Company Quick10K Filing
Quick10K
Turning Point Brands
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$52.75 20 $1,030
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
8-K 2019-05-01 Shareholder Vote
8-K 2018-11-26 Regulation FD, Exhibits
8-K 2018-09-26 Officers
8-K 2018-09-05 Enter Agreement, Regulation FD, Exhibits
8-K 2018-08-08 Earnings, Exhibits
8-K 2018-05-08 Shareholder Vote
8-K 2018-03-13 Officers, Regulation FD, Exhibits
EQT EQT 5,220
PAG Penske Automotive Group 3,850
NUS NU Skin Enterprises 3,050
EZPW EZCorp 538
STRS Stratus Properties 208
MDLY Medley Management 89
OIIM O2Micro 37
CNHC CNH Industrial Capital 0
CPLA Capella Education 0
LSMG Lode-Star Mining 0
TPB 2019-03-31
Part I-Financial Information
Item 1. Financial Statements
Note 1. Organizations and Basis of Presentation
Note 2. Summary of Significant Accounting Policies
Note 3. Acquisitions
Note 4. Derivative Instruments
Note 5. Fair Value of Financial Instruments
Note 6. Inventories
Note 7. Property, Plant, and Equipment
Note 8. Other Current Assets
Note 9. Accrued Liabilities
Note 10. Notes Payable and Long-Term Debt
Note 11. Leases
Note 12. Income Taxes
Note 13. Pension and Postretirement Benefit Plans
Note 14. Share Incentive Plans
Note 15. Contingencies
Note 16. Income per Share
Note 17. Segment Information
Note 18. Dividends
Note 19. Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii-Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 ex31_1.htm
EX-31.2 ex31_2.htm
EX-31.3 ex31_3.htm
EX-32.1 ex32_1.htm

Turning Point Brands Earnings 2019-03-31

TPB 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 form10q.htm 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, 2019

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

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 22, 2019, there were 19,589,410 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)
 
       
    5
       
    6
       
    7
       
    8
       
    10
       
    11
       

ITEM 2
28
       

ITEM 3
35
       

ITEM 4
35
     
PART II—OTHER INFORMATION
 
   

ITEM 1
36
       

ITEM 1A
36
       

ITEM 2
36
       

ITEM 3
36
       

ITEM 4
36
       

ITEM 5
36
       

ITEM 6
37
       

Signatures
  38

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;

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;

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;

some of our products are subject to developing and unpredictable regulations;

the scientific community’s lack of information regarding the long-term health effects of electronic cigarette, vaporizer and e-liquid use;

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;

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.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

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

   
(unaudited)
   

 
ASSETS
 
March 31,
2019
   
December 31,
2018
 
Current assets:
           
Cash
 
$
1,741
   
$
3,306
 
Accounts receivable, net of allowances of $47 in 2019 and $42 in 2018
   
4,343
     
2,617
 
Inventories
   
90,871
     
91,237
 
Other current assets
   
11,666
     
14,694
 
Total current assets
   
108,621
     
111,854
 
Property, plant, and equipment, net
   
10,942
     
10,589
 
Right of use assets
   
10,951
     
-
 
Deferred financing costs, net
   
818
     
870
 
Goodwill
   
145,961
     
145,939
 
Other intangible assets, net
   
34,979
     
35,339
 
Master Settlement Agreement (MSA) escrow deposits
   
31,045
     
30,550
 
Other assets
   
4,225
     
4,236
 
Total assets
 
$
347,542
   
$
339,377
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
 
$
15,070
   
$
6,841
 
Accrued liabilities
   
20,419
     
22,925
 
Current portion of long-term debt
   
12,000
     
8,000
 
Revolving credit facility
   
14,000
     
26,000
 
Total current liabilities
   
61,489
     
63,766
 
Notes payable and long-term debt
   
180,900
     
186,715
 
Deferred income taxes
   
2,172
     
2,291
 
Postretirement benefits
   
3,092
     
3,096
 
Lease liabilities
   
9,504
     
-
 
Other long-term liabilities
   
1,544
     
886
 
Total liabilities
   
258,701
     
256,754
 
                 
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; issued and outstanding shares - 19,576,398 at March 31, 2019, and 19,553,857 at December 31, 2018
   
196
     
196
 
Common stock, nonvoting, $0.01 par value; authorized shares, 10,000,000; issued and outstanding shares -0-
   
-
     
-
 
Additional paid-in capital
   
111,089
     
110,466
 
Accumulated other comprehensive loss
   
(2,614
)
   
(2,536
)
Accumulated deficit
   
(19,830
)
   
(25,503
)
Total stockholders’ equity
   
88,841
     
82,623
 
Total liabilities and stockholders’ equity
 
$
347,542
   
$
339,377
 

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

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

   
Three Months Ended
March 31,
 
   
2019
   
2018
 
Net sales
 
$
91,628
   
$
73,942
 
Cost of sales
   
51,164
     
42,133
 
Gross profit
   
40,464
     
31,809
 
Selling, general, and administrative expenses
   
28,429
     
22,068
 
Operating income
   
12,035
     
9,741
 
Interest expense, net
   
3,856
     
3,654
 
Investment income
   
(144
)
   
(95
)
Loss on extinguishment of debt
   
-
     
2,384
 
Net periodic benefit income, excluding service cost
   
(11
)
   
(43
)
Income before income taxes
   
8,334
     
3,841
 
Income tax expense
   
1,774
     
809
 
Consolidated net income
 
$
6,560
   
$
3,032
 
                 
Basic income per common share:
               
Consolidated net income
 
$
0.34
   
$
0.16
 
Diluted income per common share:
               
Consolidated net income
 
$
0.33
   
$
0.15
 
Weighted average common shares outstanding:
               
Basic
   
19,559,596
     
19,221,892
 
Diluted
   
20,045,964
     
19,762,194
 

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

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

   
Three Months Ended
March 31,
 
   
2019
   
2018
 
Consolidated net income
 
$
6,560
   
$
3,032
 
                 
Other comprehensive loss,  net of tax
               
Amortization of unrealized pension and postretirement gain (loss), net of tax of $1 in 2019 and $10 in 2018
   
(4
)
   
30
 
Unrealized gain (loss) on investments, net of tax of $93 in 2019 and $135 in 2018
   
402
     
(384
)
Unrealized loss on interest rate swaps, net of tax of $182 in 2019 and $185 in 2018
   
(476
)
   
(526
)
     
(78
)
   
(880
)
Consolidated comprehensive income
 
$
6,482
   
$
2,152
 

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

Turning Point Brands, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)

   
Three Months ended March 31,
 
   
2019
   
2018
 
Cash flows from operating activities:
           
Consolidated net income
 
$
6,560
   
$
3,032
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Loss on extinguishment of debt
   
-
     
2,384
 
Loss on disposal of property, plant, and equipment
   
23
     
-
 
Depreciation expense
   
531
     
560
 
Amortization of other intangible assets
   
359
     
176
 
Amortization of deferred financing costs
   
237
     
238
 
Deferred income taxes
   
(29
)
   
793
 
Stock compensation expense
   
466
     
197
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(1,726
)
   
965
 
Inventories
   
366
     
5,237
 
Other current assets
   
2,984
     
(2,051
)
Other assets
   
(427
)
   
(23
)
Accounts payable
   
8,229
     
2,955
 
Accrued postretirement liabilities
   
(9
)
   
(14
)
Accrued liabilities and other
   
(3,539
)
   
(6,029
)
Net cash provided by operating activities
 
$
14,025
   
$
8,420
 
                 
Cash flows from investing activities:
               
Capital expenditures
 
$
(886
)
 
$
(363
)
Restricted cash, MSA escrow deposits
   
1,702
     
(530
)
Net cash provided by (used in) investing activities
 
$
816
   
$
(893
)

Turning Point Brands, Inc.
Consolidated Statements of Cash Flows (Cont.)
(dollars in thousands)
(unaudited)

    Three Months ended March 31,  
   
2019
   
2018
 
Cash flows from financing activities:
           
Proceeds from 2018 first lien term loan
 
$
-
   
$
160,000
 
Payments of 2018 first lien term loan
   
(2,000
)
   
-
 
Proceeds from 2018 second lien term loan
   
-
     
40,000
 
Payments of 2018 revolving credit facility
   
(12,000
)
   
-
 
Payment of dividends
   
(880
)
   
-
 
Payments of 2017 first lien term loan
   
-
     
(140,613
)
Payments of 2017 second lien term loan
   
-
     
(55,000
)
Proceeds from (payments of) 2017 revolving credit facility, net
   
-
     
(8,000
)
Payments of financing costs
   
-
     
(3,279
)
Exercise of options
   
187
     
20
 
Redemption of options
   
(12
)
   
-
 
Net cash used in financing activities
 
$
(14,705
)
 
$
(6,872
)
                 
Net increase in cash
 
$
136
   
$
655
 
                 
Cash, beginning of period:
               
Unrestricted
   
3,306
     
2,607
 
Restricted
   
2,361
     
4,709
 
Total cash at beginning of period
 
$
5,667
   
$
7,316
 
                 
Cash, end of period:
               
Unrestricted
 
$
1,741
   
$
3,792
 
Restricted
   
4,062
     
4,179
 
Total cash at end of period
 
$
5,803
   
$
7,971
 
                 
Supplemental schedule of noncash financing activities:
               
Accrued expenses incurred for financing costs
 
$
-
   
$
154
 
Dividends declared not paid
 
$
887
   
$
-
 

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

Turning Point Brands, Inc.
Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
(dollars in thousands except share data)
(unaudited)

   
Voting
Shares
   
Common
Stock,
Voting
   
Common
Stock,
Non-Voting
   
Additional
Paid-In
Capital
   
Accumulated
Other
Comprehensive
Loss
   
Accumulated
Deficit
   
Total
 
                                           
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 gain on MSA investments, net of tax of $93
   
-
     
-
     
-
     
-
     
402
     
-
     
402
 
Unrealized loss on other investments, net of tax of $0
   
-
     
-
     
-
     
-
     
-
     
-
     
-
 
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
 
                                                         
Beginning balance January 1, 2018
   
19,210,633
   
$
192
   
$
-
   
$
103,640
   
$
(2,973
)
 
$
(47,535
)
 
$
53,324
 
Unrecognized pension and postretirement cost adjustment
   
-
     
-
     
-
     
-
     
30
     
-
     
30
 
Unrealized loss on MSA investments, net of tax of $133
   
-
     
-
     
-
     
-
     
(379
)
   
-
     
(379
)
Unrealized loss on other investments, net of tax of $2
   
-
     
-
     
-
     
-
     
(5
)
   
-
     
(5
)
Unrealized loss on interest rate swaps, net of tax of $185
   
-
     
-
     
-
     
-
     
(526
)
   
-
     
(526
)
Stock compensation expense
   
-
     
-
     
-
     
177
     
-
     
-
     
177
 
Restricted stock forfeitures
   
(517
)
   
-
     
-
     
(4
)
   
-
     
-
     
(4
)
Exercise of options
   
12,501
     
-
     
-
     
20
     
-
     
-
     
20
 
Dividends
   
-
     
-
     
-
     
-
     
-
     
(777
)
   
(777
)
Reclassfication of tax effects from accumulated other comprehensive income
   
-
     
-
     
-
     
-
     
24
     
(24
)
   
-
 
Net income
   
-
     
-
     
-
     
-
     
-
     
3,032
     
3,032
 
Ending balance March 31, 2018
   
19,222,617
   
$
192
   
$
-
   
$
103,833
   
$
(3,829
)
 
$
(45,304
)
 
$
54,892
 

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

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 and Turning Point Brands, LLC (“TPLLC”), and its subsidiaries. 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”); and TPLLC and its subsidiaries Intrepid Brands, LLC (“Intrepid”), Vapor Beast, LLC (“VaporBeast,” f/k/a Smoke Free Technologies, Inc.), Vapor Shark, LLC, and its subsidiaries (collectively, “Vapor Shark,” f/k/a The Hand Media), Vapor Acquisitions Company, LLC (“Vapor Supply”), Vapor Finance, LLC (“VFIN”), International Vapor Group, LLC and its subsidiaries (collectively, “IVG”), and Nu-X Ventures LLC (“Nu-X”).

Basis of Presentation

The accompanying 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, 2018, and are unaudited. 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, 2018. 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.

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, net of sales incentives and sales returns, including shipping and handling charges billed to customers, upon delivery of goods to the customer 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 Revenue from Contracts with Customers (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.

Topic 606 requires 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 17 of Notes to Consolidated Financial Statements. An additional disaggregation of contract revenue by sales channel can be found within Note 17 as well.

Shipping Costs

The Company records shipping costs incurred as a component of selling, general, and administrative expenses. Shipping costs incurred were approximately $4.3 million and $3.2 million for the three months ending March 31, 2019 and 2018, respectively.

Fair Value

GAAP establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3).

The three levels of the fair value hierarchy under GAAP are described below:


Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date.

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 – Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

Derivative Instruments

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

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

Risks and Uncertainties

Manufacturers and sellers of tobacco products are subject to regulation at the federal, state, and local levels. Such regulations include, among others, labeling requirements, limitations on advertising, and prohibition of sales to minors. The tobacco industry is likely to continue to be heavily regulated. There can be no assurance as to the ultimate content, timing, or effect of any regulation of tobacco products by any federal, state, or local legislative or regulatory body, nor can there be any assurance that any such legislation or regulation would not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

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 statue 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, 2019, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $31.0 million. At December 31, 2018, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $30.6 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 deposits 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. The following shows the fair value of the MSA escrow account:

   
As of March 31, 2019
   
As of December 31, 2018
 
   
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
   
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
Cash and cash equivalents
 
$
4,062
   
$
-
   
$
-
   
$
4,062
   
$
2,361
   
$
-
   
$
-
   
$
2,361
 
U.S. Governmental agency obligations (unrealized gain position < 12 months)
   
500
     
2
     
-
     
502
     
1,193
     
9
     
-
     
1,202
 
U.S. Governmental agency obligations (unrealized loss position < 12 months)
   
-
     
-
     
-
     
-
     
1,000
     
-
     
(3
)
   
997
 
U.S. Governmental agency obligations (unrealized loss position > 12 months)
   
27,511
     
-
     
(1,030
)
   
26,481
     
27,519
     
-
     
(1,529
)
   
25,990
 
   
$
32,073
   
$
2
   
$
(1,030
)
 
$
31,045
   
$
32,073
   
$
9
   
$
(1,532
)
 
$
30,550
 

Fair value for the U.S. Governmental agency obligations are Level 2. The following shows the maturities of the U.S. Governmental agency obligations:

 
As of
 
   
March 31,
2019
   
December 31,
2018
 
Less than one year
 
$
1,499
   
$
1,499
 
One to five years
   
14,091
     
13,591
 
Five to ten years
   
9,453
     
11,152
 
Greater than ten years
   
2,968
     
3,470
 
Total U.S. Governmental agency obligations
 
$
28,011
   
$
29,712
 

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


 
Deposits as of
 
Sales
Year
 
March 31,
 2019
   
December 31,
2018
 
             
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
   
4,552
     
4,552
 
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
 
$
32,073
   
$
32,073
 

Food and Drug Administration (“FDA”): On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”) 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. On August 8, 2016, the FDA deeming regulation became effective. The deeming regulation gave the FDA the authority to additionally regulate cigars, pipe tobacco, electronic cigarettes (“e-cigarettes”), vaporizers, and e-liquids as “deemed” tobacco products under the FSPTCA.

The FDA assesses tobacco product user fees on six classes of regulated tobacco products and computes user fees 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.

Prior to October 1, 2016, these FDA user fees applied only to those products then regulated by the FDA. Effective October 1, 2016, the FDA began additionally applying FDA user fees to newly “deemed” tobacco products subject to FDA user fees as described above, i.e., cigars and pipe tobacco.

On July 28, 2017, the FDA announced a new direction in regulating tobacco products, including the newly “deemed” markets such as cigars and vapor products. The FDA stated it intends to begin several new rulemaking processes, some of which will outline foundational rules governing the premarket application process for the deemed products, including Substantial Equivalence Applications and Premarket Tobacco Applications. Compliance and related costs could be significant and could increase the costs of operating in our NewGen segment. The original filing deadlines for newly “deemed” products on the market as of August 8, 2016, have been postponed until August 8, 2021, for “combustible” products (e.g., cigar and pipe) and August 8, 2022, for “non-combustible” products (e.g., vapor products). The FDA is currently considering changes to this policy. No other significant filing deadlines have been altered at this time. The FDA also acknowledged a “continuum of risk” among tobacco products (i.e., certain tobacco products pose a greater risk to individual and public health than others), that it intends to seek public comment on the role flavors play in attracting youth and the role flavors may play in helping some smokers switch to potentially less harmful forms of nicotine delivery, and that it would be increasing its focus on the regulation of cigarette products. FDA has since published a number of Advanced Notices of Proposed Rulemaking (“ANPRM”) on these subjects.

Recent Accounting Pronouncements Adopted

Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, “Leases.” This ASU requires substantially all leases be recorded on the balance sheet as right of use assets and lease obligations. The Company adopted the ASU using a retrospective adoption method at January 1, 2019, as outlined in ASU No. 2018-11, “Leases - Targeted Improvements.” Under this method of adoption, there is no impact to the comparative consolidated statement of income and consolidated balance sheet. The Company determined that there was no cumulative-effect adjustment to beginning retained earnings on the consolidated balance sheet. The Company will continue to report periods prior to January 1, 2019 in its financial statements under prior guidance as outlined in Accounting Standards Codification Topic 840, “Leases”. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed carry forward of historical lease classifications. Adoption of this standard did not materially impact the Company’s income before income taxes and had no impact on the statement of cash flows. See Note 11, “Leases” for further details.

Note 3. Acquisitions

IVG

In September 2018, the Company acquired 100% of the equity interest of IVG for total consideration of $23.8 million satisfied through $14.5 million paid in cash, 153,079 shares of common stock with a fair value of $5.3 million, and a $4.0 million note payable to IVG’s former owners (“IVG Note”) which matures 18 months from the acquisition date.  All principal and accrued and unpaid interest under the IVG Note is subject to indemnification obligations of the sellers pursuant to the International Vapor Group Stock Purchase Agreement dated as of September 5, 2018. The arrangement includes an additional $4.5 million of earnouts with both performance-based and service-based conditions payable to former IVG owners who became employees of the Company as a result of the acquisition. Such amounts will be considered compensation and not a component of the IVG purchase price. The portion of earnout payments a recipient will receive will be calculated by reference to certain performance metrics not to exceed a two-year period as specified within the acquisition agreement. The Company recorded earnout expense of approximately $0.4 million within the consolidated statement of income for the three months ended March 31, 2019, based on the probability of achieving the performance conditions.

IVG markets and sells a broad array of proprietary and third-party vapor products directly to adult consumers through an online platform under brand names such as VaporFi, South Beach Smoke, and Direct Vapor. IVG operates company-owned stores under the VaporFi brand and also operates as a franchisor to franchisee-owned stores. The acquisition of IVG adds a significant business-to-consumer distribution platform to the Company’s NewGen portfolio. As of March 31, 2019, the Company had not completed the accounting for the acquisition. The following purchase price and goodwill are based on the excess of the acquisition price over the estimated fair value of the tangible and intangible assets acquired and are based on management’s preliminary estimates.

Total consideration transferred
 
$
24,292
 
Adjustments to consideration transferred:
 
Cash acquired, net of debt assumed
   
(221
)
Working capital
   
(245
)
Adjusted consideration transferred
   
23,826
 
         
Assets acquired:
       
Working capital (primarily inventory)
   
3,331
 
Fixed assets
   
1,274
 
Intangible assets
   
7,880
 
Net assets acquired
   
12,485
 
         
Goodwill
 
$
11,341
 

The goodwill of $11.3 million consists of the synergies and scale expected from combining the operations and is currently deductible for tax purposes.

Vapor Supply

On April 30, 2018, the Company purchased the assets of Vapor Supply LLC, vaporsupply.com, and some of its affiliates including the Ecig.com domain through its subsidiary Vapor Acquisitions Company, LLC, for total consideration of $4.8 million paid in cash to strengthen its presence within the NewGen segment. Vapor Supply is a business-to-business e-commerce distribution platform servicing independent retail vape shops. Additionally, Vapor Supply manufactures and markets proprietary e-liquids under the DripCo brand and operates company-owned stores. As of March 31, 2019, the Company had not completed the accounting for the acquisition of these assets. The following fair value for working capital (primarily inventory), fixed assets, and trade name are based on management’s preliminary estimates:

   
Fair Value
 
       
Working capital
 
$
2,500
 
Fixed assets
   
272
 
Trade name
   
2,028
 
Total consideration transferred
 
$
4,800
 

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, 2019. During 2018 the Company executed various forward contracts, none of which met hedge accounting requirements, for the purchase of €14.5 million. At March 31, 2019, and December 31, 2018, the Company had forward contracts for the purchase of €0.0 million and €1.5 million, respectively.

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, 2019, and December 31, 2018, resulted in a liability of $1.5 million and $0.9 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.

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.

Note Payable – IVG

The fair value of the IVG Note approximates its carrying value of $4.0 million due to the recency of the note’s issuance, relative to the end of the quarter, March 31, 2019.

Long-Term Debt

As the Company’s long-term debt 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, 2019, the fair values of the 2018 First Lien Term Loan and the 2018 Second Lien Term Loan approximated $152.0 million and $40.0 million, respectively. As of December 31, 2018, the fair values of the 2018 First Lien Term Loan and the 2018 Second Lien Term Loan approximated $154.0 million and $40.0 million, respectively. See Note 10 of Notes to Consolidated Financial Statements for information regarding our credit facilities.

Foreign Exchange

The Company did not have any open forward contracts at March 31, 2019. The Company had forward contracts for the purchase of €1.5 million as of December 31, 2018. The fair values of the foreign exchange contracts are based upon quoted market prices and resulted in a gain of approximately $0.1 million for the three months ended March 31, 2019. As there were no open contracts as of March 31, 2019, there is no resulting balance sheet position related to the fair value.

Interest Rate Swaps

The Company had swap contracts for a total notional amount of $70 million at March 31, 2019 and December 31, 2018. The fair values of the swap contracts are based upon quoted market prices and resulted in a liability of $1.5 million and $0.9 million as of March 31, 2019 and December 31, 2018, respectively.

Note 6. Inventories

The components of inventories are as follows:

   
March 31,
2019
   
December 31,
2018
 
Raw materials and work in process
 
$
3,967
   
$
2,722
 
Leaf tobacco
   
35,929
     
34,977
 
Finished goods - Smokeless products
   
6,540
     
6,321
 
Finished goods - Smoking products
   
15,079
     
14,666
 
Finished goods - NewGen products
   
33,810
     
37,194
 
Other
   
903
     
738
 
     
96,228
     
96,618
 
LIFO reserve
   
(5,357
)
   
(5,381
)
   
$
90,871
   
$
91,237
 

The inventory valuation allowance was $1.5 million and $2.5 million as of March 31, 2019, and December 31, 2018, respectively.

Note 7. Property, Plant, and Equipment

Property, plant, and equipment consisted of the following:

   
March 31,
2019
   
December 31,
2018
 
Land
 
$
22
   
$
22
 
Buildings and improvements
   
2,320
     
2,320
 
Leasehold improvements
   
2,101
     
2,101
 
Machinery and equipment
   
14,214
     
13,292
 
Furniture and fixtures
   
5,003
     
5,045
 
     
23,660
     
22,780
 
Accumulated depreciation
   
(12,718
)
   
(12,191
)
   
$
10,942
   
$
10,589
 

Note 8. Other Current Assets

Other current assets consisted of the following:

   
March 31,
2019
   
December 31,
2018
 
Inventory deposits
 
$
7,134
   
$
9,739
 
Other
   
4,532
     
4,955
 
   
$
11,666
   
$
14,694
 

Note 9. Accrued Liabilities

Accrued liabilities consisted of the following:

   
March 31,
2019
   
December 31,
2018
 
Accrued payroll and related items
 
$
3,093
   
$
6,063
 
Customer returns and allowances
   
3,082
     
3,634
 
Taxes payable
   
3,758
     
2,138
 
Lease liabilities
   
1,700
     
-
 
Other
   
8,786
     
11,090
 
   
$
20,419
   
$
22,925
 

Note 10. Notes Payable and Long-Term Debt

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

   
March 31,
2019
   
December 31,
2018
 
2018 First Lien Term Loan
 
$
152,000
   
$
154,000
 
2018 Second Lien Term Loan
   
40,000
     
40,000
 
Note payable - IVG
   
4,000
     
4,000
 
Total notes payable and long-term debt
   
196,000
     
198,000
 
Less deferred finance charges
   
(3,100
)
   
(3,285
)
Less current maturities
   
(12,000
)
   
(8,000
)
   
$
180,900
   
$
186,715
 

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 (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. Proceeds from the 2018 Credit Facility were used to repay, in full, the 2017 Credit Facility. The Company incurred a loss on extinguishment of debt of $2.4 million in the first quarter of 2018 as a result of the refinancing.

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. Refer to Note 18 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 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”). The 2018 First Lien Credit Facility contains certain financial covenants including maximum senior leverage ratio of 3.50x with step-downs to 3.00x, a maximum total leverage ratio of 4.50x with step-downs to 4.00x, and a minimum fixed charge coverage ratio of 1.20x. The weighted average interest rate of the 2018 First Lien Term Loan was 5.75% at March 31, 2019. The weighted average interest rate of the 2018 Revolving Credit Facility was 6.61% at March 31, 2019. At March 31, 2019, the Company had $14.0 million of borrowings outstanding under the 2018 Revolving Credit Facility. The $36.0 million unused portion of the 2018 Revolving Credit Facility is reduced by a $1.3 million letter of credit with Fifth Third Bank, resulting in $34.7 million of availability under the 2018 Revolving Credit Facility at March 31, 2019.

2018 Second Lien Credit Facility: The 2018 Second Lien Credit Facility bears interest at a rate of LIBOR plus 7.00% and has a maturity date of March 7, 2024. The 2018 Second Lien Term Loan is secured by a second priority interest in the Collateral and is guaranteed by the same entities as the 2018 First Lien Term Loan. The 2018 Second Lien Credit Facility contains certain financial covenants including a maximum senior leverage ratio of 3.75x with step-downs to 3.50x, a maximum total leverage ratio of 4.75x with step-downs to 4.50x, and a minimum fixed charge coverage ratio of 1.10x. The weighted average interest rate of the 2018 Second Lien Term Loan was 9.48% at March 31, 2019.

Note Payable – IVG

In September 2018, the Company issued a note payable to IVG’s former shareholders (“IVG Note”). The IVG Note is $4.0 million principal with 6.0% interest compounding annually and matures on March 5, 2020. All principal and accrued and unpaid interest under the IVG Note is subject to indemnification obligations of the sellers pursuant to the International Vapor Group Stock Purchase Agreement dated as of September 5, 2018.

Note 11. 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,
2019
 
       
Operating lease cost
     
Cost of sales
 
$
192
 
Selling, general and administrative
   
555
 
Variable lease cost (1)
   
245
 
Short-term lease cost
   
54
 
Sublease income
   
(30
)
Total operating lease cost
 
$
1,016
 
 
(1) Variable lease expense includes elements of a contract that do not represent a good or service but for which the lessee is responsible for paying.

   
March 31,
2019
 
Assets:
     
Right of use assets
 
$
10,951
 
Total leased assets
 
$
10,951
 
         
Liabilities:
       
Current lease liabilities (2)
 
$
1,700
 
Long-term lease liabilities
   
9,504
 
Total Lease Liabilities
 
$
11,204
 
 
(2) Reported within accrued liabilities on the balance sheet

   
As of March 31, 2019
 
Weighted-average remaining lease term  - operating leases
 
9.0 years
 
Weighted-average discount rate - operating leases
   
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.

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

   
March 31,
2019
 
Remaining nine months of 2019
 
$
1,736
 
2020
   
2,167
 
2021
   
1,788
 
2022
   
1,144
 
2023
   
973
 
Years thereafter
   
7,245
 
Total lease payments
 
$
15,053
 
Less: Imputed interest
   
3,849
 
Present value of lease liabilities
 
$
11,204
 

Note 12. Income Taxes

In December 2017, the U.S. Congress passed the Tax Cuts and Jobs Act of 2017 (”TCJA”) which the President signed in the same month. The TCJA reduced the corporate income tax rate to 21%, effective January 1, 2018. Other significant changes accompanying the corporate income tax rate reduction include eliminating the corporate alternative minimum tax, limiting the interest expense deduction to 30% of adjusted taxable income, and limiting net operating losses to 80% of taxable income for losses arising in tax years beginning after 2017. The TCJA required the Company to remeasure its deferred tax assets and liabilities at the newly enacted tax rate in December 2017, the period of enactment.

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’s effective income tax rate for the three months ended March 31, 2018, was 21% which includes a discrete tax deduction of $0.3 million for the three months ended March 31, 2018, 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 2014.

Note 13. 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 2019. In the second quarter of 2018, the Company made mutually agreed upon lump-sum payments to certain individuals covered by the defined benefit pension plan which resulted in a curtailment loss of approximately $0.3 million during the second quarter of 2018.

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 expects to contribute approximately $0.2 million to its postretirement plan in 2019 for the payment of benefits.

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
 
   
2019
   
2018
   
2019
   
2018
 
Service cost
 
$
26
   
$
26
   
$
-
   
$
-
 
Interest cost
   
130
     
142
     
25
     
29
 
Expected return on plan assets
   
(161
)
   
(254
)
   
-
     
-
 
Amortization of (gains) losses
   
37
     
60
     
(42
)
   
(20
)
Net periodic benefit (income) cost
 
$
32
   
$
(26
)
 
$
(17
)
 
$
9
 

Note 14. 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, 2019, net of forfeitures, there were 18,059 shares of restricted stock, 272,776 performance-based restricted stock units, and 447,728 options granted under the 2015 Plan. There are 661,437 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, 2017
   
763,672
     
5.73
     
2.36
 
                         
Granted
   
124,100
     
21.27
     
6.33
 
Exercised
   
(209,943
)
   
3.97
     
1.47
 
Forfeited
   
(18,255
)
   
13.46
     
3.90
 
Outstanding, December 31, 2018
   
659,574
   
$
9.00
   
$
3.34
 
                         
                         
Granted
   
155,780
     
47.58
     
15.63
 
Exercised
   
(22,892
)
   
8.16
     
3.08
 
Forfeited
   
(912
)
   
44.69
     
14.64
 
Outstanding, March 31, 2019
   
791,550
   
$
16.58
   
$
5.75
 

Under the 2006 and 2015 Plans, the total intrinsic value of options exercised during the three months ended March 31, 2019 and 2018, was $0.8 million, and $0.3 million, respectively.

At March 31, 2019, under the 2006 Plan, the outstanding stock options’ exercise price for 405,296 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 4.17 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, 2019, 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
 
Number of options granted
   
40,000
     
93,819
     
98,100
     
26,000
     
155,780
 
Options outstanding at March 31, 2019
   
30,700
     
79,874
     
94,730
     
26,000
     
154,950
 
Number exercisable at March 31, 2019
   
19,150
     
53,511
     
33,746
     
17,420
     
-
 
Exercise price
 
$
13.00
   
$
15.41
   
$
21.21
   
$
21.49
   
$
47.58
 
Remaining lives
   
7.87
     
8.13
     
8.94
     
8.96
     
9.98
 
Risk free interest rate
   
1.89
%
   
1.76
%
   
2.65
%
   
2.62
%
   
2.34
%
Expected volatility
   
27.44
%
   
26.92
%
   
28.76
%
   
28.76
%
   
30.95
%
Expected life
   
6.000
     
6.000
     
6.000
     
5.495
     
6.000
 
Dividend yield
   
-
     
-
     
0.83
%
   
0.82
%
   
0.42
%
Fair value at grant date
 
$
3.98
   
$
4.60
   
$
6.37
   
$
6.18
   
$
15.63
 

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 $0.1 million for the three months ended March 31, 2019 and 2018. Total unrecognized compensation expense related to options at March 31, 2019, is $2.5 million, which will be expensed over 2.62 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). On March 7, 2018, the Company’s Board of Directors granted 96,000 PRSUs to employees of the Company.  On March 20, 2019, the Company’s Board of Directors granted an additional 92,500 PRSUs to employees of the Company. The fair values of the PRSUs granted on March 7, 2018, and March 20, 2019, are $21.21 and $47.58, respectively, the Company’s stock price on the date of grant. As of March 31, 2019, there are 267,900 PRSUs outstanding, all of which are unvested. On March 20, 2019, the Company’s Board of Directors granted 4,876 PRSUs with a one-year performance period. The fair value of these awards is $47.58. The Company recorded compensation expense related to the PRSUs of approximately $0.2 million and $0.1 million in the consolidated statements of income for the three months ended March 31, 2019 and 2018, based on the probability of achieving the performance condition. Total unrecognized compensation expense related to these awards at March 31, 2019, is $6.7 million which will be expensed over the service periods based on the probability of achieving the performance condition.

Note 15. 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 a defendant in certain cases which have been dormant for many years, which cases have now been dismissed with prejudice.

The Company is subject to several lawsuits alleging personal injuries resulting from malfunctioning vaporizer devices 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.

Note 16. 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,  
   
2019
   
2018
 
   
Income
   
Shares
   
Per
Share
   
Income
   
Shares
   
Per
Share
 
Consolidated net income
 
$
6,560
               
$
3,032
             
                                         
Basic EPS:
                                       
Weighted average
           
19,559,596
   
$
0.34
             
19,221,892
   
$
0.16
 
                                                 
Diluted EPS:
                                               
Effect of dilutive securities:
                                               
Stock options
           
486,368
                     
540,302
         
             
20,045,964
   
$
0.33
             
19,762,194
   
$
0.15
 

Note 17. 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 and distributes 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) distributes a wide assortment of vaping and CBD related products to non-traditional retail outlets via VaporBeast, Vapor Shark, Vapor Supply, and IVG; and (iii) distributes a wide assortment of vaping and CBD related products to individual consumers via Vapor Shark, Vapor World, 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 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. In 2018, corporate costs were allocated to the segments based on net sales. Management believes this allocation does not reflect the operations of the business. Prior periods have been adjusted to conform to the current year presentation.

The tables below present financial information about reported segments:

   
Three Months Ended
March 31,
 
   
2019
   
2018
 
             
Net sales
           
Smokeless products
 
$
22,544
   
$
20,747
 
Smoking products
   
25,519
     
26,996
 
NewGen products
   
43,565
     
26,199
 
   
$
91,628
   
$
73,942
 
                 
Gross profit
               
Smokeless products
 
$
12,073
   
$
10,993
 
Smoking products
   
13,484
     
13,164
 
NewGen products
   
14,907
     
7,652
 
   
$
40,464
   
$
31,809
 
                 
Operating income (loss)
               
Smokeless products
 
$
7,487
   
$
6,805
 
Smoking products
   
9,946
     
9,544
 
NewGen products
   
2,838
     
1,010
 
Corporate unallocated (1)
   
(8,236
)
   
(7,618
)
   
$
12,035
   
$
9,741
 
                 
Interest expense, net
   
3,856
     
3,654
 
Investment Income
   
(144
)
   
(95
)
Loss on extinguishment of debt
   
-
     
2,384
 
Net periodic benefit income, excluding service cost
   
(11
)
   
(43
)
                 
Income before income taxes
 
$
8,334
   
$
3,841
 
                 
Capital expenditures
               
Smokeless products
 
$
577
   
$
349
 
Smoking products
   
-
     
-
 
NewGen products
   
309
     
14
 
   
$
886
   
$
363
 
                 
Depreciation and amortization
               
Smokeless products
 
$
357
   
$
339
 
Smoking products
   
-
     
-
 
NewGen products
   
533
     
396
 
   
$
890
   
$
735
 
                 
(1) Includes corporate costs that are not allocated to any of the three reportable segments.
 

   
March 31,
2019
   
December 31,
2018
 
Assets
           
Smokeless products
 
$
108,762
   
$
99,441
 
Smoking products
   
143,108
     
142,520
 
NewGen products
   
93,990
     
95,397
 
Corporate unallocated (1)
   
1,682
     
2,019
 
 
 
$
347,542
   
$
339,377
 
 
(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 to wholesalers, retailers, and ultimate end-customers. NewGen net sales are broken out by sales channel below.

 
 
NewGen Segment
 
 
 
Three Months Ended
March 31,
 
 
 
2019
 
 
2018
 
             
Wholesalers
 
$
2,197
   
$
2,330
 
Retail outlets
   
28,645
     
20,884
 
End-customers
   
12,673
     
2,935
 
Other
   
50
     
50
 
   
$
43,565
   
$
26,199
 

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,
 
   
2019
   
2018
 
Domestic
 
$
88,769
   
$
70,858
 
Foreign
   
2,859
     
3,084
 
Total
 
$
91,628