs attributable to liability component	4,700
Debt issuance costs attributable to equity component	$ 1,200

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Pension and Postretirement Benefit Plans (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Pension Benefits [Member]
Plan Contributions [Abstract]
Expected contributions in 2020	$ 0
Net Periodic Benefit Cost [Abstract]
Service cost	0	$ 26
Interest cost	95	130
Expected return on plan assets	(161)	(161)
Amortization of (gains) losses	36	37
Net periodic benefit (income) cost	(30)	32
Postretirement Benefits [Member]
Net Periodic Benefit Cost [Abstract]
Service cost	0	0
Interest cost	0	25
Expected return on plan assets	0	0
Amortization of (gains) losses	(57)	(42)
Net periodic benefit (income) cost	$ (57)	$ (17)

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Share Incentive Plans, Assumptions for Options Granted Under 2015 Plan (Details) - 2015 Plan [Member] - Stock Options [Member] - $ / shares								3 Months Ended
	Mar. 18, 2020	Oct. 24, 2019	Mar. 20, 2019	Mar. 13, 2018	Mar. 07, 2018	May 17, 2017	Feb. 10, 2017	Mar. 31, 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 10 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)								66,572
Number exercisable (in shares)								66,572
Exercise price (in dollars per share)								$ 15.41
Remaining lives								7 years 1 month 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)								86,792
Number exercisable (in shares)								58,298
Exercise price (in dollars per share)								$ 21.21
Remaining lives								7 years 11 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 11 months 16 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)								147,592
Number exercisable (in shares)								50,262
Exercise price (in dollars per share)								$ 47.58
Remaining lives								8 years 11 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 6 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)								155,000
Number exercisable (in shares)								0
Exercise price (in dollars per share)								$ 14.85
Remaining lives								9 years 11 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

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Summary of Significant Accounting Policies, Derivative Instruments (Details) - Maximum [Member]	3 Months Ended
	Mar. 31, 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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Share Incentive Plans (Tables)

3 Months Ended

Mar. 31, 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		(42,407	)		5.36		2.50
Forfeited		(406	)		34.27		11.07
Outstanding, March 31, 2020		808,903		$	18.16	$	6.03

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 March 31, 2020		28,700			66,572			86,792			26,000			147,592			25,000			155,000
Number exercisable at March 31, 2020		28,700			66,572			58,298			26,000			50,262			8,250			-
Exercise price	$	13.00		$	15.41		$	21.21		$	21.49		$	47.58		$	20.89		$	14.85
Remaining lives		6.87			7.13			7.94			7.96			8.98			9.57			9.97
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

The following table outlines the PRSUs granted and outstanding as of March 31, 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 March 31, 2020		83,000		93,000		85,650		-		88,582		90,000
Fair value as of grant date	$	15.60	$	21.21	$	47.58	$	47.58	$	52.15	$	14.85
Remaining lives		1.75		2.75		3.75		-		2.75		4.75

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Segment Information, Revenue Disaggregation - Sales Channel (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Net Sales by Sales Channel [Abstract]
Net sales	$ 90,689	$ 91,628
NewGen Products [Member]
Net Sales by Sales Channel [Abstract]
Net sales	35,280	43,565
NewGen Products [Member] | Business to Business [Member]
Net Sales by Sales Channel [Abstract]
Net sales	25,279	32,463
NewGen Products [Member] | Business to Consumer - Online [Member]
Net Sales by Sales Channel [Abstract]
Net sales	8,134	8,219
NewGen Products [Member] | Business to Consumer - Corporate Store [Member]
Net Sales by Sales Channel [Abstract]
Net sales	1,793	2,799
NewGen Products [Member] | Other [Member]
Net Sales by Sales Channel [Abstract]
Net sales	$ 74	$ 84

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Share Incentive Plans, Compensation Expense Related to Options (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Compensation Expense [Abstract]
Compensation expense related to options	$ 0.2	$ 0.2
Unrecognized compensation expense related to options	$ 1.5
Period over which unrecognized compensation expense will be expensed	2 years 1 month 20 days

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Other Current Assets (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Other Current Assets [Abstract]
Inventory deposits	$ 5,616	$ 4,012
Prepaid taxes	3,250	3,673
Other	10,002	8,430
Total	$ 18,868	$ 16,115

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Notes Payable and Long-Term Debt, Summary of Notes Payable and Long-Term Debt (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019	Jul. 31, 2019
Notes Payable and Long-Term Debt [Abstract]
Gross notes payable and long-term debt	$ 316,500	$ 322,740
Less deferred finance charges	(6,190)	(6,466)
Less debt discount	(30,333)	(32,083)
Less current maturities	(12,000)	(15,240)
Net notes payable and long-term debt	267,977	268,951
2018 First Lien Term Loan [Member]
Notes Payable and Long-Term Debt [Abstract]
Gross notes payable and long-term debt	144,000	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)
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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Consolidated Statements of Change in Stockholders' 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	(4)	0	(4)
Unrealized loss on MSA investments, net of tax	0	0	0	402	0	402
Unrealized loss on interest rate swaps, net of tax	0	0	0	(476)	0	(476)
Stock compensation expense	0	449	0	0	0	449
Restricted stock forfeitures	$ 0	(1)	0	0	0	(1)
Restricted stock forfeitures (in shares)	(47)
Exercise of options	$ 0	187	0	0	0	187
Exercise of options (in shares)	22,588
Redemption of options	$ 0	(12)	0	0	0	(12)
Dividends	0	0	0	0	(887)	(887)
Net income	0	0	0	0	6,560	6,560
Ending balance at Mar. 31, 2019	$ 196	111,089	0	(2,614)	(19,830)	88,841
Ending balance (in shares) at Mar. 31, 2019	19,576,398
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
Unrecognized pension and postretirement cost adjustment, net of tax	$ 0	0	0	9	0	9
Unrealized loss on interest rate swaps, net of tax	0	0	0	(1,615)	0	(1,615)
Stock compensation expense	0	455	0	0	0	455
Exercise of options	$ 0	227	0	0	0	227
Exercise of options (in shares)	42,407
Cost of repurchased common stock	$ 0	0	$ (2,627)	0	0	$ (2,627)
Cost of repurchased common stock (in shares)			(134,130)			(134,130)
Dividends	0	0	$ 0	0	(998)	$ (998)
Net income	0	0	0	0	3,275	3,275
Ending balance at Mar. 31, 2020	$ 197	$ 126,151	$ (2,627)	$ (5,379)	$ (13,031)	$ 105,311
Ending balance (in shares) at Mar. 31, 2020	19,588,950

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Property, Plant, and Equipment (Tables)

3 Months Ended

Mar. 31, 2020

Property, Plant and Equipment [Abstract]

Property, Plant and Equipment

Property, plant, and equipment consists of:

	March 31, 2020			December 31, 2019
Land	$	22		$	22
Buildings and improvements		2,655			2,655
Leasehold improvements		2,511			2,567
Machinery and equipment		15,087			14,516
Furniture and fixtures		8,307			8,502
Gross property, plant and equipment		28,582			28,262
Accumulated depreciation		(15,178	)		(14,446	)
Net property, plant and equipment	$	13,404		$	13,816

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Summary of Significant Accounting Policies (Tables)

3 Months Ended

Mar. 31, 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	March 31, 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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Consolidated Statements of Income (unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Consolidated Statements of Income (unaudited) [Abstract]
Net sales	$ 90,689	$ 91,628
Cost of sales	49,258	51,164
Gross profit	41,431	40,464
Selling, general, and administrative expenses	32,394	28,429
Operating income	9,037	12,035
Interest expense, net	4,994	3,856
Investment income	(91)	(144)
Net periodic income, excluding service cost	(87)	(11)
Income before income taxes	4,221	8,334
Income tax expense	946	1,774
Consolidated net income	$ 3,275	$ 6,560
Basic income per common share:
Consolidated net income (in dollars per share)	$ 0.17	$ 0.34
Diluted income per common share:
Consolidated net income (in dollars per share)	$ 0.16	$ 0.33
Weighted average common shares outstanding:
Basic (in shares)	19,689,446	19,559,596
Diluted (in shares)	20,106,800	20,045,964

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Inventories

3 Months Ended

Mar. 31, 2020

Inventories [Abstract]

Inventories

Note 6. Inventories

The components of inventories are as follows:

	March 31, 2020			December 31, 2019
Raw materials and work in process	$	6,574		$	7,050
Leaf tobacco		36,900			32,763
Finished goods - Smokeless products		5,907			5,680
Finished goods - Smoking products		11,081			13,138
Finished goods - NewGen products		13,535			17,111
Other		950			989
Gross Inventory		74,947			76,731
LIFO reserve		(5,752	)		(5,752	)
Net Inventory	$	69,195		$	70,979

The inventory valuation allowance was $19.2 million and $21.5 million as of March 31, 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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Accrued Liabilities

3 Months Ended

Mar. 31, 2020

Accrued Liabilities [Abstract]

Accrued Liabilities

Note 10. Accrued Liabilities

Accrued liabilities consists of:

	March 31, 2020		December 31, 2019
Accrued payroll and related items	$	6,144	$	5,267
Customer returns and allowances		5,537		6,160
Taxes payable		1,508		705
Lease liabilities		2,531		2,218
Accrued interest		928		1,909
Other		12,106		10,261
Total	$	28,754	$	26,520

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Subsequent Events

3 Months Ended

Mar. 31, 2020

Subsequent Events [Abstract]

Subsequent Events

Note 20. Subsequent Events

Standard Diversified Inc. (“SDI”) Reorganization

On April 8, 2020, the Company and SDI announced a definitive agreement under which SDI will be 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, the “SDI Common Stock”) will receive in the aggregate, in return for their SDI Common Stock, TPB Voting Common Stock (“TPB Common Stock”) at a ratio of 0.97 of a share of TPB Common Stock for each share of TPB Common Stock held by SDI at the time of the merger. SDI will divest its assets prior to close such that the net liabilities at closing will not exceed $25,000 and the only assets that it shall retain is the remaining TPB stock holdings. The merger of SDI is subject to customary closing conditions, including approval by holders of a majority of the aggregate voting power of the SDI Common Stock and the receipt of any applicable statutory approvals. The Company expects the transaction to close in the summer of 2020.

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Leases

3 Months Ended

Mar. 31, 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 March 31,
	2020			2019
Operating lease cost
Cost of sales	$	233		$	192
Selling, general and administrative		398			555
Variable lease cost (1)		312			245
Short-term lease cost		83			54
Sublease income		(30	)		(30	)
Total	$	996		$	1,016
(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.

	March 31, 2020		December 31, 2019
Assets:
Right of use assets	$	13,036	$	12,130
Total lease assets	$	13,036	$	12,130
Liabilities:
Current lease liabilities (2)	$	2,531	$	2,218
Long-term lease liabilities		11,673		11,067
Total lease liabilities	$	14,204	$	13,285
(2) Reported within accrued liabilities on the balance sheet

	As of March 31,
	2020			2019
Weighted-average remaining lease term  - operating leases	7.8 years			9.0 years
Weighted-average discount rate - operating leases		5.84	%		6.49	%

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 March 31, 2020, and December 31, 2019, maturities of lease liabilities consisted of the following:

	March 31, 2020		December 31, 2019
2020	$	2,431	$	2,924
2021		3,174		2,730
2022		2,595		2,165
2023		2,199		1,782
2024		1,063		1,028
Years thereafter		6,297		6,297
Total lease payments	$	17,759	$	16,926
Less: Imputed interest		3,555		3,641
Present value of lease liabilities	$	14,204	$	13,285

During the first quarter, the Company entered into a number of additional operating leases related to vehicles for business use. These changes resulted in additional lease liabilities of $1.6 million as of March 31, 2020.

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Contingencies

3 Months Ended

Mar. 31, 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, which claim has been filed but not yet served. 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 the Franchise Disclosure Document (and therefore it was improper to pursue litigation). There can be no assurance that the subsidiary 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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Segment Information (Tables)

3 Months Ended

Mar. 31, 2020

Segment Information [Abstract]

Financial Information of Reported Segments

The tables below present financial information about reported segments:

	Three Months Ended March 31,
	2020			2019
Net sales
Smokeless products	$	26,495		$	22,544
Smoking products		28,914			25,519
NewGen products		35,280			43,565
Total	$	90,689		$	91,628
Gross profit
Smokeless products	$	13,874		$	12,073
Smoking products		16,132			13,484
NewGen products		11,425			14,907
Total	$	41,431		$	40,464
Operating income (loss)
Smokeless products	$	9,746		$	7,487
Smoking products		12,417			9,946
NewGen products		477			2,838
Corporate unallocated (1)		(13,603	)		(8,236	)
Total	$	9,037		$	12,035
Interest expense, net		4,994			3,856
Investment income		(91	)		(144	)
Net periodic income, excluding service cost		(87	)		(11	)
Income before income taxes	$	4,221		$	8,334
Capital expenditures
Smokeless products	$	860		$	577
Smoking products		-			-
NewGen products		17			309
Total	$	877		$	886
Depreciation and amortization
Smokeless products	$	519		$	357
Smoking products		-			-
NewGen products		757			533
Total	$	1,276		$	890
(1) Includes corporate costs that are not allocated to any of the three reportable segments.

	March 31, 2020		December 31, 2019
Assets
Smokeless products	$	128,406	$	120,723
Smoking products		142,850		145,831
NewGen products		86,650		90,899
Corporate unallocated (1)		91,414		89,131
Total	$	449,320	$	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

NewGen net sales are broken out by sales channel below.

	NewGen Segment
	Three Months Ended March 31,
	2020		2019
Business to Business	$	25,279	$	32,463
Business to Consumer - Online		8,134		8,219
Business to Consumer - Corporate store		1,793		2,799
Other		74		84
Total	$	35,280	$	43,565

Net Sales - Domestic vs. Foreign

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

	Three Months Ended March 31,
	2020		2019
Domestic	$	87,568	$	88,769
Foreign		3,121		2,859
Total	$	90,689	$	91,628

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Leases (Tables)

3 Months Ended

Mar. 31, 2020

Leases [Abstract]

Components of Lease Expense

The components of lease expense consisted of the following:

	Three Months Ended March 31,
	2020			2019
Operating lease cost
Cost of sales	$	233		$	192
Selling, general and administrative		398			555
Variable lease cost (1)		312			245
Short-term lease cost		83			54
Sublease income		(30	)		(30	)
Total	$	996		$	1,016
(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

	March 31, 2020		December 31, 2019
Assets:
Right of use assets	$	13,036	$	12,130
Total lease assets	$	13,036	$	12,130
Liabilities:
Current lease liabilities (2)	$	2,531	$	2,218
Long-term lease liabilities		11,673		11,067
Total lease liabilities	$	14,204	$	13,285
(2) Reported within accrued liabilities on the balance sheet

Operating Lease Weighted-Average Remaining Lease Term and Discount Rate

	As of March 31,
	2020			2019
Weighted-average remaining lease term  - operating leases	7.8 years			9.0 years
Weighted-average discount rate - operating leases		5.84	%		6.49	%

Maturities of Lease Liabilities

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

	March 31, 2020		December 31, 2019
2020	$	2,431	$	2,924
2021		3,174		2,730
2022		2,595		2,165
2023		2,199		1,782
2024		1,063		1,028
Years thereafter		6,297		6,297
Total lease payments	$	17,759	$	16,926
Less: Imputed interest		3,555		3,641
Present value of lease liabilities	$	14,204	$	13,285

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Summary of Significant Accounting Policies, Food and Drug Administration (Details)	1 Months Ended	3 Months Ended
	Jan. 31, 2020	Mar. 31, 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
Application period for deemed new tobacco products		10 months
Period deemed new tobacco products may remain on the market pending FDA review		1 year
Proposed extension period for filing premarket applications	120 days

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Leases (Details) - USD ($) $ in Thousands		3 Months Ended
		Mar. 31, 2020		Mar. 31, 2019		Dec. 31, 2019
Components of Lease Expense [Abstract]
Variable lease cost	[1]	$ 312		$ 245
Short-term lease cost		83		54
Sublease income		(30)		(30)
Total operating lease cost		996		1,016
Assets [Abstract]
Right of use assets		13,036		12,130		$ 12,130
Liabilities [Abstract]
Current lease liabilities		2,531	[2]	2,218	[2]	2,218
Long-term lease liabilities		11,673		11,067		11,067
Total lease liabilities		$ 14,204		$ 13,285		13,285
Weighted-Average Remaining Lease Term and Discount Rate [Abstract]
Weighted-average remaining lease term - operating leases		7 years 9 months 18 days		9 years
Weighted-average discount rate - operating leases		5.84%		6.49%
Maturities of Lease Liabilities [Abstract]
2020		$ 2,431
2021/2020		3,174				2,924
2022/2021		2,595				2,730
2023/2022		2,199				2,165
2024/2023		1,063				1,782
2024						1,028
Years thereafter		6,297
Years thereafter						6,297
Total lease payments		17,759				16,926
Less: Imputed interest		3,555				3,641
Present value of lease liabilities		14,204		$ 13,285		$ 13,285
Additional lease liabilities		1,600
Cost of Sales [Member]
Components of Lease Expense [Abstract]
Operating lease cost		233		192
Selling, General and Administrative [Member]
Components of Lease Expense [Abstract]
Operating lease cost		$ 398		$ 555

[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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Share Incentive Plans, Stock Option Activity (Details) - 2006 and 2015 Plans [Member] - Stock Options [Member] - USD ($) $ / shares in Units, $ in Millions	3 Months Ended		12 Months Ended
	Mar. 31, 2020	Mar. 31, 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)	(42,407)		(129,067)
Forfeited (in shares)	(406)		(14,571)
Outstanding, ending balance (in shares)	808,903		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)	5.36		5.72
Forfeited (in dollars per share)	34.27		34.55
Outstanding, ending balance (in dollars per share)	18.16		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)	2.50		2.58
Forfeited (in dollars per share)	11.07		11.10
Outstanding, ending balance (in dollars per share)	$ 6.03		$ 6.17
Intrinsic value of options exercised	$ 0.9	$ 0.8

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Notes Payable and Long-Term Debt, 2018 First Lien Credit Facility (Details) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Jun. 30, 2019	Mar. 31, 2019	Mar. 07, 2018
Notes Payable and Long-Term Debt [Abstract]
Financing costs of amending facility	$ 168		$ 0
Letter of Credit [Member]
Notes Payable and Long-Term Debt [Abstract]
Maximum borrowing capacity	$ 3,700
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	$ 46,300
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	3.74%
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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Fair Value of Financial Instruments (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019	Mar. 31, 2018
Fair Value of Financial Instruments [Abstract]
Note payable	$ 316,500	$ 322,740
Interest Rate Swap [Member]
Fair Value of Financial Instruments [Abstract]
Notional amount	70,000	70,000	$ 70,000
Fair value	4,800	2,500
2018 First Lien Term Loan [Member]
Fair Value of Financial Instruments [Abstract]
Note payable	144,000	146,000
2.5% Convertible Senior Notes [Member]
Fair Value of Financial Instruments [Abstract]
Note payable	$ 172,500	172,500
Interest rate	2.50%
Fair Value [Member] | 2018 First Lien Term Loan [Member]
Fair Value of Financial Instruments [Abstract]
Long-term debt	$ 144,000	146,000
Fair Value [Member] | 2.5% Convertible Senior Notes [Member]
Fair Value of Financial Instruments [Abstract]
Long-term debt	$ 141,600	$ 140,100

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Other Assets (Details) - USD ($) $ in Thousands	1 Months Ended
	Jul. 31, 2019	Mar. 31, 2020	Dec. 31, 2019
Other Assets [Abstract]
Equity investments		$ 5,421	$ 5,421
Pension assets		1,753	1,686
Other		3,667	3,566
Total		$ 10,841	$ 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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Dividends and Share Repurchase (Details) - USD ($) $ / shares in Units, $ in Thousands		3 Months Ended
	Apr. 10, 2020	Mar. 31, 2020	Feb. 25, 2020
Share Repurchase [Abstract]
Share repurchase program authorized amount			$ 50,000
Total number of shares repurchased (in shares)		134,130
Cost of shares repurchased		$ 2,627
Average price per share (in dollars per share)		$ 19.59
Dividend Declared Q1-2020 [Member] | Subsequent Event [Member]
Dividends [Abstract]
Cash dividend paid (in dollars per share)	$ 0.05
Dividend payable, date to be paid	Apr. 10, 2020
Dividend payable, date of record	Mar. 20, 2020

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Income Per Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Income Per Share [Abstract]
Consolidated net income	$ 3,275	$ 6,560
Basic EPS [Abstract]
Basic weighted average shares (in shares)	19,689,446	19,559,596
Basic EPS (in dollars per share)	$ 0.17	$ 0.34
Effect of Dilutive Securities [Abstract]
Stock options (in shares)	417,354	486,368
Diluted weighted average shares (in shares)	20,106,800	20,045,964
Diluted EPS (in dollars per share)	$ 0.16	$ 0.33
Income per Share [Abstract]
Average stock price (in dollars per share)	$ 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

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Derivative Instruments

3 Months Ended

Mar. 31, 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 months ended March 31, 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 March 31, 2020, and December 31, 2019, resulted in a liability of $4.8 million and $2.5 million, respectively, included in other long-term liabilities.

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Property, Plant, and Equipment

3 Months Ended

Mar. 31, 2020

Property, Plant and Equipment [Abstract]

Property, Plant and Equipment

Note 8. Property, Plant, and Equipment

Property, plant, and equipment consists of:

	March 31, 2020			December 31, 2019
Land	$	22		$	22
Buildings and improvements		2,655			2,655
Leasehold improvements		2,511			2,567
Machinery and equipment		15,087			14,516
Furniture and fixtures		8,307			8,502
Gross property, plant and equipment		28,582			28,262
Accumulated depreciation		(15,178	)		(14,446	)
Net property, plant and equipment	$	13,404		$	13,816

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Inventories (Tables)

3 Months Ended

Mar. 31, 2020

Inventories [Abstract]

Inventories

The components of inventories are as follows:

	March 31, 2020			December 31, 2019
Raw materials and work in process	$	6,574		$	7,050
Leaf tobacco		36,900			32,763
Finished goods - Smokeless products		5,907			5,680
Finished goods - Smoking products		11,081			13,138
Finished goods - NewGen products		13,535			17,111
Other		950			989
Gross Inventory		74,947			76,731
LIFO reserve		(5,752	)		(5,752	)
Net Inventory	$	69,195		$	70,979

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Organizations and Basis of Presentation (Policies)

3 Months Ended

Mar. 31, 2020

Organizations and Basis of Presentation [Abstract]

Basis of Presentation

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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Accrued Liabilities (Tables)

3 Months Ended

Mar. 31, 2020

Accrued Liabilities [Abstract]

Accrued Liabilities

Accrued liabilities consists of:

	March 31, 2020		December 31, 2019
Accrued payroll and related items	$	6,144	$	5,267
Customer returns and allowances		5,537		6,160
Taxes payable		1,508		705
Lease liabilities		2,531		2,218
Accrued interest		928		1,909
Other		12,106		10,261
Total	$	28,754	$	26,520

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Consolidated Statements of Comprehensive Income (unaudited) (Parenthetical) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Other comprehensive income (loss), net of tax
Amortization of unrealized pension and postretirement gain (loss), tax	$ 2	$ 1
Unrealized gain on investments, tax	0	93
Unrealized loss on interest rate swaps, tax	$ 624	$ 182

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Consolidated Balance Sheets (unaudited) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Current assets:
Cash	$ 99,406	$ 95,250
Accounts receivable, net of allowances of $256 in 2020 and $280 in 2019	4,310	6,906
Inventories	69,195	70,979
Other current assets	18,868	16,115
Total current assets	191,779	189,250
Property, plant, and equipment, net	13,404	13,816
Right of use assets	13,036	12,130
Deferred financing costs, net	860	890
Goodwill	154,282	154,282
Other intangible assets, net	33,044	33,469
Master Settlement Agreement (MSA) escrow deposits	32,074	32,074
Other assets	10,841	10,673
Total assets	449,320	446,584
Current liabilities:
Accounts payable	17,348	14,126
Accrued liabilities	28,754	26,520
Current portion of long-term debt	12,000	15,240
Revolving credit facility	0	0
Total current liabilities	58,102	55,886
Notes payable and long-term debt	267,977	268,951
Deferred income taxes	1,495	1,572
Lease liabilities	11,673	11,067
Other long-term liabilities	4,762	2,523
Total liabilities	344,009	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	126,151	125,469
Cost of repurchased common stock (134,130 shares at March 31, 2020 and 0 shares at December 31, 2019)	(2,627)	0
Accumulated other comprehensive loss	(5,379)	(3,773)
Accumulated deficit	(13,031)	(15,308)
Total stockholders' equity	105,311	106,585
Total liabilities and stockholders' equity	449,320	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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Derivative Instruments (Details) $ in Millions	3 Months Ended
	Mar. 31, 2020 USD ($) Contract	Mar. 31, 2019 Contract	Dec. 31, 2019 USD ($)	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
Interest Rate Swap [Member]
Derivative Instruments [Abstract]
Notional amount	$ 70.0		$ 70.0	$ 70.0
Fair value	$ 4.8		$ 2.5
Interest Rate Swap [Member] | LIBOR [Member]
Derivative Instruments [Abstract]
Interest rate percentage	2.755%

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Property, Plant, and Equipment (Details) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Property, Plant and Equipment [Abstract]
Gross property, plant and equipment	$ 28,582	$ 28,262
Accumulated depreciation	(15,178)	(14,446)
Net property, plant and equipment	13,404	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	2,511	2,567
Machinery and Equipment [Member]
Property, Plant and Equipment [Abstract]
Gross property, plant and equipment	15,087	14,516
Furniture and Fixtures [Member]
Property, Plant and Equipment [Abstract]
Gross property, plant and equipment	$ 8,307	$ 8,502

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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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Subsequent Events (Details) - Subsequent Event [Member] - Standard Diversified Inc. [Member]	Apr. 08, 2020 USD ($)
Reorganization [Abstract]
Common stock conversion ratio	0.97
Net liabilities	$ 25,000

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Segment Information, Financial Information of Reportable Segments (Details) $ in Thousands		3 Months Ended
		Mar. 31, 2020 USD ($) Segment	Mar. 31, 2019 USD ($)	Dec. 31, 2019 USD ($)
Segment Information [Abstract]
Number of reportable segments | Segment		3
Segment Information [Abstract]
Net sales		$ 90,689	$ 91,628
Gross profit		41,431	40,464
Operating income (loss)		9,037	12,035
Interest expense, net		4,994	3,856
Investment income		(91)	(144)
Net periodic benefit income, excluding service cost		(87)	(11)
Income before income taxes		4,221	8,334
Capital expenditures		877	886
Depreciation and amortization		1,276	890
Assets		449,320		$ 446,584
NewGen Products [Member]
Segment Information [Abstract]
Net sales		35,280	43,565
Corporate Unallocated [Member]
Segment Information [Abstract]
Operating income (loss)	[1]	(13,603)	(8,236)
Assets	[2]	91,414		89,131
Reportable Segments [Member] | Smokeless Products [Member]
Segment Information [Abstract]
Net sales		26,495	22,544
Gross profit		13,874	12,073
Operating income (loss)		9,746	7,487
Capital expenditures		860	577
Depreciation and amortization		519	357
Assets		128,406		120,723
Reportable Segments [Member] | Smoking Products [Member]
Segment Information [Abstract]
Net sales		28,914	25,519
Gross profit		16,132	13,484
Operating income (loss)		12,417	9,946
Capital expenditures		0	0
Depreciation and amortization		0	0
Assets		142,850		145,831
Reportable Segments [Member] | NewGen Products [Member]
Segment Information [Abstract]
Net sales		35,280	43,565
Gross profit		11,425	14,907
Operating income (loss)		477	2,838
Capital expenditures		17	309
Depreciation and amortization		757	$ 533
Assets		$ 86,650		$ 90,899

[1] Includes corporate costs that are not allocated to any of the three reportable segments.

[2] Includes assets not assigned to the three reportable segments. All goodwill has been allocated to the reportable segments.

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Acquisitions

3 Months Ended

Mar. 31, 2020

Acquisitions [Abstract]

Acquisitions

Note 3. Acquisitions

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 March 31, 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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Other Current Assets

3 Months Ended

Mar. 31, 2020

Other Current Assets [Abstract]

Other Current Assets

Note 7. Other Current Assets

Other current assets consists of:

	March 31, 2020		December 31, 2019
Inventory deposits	$	5,616	$	4,012
Prepaid taxes		3,250		3,673
Other		10,002		8,430
Total	$	18,868	$	16,115

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Consolidated Statements of Cash Flows (unaudited) - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Cash flows from operating activities:
Consolidated net income	$ 3,275	$ 6,560
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on sale of property, plant, and equipment	0	23
Depreciation expense	851	531
Amortization of other intangible assets	425	359
Amortization of debt discount and deferred financing costs	2,237	237
Deferred income taxes	545	(29)
Stock compensation expense	455	466
Noncash lease expense	13	0
Changes in operating assets and liabilities:
Accounts receivable	2,596	(1,726)
Inventories	1,784	366
Other current assets	(2,420)	2,984
Other assets	(130)	(427)
Accounts payable	3,210	8,229
Accrued postretirement liabilities	(27)	(9)
Accrued liabilities and other	1,913	(3,539)
Net cash provided by operating activities	14,727	14,025
Cash flows from investing activities:
Capital expenditures	(877)	(886)
Restricted cash, MSA escrow deposits	0	1,702
Net cash provided by (used in) investing activities	(877)	816
Cash flows from financing activities:
Payments of 2018 revolving credit facility	0	(12,000)
Payment of dividends	(886)	(880)
Payments of financing costs	(168)	0
Exercise of options	227	187
Redemption of options	0	(12)
Common stock repurchased	(2,627)	0
Net cash used in financing activities	(9,694)	(14,705)
Net increase in cash	4,156	136
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	99,406	1,741
Restricted	32,074	4,062
Total cash at end of period	131,480	5,803
Supplemental schedule of noncash financing activities:
Accrued expenses incurred for financing costs	13	0
Dividends declared not paid	998	887
2018 First Lien Term Loan [Member]
Cash flows from financing activities:
Payments of term loan	(2,000)	(2,000)
Payments of financing costs	(200)
IVG Note [Member]
Cash flows from financing activities:
Payments of term loan	$ (4,240)	$ 0

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Notes Payable and Long-Term Debt (Tables)

3 Months Ended

Mar. 31, 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:

	March 31, 2020			December 31, 2019
2018 First Lien Term Loan	$	144,000		$	146,000
Convertible Senior Notes		172,500			172,500
Note payable - IVG		-			4,240
Gross notes payable and long-term debt		316,500			322,740
Less deferred finance charges		(6,190	)		(6,466	)
Less debt discount		(30,333	)		(32,083	)
Less current maturities		(12,000	)		(15,240	)
Net notes payable and long-term debt	$	267,977		$	268,951

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Consolidated Balance Sheets (unaudited) (Parenthetical) - USD ($) $ in Thousands	Mar. 31, 2020	Dec. 31, 2019
Current assets:
Accounts receivable, allowance	$ 256	$ 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)	134,130	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)	19,723,080	19,680,673
Common stock, shares outstanding (in shares)	19,588,950	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

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Other Current Assets (Tables)

3 Months Ended

Mar. 31, 2020

Other Current Assets [Abstract]

Other Current Assets

Other current assets consists of:

	March 31, 2020		December 31, 2019
Inventory deposits	$	5,616	$	4,012
Prepaid taxes		3,250		3,673
Other		10,002		8,430
Total	$	18,868	$	16,115

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Summary of Significant Accounting Policies (Policies)

3 Months Ended

Mar. 31, 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 $5.3 million and $4.3 million for the three months ending March 31, 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. Recently, several state governors have reacted to perceived issues around nicotine vapor products by unilaterally, without regard to the legislative process, proclaiming bans on vapor products, particularly those that are flavored.  Many of these executive actions have been challenged and temporarily restrained, but no assurance can be given that such state or local flavor bans will not be enacted or ultimately upheld. Indeed, in a number of states, targeted flavor bans, particularly with regard to vapor products, have been enacted legislatively. 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 March 31, 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 March 31, 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	March 31, 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 (“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 (“TTPP,” also known as the “Tobacco Buyout”) 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 pipe tobacco, 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 an 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.  On October 24, 2019, FDA filed a Notice of Appeal from the Remedy Order and other actions adverse to FDA. The court-ordered modification to the compliance policy remains subject to change as a result of potential appeals or litigation brought or pending in other venues.

In January 2020, the FDA indicated it intended to maintain this deadline irrespective of the outcome of the pending appeal in the Maryland Lawsuit. On March 30, 2020, however, 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 stated it will update 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 PMTA 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 line of vapor products that the FDA regulates as tobacco products past September 9, 2020, unless we file an application for each such product by that date.  We expect to be able to make appropriate PMTA applications 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.  On September 25, 2019, FDA published a proposed rule outlining certain required elements of PMTA filings. This rule is not yet final, and its requirements may shift before being finalized. We believe we have products that meet the requisite standard and that we will be able to efficiently produce satisfactory PMTA 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 PMTAs. Even if we successfully file all of our PMTAs 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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Notes Payable and Long-Term Debt

3 Months Ended

Mar. 31, 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:

	March 31, 2020			December 31, 2019
2018 First Lien Term Loan	$	144,000		$	146,000
Convertible Senior Notes		172,500			172,500
Note payable - IVG		-			4,240
Gross notes payable and long-term debt		316,500			322,740
Less deferred finance charges		(6,190	)		(6,466	)
Less debt discount		(30,333	)		(32,083	)
Less current maturities		(12,000	)		(15,240	)
Net notes payable and long-term debt	$	267,977		$	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 3.74% at March 31, 2020. At March 31, 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 $3.7 million, resulting in $46.3 million of availability under the 2018 Revolving Credit Facility at March 31, 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 March 31, 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 of amortization for the three months ended March 31, 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.

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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Share Incentive Plans

3 Months Ended

Mar. 31, 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 March 31, 2020, net of forfeitures, there were 16,159 shares of restricted stock, 440,232 performance-based restricted stock units, and 613,832 options granted under the 2015 Plan. There are 329,777 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		(42,407	)		5.36		2.50
Forfeited		(406	)		34.27		11.07
Outstanding, March 31, 2020		808,903		$	18.16	$	6.03

Under the 2006 and 2015 Plans, the total intrinsic value of options exercised during the three months ended March 31, 2020 and 2019, was $0.9 million, and $0.8 million, respectively.

At March 31, 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 3.28 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 March 31, 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 March 31, 2020		28,700			66,572			86,792			26,000			147,592			25,000			155,000
Number exercisable at March 31, 2020		28,700			66,572			58,298			26,000			50,262			8,250			-
Exercise price	$	13.00		$	15.41		$	21.21		$	21.49		$	47.58		$	20.89		$	14.85
Remaining lives		6.87			7.13			7.94			7.96			8.98			9.57			9.97
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 $0.2 million for the three months ended March 31, 2020 and 2019, respectively. Total unrecognized compensation expense related to options at March 31, 2020, is $1.5 million, which will be expensed over 2.14 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 March 31, 2020, there are 440,232 PRSUs outstanding, all of which are unvested. The following table outlines the PRSUs granted and outstanding as of March 31, 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 March 31, 2020		83,000		93,000		85,650		-		88,582		90,000
Fair value as of grant date	$	15.60	$	21.21	$	47.58	$	47.58	$	52.15	$	14.85
Remaining lives		1.75		2.75		3.75		-		2.75		4.75

The Company recorded compensation expense related to the PRSUs of approximately $0.2 million and $0.2 million in the consolidated statements of income for the three months ended March 31, 2020 and 2019, respectively, based on the probability of achieving the performance condition. Total unrecognized compensation expense related to these awards at March 31, 2020, is $9.0 million which will be expensed over the service periods based on the probability of achieving the performance condition.

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Dividends and Share Repurchase

3 Months Ended

Mar. 31, 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 April 10, 2020, to shareholders of record at the close of business on March 20, 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 three months ended was 134,130 shares for a total cost of $2.6 million and an average price per share of $19.59.

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Acquisitions (Details) - USD ($) $ in Thousands	1 Months Ended	3 Months Ended
	Jul. 31, 2019	Mar. 31, 2020	Dec. 31, 2019
Assets Acquired [Abstract]
Goodwill		$ 154,282	$ 154,282
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
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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Summary of Significant Accounting Policies, Shipping Costs (Details) - USD ($) $ in Millions	3 Months Ended
	Mar. 31, 2020	Mar. 31, 2019
Shipping Costs [Abstract]
Shipping costs	$ 5.3	$ 4.3

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Pension and Postretirement Benefit Plans (Tables)

3 Months Ended

Mar. 31, 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 March 31,
	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			37			(57	)		(42	)
Net periodic benefit (income) cost	$	(30	)	$	32		$	(57	)	$	(17	)

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Notes Payable and Long-Term Debt, Note Payable - IVG (Details) - Note Payable - IVG [Member] - USD ($) $ in Thousands	3 Months Ended
	Mar. 31, 2020	Mar. 31, 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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Share Incentive Plans, Equity Incentive Plans (Details) - shares	Mar. 31, 2020	Apr. 28, 2016
2015 Plan [Member]
Share Incentive Plans [Abstract]
Number of shares available for grant (in shares)	329,777
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)	440,232
2015 Plan [Member] | Stock Options [Member]
Share Incentive Plans [Abstract]
Number of awards granted (in shares)	613,832
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