Company Quick10K Filing
Quick10K
Turning Point Brands
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$52.75 20 $1,030
10-Q 2019-06-30 Quarter: 2019-06-30
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 2019-07-31 Earnings, Exhibits
8-K 2019-07-25 Enter Agreement, Off-BS Arrangement, Sale of Shares, Other Events, Exhibits
8-K 2019-07-24 Enter Agreement, Earnings, Regulation FD, Exhibits
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
DIS Walt Disney 240,140
COHR Coherent 3,300
HESM Hess Midstream Partners 1,120
CNXN PC Connection 935
OMP Oasis Midstream Partners 688
ARDS Aridis Pharmaceuticals 75
CIFS China Internet Nationwide Financial Services 58
CLSD Clearside Biomedical 45
MICR Micron Solutions 7
CCSB Community Savings Bancorp 0
TPB 2019-06-30
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. Other Assets
Note 10. Accrued Liabilities
Note 11. Notes Payable and Long-Term Debt
Note 12. Leases
Note 13. Income Taxes
Note 14. Pension and Postretirement Benefit Plans
Note 15. Share Incentive Plans
Note 16. Contingencies
Note 17. Legal Settlement
Note 18. Income per Share
Note 19. Segment Information
Note 20. Dividends
Note 21. 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-10.1 ex10_1.htm
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 2019-06-30

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 June 30, 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

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 July 25, 2019, there were 19,658,317 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
 

 
 
9
 

 
 
11
 
   
 
12
 
   
ITEM 2
33
 


ITEM 3
44
 
   
ITEM 4
44
     
PART II—OTHER INFORMATION
 
     
ITEM 1
45
 
   
ITEM 1A
45
 
   
ITEM 2
46
 
   
ITEM 3
46
 
   
ITEM 4
46
 
   
ITEM 5
46
 
   
ITEM 6
46
 
   
  47

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, for example, current court action moving forward certain substantial Pre Market Tobacco Application obligations;

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 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)

ASSETS
 
(unaudited)
June 30,
2019
   
December 31,
2018
 
Current assets:
           
Cash
 
$
2,127
   
$
3,306
 
Accounts receivable, net of allowances of $49 in 2019 and $42 in 2018
   
6,280
     
2,617
 
Inventories
   
94,583
     
91,237
 
Other current assets
   
18,184
     
14,694
 
Total current assets
   
121,174
     
111,854
 
Property, plant, and equipment, net
   
11,390
     
10,589
 
Right of use assets
   
11,304
     
-
 
Deferred financing costs, net
   
797
     
870
 
Goodwill
   
147,846
     
145,939
 
Other intangible assets, net
   
32,842
     
35,339
 
Master Settlement Agreement (MSA) escrow deposits
   
31,724
     
30,550
 
Other assets
   
4,218
     
4,236
 
Total assets
 
$
361,295
   
$
339,377
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
 
$
19,768
   
$
6,841
 
Accrued liabilities
   
20,142
     
22,925
 
Current portion of long-term debt
   
13,000
     
8,000
 
Revolving credit facility
   
15,000
     
26,000
 
Total current liabilities
   
67,910
     
63,766
 
Notes payable and long-term debt
   
173,602
     
186,715
 
Deferred income taxes
   
1,949
     
2,291
 
Postretirement benefits
   
3,096
     
3,096
 
Lease liabilities
   
9,951
     
-
 
Other long-term liabilities
   
2,786
     
886
 
Total liabilities
   
259,294
     
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 - 19,657,946 at June 30, 2019, and 19,553,857 at December 31, 2018
   
197
     
196
 
Common stock, nonvoting, $0.01 par value; authorized shares, 10,000,000; issued and outstanding shares -0-
   
-
     
-
 
Additional paid-in capital
   
112,366
     
110,466
 
Accumulated other comprehensive loss
   
(3,040
)
   
(2,536
)
Accumulated deficit
   
(7,522
)
   
(25,503
)
Total stockholders’ equity
   
102,001
     
82,623
 
Total liabilities and stockholders’ equity
 
$
361,295
   
$
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
June 30,
 
   
2019
   
2018
 
Net sales
 
$
93,339
   
$
81,101
 
Cost of sales
   
52,156
     
45,306
 
Gross profit
   
41,183
     
35,795
 
Selling, general, and administrative expenses
   
21,242
     
20,993
 
Operating income
   
19,941
     
14,802
 
Interest expense, net
   
3,736
     
3,455
 
Investment income
   
(118
)
   
(144
)
Loss on extinguishment of debt
   
150
     
-
 
Net periodic benefit (income), excluding service cost
   
(11
)
   
264
 
Income before income taxes
   
16,184
     
11,227
 
Income tax expense
   
2,979
     
1,908
 
Consolidated net income
 
$
13,205
   
$
9,319
 
                 
Basic income per common share:
               
Consolidated net income
 
$
0.67
   
$
0.48
 
Diluted income per common share:
               
Consolidated net income
 
$
0.66
   
$
0.47
 
Weighted average common shares outstanding:
               
Basic
   
19,621,695
     
19,268,625
 
Diluted
   
20,131,980
     
19,788,865
 
 
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)

   
Six Months Ended
June 30,
 
   
2019
   
2018
 
             
Net sales
 
$
184,967
   
$
155,043
 
Cost of sales
   
103,320
     
87,439
 
Gross profit
   
81,647
     
67,604
 
Selling, general, and administrative expenses
   
49,671
     
43,061
 
Operating income
   
31,976
     
24,543
 
Interest expense, net
   
7,592
     
7,109
 
Investment income
   
(262
)
   
(239
)
Loss on extinguishment of debt
   
150
     
2,384
 
Net periodic benefit (income), excluding service cost
   
(22
)
   
221
 
Income before income taxes
   
24,518
     
15,068
 
Income tax expense
   
4,753
     
2,717
 
Consolidated net income
 
$
19,765
     
12,351
 
                 
Basic income per common share:
               
Consolidated net income
 
$
1.01
   
$
0.64
 
Diluted income per common share:
               
Consolidated net income
 
$
0.99
   
$
0.62
 
Weighted average common shares outstanding:
               
Basic
   
19,590,817
     
19,245,388
 
Diluted
   
19,895,959
     
19,787,846
 

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
June 30,
 
   
2019
   
2018
 
Consolidated net income
 
$
13,205
   
$
9,319
 
                 
Other comprehensive income (loss), net of tax
               
Amortization of unrealized pension and postretirement gain (loss), net of tax of $1 in 2019 and $72 in 2018
   
(4
)
   
274
 
Unrealized gain (loss) on investments, net of tax of $170 in 2019 and $31 in 2018
   
509
     
(123
)
Unrealized gain (loss) on interest rate swaps, net of tax of $310 in 2019 and $162 in 2018
   
(931
)
   
451
 
     
(426
)
   
602
 
Consolidated comprehensive income
 
$
12,779
   
$
9,921
 

   
Six Months Ended
June 30,
 
   
2019
   
2018
 
Consolidated net income
 
$
19,765
   
$
12,351
 
                 
Other comprehensive income (loss), net of tax
               
Amortization of unrealized pension and postretirement gain (loss), net of tax of $3 in 2019 and $82 in 2018
   
(8
)
   
304
 
Unrealized gain (loss) on investments, net of tax of $263 in 2019 and $104 in 2018
   
911
     
(507
)
Unrealized loss on interest rate swaps, net of tax of $493 in 2019 and $22 in 2018
   
(1,407
)
   
(75
)
     
(504
)
   
(278
)
                 
Consolidated Comprehensive income
 
$
19,261
   
$
12,073
 

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)
 
   
Six Months Ended
June 30,
 
   
2019
   
2018
 
Cash flows from operating activities:
           
Consolidated net income
 
$
19,765
   
$
12,351
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Loss on extinguishment of debt
   
150
     
2,384
 
Loss on disposal of property, plant, and equipment
   
22
     
-
 
Depreciation expense
   
1,163
     
1,117
 
Amortization of other intangible assets
   
723
     
351
 
Amortization of deferred financing costs
   
478
     
474
 
Deferred income taxes
   
(109
)
   
1,443
 
Stock compensation expense
   
1,412
     
691
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(3,663
)
   
(2,440
)
Inventories
   
(3,346
)
   
(10,348
)
Other current assets
   
(3,534
)
   
(4,463
)
Other assets
   
(359
)
   
249
 
Accounts payable
   
12,927
     
10,047
 
Accrued postretirement liabilities
   
(83
)
   
(71
)
Accrued liabilities and other
   
(3,848
)
   
(5,820
)
Net cash provided by operating activities
 
$
21,698
   
$
5,965
 
                 
Cash flows from investing activities:
               
Capital expenditures
 
$
(1,964
)
 
$
(1,003
)
Restricted cash, MSA escrow deposits
   
1,677
     
(1,735
)
Acquisitions, net of cash acquired
   
-
     
(4,797
)
Issuance of note receivable
   
-
     
(6,500
)
Net cash used in investing activities
 
$
(287
)
 
$
(14,035
)

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

   
Six Months Ended
June 30,
 
   
2019
   
2018
 
Cash flows from financing activities:
           
Proceeds from 2018 first lien term loan
 
$
-
   
$
158,000
 
Payments of 2018 first lien term loan
   
(4,000
)
   
-
 
Proceeds from 2018 second lien term loan
   
-
     
40,000
 
Payments of 2018 second lien term loan
   
(4,489
)
   
-
 
Proceeds from 2018 revolving credit facility
   
-
     
16,000
 
Payments of 2018 revolving credit facility
   
(11,000
)
   
-
 
Payment of dividends
   
(1,762
)
   
(768
)
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 VaporBeast Note Payable
   
-
     
(2,000
)
Proceeds from release of restricted funds
   
-
     
1,107
 
Payments of financing costs
   
(179
)
   
(3,279
)
Exercise of options
   
610
     
607
 
Surrender of restricted stock
   
(81
)
   
-
 
Redemption of options
   
(12
)
   
-
 
Net cash provided by (used in) financing activities
 
$
(20,913
)
 
$
6,054
 
                 
Net increase (decrease) in cash
 
$
498
   
$
(2,016
)
                 
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
 
$
2,127
   
$
3,433
 
Restricted
   
4,038
     
1,867
 
Total cash at end of period
 
$
6,165
   
$
5,300
 
                 
Supplemental schedule of noncash financing activities:
               
Accrued expenses incurred for financing costs
 
$
-
   
$
43
 
Dividends declared not paid
 
$
897
   
$
780
 

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 April 1, 2019
   
19,576,398
   
$
196
   
$
-
   
$
111,089
   
$
(2,614
)
 
$
(19,830
)
 
$
88,841
 
Unrecognized pension and postretirement cost adjustment, net of tax of $1
   
-
     
-
     
-
     
-
     
(4
)
   
-
     
(4
)
Unrealized gain on MSA investments, net of tax of $170
   
-
     
-
     
-
     
-
     
509
     
-
     
509
 
Unrealized loss on interest rate swaps, net of tax of $310
   
-
     
-
     
-
     
-
     
(931
)
   
-
     
(931
)
Stock compensation expense
   
-
     
-
     
-
     
938
     
-
     
-
     
938
 
Restricted stock forfeitures
   
(1,900
)
   
-
     
-
     
(83
)
   
-
     
-
     
(83
)
Exercise of options
   
83,448
     
1
     
-
     
422
     
-
     
-
     
423
 
Dividends
   
-
     
-
     
-
     
-
     
-
     
(897
)
   
(897
)
Net income
   
-
     
-
     
-
     
-
     
-
     
13,205
     
13,205
 
Ending balance June 30, 2019
   
19,657,946
   
$
197
   
$
-
   
$
112,366
   
$
(3,040
)
 
$
(7,522
)
 
$
102,001
 
                                                         
Beginning balance April 1, 2018
   
19,222,617
   
$
192
   
$
-
   
$
103,833
   
$
(3,829
)
 
$
(45,304
)
 
$
54,892
 
Unrecognized pension and postretirement cost adjustment, net of tax of $72
   
-
     
-
     
-
     
-
     
274
     
-
     
274
 
Unrealized loss on MSA investments, net of tax of $30
   
-
     
-
     
-
     
-
     
(125
)
   
-
     
(125
)
Unrealized loss on other investments, net of tax of $1
   
-
     
-
     
-
     
-
     
2
     
-
     
2
 
Unrealized loss on interest rate swaps, net of tax of $162
   
-
     
-
     
-
     
-
     
451
     
-
     
451
 
Stock compensation expense
   
-
     
-
     
-
     
474
     
-
     
-
     
474
 
Restricted stock forfeitures
   
(2,245
)
   
-
     
-
     
(1
)
   
-
     
-
     
(1
)
Exercise of options
   
92,348
     
1
     
-
     
586
     
-
     
-
     
587
 
Dividends
   
-
     
-
     
-
     
-
     
-
     
(780
)
   
(780
)
Net income
   
-
     
-
     
-
     
-
     
-
     
9,319
     
9,319
 
Ending balance June 30, 2018
   
19,312,720
   
$
193
   
$
-
   
$
104,892
   
$
(3,227
)
 
$
(36,765
)
 
$
65,093
 

   
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 $3
   
-
     
-
     
-
     
-
     
(8
)
   
-
     
(8
)
Unrealized gain on MSA investments, net of tax of $263
   
-
     
-
     
-
     
-
     
911
     
-
     
911
 
Unrealized loss on interest rate swaps, net of tax of $493
   
-
     
-
     
-
     
-
     
(1,407
)
   
-
     
(1,407
)
Stock compensation expense
   
-
     
-
     
-
     
1,387
     
-
     
-
     
1,387
 
Restricted stock forfeitures
   
(1,947
)
   
-
     
-
     
(84
)
   
-
     
-
     
(84
)
Exercise of options
   
106,036
     
1
     
-
     
609
     
-
     
-
     
610
 
Redemption of options
   
-
     
-
     
-
     
(12
)
   
-
     
-
     
(12
)
Dividends
   
-
     
-
     
-
     
-
     
-
     
(1,784
)
   
(1,784
)
Net income
   
-
     
-
     
-
     
-
     
-
     
19,765
     
19,765
 
Ending balance June 30, 2019
   
19,657,946
   
$
197
   
$
-
   
$
112,366
   
$
(3,040
)
 
$
(7,522
)
 
$
102,001
 
                                                         
Beginning balance January 1, 2018
   
19,210,633
   
$
192
   
$
-
   
$
103,640
   
$
(2,973
)
 
$
(47,535
)
 
$
53,324
 
Unrecognized pension and postretirement cost adjustment, net of tax of $82
   
-
     
-
     
-
     
-
     
304
     
-
     
304
 
Unrealized loss on MSA investments, net of tax of $103
   
-
     
-
     
-
     
-
     
(504
)
   
-
     
(504
)
Unrealized loss on other investments, net of tax of $1
   
-
     
-
     
-
     
-
     
(3
)
   
-
     
(3
)
Unrealized loss on interest rate swaps, net of tax of $22
   
-
     
-
     
-
     
-
     
(75
)
   
-
     
(75
)
Stock compensation expense
   
-
     
-
     
-
     
651
     
-
     
-
     
651
 
Restricted stock forfeitures
   
(2,762
)
   
-
     
-
     
(6
)
   
-
     
-
     
(6
)
Exercise of options
   
104,849
     
1
     
-
     
607
     
-
     
-
     
608
 
Dividends
   
-
     
-
     
-
     
-
     
-
     
(1,557
)
   
(1,557
)
Reclassification of tax effects from accumulated other comprehensive income
   
-
     
-
     
-
     
-
     
24
     
(24
)
   
-
 
Net income
   
-
     
-
     
-
     
-
     
-
     
12,351
     
12,351
 
Ending balance June 30, 2018
   
19,312,720
   
$
193
   
$
-
   
$
104,892
   
$
(3,227
)
 
$
(36,765
)
 
$
65,093
 

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, 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”); 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 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, 2018. 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.

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, 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 19 of Notes to Consolidated Financial Statements. An additional disaggregation of contract revenue by sales channel can be found within Note 19 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 $3.5 million for the three months ending June 30, 2019 and 2018, respectively. Shipping costs incurred were approximately $9.2 million and $6.7 million for the six months ending June 30, 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 statute to pay a final judgement to that state’s plaintiffs in the event of such a final judgement against the company.  The Company chose to open and fund an escrow account as its method of compliance. It is the Company’s policy to record amounts on deposit in the escrow account for prior years as a non-current asset. Each year’s annual obligation is required to be deposited in the escrow account by April 15 of the following year. In addition to the annual deposit, many states have elected to require quarterly deposits for the previous quarter’s sales. As of June 30, 2019, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $31.7 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 June 30, 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
 
$
4,038
   
$
-
   
$
-
   
$
4,038
   
$
2,361
   
$
-
   
$
-
   
$
2,361
 
U.S. Governmental agency obligations (unrealized gain position < 12 months)
   
3,245
     
27
     
-
     
3,272
     
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)
   
24,790
     
-
     
(376
)
   
24,414
     
27,519
     
-
     
(1,529
)
   
25,990
 
   
$
32,073
   
$
27
   
$
(376
)
 
$
31,724
   
$
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
 
   
June 30,
2019
   
December 31,
2018
 
Less than one year
 
$
1,499
   
$
1,499
 
One to five years
   
14,091
     
13,591
 
Five to ten years
   
9,469
     
11,152
 
Greater than ten years
   
2,976
     
3,470
 
Total U.S. Governmental agency obligations
 
$
28,035
   
$
29,712
 

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

Sales
 
Deposits as of
 
Year
 
June 30,
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.
 
In August 2016, the FDA’s regulatory authority under the Tobacco Control Act (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 a compliance policy (the “August 2017 Guidance”) that allowed new tobacco products to remain on the market without an FDA authorization until specified deadlines had passed.  Compliance dates vary depending upon type of application submitted, but all newly-deemed products will 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 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.  There have been no appeals of the Remedy Order filed to date.
 
Currently, the deadline to submit an application and to continue marketing a deemed new product is May 12, 2020.  This court-ordered modification to the compliance policy remains subject to change or a stay as a result of potential appeals, litigation brought or pending in other venues, or FDA’s finalization of the March 2019 draft guidance.
 
Should the Remedy Order stand, we would not be permitted to continue marketing our existing line of vapor products that the FDA regulates as tobacco products past May 12, 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.  We believe we have products that meet that standard and that we will be able to efficiently produce satisfactory PMTA filings. However, there is no assurance that the FDA’s guidance will not change, the Remedy Order will not be 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 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 requirements of the deeming regulations generally and the Remedy Order more specifically.  There can be no assurances that some products that we currently distribute will no longer be able to be sold to end consumers after May 2020.   While we will take measures to pursue regulatory compliance for our own privately-branded or proprietary vape products that compete with these third-party products, there is no assurance that such proprietary products would be as successful in the marketplace or can fully displace third-party products that are currently being distributed by us, which could adversely affect our results of operations and liquidity.

Recent Accounting Pronouncements Adopted

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 12, “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 recorded as compensation and not additional 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 $0.1 million and $0.9 million for the three and six months, respectively, ended June 30, 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 June 30, 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)
   
3,218
 
Fixed assets
   
1,274
 
Intangible assets
   
7,880
 
Net assets acquired
   
12,372
 
         
Goodwill
 
$
11,454
 

The goodwill of $11.5 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. The accounting for the acquisition of these assets was finalized during the second quarter 2019. 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:

Total consideration transferred
 
$
4,800
 
         
Assets acquired:
       
Working capital (primarily inventory)
   
2,500
 
Fixed assets
   
272
 
Intangible assets
   
256
 
Net assets acquired
   
3,028
 
         
Goodwill
 
$
1,772
 

Upon finalization of the acquisition accounting during the second quarter 2019, $1.8 million was transferred between intangible assets and goodwill. The goodwill of $1.8 million is related to the expected increased retail presence in geographic regions not previously served by the Company and is currently deductible for tax purposes.

Note 4. Derivative Instruments

Foreign Currency

The Company’s policy is to manage the risks associated with foreign exchange rate movements. The policy allows hedging up to 100% of its anticipated purchases of inventory over a forward period that will not exceed 12 rolling and consecutive months. The Company may, from time to time, hedge currency for non-inventory purchases, e.g., production equipment, not to exceed 90% of the purchase price. The Company did not execute any forward contracts during the three and six months ended June 30, 2019. The Company executed various forward contracts during the three and six months ended June 30, 2018, none of which met hedge accounting requirements, for the purchase of €6.3 million and €12.3 million, respectively. At June 30, 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 June 30, 2019, and December 31, 2018, resulted in a liability of $2.8 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, June 30, 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 June, 2019, the fair values of the 2018 First Lien Term Loan and the 2018 Second Lien Term Loan approximated $150.0 million and $35.5 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 11, “Notes Payable and Long-Term Debt”, for information regarding our credit facilities.

Foreign Exchange

The Company did not have any open forward contracts at June 30, 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 no gain or loss for the three months ended June 30, 2019 and a gain of approximately $0.1 million for the six months ended June 30, 2019. As there were no open contracts as of June 30, 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 June, 2019 and December 31, 2018. The fair values of the swap contracts are based upon quoted market prices and resulted in a liability of $2.8 million and $0.9 million as of June 30, 2019 and December 31, 2018, respectively.

Note 6. Inventories

The components of inventories are as follows:

   
June 30,
2019
   
December 31,
2018
 
Raw materials and work in process
 
$
4,924
   
$
2,722
 
Leaf tobacco
   
37,110
     
34,977
 
Finished goods - Smokeless products
   
6,403
     
6,321
 
Finished goods - Smoking products
   
15,125
     
14,666
 
Finished goods - NewGen products
   
35,194
     
37,194
 
Other
   
1,072
     
738
 
 
   
99,828
     
96,618
 
LIFO reserve
   
(5,245
)
   
(5,381
)
 
 
$
94,583
   
$
91,237
 

The inventory valuation allowance was $1.9 million and $2.5 million as of June 30, 2019, and December 31, 2018, respectively.

Note 7. Property, Plant, and Equipment

Property, plant, and equipment consisted of the following:

   
June 30,
2019
   
December 31,
2018
 
Land
 
$
22
   
$
22
 
Buildings and improvements
   
2,444
     
2,320
 
Leasehold improvements
   
2,108
     
2,101
 
Machinery and equipment
   
13,928
     
13,292
 
Furniture and fixtures
   
6,238
     
5,045
 
     
24,740
     
22,780
 
Accumulated depreciation
   
(13,350
)
   
(12,191
)
   
$
11,390
   
$
10,589
 

Note 8. Other Current Assets

Other current assets consisted of the following:

   
June 30,
2019
   
December 31,
2018
 
Inventory deposits
 
$
10,583
   
$
9,739
 
Other
   
7,601
     
4,955
 
   
$
18,184
   
$
14,694
 

Note 9. Other Assets

Other assets consisted of the following:

   
June 30,
2019
   
December 31,
2018
 
Investment in Canadian American Standard Hemp
 
$
2,000
   
$
2,000
 
Investment in General Wireless Operations
   
421
     
421
 
Pension assets
   
1,233
     
1,223
 
Other
   
564
     
592
 
   
$
4,218
   
$
4,236
 

Note 10. Accrued Liabilities

Accrued liabilities consisted of the following:

   
June 30,
2019
   
December 31,
2018
 
Accrued payroll and related items
 
$
4,876
   
$
6,063
 
Customer returns and allowances
   
3,456
     
3,634
 
Taxes payable
   
1,953
     
2,138
 
Lease liabilities
   
1,653
     
-
 
Other
   
8,204
     
11,090
 
   
$
20,142
   
$
22,925
 

Note 11. Notes Payable and Long-Term Debt

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

   
June 30,
2019
   
December 31,
2018
 
2018 First Lien Term Loan
 
$
150,000
   
$
154,000
 
2018 Second Lien Term Loan
   
35,511
     
40,000
 
Note payable - IVG
   
4,000
     
4,000
 
Total notes payable and long-term debt
   
189,511
     
198,000
 
Less deferred finance charges
   
(2,909
)
   
(3,285
)
Less current maturities
   
(13,000
)
   
(8,000
)
   
$
173,602
   
$
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. See Note 20, “Dividends”, 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. 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 5.40% at June 30, 2019. The weighted average interest rate of the 2018 Revolving Credit Facility was 5.54% at June 30, 2019. At June 30, 2019, the Company had $15.0 million of borrowings outstanding under the 2018 Revolving Credit Facility. The $35.0 million unused portion of the 2018 Revolving Credit Facility is reduced by letters of credit from Fifth Third Bank totaling $1.8 million, resulting in $33.2 million of availability under the 2018 Revolving Credit Facility at June 30, 2019. See Note 21, “Subsequent Events”, for further information on amendments for the facility.

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. 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.  The weighted average interest rate on the remaining $35.5 million balance of the 2018 Second Lien Term Loan was 9.40% at June 30, 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 12. Leases
 
As of January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). The main impact to the financial statements is the recognition of lease liabilities and right of use assets. The Company’s leases consist primarily of leased property for manufacturing warehouse, head offices and retail space as well as vehicle leases. In general, the Company does not recognize any renewal periods within the lease terms as there are not significant barriers to ending the lease at the initial term.  Lease and non-lease components are accounted for as a single lease component.
 
Leases with an initial term of 12 months or less are not recorded on the balance sheet.  Lease expense for these leases is recognized on a straight-line basis over the lease term.
 
The components of lease expense consisted of the following:
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
   
2019
   
2019
 
             
Operating lease cost
           
Cost of sales
 
$
232
   
$
424
 
Selling, general and administrative
   
605
     
1,160
 
Variable lease cost (1)
   
125
     
370
 
Short-term lease cost
   
35
     
89
 
Sublease income
   
(20
)
   
(50
)
Total operating lease cost
 
$
977
   
$
1,993
 
 
(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.

   
June 30,
2019
 
Assets:
     
Right of use assets
 
$
11,304
 
Total leased assets
 
$
11,304
 
         
         
Liabilities:
       
Current lease liabilities (2)
 
$
1,653
 
Long-term lease liabilities
   
9,951
 
Total Lease Liabilities
 
$
11,604
 
 
(2) Reported within accrued liabilities on the balance sheet

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

As of June 30, 2019, maturities of lease liabilities consisted of the following:

   
June 30,
2019
 
Remaining six months of 2019
 
$
1,051
 
2020
   
2,465
 
2021
   
2,104
 
2022
   
1,425
 
2023
   
1,100
 
Years thereafter
   
7,280
 
Total lease payments
 
$
15,425
 
Less: Imputed interest
   
3,821
 
Present value of lease liabilities
 
$
11,604
 

During the second quarter, seven retail leases and one warehouse lease were extended, renewed or adjusted.  These changes resulted in additional lease liabilities of $1.2 million as of June 30, 2019.

Note 13. 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 and six months ended June 30, 2019, was 18% and 19%, respectively, which includes a discrete tax deduction of $3.7 million and $4.5 million for the three and six months ended June 30 2019, relating to stock option exercises. The Company’s effective income tax rate for the three and six months ended June 30, 2018, was 17% and 18%, respectively, which includes a discrete tax deduction of $1.6 million and $1.8 million for the three and six months ended June 30, 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 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 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, which is reported within “Net periodic benefit (income), excluding service cost within the Consolidated Statements of Income.

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 June 30,
 
   
Pension
Benefits
   
Postretirement
Benefits
 
   
2019
   
2018
   
2019
   
2018
 
Service cost
 
$
26
   
$
26
   
$
-
   
$
-
 
Interest cost
   
130
     
142
     
25
     
29
 
Expected return on plan assets
   
(161
)
   
(253
)
   
-
     
-
 
Amortization of (gains) losses
   
36
     
60
     
(41
)
   
(20
)
Curtailment loss
   
-
     
306
     
-
     
-
 
Net periodic benefit (income) cost
 
$
31
   
$
281
   
$
(16
)
 
$
9
 

   
Six Months Ended June 30,
 
   
Pension
Benefits
   
Postretirement
Benefits
 
   
2019
   
2018
   
2019
   
2018
 
Service cost
 
$
52
   
$
52
   
$
-
   
$
-
 
Interest cost
   
260
     
284
     
51
     
58
 
Expected return on plan assets
   
(323
)
   
(507
)
   
-
     
-
 
Amortization of (gains) losses
   
73
     
120
     
(83
)
   
(40
)
Curtailment loss
   
-
     
306
     
-
     
-
 
Net periodic benefit cost
 
$
62
   
$
255
   
$
(32
)
 
$
18
 

Note 15. Share Incentive Plans

On April 28, 2016, the Board of Directors of the Company adopted the Turning Point Brands, Inc., 2015 Equity Incentive Plan (the “2015 Plan”), pursuant to which awards may be granted to employees, non-employee directors, and consultants. In addition, the 2015 Plan provides for the granting of nonqualified stock options to employees of the Company or any subsidiary of the Company. Pursuant to the 2015 Plan, 1,400,000 shares of the Company’s voting common stock are reserved for issuance as awards to employees, non-employee directors, and consultants as compensation for past or future services or the attainment of certain performance goals. The 2015 Plan is scheduled to terminate on April 27, 2026. The 2015 Plan is administered by a committee (the “Committee”) of the Company’s Board of Directors. The Committee determines the vesting criteria for the awards, with such criteria to be specified in the award agreement. As of June 30, 2019, net of forfeitures, there were 16,159 shares of restricted stock, 272,776 performance-based restricted stock units, and 446,187 options granted under the 2015 Plan. There are 664,878 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
   
(106,340
)
   
5.73
     
2.58
 
Forfeited
   
(2,453
)
   
27.54
     
8.71
 
Outstanding, June 30, 2019
   
706,561
   
$
17.94
   
$
6.15
 

Under the 2006 and 2015 Plans, the total intrinsic value of options exercised during the six months ended June 30, 2019 and 2018, was $4.5 million, and $1.9 million, respectively.

At June 30, 2019, under the 2006 Plan, the outstanding stock options’ exercise price for 329,363 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 4.05 years. The Company estimates the expected life of these stock options is ten years from the date of grant. For the $3.83 per share options, the weighted average fair value of options was determined using the Black-Scholes model assuming a ten-year life from grant date, a current share price and exercise price of $3.83, a risk-free interest rate of 3.57%, volatility of 40%, and no assumed dividend yield.  Based on these assumptions, the fair value of these options is approximately $2.17 per share option granted.
 
At June 30, 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 June 30, 2019
   
30,700
     
74,118
     
91,430
     
26,000
     
154,950
 
Number exercisable at June 30, 2019
   
19,150
     
48,600
     
30,974
     
17,420
     
-
 
Exercise price
 
$
13.00
   
$
15.41
   
$
21.21
   
$
21.49
   
$
47.58
 
Remaining lives
   
7.62
     
7.88
     
8.69
     
8.71
     
9.73
 
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 $0.5 million and $0.3 million for the three months ended June 30, 2019 and 2018. The Company recorded compensation expense related to the options of approximately $0.7 million and $0.4 million for the six months ended June 30, 2019 and 2018. Total unrecognized compensation expense related to options at June 30, 2019, is $2.0 million, which will be expensed over 2.38 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 31, 2017, the Company’s Board of Directors granted 94,000 PRSUs to employees of the Company. 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 31, 2017, March 7, 2018, and March 20, 2019, are $15.60, $21.21 and $47.58, respectively, the Company’s stock price on the date of grant. As of June 30, 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, which are all outstanding and unvested as of June 30, 2019. The fair value of these awards is $47.58, the Company’s stock price on the date of grant. The Company recorded compensation expense related to the PRSUs of approximately $0.5 million and $0.2 million in the consolidated statements of income for the three months ended June 30, 2019 and 2018, based on the probability of achieving the performance condition. The Company recorded compensation expense related to the PRSUs of approximately $0.7 million and $0.3 million in the consolidated statements of income for the six months ended June 30, 2019 and 2018. Total unrecognized compensation expense related to these awards at June 30, 2019, is $6.3 million which will be expensed over the service periods based on the probability of achieving the performance condition.

Note 16. Contingencies

Other major tobacco companies are defendants in product liability claims. In a number of these cases, the amounts of punitive and compensatory damages sought are significant and could have a material adverse effect on our business and results of operations. The Company is 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 17. Legal Settlement
 
The company engaged in discussions and mediation with VMR Products LLC (“VMR”), which was acquired in 2018. Pursuant to a Distribution and Supply agreement (“VMR Agreement”), VMR was providing the Company with V2 e-cigarettes for the exclusive distribution in bricks-and-mortar stores in the United States. Under the terms of the VMR Agreement, in the event of termination following a change in control, the acquirer was required to make a payment to the Company under a formula designed to provide the Company with a fair share of the value created by the Company’s performance under the VMR Agreement. The discussions have been completed and the Company received $6.7 million in the second quarter 2019 to settle the issue.  Net of legal costs and reserves for anticipated future returns associated with the discontinuance, the Company recorded a $5.5 million gain in the second quarter, which is recorded as a reduction to selling, general, and administrative expenses.

Note 18. Income Per Share

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

   
Three Months Ended June 30,
 
   
2019
   
2018
 
   
Income
   
Shares
   
Per
Share
   
Income
   
Shares
   
Per
Share
 
Consolidated net income
 
$
13,205
               
$
9,319
             
                                         
Basic EPS:
                                       
Weighted average
           
19,621,695
   
$
0.67
             
19,268,625
   
$
0.48
 
                                                 
Diluted EPS:
                                               
Effect of dilutive securities:
                                               
Stock options
           
510,285
                     
520,240
         
             
20,131,980
   
$
0.66
             
19,788,865
   
$
0.47
 

   
Six Months Ended June 30,
 
   
2019
   
2018
 
   
Income
   
Shares
   
Per
Share
   
Income
   
Shares
   
Per
Share
 
Net income attributable to Turning Point Brands, Inc.
 
$
19,765
               
$
12,351
             
                                         
Basic EPS:
                                       
Weighted average
           
19,590,817
   
$
1.01