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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended June 30, 2020

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
VECTOR GROUP LTD.
(Exact name of registrant as specified in its charter)
Delaware
1-5759
65-0949535
(State or other jurisdiction of incorporation
Commission File Number
(I.R.S. Employer Identification No.)
incorporation or organization)
 
 
4400 Biscayne Boulevard
Miami, Florida 33137
305-579-8000
(Address, including zip code and telephone number, including area code,
of the principal executive offices)
 
Securities Registered Pursuant to 12(b) of the Act:
Title of each class:
Trading
Name of each exchange
 
Symbol(s)
on which registered:
Common stock, par value $0.10 per share
VGR
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.
x Yes o 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 and post such files).
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes x No
At August 5, 2020, Vector Group Ltd. had 153,293,358 shares of common stock outstanding.
 




VECTOR GROUP LTD.

FORM 10-Q

TABLE OF CONTENTS

 
Page
PART I. FINANCIAL INFORMATION
 
 
 
Item 1. Vector Group Ltd. Condensed Consolidated Financial Statements (Unaudited):
 
 
 
Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019
 
 
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2020 and 2019
 
 
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2020 and 2019
 
 
Condensed Consolidated Statements of Stockholders' Deficiency for the three and six months ended June 30, 2020 and 2019
 
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019
 
 
Notes to Condensed Consolidated Financial Statements
 
 
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 6. Exhibits
 
 
SIGNATURE


1

VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Amounts)
Unaudited

 
June 30,
2020
 
December 31,
2019
ASSETS:
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
540,363

 
$
371,341

Investment securities at fair value
88,643

 
129,641

Accounts receivable - trade, net
32,760

 
36,959

Inventories
98,609

 
98,762

Other current assets
38,363

 
44,911

Total current assets
798,738

 
681,614

Property, plant and equipment, net
77,617

 
82,160

Investments in real estate, net
28,876

 
28,317

Long-term investment securities at fair value
33,232

 
45,781

Investments in real estate ventures
115,377

 
131,556

Operating lease right-of-use assets
148,662

 
149,578

Goodwill and other intangible assets, net
207,659

 
265,993

Other assets
121,586

 
120,090

Total assets
$
1,531,747

 
$
1,505,089

LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
 
 
 
Current liabilities:
 
 
 
   Current portion of notes payable and long-term debt
$
8,853

 
$
209,269

   Current portion of fair value of derivatives embedded within convertible debt

 
4,999

 Current payments due under the Master Settlement Agreement
102,125

 
34,116

Income taxes payable, net
36,831

 
5,138

Current operating lease liability
18,268

 
18,294

Other current liabilities
332,034

 
189,317

Total current liabilities
498,111

 
461,133

Notes payable, long-term debt and other obligations, less current portion
1,398,194

 
1,397,216

Non-current employee benefits
61,025

 
67,853

Deferred income taxes, net
12,438

 
33,695

Non-current operating lease liability
159,296

 
156,963

Payments due under the Master Settlement Agreement
18,130

 
17,275

Other liabilities
53,757

 
55,970

Total liabilities
2,200,951

 
2,190,105

Commitments and contingencies (Note 9)

 

Stockholders' deficiency:
 
 
 
Preferred stock, par value $1 per share, 10,000,000 shares authorized

 

Common stock, par value $0.1 per share, 250,000,000 shares authorized, 153,484,477 and 148,084,900 shares issued and outstanding
15,348

 
14,808

Accumulated deficit
(663,723
)
 
(678,464
)
Accumulated other comprehensive loss
(20,829
)
 
(21,808
)
Total Vector Group Ltd. stockholders' deficiency
(669,204
)
 
(685,464
)
Non-controlling interest

 
448

Total stockholders' deficiency
(669,204
)
 
(685,016
)
Total liabilities and stockholders' deficiency
$
1,531,747

 
$
1,505,089


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

2



VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
Unaudited

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Revenues:
 
 
 
 
 
 
 
   Tobacco*
$
312,510

 
$
294,501

 
$
599,579

 
$
551,257

   Real estate
133,250

 
243,931

 
300,669

 
408,099

       Total revenues
445,760

 
538,432

 
900,248

 
959,356

 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 Cost of sales:
 
 
 
 
 
 
 
   Tobacco*
214,067

 
204,461

 
411,357

 
381,764

   Real estate
90,818

 
163,713

 
204,151

 
272,430

       Total cost of sales
304,885

 
368,174

 
615,508

 
654,194

 
 
 
 
 
 
 
 
Operating, selling, administrative and general expenses
71,064

 
93,359

 
161,581

 
185,673

Litigation settlement and judgment expense
53

 
655

 
53

 
655

Impairments of goodwill and intangible assets

 

 
58,252

 

Restructuring charges
2,961

 

 
2,961

 

Operating income
66,797

 
76,244

 
61,893

 
118,834

 
 
 
 
 
 
 
 
Other income (expenses):
 
 
 
 
 
 
 
Interest expense
(29,358
)
 
(32,753
)
 
(64,985
)
 
(70,273
)
Change in fair value of derivatives embedded within convertible debt
1,669

 
3,788

 
4,999

 
14,137

Equity in earnings (losses) from investments
2,207

 
(1,685
)
 
52,359

 
(323
)
Equity in (losses) earnings from real estate ventures
(12,260
)
 
6,391

 
(18,765
)
 
3,952

Other, net
7,635

 
4,781

 
(3,020
)
 
12,221

Income before provision for income taxes
36,690

 
56,766

 
32,481

 
78,548

Income tax expense
10,916

 
17,459

 
9,938

 
24,208

 
 
 
 
 
 
 
 
Net income
25,774

 
39,307

 
22,543

 
54,340

 
 
 
 
 
 
 
 
Net income attributed to non-controlling interest

 

 

 
(80
)
 
 
 
 
 
 
 
 
Net income attributed to Vector Group Ltd.
$
25,774

 
$
39,307

 
$
22,543

 
$
54,260

 
 
 
 
 
 
 
 
Per basic common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income applicable to common shares attributed to Vector Group Ltd.
$
0.17

 
$
0.25

 
$
0.14

 
$
0.34

 
 
 
 
 
 
 
 
Per diluted common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income applicable to common shares attributed to Vector Group Ltd.
$
0.16

 
$
0.25

 
$
0.14

 
$
0.33

                                      

* Revenues and cost of sales include federal excise taxes of $121,170, $119,943, $234,309, and $224,576, respectively.


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

3




VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
Unaudited
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
 
 
 
 
Net income
$
25,774

 
$
39,307

 
$
22,543

 
$
54,340

 
 
 
 
 
 
 
 
Net unrealized gains on investment securities available for sale:
 
 
 
 
 
 
 
Change in net unrealized gains (losses)
644

 
346

 
(20
)
 
723

Net unrealized (gains) losses reclassified into net income
(70
)
 
(4
)
 
433

 
(37
)
Net unrealized gains on investment securities available for sale
574

 
342

 
413

 
686

 
 
 
 
 


 
 
Net change in pension-related amounts
 
 
 
 
 
 
 
Amortization of loss
463

 
491

 
927

 
948

Net change in pension-related amounts
463

 
491

 
927

 
948

 
 
 
 
 
 
 
 
Other comprehensive income
1,037

 
833

 
1,340

 
1,634

 
 
 
 
 
 
 
 
Income tax effect on:
 
 
 
 
 
 
 
Change in net unrealized gains (losses) on investment securities
(174
)
 
(94
)
 
6

 
(198
)
Net unrealized (gains) losses reclassified into net income on investment securities
19

 
1

 
(117
)
 
10

Pension-related amounts
(125
)
 
(135
)
 
(250
)
 
(260
)
Income tax provision on other comprehensive income
(280
)
 
(228
)
 
(361
)
 
(448
)
 
 
 
 
 
 
 
 
Other comprehensive income, net of tax
757

 
605

 
979

 
1,186

 
 
 
 
 
 
 
 
Comprehensive income
26,531

 
39,912

 
23,522

 
55,526

 
 
 
 
 
 
 
 
Comprehensive income attributed to non-controlling interest

 

 

 
(80
)
Comprehensive income attributed to Vector Group Ltd.
$
26,531

 
$
39,912

 
$
23,522

 
$
55,446


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

4



VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY
(Dollars in Thousands, Except Share Amounts)
Unaudited
 
Vector Group Ltd. Stockholders' Deficiency
 
 
 
 
 
Additional Paid-In
 
 
 
Accumulated
Other Comprehensive
 
Non-controlling
 
 
 
Common Stock
 
 
Accumulated
 
 
 
 
 
Shares
 
Amount
 
Capital
 
Deficit
 
Loss
 
Interest
 
Total
Balance as of April 1, 2020
148,084,900

 
$
14,808

 
$

 
$
(712,221
)
 
$
(21,586
)
 
$

 
$
(718,999
)
Net income

 

 

 
25,774

 

 

 
25,774

Total other comprehensive income

 

 

 

 
757

 

 
757

Distributions and dividends on common stock ($0.20 per share)

 

 
(54,244
)
 
22,644

 

 

 
(31,600
)
Restricted stock grant
405,000

 
41

 
(41
)
 

 

 

 

Surrender of shares in connection with restricted stock vesting
(5,423
)
 
(1
)
 
(61
)
 

 

 

 
(62
)
Issuance of common stock, net of offering costs
5,000,000

 
500

 
52,063

 

 

 

 
52,563

Stock-based compensation

 

 
2,283

 

 

 

 
2,283

Other

 

 

 
80

 

 

 
80

Balance as of June 30, 2020
153,484,477

 
$
15,348

 
$

 
$
(663,723
)
 
$
(20,829
)
 
$

 
$
(669,204
)
 
Vector Group Ltd. Stockholders' Deficiency
 
 
 
 
 
Additional Paid-In
 
 
 
Accumulated
Other Comprehensive
 
Non-controlling
 
 
 
Common Stock
 
 
Accumulated
 
 
 
 
 
Shares
 
Amount
 
Capital
 
Deficit
 
Loss
 
Interest
 
Total
Balance as of April 1, 2019
140,899,065

 
$
14,090

 
$

 
$
(580,581
)
 
$
(24,098
)
 
$
488

 
$
(590,101
)
Net income

 

 

 
39,307

 

 

 
39,307

Total other comprehensive income

 

 

 

 
605

 

 
605

Distributions and dividends on common stock ($0.38 per share)

 

 
(2,285
)
 
(56,512
)
 

 

 
(58,797
)
Restricted stock grant
60,000

 
6

 
(6
)
 

 

 

 

Surrender of shares in connection with restricted stock vesting
(5,165
)
 
(1
)
 
(47
)
 

 

 

 
(48
)
Effect of 2019 stock dividend*
7,047,695

 
705

 

 
(705
)
 

 

 

Stock-based compensation

 

 
2,338

 

 

 

 
2,338

Balance as of June 30, 2019
148,001,595

 
$
14,800

 
$

 
$
(598,491
)
 
$
(23,493
)
 
$
488

 
$
(606,696
)
                        
*    Represents the effect of the September 27, 2019 stock dividend on the second quarter 2019 common-stock activity.
The accompanying notes are an integral part of the condensed consolidated financial statements.

5



 
Vector Group Ltd. Stockholders' Deficiency
 
 
 
 
 
 
Additional Paid-In
 
 
 
Accumulated
Other Comprehensive
 
Non-controlling
 
 
 
Common Stock
 
 
Accumulated
 
 
 
 
 
Shares
 
Amount
 
Capital
 
Deficit
 
Loss
 
Interest
 
Total
Balance as of January 1, 2020
148,084,900

 
$
14,808

 
$

 
$
(678,464
)
 
$
(21,808
)
 
$
448

 
$
(685,016
)
Impact of adoption of new accounting standards

 

 

 
(2,263
)
 

 

 
(2,263
)
Net income

 

 

 
22,543

 

 

 
22,543

Total other comprehensive income

 

 

 

 
979

 

 
979

Distributions and dividends on common stock ($0.40 per share)

 

 
(56,502
)
 
(5,619
)
 

 

 
(62,121
)
Restricted stock grant
405,000

 
41

 
(41
)
 

 

 

 

Surrender of shares in connection with restricted stock vesting
(5,423
)
 
(1
)
 
(61
)
 

 

 

 
(62
)
Issuance of common stock, net of offering costs
5,000,000

 
500

 
52,063

 

 

 

 
52,563

Stock-based compensation

 

 
4,541

 

 

 

 
4,541

Distributions to non-controlling interest

 

 

 

 

 
(448
)
 
(448
)
Other

 

 

 
80

 

 

 
80

Balance as of June 30, 2020
153,484,477

 
$
15,348

 
$

 
$
(663,723
)
 
$
(20,829
)
 
$

 
$
(669,204
)
 
Vector Group Ltd. Stockholders' Deficiency
 
 
 
 
 
 
Additional Paid-In
 
 
 
Accumulated
Other Comprehensive
 
Non-controlling
 
 
 
Common Stock
 
 
Accumulated
 
 
 
 
 
Shares
 
Amount
 
Capital
 
Deficit
 
Loss
 
Interest
 
Total
Balance as of January 1, 2019
140,914,642

 
$
14,092

 
$

 
$
(542,169
)
 
$
(19,982
)
 
$
693

 
$
(547,366
)
Impact of adoption of new accounting standards

 

 

 
3,147

 
(4,697
)
 

 
(1,550
)
Net income

 

 

 
54,260

 

 
80

 
54,340

Total other comprehensive income

 

 

 

 
1,186

 

 
1,186

Distributions and dividends on common stock ($0.76 per share)

 

 
(4,550
)
 
(113,024
)
 

 

 
(117,574
)
Restricted stock grant
60,000

 
6

 
(6
)
 

 

 

 

Surrender of shares in connection with restricted stock vesting
(20,742
)
 
(3
)
 
(218
)
 

 

 

 
(221
)
Effect of 2019 stock dividend*
7,047,695

 
705

 

 
(705
)
 

 

 

Stock-based compensation

 

 
4,774

 

 

 

 
4,774

Distributions to non-controlling interest

 

 

 

 

 
(285
)
 
(285
)
Balance as of June 30, 2019
148,001,595

 
$
14,800

 
$

 
$
(598,491
)
 
$
(23,493
)
 
$
488

 
$
(606,696
)
                        
*    Represents the effect of the September 27, 2019 stock dividend on the second quarter 2019 common-stock activity.
The accompanying notes are an integral part of the condensed consolidated financial statements.

6



VECTOR GROUP LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
Unaudited

 
Six Months Ended
 
Six Months Ended
 
June 30,
2020
 
June 30,
2019
Net cash provided by operating activities
$
341,329

 
$
98,102

Cash flows from investing activities:
 
 
 
Sale of investment securities
19,555

 
12,942

Maturities of investment securities
31,574

 
28,610

Purchase of investment securities
(16,867
)
 
(44,222
)
Proceeds from sale or liquidation of long-term investments
23,407

 

Purchase of long-term investments
(5,238
)
 

Investments in real estate ventures
(3,858
)
 
(21,908
)
Distributions from investments in real estate ventures
5,172

 
23,200

Increase in cash surrender value of life insurance policies
(751
)
 
(789
)
Decrease in restricted assets
87

 
668

Proceeds from sale of fixed assets

 
8

Capital expenditures
(6,242
)
 
(6,320
)
Purchase of subsidiaries

 
(668
)
Pay downs of investment securities
415

 
545

Investments in real estate, net
(679
)
 
(1,153
)
Net cash provided by (used in) investing activities
46,575

 
(9,087
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of debt
531

 

Deferred financing costs

 
(33
)
Repayments of debt
(172,467
)
 
(230,771
)
Borrowings under revolver
130,641

 
172,224

Repayments on revolver
(165,593
)
 
(169,727
)
Dividends and distributions on common stock
(63,478
)
 
(118,748
)
Distributions to non-controlling interest
(448
)
 
(285
)
Proceeds from issuance of Vector stock
52,563

 

Other
5

 

Net cash used in financing activities
(218,246
)
 
(347,340
)
Net increase (decrease) in cash, cash equivalents and restricted cash
169,658

 
(258,325
)
Cash, cash equivalents and restricted cash, beginning of period
379,476

 
591,729

Cash, cash equivalents and restricted cash, end of period
$
549,134

 
$
333,404


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

7

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a)
Basis of Presentation:
The condensed consolidated financial statements of Vector Group Ltd. (the “Company” or “Vector”) include the accounts of Liggett Group LLC (“Liggett”), Vector Tobacco Inc. (“Vector Tobacco”), Liggett Vector Brands LLC (“Liggett Vector Brands”), New Valley LLC (“New Valley”) and other less significant subsidiaries. New Valley includes the accounts of Douglas Elliman Realty, LLC (“Douglas Elliman”) and other less significant subsidiaries. All significant intercompany balances and transactions have been eliminated.
Liggett and Vector Tobacco are engaged in the manufacture and sale of cigarettes in the United States. Liggett Vector Brands coordinates Liggett and Vector Tobacco’s sales and marketing efforts. Certain references to “Liggett” refer to the Company’s tobacco operations, including the business of Liggett and Vector Tobacco, unless otherwise specified. New Valley is engaged in the real estate business.
The unaudited, interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information and, in management’s opinion, contain all adjustments, consisting only of normal recurring items, necessary for a fair statement of the results for the periods presented. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission (“SEC”). The consolidated results of operations for interim periods should not be regarded as necessarily indicative of the results that may be expected for the entire year.
Certain reclassifications have been made to the 2019 financial information to conform to the 2020 presentation.

(b)
Distributions and Dividends on Common Stock:

The Company records distributions on its common stock as dividends in its condensed consolidated statement of stockholders’ deficiency to the extent of retained earnings. Any amounts exceeding retained earnings are recorded as a reduction to additional paid-in capital to the extent paid-in-capital is available and then to accumulated deficit. The Company’s stock dividends are recorded as stock splits and given retroactive effect to earnings per share for all periods presented. On November 5, 2019, the Company announced that its board of directors decided that the Company will no longer pay an annual stock dividend.

(c)
Earnings Per Share (“EPS”):

Information concerning the Company’s common stock has been adjusted to give retroactive effect to the 5% stock dividend distributed to Company stockholders on September 27, 2019. All per share amounts and references to share amounts have been updated to reflect the retrospective effect of the stock dividend.

Net income for purposes of determining basic EPS was as follows:

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Net income attributed to Vector Group Ltd.
$
25,774

 
$
39,307

 
$
22,543

 
$
54,260

Income attributed to participating securities
(707
)
 
(2,027
)
 
(1,268
)
 
(4,029
)
Net income applicable to common shares attributed to Vector Group Ltd.
$
25,067

 
$
37,280

 
$
21,275

 
$
50,231




8

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Net income for purposes of determining diluted EPS was as follows:

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Net income attributed to Vector Group Ltd.
$
25,774

 
$
39,307

 
$
22,543

 
$
54,260

Income attributable to 5.5% Variable Interest Senior Convertible Notes
(375
)
 

 

 

Income attributable to 7.5% Variable Interest Senior Convertible Notes

 

 

 
(1,246
)
Income attributed to participating securities
(707
)
 
(2,027
)
 
(1,268
)
 
(4,029
)
Net income applicable to common shares attributed to Vector Group Ltd.
$
24,692

 
$
37,280

 
$
21,275

 
$
48,985



 
Basic and diluted EPS were calculated using the following common shares:

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Weighted-average shares for basic EPS
149,379,306

 
146,509,025

 
148,189,710

 
146,490,322

Plus incremental shares related to convertible debt
1,379,454

 

 

 
1,449,753

Plus incremental shares related to stock options and non-vested restricted stock
88,100

 
12,082

 
85,701

 
14,242

Weighted-average shares for diluted EPS
150,846,860

 
146,521,107

 
148,275,411

 
147,954,317



The following non-vested restricted stock and shares issuable upon the conversion of convertible debt were outstanding during the three and six months ended June 30, 2020 and 2019, but were not included in the computation of diluted EPS because the impact of the per share expense associated with the restricted stock were greater than the average market price of the common shares during the respective periods and the common shares issuable under the convertible debt were anti-dilutive to EPS.

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
  Weighted-average shares of non-vested restricted stock
625,122

 
1,407,820

 
625,122

 
1,407,820

  Weighted-average expense per share
$
19.54

 
$
17.92

 
$
19.54

 
$
17.92

  Weighted-average number of shares issuable upon conversion of debt

 
11,447,061

 
4,874,072

 
11,447,061

  Weighted-average conversion price
$

 
$
20.27

 
$
20.27

 
$
20.27




(d)
Restructuring:
In response to the current novel coronavirus pandemic (“COVID-19”), the Company's Real Estate segment, including Douglas Elliman, has commenced a restructuring by realigning its administrative support function and office locations as well as adjusting its business model to more efficiently serve its clients. This included a reduction of staff by approximately 25% at Douglas Elliman.

9

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


The following table summarizes amounts expensed for the three and six months ended June 30, 2020:
 
Three Months Ended June 30, 2020
 
Six Months Ended June 30, 2020
Cash Charges:
 
 
 
Employee severance and benefits
$
1,599

 
$
1,599

Other restructuring expenses
218

 
218

 
1,817

 
1,817

Non-Cash:
 
 
 
Loss on fixed assets associated with consolidation of sales offices
1,144

 
1,144

 
1,144

 
1,144

 
 
 
 
  Total restructuring charges
$
2,961

 
$
2,961

 
 
 
 

All amounts expensed for the three and six months ended June 30, 2020 are included as Restructuring charges in the Company’s condensed consolidated statements of operations and are all attributable to the Company’s Real Estate segment.
Severance and benefits expensed for the three and six months ended June 30, 2020 relate entirely to a reduction in administrative positions.
The following table presents the activity under the Real Estate segment restructuring plan for the six months ended June 30, 2020:
 
 
Employee Severance and Benefits
 
Other
 
Non-Cash Loss on Fixed Assets
 
Total
Accrual balance as of January 1, 2020
 
$

 
$

 
$

 
$

Restructuring charges
 
1,599

 
218

 
1,144

 
2,961

Utilized
 
(1,239
)
 

 
(1,144
)
 
(2,383
)
Accrual balance as of June 30, 2020
 
$
360

 
$
218

 
$

 
$
578



(e)
Investments in Real Estate Ventures:
In accounting for its investments in real estate ventures, the Company identified its participation in Variable Interest Entities (“VIE”), which are defined as (a) entities in which the equity investment at risk is not sufficient to finance its activities without additional subordinated financial support; (b) as a group, the equity investors at risk lack 1) the power to direct the activities of a legal entity that most significantly impact the entity’s economic performance, 2) the obligation to absorb the expected losses of the entity, or 3) the right to receive the expected residual returns of the entity; or (c) as a group, the equity investors have voting rights that are not proportionate to their economic interests and the entity’s activities involve or are conducted on behalf of an investor with a disproportionately small voting interest.
The Company’s interest in VIEs is primarily in the form of equity ownership. The Company examines specific criteria and uses judgment when determining if the Company is the primary beneficiary of a VIE. Factors considered include risk and reward sharing, experience and financial condition of other partner(s), voting rights, involvement in day-to-day capital and operating decisions, representation on a VIE’s executive committee, existence of unilateral kick-out rights exclusive of protective rights or voting rights and level of economic disproportionality between the Company and its other partner(s).
Accounting guidance requires the consolidation of VIEs in which the Company is the primary beneficiary. The guidance requires consolidation of VIEs that an enterprise has a controlling financial interest. A controlling financial interest will have both of the following characteristics: (a) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance and (b) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
The Company’s maximum exposure to loss in its investments in unconsolidated VIEs is limited to its investment in the VIE,

10

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


any unfunded capital commitments to the VIE, and, in some cases, guarantees in connection with debt on the specific project. The Company’s maximum exposure to loss in its investment in consolidated VIEs is limited to its investment, which is the carrying value of the investment net of the non-controlling interest. Creditors of the consolidated VIEs have no recourse to the general credit of the primary beneficiary.
On a quarterly basis, the Company evaluates its investments in real estate ventures to determine if there are indicators of impairment. If so, the Company further investigates to determine if an impairment has occurred and whether such impairment is considered temporary or other than temporary. The Company believes that the assessment of temporary or other-than-temporary impairment is facts-and-circumstances driven.


(f)
Other, Net:

Other, net consisted of:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Interest and dividend income
$
968

 
$
3,139

 
$
3,648

 
$
6,347

Net gains (losses) recognized on investment securities
4,781

 
2,315

 
(7,459
)
 
7,088

Net periodic benefit cost other than the service costs
(454
)
 
(575
)
 
(909
)
 
(1,116
)
Other income (expense)
2,340

 
(98
)
 
1,700

 
(98
)
Other, net
$
7,635

 
$
4,781

 
$
(3,020
)
 
$
12,221




11

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


(g)
Other Assets:

Other assets consisted of:
 
June 30,
2020
 
December 31, 2019
Restricted assets
$
4,004

 
$
5,241

Prepaid pension costs
32,207

 
31,686

Equity-method investments
14,817

 
15,942

Contract assets, net
25,957

 
18,443

Other assets
44,601

 
48,778

Total other assets
$
121,586

 
$
120,090



(h)
Other Current Liabilities:
Other current liabilities consisted of:
 
June 30,
2020
 
December 31, 2019
Accounts payable
$
12,232

 
$
10,222

Accrued promotional expenses
44,254

 
35,900

Accrued excise and payroll taxes payable, net
149,758

 
18,653

Accrued interest
31,623

 
35,756

Commissions payable
22,225

 
18,378

Accrued salary and benefits
15,407

 
29,464

Contract liabilities
7,830

 
9,358

Allowance for sales returns
8,191

 
7,785

Other current liabilities
40,514

 
23,801

Total other current liabilities
$
332,034

 
$
189,317




(i)
Reconciliation of Cash, Cash Equivalents and Restricted Cash:

The components of “Cash, cash equivalents and restricted cash” in the condensed consolidated statements of cash flows were as follows:
 
June 30,
2020
 
December 31,
2019
Cash and cash equivalents
$
540,363

 
$
371,341

Restricted cash and cash equivalents included in other current assets
6,310

 
4,423

Restricted cash and cash equivalents included in other assets
2,461

 
3,712

Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows
$
549,134

 
$
379,476



Amounts included in current restricted assets and non-current restricted assets represent cash and cash equivalents required to be deposited into escrow for bonds required to appeal adverse product liability judgments, amounts required for letters of credit related to office leases, and certain deposit requirements for banking arrangements. The restrictions related to the appellate bonds will remain in place until the appeal process has been completed. The restrictions related to the letters of credit will remain in place for the duration of the respective lease. The restrictions related to the banking arrangements will remain in place for the duration of the arrangement.
 

12

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


(j)    New Accounting Pronouncements:

Accounting Standards Updates (“ASU”) adopted in 2020:
In October 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. The guidance requires indirect interests held through related parties under common control arrangements be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Adoption of this update did not have a material impact on the Company’s condensed consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other Internal Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. ASU 2018-15 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. Adoption of this update did not have a material impact on the Company’s condensed consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which is designed to improve the effectiveness of disclosures by removing, modifying and adding disclosures related to fair value measurements. The ASU eliminates disclosures such as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The ASU also adds new disclosure requirements for Level 3 measurements. ASU No. 2018-13 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The adoption of ASU 2018-13 impacted financial statement disclosure and had no impact on operating results.
In June 2016, the FASB issued ASU No. 2016-13Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), sets forth a current expected credit loss model that changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. Subsequent updates were released in November 2018 (ASU No. 2018-19), November 2019 (ASU No. 2019-10 and 2019-11) and February 2020 (ASU No. 2020-02) that provided additional guidance on this Topic. This guidance is effective for fiscal years beginning after December 15, 2019.
The ASU introduces a new accounting model, the Current Expected Credit Losses model (CECL), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses for notes and other receivables at the time the financial asset is originated or acquired. The expected credit losses are adjusted each period for changes in expected lifetime credit losses. This model replaced the previous impairment models in U.S. GAAP, which generally required that a loss be incurred before it is recognized. The new standard applies to receivables arising from revenue transactions such as contract assets and accounts receivables. The adoption of this standard resulted in an increase in stockholders’ deficiency of $2,263, net of tax, attributed to commercial real estate term loans allowance for credit losses of $3,100 as of January 1, 2020.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The update simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount. Under the amendments of the ASU, an entity should recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The amendments in this update are effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. This guidance was adopted on January 1, 2020, on a prospective basis. The Company applied the new guidance to evaluate its goodwill during the first quarter of 2020. As a result, a goodwill impairment charge of $46,252 was recorded as the Company's estimated fair value of a reporting unit was less than its book value.

ASUs to be adopted in future periods:
In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”).

13

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


ASU 2018-14 eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year. The ASU also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit obligation for postretirement health care benefits. ASU 2018-14 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020. The Company does not plan to early adopt. The adoption of ASU 2018-14 will impact financial statement disclosure with no impact on operating results.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”). This update simplifies various aspects related to accounting for income taxes, removes certain exceptions to the general principles in Accounting Standards Codification (“ASC”) 740, and clarifies and amends existing guidance to improve consistent application. ASU No. 2019-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the effect the standard will have on its condensed consolidated financial statements and related disclosures.
In January 2020, the FASB issued ASU No. 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (“ASU 2020-01”). The new standard clarifies the interaction of accounting for the transition into and out of the equity method. The new standard also clarifies the accounting for measuring certain purchased options and forward contracts to acquire investments. The ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted, including early adoption in an interim period. The Company is currently evaluating the effect the standard will have on its condensed consolidated financial statements and related disclosures.

In March 2020, the FASB issued ASU No. 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). This ASU is intended to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. This guidance is effective for all entities for contract modifications beginning March 12, 2020 and can be applied prospectively through December 31, 2022. The Company has not yet determined the extent to which it will utilize these expedients and exceptions should a modification occur. The Company is currently evaluating the impact of the new guidance on its condensed consolidated financial statements.
   
2.        REVENUE RECOGNITION

Disaggregation of Revenue
In the following table, revenue is disaggregated by major product line for the Tobacco segment:
 
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2020
 
2019
 
2020
 
2019
Tobacco Segment Revenues:
 
 
 
 
 
 
 
 
Core Discount Brands - EAGLE 20’s, PYRAMID, GRAND PRIX, LIGGETT SELECT, and EVE
 
$
283,951

 
$
267,277

 
$
542,166

 
$
500,383

Other Brands
 
28,559

 
27,224

 
57,413

 
50,874

Total tobacco revenues
 
$
312,510

 
$
294,501

 
$
599,579

 
$
551,257


14

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited



In the following table, revenue is disaggregated by major services line and primary geographical market for the Real Estate segment:
 
 
Three months ended June 30, 2020
 
 
New York City
 
Northeast
 
Southeast
 
West
 
Total
Real Estate Segment Revenues:
 
 
 
 
 
 
 
 
 
 
Commission and other brokerage income - existing home sales
 
$
35,861

 
$
35,631

 
$
23,232

 
$
20,024

 
$
114,748

Commission and other brokerage income - development marketing
 
5,173

 

 
2,747

 
586

 
8,506

Property management revenue
 
8,617

 
215

 

 

 
8,832

Title fees
 
474

 
369

 

 

 
843

Total Douglas Elliman revenue
 
50,125

 
36,215

 
25,979

 
20,610

 
132,929

Other real estate revenues
 

 

 

 
321

 
321

  Total real estate revenues
 
$
50,125

 
$
36,215

 
$
25,979

 
$
20,931

 
$
133,250


 
 
Three months ended June 30, 2019
 
 
New York City
 
Northeast
 
Southeast
 
West
 
Total
Real Estate Segment Revenues:
 
 
 
 
 
 
 
 
 
 
Commission and other brokerage income - existing home sales
 
$
104,301

 
$
39,880

 
$
31,324

 
$
31,653

 
$
207,158

Commission and other brokerage income - development marketing
 
22,718

 

 
436

 
22

 
23,176

Property management revenue
 
10,048

 
170

 

 

 
10,218

Title fees
 
1,869

 
471

 

 
60

 
2,400

Total Douglas Elliman revenue
 
138,936

 
40,521

 
31,760

 
31,735

 
242,952

Other real estate revenues
 

 

 

 
979

 
979

  Total real estate revenues
 
$
138,936

 
$
40,521

 
$
31,760

 
$
32,714

 
$
243,931

 
 
Six Months Ended June 30, 2020
 
 
New York City
 
Northeast
 
Southeast
 
West
 
Total
Real Estate Segment Revenues:
 
 
 
 
 
 
 
 
 
 
Commission and other brokerage income - existing home sales
 
$
85,970

 
$
70,355

 
$
53,410

 
$
45,724

 
$
255,459

Commission and other brokerage income - development marketing
 
13,624

 

 
9,469

 
668

 
23,761

Property management revenue
 
17,179

 
432

 

 

 
17,611

Title fees
 
1,067

 
632

 

 

 
1,699

Total Douglas Elliman revenue
 
117,840

 
71,419

 
62,879

 
46,392

 
298,530

Other real estate revenues
 

 

 

 
2,139

 
2,139

  Total real estate revenues
 
$
117,840

 
$
71,419

 
$
62,879

 
$
48,531

 
$
300,669



15

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


 
 
Six Months Ended June 30, 2019
 
 
New York City
 
Northeast
 
Southeast
 
West
 
Total
Real Estate Segment Revenues:
 
 
 
 
 
 
 
 
 
 
Commission and other brokerage income - existing home sales
 
$
169,980

 
$
70,991

 
$
54,295

 
$
50,182

 
$
345,448

Commission and other brokerage income - development marketing
 
34,104

 

 
3,066

 
29

 
37,199

Property management revenue
 
18,215

 
354

 

 

 
18,569

Title fees
 
2,663

 
910

 
60

 

 
3,633

Total Douglas Elliman revenue
 
224,962

 
72,255

 
57,421

 
50,211

 
404,849

Other real estate revenues
 

 

 

 
3,250

 
3,250

  Total real estate revenues
 
$
224,962

 
$
72,255

 
$
57,421

 
$
53,461

 
$
408,099


Contract Balances
The following table provides information about contracts assets and contract liabilities from development marketing and commercial leasing contracts with customers:
 
June 30, 2020
 
December 31, 2019
Receivables, which are included in accounts receivable - trade, net
$
1,532

 
$
2,129

Contract assets, net, which are included in other current assets
5,296

 
8,766

Payables, which are included in other current liabilities
1,084

 
1,663

Contract liabilities, which are included in other current liabilities
7,830

 
9,358

Contract assets, net, which are included in other assets
25,957

 
18,443

Contract liabilities, which are included in other liabilities
32,125

 
29,045



The Company recognized revenue of $3,921 and $6,658 for the three and six months ended June 30, 2020, that were included in the contract liabilities balances at December 31, 2019. There was no revenue recognized relating to performance obligations satisfied or partially satisfied in prior periods for the three and six months ended June 30, 2020 and 2019, respectively.

3.
CURRENT EXPECTED CREDIT LOSSES

On January 1, 2020, the Company adopted ASU No. 2016-13, which sets forth a current expected credit loss model that changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income.
ASU 2016-13 introduces a new accounting model, the Current Expected Credit Losses model (CECL), which requires earlier recognition of credit losses and additional disclosures related to credit risk. The Company adopted this guidance using the modified retrospective approach, as required, and has not adjusted prior period comparative information and will continue to disclose the prior period financial information in accordance with the previous guidance. The adoption of this standard resulted in an increase in stockholders’ deficiency of $2,263 net of tax, attributed to commercial real estate term loans allowance for credit losses of $3,100 as of January 1, 2020.
Tobacco receivables: Average collection terms for Tobacco sales range between three and twelve days from the time that the cigarettes are shipped to the customer. Based on Tobacco historical and ongoing cash collections from customers, an estimated credit loss in accordance with ASU 2016-13 was not required for these trade receivables as of January 1, 2020 and June 30, 2020.
Real estate broker agent receivables: Douglas Elliman Realty is exposed to credit losses for various amounts due from real estate agents, which are included in Other current assets on the condensed consolidated balance sheets, net of an allowance for credit losses. The Company historically estimated its allowance for credit losses on receivables from agents based on an evaluation of aging, agent sales in pipeline, any security, specific exposures, and historical experience of collections from the individual

16

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


agents. Based on the Company’s historical credit losses on receivables from agents, current and expected future market trends (such as the current and expected impact of COVID-19 on the real estate market), it was determined that the requirements of Topic 326 did not result in a material impact on the Company’s allowance for credit losses as of January 1, 2020 of $6,132. The Company estimated that the credit losses for these receivables were $7,361 at June 30, 2020.
Term loan receivables: New Valley periodically provides term loans to commercial real estate developers, which are included in Other assets on the condensed consolidated balance sheets. New Valley had two loans with a total amortized cost basis of $15,534 and $15,276, including accrued interest receivable of $6,034 and $5,776 at June 30, 2020 and December 31, 2019, respectively, and have maturities in 2021 and beyond. The loans are secured by guarantees and given their risk profiles are evaluated individually. As New Valley does not have internal historical loss information by which to evaluate the risk of credit losses, external market data measuring default risks on high yield loans as of each measurement date was utilized to estimate reserves for credit losses on these loans. Pursuant to the requirements of Topic 326, New Valley’s expected credit loss estimate was $3,100 as of January 1, 2020 and $3,532 as of June 30, 2020, which reflects the significant current and expected decline in market conditions as of June 30, 2020 due to the impact of COVID-19 on the real estate market.
The adoption of this standard did not have a material impact on the debt securities available for sale portfolio.
The following is the rollforward of the allowance for credit losses for the six months ended June 30, 2020:
 
January 1,
2020
 
Current Period Provision
 
Write-offs
 
Recoveries
 
June 30,
2020
Allowance for credit losses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate broker agent receivables
$
6,132

 
$
1,270

(1)
$
41

 
$

 
7,361

 
 
 
 
 
 
 
 
 
 
New Valley term loan receivables
3,100

 
432

(2)

 

 
3,532

______________________
(1) The bad debt expense related to the real estate broker agent receivables is included in Operating, selling, administrative and general expenses on the condensed consolidated statements of operations.
(2) The credit losses related to the New Valley term loan receivables are included in Other, net on the condensed consolidated statements of operations.

4.
LEASES

Leases
The Company has operating and finance leases for corporate and sales offices, and certain vehicles and equipment. The components of lease expense were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Operating lease cost
$
9,356

 
$
9,630

 
$
18,780

 
$
18,505

Short-term lease cost
389

 
279

 
790

 
513

Variable lease cost
588

 
898

 
1,155

 
1,690

 
 
 
 
 
 
 
 
Finance lease cost:
 
 
 
 
 
 
 
Amortization
39

 
63

 
77

 
119

Interest on lease liabilities
4

 
4

 
7

 
7

Total lease cost
$
10,376

 
$
10,874

 
$
20,809

 
$
20,834



17

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Supplemental cash flow information related to leases was as follows:
 
Six Months Ended
 
June 30,
 
2020
 
2019
Cash paid for amounts included in measurement of lease liabilities:
 
 
 
Operating cash flows from operating leases
$
11,953

 
$
18,440

Operating cash flows from finance leases
7

 
7

Financing cash flows from finance leases
69

 
113

 
 
 
 
Right-of-use assets obtained in exchange for lease obligations:
 
 
 
Operating leases
9,076

 
13,061

Finance leases
60

 
123






18

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Supplemental balance sheet information related to leases was as follows:
 
June 30,
 
December 31,
 
2020
 
2019
Operating leases:
 
 
 
Operating lease right-of-use assets
$
148,662

 
$
149,578

 
 
 
 
Current operating lease liability
$
18,268

 
$
18,294

Non-current operating lease liability
159,296

 
156,963

Total operating lease liabilities
$
177,564

 
$
175,257

 
 
 
 
Finance leases:
 
 
 
Investments in real estate, net (1)
$
84

 
$
88

 
 
 
 
Property, plant and equipment, at cost
$
127

 
$
127

Accumulated amortization
(32
)
 
(19
)
Property and equipment, net
$
95

 
$
108

 
 
 
 
Current portion of notes payable and long-term debt
$
61

 
$
86

Notes payable, long-term debt and other obligations, less current portion
124

 
108

Total finance lease liabilities
$
185

 
$
194

 
 
 
 
Weighted average remaining lease term:
 
 
 
Operating leases
8.35

 
8.46

Finance leases
3.10

 
3.01

 
 
 
 
Weighted average discount rate:
 
 
 
Operating leases
9.48
%
 
10.75
%
Finance leases
7.68
%
 
8.61
%
(1)  
Included in Investments in real estate, net on the condensed consolidated balance sheets are financing lease equipment, at cost of $822 and $762 and accumulated amortization of $738 and $674 as of June 30, 2020 and December 31, 2019, respectively.


19

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


As of June 30, 2020, maturities of lease liabilities were as follows:
 
Operating Leases
 
Finance
 Leases
Period Ending December 31:
 

 
 

Remainder of 2020
$
15,374

 
$
39

2021
38,992

 
66

2022
34,772

 
61

2023
31,516

 
35

2024
25,902

 
8

2025
20,980

 

Thereafter
96,668

 

Total lease payments
264,204

 
209

 Less imputed interest
(86,640
)
 
(24
)
Total
$
177,564

 
$
185



As of June 30, 2020, the Company had $870 in undiscounted lease payments relating to additional operating leases for office space and equipment that have not yet commenced. The operating leases will commence in the third and fourth quarter of 2020 with lease terms ranging from 1.5 years to 5 years.
Due to the business disruptions and challenges severely affecting the global economy caused by the COVID-19 pandemic, lessors may provide rent deferrals and other lease concessions to lessees. While the lease modification guidance in Topic 842 addresses routine changes to lease terms resulting from negotiations between the lessee and the lessor, this guidance does not contemplate concessions being so rapidly executed to address the sudden liquidity constraints of some lessees arising from the COVID-19 pandemic and restrictions intended to prevent its spread.
In April 2020, the FASB staff issued a question and answer document (the “Lease Modification Q&A”) focused on the application of lease accounting guidance to lease concessions provided as a result of the COVID-19 pandemic. Under existing lease guidance, the Company would have to determine, on a lease by lease basis, if a lease concession was the result of a new arrangement reached with the tenant (treated within the lease modification accounting framework) or if a lease concession was under the enforceable rights and obligations within the existing lease agreement (precluded from applying the lease modification accounting framework). The Lease Modification Q&A allows the Company, if certain criteria have been met, to bypass the lease by lease analysis, and instead elect to either apply the lease modification accounting framework or not, with such election applied consistently to leases with similar characteristics and similar circumstances.
The Company entered into rent deferral concession agreements during the three months ended June 30, 2020, with approximately half of its existing landlords. The agreements varied on the timing of repayment but all agreements required repayment of the deferrals over the remaining lease terms. The Company elected to treat these deferrals agreements as lease modifications and the existing lease liabilities were remeasured with a corresponding adjustment to the ROU asset on the effective date of the modification.
The Lease Modification Q&A’s future impact to the Company’s condensed consolidated financial statements is dependent upon the extent of any lease concessions granted to the Company or its subsidiaries as a result of the COVID-19 pandemic in future periods and the elections made by the Company at the time of entering into such concessions.


20

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


5.
INVENTORIES

Inventories consisted of:
 
June 30,
2020
 
December 31,
2019
Leaf tobacco
$
48,482

 
$
44,516

Other raw materials
4,564

 
4,669

Work-in-process
532

 
333

Finished goods
66,970

 
71,183

Inventories at current cost
120,548

 
120,701

LIFO adjustments
(21,939
)
 
(21,939
)
 
$
98,609

 
$
98,762



All of the Company’s inventories at June 30, 2020 and December 31, 2019 are reported under the LIFO method. The $21,939 LIFO adjustment as of June 30, 2020 decreases the current cost of inventories by $15,210 for Leaf tobacco, $183 for Other raw materials, $24 for Work-in-process and $6,522 for Finished goods. The $21,939 LIFO adjustment as of December 31, 2019 decreased the current cost of inventories by $15,210 for Leaf tobacco, $182 for Other raw materials, $24 for Work-in-process and $6,523 for Finished goods.
The amount of capitalized MSA cost in “Finished goods” inventory was $20,801 and $20,472 at June 30, 2020 and December 31, 2019, respectively. Federal excise tax capitalized in inventory was $27,663 and $27,676 at June 30, 2020 and December 31, 2019, respectively.
At June 30, 2020, Liggett had tobacco purchase commitments of approximately $18,799. Liggett has a single source supply agreement for reduced ignition propensity cigarette paper through 2022.

6.
INVESTMENT SECURITIES

Investment securities consisted of the following:
 
June 30,
2020
 
December 31, 2019
Debt securities available for sale
$
54,885

 
$
83,445

 
 
 
 
Equity securities at fair value:
 
 
 
Marketable equity securities
11,091

 
23,819

Mutual funds invested in debt securities
22,667

 
22,377

Long-term investment securities at fair value (1)
33,232

 
45,781

          Total equity securities at fair value
66,990

 
91,977

 
 
 
 
Total investment securities at fair value
121,875

 
175,422

Less:
 
 
 
Long-term investment securities at fair value
33,232

 
45,781

Current investment securities at fair value
88,643

 
129,641

 
 
 
 
Equity-method investments
$
14,817

 
$
15,942


(1) These assets are measured at net asset value (“NAV”) as a practical expedient under ASC 820.

21

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Net gains (losses) recognized on investment securities were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Net gains (losses) recognized on equity securities
$
4,711

 
$
2,311

 
$
(7,026
)
 
$
7,051

Net gains (losses) recognized on debt securities available for sale
70

 
6

 
(47
)
 
42

Impairment expense

 
(2
)
 
(386
)
 
(5
)
Net gains (losses) recognized on investment securities
$
4,781

 
$
2,315

 
$
(7,459
)
 
$
7,088


 
(a) Debt Securities Available for Sale
The components of debt securities available for sale at June 30, 2020 were as follows:

 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Marketable debt securities
$
53,741

 
$
1,144

 
$

 
$
54,885




The table below summarizes the maturity dates of debt securities available for sale at June 30, 2020.

Investment Type:
Fair Value
 
Under 1 Year
 
1 Year up to 5 Years
 
More than 5 Years
U.S. Government securities
$
12,754

 
$
8,761

 
$
3,993

 
$

Corporate securities
37,145

 
22,570

 
14,575

 

U.S. mortgage-backed securities
4,984

 
3,134

 
1,850

 

Commercial mortgage-backed securities
2

 
2

 

 

Total debt securities available for sale by maturity dates
$
54,885

 
$
34,467

 
$
20,418

 
$



The components of debt securities available for sale at December 31, 2019 were as follows:

 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Marketable debt securities
$
82,714

 
$
731

 
$

 
$
83,445



There were no available-for-sale debt securities with continuous unrealized losses for less than 12 months and 12 months or greater at June 30, 2020 and December 31, 2019, respectively.


22

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Gross realized gains and losses on debt securities available for sale were as follows:

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Gross realized gains on sales
$
72

 
$
9

 
$
170

 
$
47

Gross realized losses on sales
(2
)
 
(3
)
 
(217
)
 
(5
)
Net gains (losses) recognized on debt securities available for sale
$
70

 
$
6

 
$
(47
)
 
$
42

 
 
 
 
 
 
 
 
Impairment expense
$

 
$
(2
)
 
$
(386
)
 
$
(5
)
 

 

 

 



Although management generally does not have the intent to sell any specific securities at the end of the period, in the ordinary course of managing the Company’s investment securities portfolio, management may sell securities prior to their maturities for a variety of reasons, including diversification, credit quality, yield and liquidity requirements.

(b) Equity Securities at Fair Value

The following is a summary of unrealized and realized net gains and losses recognized in net income on equity securities at fair value during the three and six months ended June 30, 2020 and 2019, respectively:

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Net gains (losses) recognized on equity securities
$
4,711

 
$
2,311

 
$
(7,026
)
 
$
7,051

Less: Net gains (losses) recognized on equity securities sold
601

 
278

 
(17
)
 
410

Net unrealized gains (losses) recognized on equity securities still held at the reporting date
$
4,110

 
$
2,033

 
$
(7,009
)
 
$
6,641

 
 
 
 
 
 
 
 

The Company’s marketable equity securities and mutual funds invested in debt securities are classified as Level 1 under the fair value hierarchy disclosed in Note 12. Their fair values are based on quoted prices for identical assets in active markets or inputs that are based upon quoted prices for similar instruments in active markets.

The Company received cash distributions of $23,510 and recorded $2,148 of in-transit redemptions as of June 30, 2020 related to its long-term investment securities at fair value. The Company classified $23,407 of these distributions as investing cash inflows for the six months ended June 30, 2020. The remaining distributions were classified as operating cash inflows.

(c) Equity-Method Investments:
Equity-method investments consisted of the following:
 
June 30,
2020
 
December 31, 2019
Mutual fund and hedge funds
$
14,817

 
$
15,509

Ladenburg Thalmann Financial Services Inc. (“LTS”)

 
433

 
$
14,817

 
$
15,942




23

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


At June 30, 2020, the Company’s ownership percentages in the mutual fund and hedge funds accounted for under the equity method ranged from 7.10% to 35.75%. The Company’s ownership percentage in these investments meets the threshold for equity-method accounting.
In November 2019, LTS entered into an Agreement and Plan of Merger with Advisor Group whereby each LTS common share would be converted into the right to receive $3.50 per common share. On February 14, 2020, the merger was completed and the Company received proceeds of $53,169 in exchange for the Company’s 15,191,205 common shares of LTS. The Company also tendered 240,000 shares of LTS 8% Series A Cumulative Redeemable Preferred Stock (Liquidation Preference $25.00 Per Share) for redemption and received an additional $6,009 in March 2020. At the closing of the transaction, the Company’s Executive Vice President resigned as Chairman, President and Chief Executive Officer of LTS, and the Company’s management agreement with LTS was terminated.
Equity in earnings (losses) from investments were:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Mutual fund and hedge funds
$
2,207

 
$
(230
)
 
$
(693
)
 
$
612

LTS

 
(1,480
)
 
53,052

 
(985
)
Other

 
25

 

 
50

Equity in earnings (losses) from investments
$
2,207

 
$
(1,685
)
 
$
52,359

 
$
(323
)


The Company received cash distributions of $53,484 (including the $53,169 received by the Company in exchange for the Company’s 15,191,205 common shares of LTS) and $855 from the Company’s equity-method investments for the six months ended June 30, 2020 and 2019, respectively. The Company classified its cash distributions of $53,484 and $855 as operating activities on the condensed consolidated statements of cash flows for the six months ended June 30, 2020 and June 30, 2019, respectively.

(d) Equity Securities Without Readily Determinable Fair Values That Do Not Qualify for the NAV Practical Expedient

Equity securities without readily determinable fair values that do not qualify for the NAV practical expedient consisted of investments in the common stock of a reinsurance company and membership units of a commercial real estate limited liability company at June 30, 2020 and December 31, 2019, respectively. Membership units of a real estate limited liability company were also included in the balance as of December 31, 2019. The total carrying value of these investments was $5,200 as of June 30, 2020 and $6,200 as of December 31, 2019, and was included in “Other assets” on the condensed consolidated balance sheets. No impairment or other adjustments related to observable price changes in orderly transactions for identical or similar investments were identified for the three and six months ended June 30, 2020 and 2019, respectively.


24

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


7.    NEW VALLEY LLC

Investments in real estate ventures:

The components of “Investments in real estate ventures” were as follows:
 
Range of Ownership (1)
 
June 30, 2020
 
December 31, 2019
Condominium and Mixed Use Development:
 
 
 
 
 
            New York City Standard Metropolitan Statistical Area (“SMSA”)
3.1% - 49.5%
 
$
42,851

 
$
51,078

            All other U.S. areas
15.0% - 77.8%
 
47,172

 
55,842

 
 
 
90,023

 
106,920

Hotels:
 
 
 
 
 
            New York City SMSA
1.0% - 18.4%
 
3,107

 
2,462

            International
49.0%
 
1,610

 
2,161

 
 
 
4,717

 
4,623

Commercial:
 
 
 
 
 
            New York City SMSA
49.0%
 
2,076

 
1,852

            All other U.S. areas
1.6%
 
7,567

 
7,634

 
 
 
9,643

 
9,486

 
 
 
 
 
 
Other:
15.0% - 49.0%
 
10,994

 
10,527

Investments in real estate ventures
 
 
$
115,377

 
$
131,556

______________________
(1) The Range of Ownership reflects New Valley’s estimated current ownership percentage. New Valley’s actual ownership percentage as well as the percentage of earnings and cash distributions may ultimately differ as a result of a number of factors including potential dilution, financing or admission of additional partners.

Contributions:

The components of New Valley’s contributions to its investments in real estate ventures were as follows:
 
Six Months Ended
 
June 30,
 
2020
 
2019
Condominium and Mixed Use Development:
 
 
 
            New York City SMSA
$
1,169

 
$
21,537

            All other U.S. areas
2,161

 

 
3,330

 
21,537

Apartment Buildings:
 
 
 
            All other U.S. areas
76

 

 
76

 

 
 
 
 
Hotels:
 
 
 
            New York City SMSA

 
172

 

 
172

 
 
 
 
Other:
452

 
199

Total contributions
$
3,858

 
$
21,908



For ventures where New Valley previously held an investment, New Valley contributed its proportionate share of additional capital along with contributions by the other investment partners during the six months ended June 30, 2020 and June 30, 2019. New Valley’s direct investment percentage for these ventures did not significantly change. 

25

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited



Distributions:

The components of distributions received by New Valley from its investments in real estate ventures were as follows:
 
Six Months Ended
 
June 30,
 
2020
 
2019
Condominium and Mixed Use Development:
 
 
 
            New York City SMSA
$
1,735

 
$
571

            All other U.S. areas
5,214

 
1,279

 
6,949

 
1,850

Apartment Buildings:
 
 
 
            All other U.S. areas

 
3

 

 
3

Hotels:
 
 
 
            New York City SMSA

 
21,572

 

 
21,572

Commercial:
 
 
 
            New York City SMSA
3

 
9

            All other U.S. areas
52

 
129

 
55

 
138

 
 
 
 
Other
23

 
1,697

Total distributions
$
7,027

 
$
25,260



Of the distributions received by New Valley from its investment in real estate ventures, $1,855 and $2,060 were from distributions of earnings for the six months ended June 30, 2020 and 2019, respectively, and $5,172 and $23,200 were a return of capital for the six months ended June 30, 2020 and 2019, respectively. Distributions from earnings are included in cash from operations in the condensed consolidating statements of cash flows, while distributions that are returns of capital are included in cash flows from investing activities in the condensed consolidating statements of cash flows.

26

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited



Equity in (Losses) Earnings from Real Estate Ventures:

New Valley recognized equity in (losses) earnings from real estate ventures as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Condominium and Mixed Use Development:
 
 
 
 
 
 
 
            New York City SMSA
$
(5,104
)
 
$
(1,120
)
 
$
(8,451
)
 
$
(3,226
)
            All other U.S. areas (1)
(6,489
)
 
(2,258
)
 
(9,288
)
 
(2,366
)
 
(11,593
)
 
(3,378
)
 
(17,739
)
 
(5,592
)
Apartment Buildings:
 
 
 
 
 
 
 
            All other U.S. areas
(76
)
 
3

 
(76
)
 
3

 
(76
)
 
3

 
(76
)
 
3

Hotels:
 
 
 
 
 
 
 
            New York City SMSA (1)
(542
)
 
8,942

 
(649
)
 
8,234

            International
(90
)
 
122

 
(551
)
 
(364
)
 
(632
)
 
9,064

 
(1,200
)
 
7,870

Commercial:
 
 
 
 
 
 
 
            New York City SMSA
301

 
384

 
227

 
263

            All other U.S. areas
(264
)
 
79

 
(15
)
 
371

 
37

 
463

 
212

 
634

 
 
 
 
 
 
 
 
Other:
4

 
239

 
38

 
1,037

Equity in (losses) earnings from real estate ventures
$
(12,260
)
 
$
6,391

 
$
(18,765
)
 
$
3,952


______________________
(1) The Company recognized a liability, classified in Other current liabilities, of $2,498 as a result of recording equity in losses in excess of the joint ventures' carrying value.

During the six months ended June 30, 2019, New Valley’s Park Lane joint venture sold 80.0% of its interest in the Park Lane Hotel, a hotel located in the New York City SMSA. New Valley recognized equity in earnings of $10,328 from the sale and received distributions of $20,788 for the six months ended June 30, 2019. The sale reduced New Valley’s direct ownership percentage of the Park Lane Hotel from 5.2% to 1.0%. New Valley continues to account for its investment in the joint venture under the equity method of accounting because its ownership percentage in its direct investment continues to meet the threshold for equity method accounting.
As part of the Company’s ongoing assessment of the carrying values of its investments in real estate ventures, the Company determined that the fair value of a New York City SMSA Condominium and Mixed Use Development venture was less than its carrying value as of June 30, 2020. The Company determined that the impairment was other than temporary. The Company recorded an impairment charge as a component of equity in losses from real estate ventures of $3,784 for the three and six months ended June 30, 2020.

As part of the Company’s ongoing assessment of the carrying values of its investments in real estate ventures, the Company determined that the fair value of three New York City SMSA and one All other U.S. areas Condominium and Mixed Use Development ventures were less than their carrying value as of June 30, 2019. The Company determined that the impairment was other than temporary. The Company recorded an impairment charge as a component of equity in earnings from real estate ventures of $3,866 for the three and six months ended June 30, 2019.


27

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


VIE Consideration:

The Company has determined that New Valley is the primary beneficiary of two real estate ventures because it controls the activities that most significantly impact economic performance of each of the two real estate ventures. Consequently, New Valley consolidates these variable interest entities (“VIEs”).

The carrying amount of the consolidated assets of the VIEs was $0 and $897 as of June 30, 2020 and December 31, 2019, respectively. Those assets are owned by the VIEs, not the Company. Neither of the two consolidated VIEs had recourse liabilities as of June 30, 2020 and December 31, 2019. A VIE’s assets can only be used to settle obligations of that VIE. The VIEs are not guarantors of the Company’s senior notes and other debts payable.

For the remaining investments in real estate ventures, New Valley determined that the entities were VIEs but New Valley was not the primary beneficiary. Therefore, New Valley’s investment in such real estate ventures has been accounted for under the equity method of accounting.

Maximum Exposure to Loss:

New Valley’s maximum exposure to loss from its investments in real estate ventures consisted of the net carrying value of the venture adjusted for any future capital commitments and/or guarantee arrangements. The maximum exposure to loss was as follows:
 
June 30, 2020
Condominium and Mixed Use Development:
 
            New York City SMSA
$
42,851

            All other U.S. areas
47,172

 
90,023

Hotels:
 
            New York City SMSA
3,107

            International
1,610

 
4,717

Commercial:
 
            New York City SMSA
2,076

            All other U.S. areas
7,567

 
9,643

 
 
Other:
24,641

Total maximum exposure to loss
$
129,024


New Valley capitalized $1,004 and $2,257 of interest costs into the carrying value of its ventures whose projects were currently under development for the three and six months ended June 30, 2020. New Valley capitalized $1,688 and $3,003 of interest costs into the carrying value of its ventures whose projects were currently under development for the three and six months ended June 30, 2019.
 
Douglas Elliman is engaged by certain developers as a broker for several of the real estate ventures that New Valley invests in. Douglas Elliman earned gross commissions of approximately $7,698 and $11,223 from these projects for the six months ended June 30, 2020 and 2019, respectively.

Combined Financial Statements for Unconsolidated Subsidiaries:
The following summarized financial data for certain unconsolidated subsidiaries that meet certain thresholds pursuant to SEC Regulation S-X Rule 210.10-01(b) includes information for the West Hollywood Edition investment. New Valley has elected a one-month lag reporting period for the investment.

28

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited



Condominium and Mixed Use Development:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Income Statement
 
 
 
 
 
 
 
Revenue
$
1,830

 
$

 
$
33,409

 
$

Cost of goods sold

 

 
22,100

 

Other expenses
14,013

 
6

 
31,926

 
75

Loss from continuing operations
$
(12,183
)
 
$
(6
)
 
$
(20,617
)
 
$
(75
)

Investments in Real Estate, net:

The components of “Investments in real estate, net” were as follows:
 
June 30,
2020
 
December 31,
2019
Escena, net
$
9,852

 
$
9,972

Sagaponack
19,024

 
18,345

            Investments in real estate, net
$
28,876

 
$
28,317


Escena.  The assets of “Escena, net” were as follows:
 
June 30,
2020
 
December 31,
2019
Land and land improvements
$
8,911

 
$
8,910

Building and building improvements
1,926

 
1,926

Other
1,673

 
1,659

 
12,510

 
12,495

Less accumulated depreciation
(2,658
)
 
(2,523
)
 
$
9,852

 
$
9,972


New Valley recorded operating losses of $629 and $354 for the three months ended June 30, 2020 and 2019, respectively, from Escena. New Valley recorded operating losses of $272 and operating income of $332 for the six months ended June 30, 2020 and 2019, respectively, from Escena. Escena is a master planned community, golf course, and club house in Palm Springs, California.

Investment in Sagaponack. In April 2015, New Valley invested $12,502 in a residential real estate project located in Sagaponack, NY. The project is wholly-owned and the balances of the project are included in the condensed consolidated financial statements of the Company. As of June 30, 2020 and December 31, 2019, the assets of Sagaponack consisted of land and land improvements of $19,024 and $18,345, respectively.


29

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


8.
NOTES PAYABLE, LONG-TERM DEBT AND OTHER OBLIGATIONS

Notes payable, long-term debt and other obligations consisted of:

 
June 30,
2020
 
December 31,
2019
Vector:
 
 
 
6.125% Senior Secured Notes due 2025
$
850,000

 
$
850,000

10.5% Senior Notes due 2026, net of unamortized discount of $3,221 and $3,392
551,779

 
551,608

5.5% Variable Interest Senior Convertible Debentures due 2020, net of unamortized discount of $0 and $5,276*

 
164,334

Liggett:
 
 
 
Revolving credit facility

 
34,952

Equipment loans
143

 
347

Other
28,033

 
30,146

Notes payable, long-term debt and other obligations
1,429,955

 
1,631,387

Less:
 
 
 
Debt issuance costs
(22,908
)
 
(24,902
)
Total notes payable, long-term debt and other obligations
1,407,047

 
1,606,485

Less:
 
 
 
Current maturities
(8,853
)
 
(209,269
)
Amount due after one year
$
1,398,194

 
$
1,397,216

______________________
* The fair value of the derivatives embedded within the 5.5% Variable Interest Senior Convertible Debentures ($4,999 at December 31, 2019), is separately classified as a derivative liability in the condensed consolidated balance sheets.

6.125% Senior Secured Notes due 2025 — Vector:
As of June 30, 2020, the Company was in compliance with all debt covenants related to its 6.125% Senior Secured Notes due 2025.
10.5% Senior Notes due 2026 — Vector:
As of June 30, 2020, the Company was in compliance with all debt covenants related to its 10.5% Senior Notes due 2026.
5.5% Variable Interest Senior Convertible Debentures due 2020 — Vector:
In April 2020, the Company paid $169,610 of principal as full payment of its 5.5% Variable Interest Senior Convertible Debentures due 2020, which matured on April 15, 2020.
Revolving Credit Agreement — Liggett:
As of June 30, 2020, there was no outstanding balance due under the Third Amended and Restated Credit Agreement (the “Credit Agreement”), all of which was classified as current debt as of June 30, 2020. Availability, as determined under the Credit Agreement, was approximately $60,000 based on eligible collateral at June 30, 2020. As of June 30, 2020, the Company’s applicable subsidiaries were in compliance with all debt covenants under the Credit Agreement.
Other:
Other Notes Payable consist primarily of $27,500 of notes payable issued by New Valley. On December 31, 2018, New Valley acquired the remaining 29.41% interest in Douglas Elliman for a total purchase price of $40,000, which included $10,000 of cash paid and the remaining $30,000 of notes payable to the sellers. Interest on the outstanding principal balance of the notes accrued at the mid-term applicable federal rate (“AFR”) in effect as of December 31, 2018 until January 1, 2020 and thereafter is adjusted to the then-current AFR on each payment date. Principal and interest is payable in installments through October 1, 2022. $2,500

30

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


of principal has been repaid through June 30, 2020 and the remaining principal is due to be repaid as follows: (1) $2,500 in the remainder of 2020; (2) $12,500 in 2021; and (3) $12,500 in 2022.
Non-Cash Interest Expense — Vector:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Amortization of debt discount, net
$
847

 
$
5,447

 
$
5,447

 
$
13,972

Amortization of debt issuance costs
889

 
1,053

 
2,047

 
2,238


$
1,736

 
$
6,500

 
$
7,494

 
$
16,210



Fair Value of Notes Payable and Long-Term Debt:

 
June 30, 2020
 
December 31, 2019
 
Carrying
 
Fair
 
Carrying
 
Fair
 
Value
 
Value
 
Value
 
Value
Senior Notes
$
1,401,779

 
$
1,380,787

 
$
1,401,608

 
$
1,409,920

Variable Interest Senior Convertible Debt

 

 
164,334

 
176,289

Liggett and other
28,176

 
28,188

 
65,445

 
65,456

Notes payable and long-term debt
$
1,429,955

 
$
1,408,975

 
$
1,631,387

(1)
$
1,651,665


______________________
(1) The carrying value does not include the carrying value of the embedded derivative. See Note 12.

Notes payable and long-term debt are carried on the condensed consolidated balance sheets at amortized cost. The fair value determinations disclosed above are classified as Level 2 under the fair value hierarchy disclosed in Note 12 if such liabilities were recorded on the condensed consolidated balance sheet at fair value. The estimated fair value of the Company’s notes payable and long-term debt has been determined by the Company using available market information and appropriate valuation methodologies including the evaluation of the Company’s credit risk as described in the Company’s Form 10-K. The Company used a derived price based upon quoted market prices and trade activity as of June 30, 2020 to determine the fair value of its publicly-traded notes and debentures. The carrying value of the revolving credit facility is equal to fair value. The fair value of the equipment loans and other obligations was determined by calculating the present value of the required future cash flows. However, considerable judgment is required to develop the estimates of fair value and, accordingly, the estimate presented herein is not necessarily indicative of the amount that could be realized in a current market exchange.



31

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


9.
CONTINGENCIES

Tobacco-Related Litigation:
Overview. Since 1954, Liggett and other United States cigarette manufacturers have been named as defendants in numerous direct, third-party and purported class actions predicated on the theory that cigarette manufacturers should be liable for damages alleged to have been caused by cigarette smoking or by exposure to secondary smoke from cigarettes. The cases have generally fallen into the following categories: (i) smoking and health cases alleging personal injury brought on behalf of individual plaintiffs (“Individual Actions”); (ii) lawsuits by individuals requesting the benefit of the Engle ruling (“Engle progeny cases”); (iii) smoking and health cases primarily alleging personal injury or seeking court-supervised programs for ongoing medical monitoring, as well as cases alleging that use of the terms “lights” and/or “ultra lights” constitutes a deceptive and unfair trade practice, common law fraud or violation of federal law, purporting to be brought on behalf of a class of individual plaintiffs (“Class Actions”); and (iv) health care cost recovery actions brought by various foreign and domestic governmental plaintiffs and non-governmental plaintiffs seeking reimbursement for health care expenditures allegedly caused by cigarette smoking and/or disgorgement of profits (“Health Care Cost Recovery Actions”). The future financial impact of the risks and expenses of litigation are not quantifiable. For the six months ended June 30, 2020 and 2019, Liggett incurred tobacco product liability legal expenses and costs totaling $3,191 and $3,737, respectively. The tobacco product liability legal expenses and costs are included in the operating, selling, administrative and general expenses and litigation settlement and judgment expense line items in the condensed consolidated statements of operations. Legal defense costs are expensed as incurred.
Litigation is subject to uncertainty and it is possible that there could be adverse developments in pending cases. With the commencement of new cases, the defense costs and the risks relating to the unpredictability of litigation increase. Management reviews on a quarterly basis with counsel all pending litigation and evaluates the probability of a loss being incurred and whether an estimate can be made of the possible loss or range of loss that could result from an unfavorable outcome. An unfavorable outcome or settlement of pending tobacco-related litigation could encourage the commencement of additional litigation. Damages awarded in tobacco-related litigation can be significant.
Bonds. Although Liggett has been able to obtain required bonds or relief from bonding requirements in order to prevent plaintiffs from seeking to collect judgments while adverse verdicts are on appeal, there remains a risk that such relief may not be obtainable in all cases. This risk has been reduced given that a majority of states now limit the dollar amount of bonds or require no bond at all. As of June 30, 2020, to obtain a stay of the judgment pending the appeal of the Santoro case, Liggett secured a $535 supersedeas bond.
In June 2009, Florida amended its existing bond cap statute by adding a $200,000 bond cap that applies to all Engle progeny cases in the aggregate and establishes individual bond caps for individual Engle progeny cases in amounts that vary depending on the number of judgments in effect at a given time. The maximum amount of any such bond for an appeal in the Florida state courts will be no greater than $5,000. In several cases, plaintiffs challenged the constitutionality of the bond cap statute, but to date the courts have upheld the constitutionality of the statute. It is possible that the Company’s consolidated financial position, results of operations, and cash flows could be materially adversely affected by an unfavorable outcome of such challenges.
Accounting Policy. The Company and its subsidiaries record provisions in their consolidated financial statements for pending litigation when they determine that an unfavorable outcome is probable and the amount of loss can be reasonably estimated. At the present time, while it is reasonably possible that an unfavorable outcome in a case may occur, except as discussed in this Note 9: (i) management has concluded that it is not probable that a loss has been incurred in any of the pending tobacco-related cases; or (ii) management is unable to reasonably estimate the possible loss or range of loss that could result from an unfavorable outcome of any of the pending tobacco-related cases and, therefore, management has not provided any amounts in the consolidated financial statements for unfavorable outcomes, if any.
Although Liggett has generally been successful in managing the litigation filed against it, litigation is subject to uncertainty and significant challenges remain, including with respect to the remaining Engle progeny cases. There can be no assurances that Liggett’s past litigation experience will be representative of future results. Judgments have been entered against Liggett in the past, in Individual Actions and Engle progeny cases, and several of those judgments were affirmed on appeal and satisfied by Liggett. It is possible that the consolidated financial position, results of operations and cash flows of the Company could be materially adversely affected by an unfavorable outcome or settlement of any of the remaining smoking-related litigation. Liggett believes, and has been so advised by counsel, that it has valid defenses to the litigation pending against it, as well as valid bases for appeal of adverse verdicts. All such cases are and will continue to be vigorously defended. Liggett has entered into settlement discussions in individual cases or groups of cases where Liggett has determined it was in its best interest to do so, and it may

32

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


continue to do so in the future. As cases proceed through the appellate process, the Company will consider accruals on a case-by-case basis if an unfavorable outcome becomes probable and the amount can be reasonably estimated.
Individual Actions
As of June 30, 2020, there were 54 Individual Actions pending against Liggett, where one or more individual plaintiffs allege injury resulting from cigarette smoking, addiction to cigarette smoking or exposure to secondary smoke and seek compensatory and, in some cases, punitive damages. These cases do not include the remaining Engle progeny cases. The following table lists the number of Individual Actions by state:
State
 
Number
of Cases
Florida
 
37
Illinois
 
9
Nevada
 
5
Louisiana
 
2
Massachusetts
 
1

The plaintiffs’ allegations of liability in cases in which individuals seek recovery for injuries allegedly caused by cigarette smoking are based on various theories of recovery, including negligence, gross negligence, breach of special duty, strict liability, fraud, concealment, misrepresentation, design defect, failure to warn, breach of express and implied warranties, conspiracy, aiding and abetting, concert of action, unjust enrichment, common law public nuisance, property damage, invasion of privacy, mental anguish, emotional distress, disability, shock, indemnity, violations of deceptive trade practice laws, the federal Racketeer Influenced and Corrupt Organizations Act (“RICO”), state RICO statutes and antitrust statutes. In many of these cases, in addition to compensatory damages, plaintiffs also seek other forms of relief including treble/multiple damages, medical monitoring, disgorgement of profits and punitive damages. Although alleged damages often are not determinable from a complaint, and the law governing the pleading and calculation of damages varies from state to state and jurisdiction to jurisdiction, compensatory and punitive damages have been specifically pleaded in a number of cases, sometimes in amounts ranging into the hundreds of millions and even billions of dollars.
Defenses raised in Individual Actions include lack of proximate cause, assumption of the risk, comparative fault and/or contributory negligence, lack of design defect, statute of limitations, statute of repose, equitable defenses such as “unclean hands” and lack of benefit, failure to state a claim and federal preemption.
Engle Progeny Cases
In May 1994, the Engle case was filed as a class action against Liggett and others in Miami-Dade County, Florida. The class consisted of all Florida residents who, by November 21, 1996, “have suffered, presently suffer or have died from diseases and medical conditions caused by their addiction to cigarette smoking.” A trial was held and the jury returned a verdict adverse to the defendants (approximately $145,000,000 in punitive damages, including $790,000 against Liggett). Following an appeal to the Third District Court of Appeal, the Florida Supreme Court in July 2006 decertified the class on a prospective basis and affirmed the appellate court’s reversal of the punitive damages award. Former class members had until January 2008 to file individual lawsuits. As a result, Liggett and the Company, and other cigarette manufacturers, were sued in thousands of Engle progeny cases in both federal and state courts in Florida. Although the Company was not named as a defendant in the Engle case, it was named as a defendant in substantially all of the Engle progeny cases where Liggett was named as a defendant.
Cautionary Statement About Engle Progeny Cases. Since 2009, judgments have been entered against Liggett and other cigarette manufacturers in Engle progeny cases. A number of the judgments were affirmed on appeal and satisfied by the defendants. Many were overturned on appeal. As of June 30, 2020, 25 Engle progeny cases where Liggett was a defendant at trial resulted in verdicts.
There have been 16 verdicts returned in favor of the plaintiffs and nine in favor of Liggett. In five of the cases, punitive damages were awarded against Liggett. Several of the adverse verdicts were overturned on appeal and new trials were ordered. In certain cases, the judgments were entered jointly and severally with other defendants and Liggett may face the risk that one or more co-defendants decline or otherwise fail to participate in the bonding required for an appeal or to pay their proportionate or jury-allocated share of a judgment. As a result, under certain circumstances, Liggett may have to pay more than its proportionate share of any bonding or judgment related amounts. Except as discussed in this Note 9, management is unable to estimate the

33

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


possible loss or range of loss from the remaining Engle progeny cases as there are currently multiple defendants in each case and, in most cases, discovery has not occurred or is limited. As a result, the Company lacks information about whether plaintiffs are in fact Engle class members, the relevant smoking history, the nature of the alleged injury and the availability of various defenses, among other things. Further, plaintiffs typically do not specify the amount of their demand for damages. As cases proceed through the appellate process, the Company will consider accruals on a case-by-case basis if an unfavorable outcome becomes probable and the amount can be reasonably estimated.
Engle Progeny Settlements.
In October 2013, the Company and Liggett entered into a settlement with approximately 4,900 Engle progeny plaintiffs and their counsel. Pursuant to the terms of the settlement, Liggett agreed to pay a total of approximately $110,000, with $61,600 paid in an initial lump sum and the balance of $48,000 to be paid in installments over 14 years starting in February 2015. In exchange, the claims of these plaintiffs were dismissed with prejudice against the Company and Liggett. The Company’s future payments will be approximately $3,400 per annum through 2028, with a cost of living increase beginning in 2021.
Liggett subsequently entered into two separate agreements with a total of 152 Engle progeny plaintiffs where Liggett paid a total of $23,150 to settle their claims. On an individual basis, Liggett settled an additional 201 Engle progeny cases for approximately $8,100 in the aggregate. Two of these settlements occurred in the second quarter of 2020.
Notwithstanding the comprehensive nature of the Engle Progeny Settlements, 42 plaintiffs’ claims remain pending in state court. Therefore, the Company and Liggett may still be subject to periodic adverse judgments which could have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows.
Judgments Paid in Engle Progeny Cases.
As of June 30, 2020, Liggett had paid in the aggregate $39,773, including interest and attorneys’ fees, to satisfy the judgments in the following Engle progeny cases: Lukacs, Campbell, Douglas, Clay, Tullo, Ward, Rizzuto, Lambert and Buchanan. An adverse verdict against Liggett for $265 in Santoro is currently on appeal.
Maryland Cases
Liggett was a defendant in 16 multi-defendant personal injury cases in Maryland alleging claims arising from asbestos and tobacco exposure (“synergy cases”). In July 2016, the Court of Appeals (Maryland’s highest court) ruled that joinder of tobacco and asbestos cases may be possible in certain circumstances, but plaintiffs must demonstrate at the trial court level how such cases may be joined while providing appropriate safeguards to prevent embarrassment, delay, expense or prejudice to defendants and “the extent to which, if at all, the special procedures applicable to asbestos cases should extend to tobacco companies.” The Court of Appeals remanded these issues to be determined at the trial court level. In June 2017, the trial court issued an order dismissing all synergy cases against the tobacco defendants, including Liggett, without prejudice. Plaintiffs may seek appellate review or file new cases against the tobacco companies.
Liggett Only Cases  
There are currently two cases where Liggett is the sole defendant: Cowart, a Florida Individual Action, and Tumin, an Engle progeny case. It is possible that cases where Liggett is the only defendant could increase as a result of the remaining Engle progeny cases and newly filed Individual Actions.
Class Actions
As of June 30, 2020, two actions were pending for which either a class had been certified or plaintiffs were seeking class certification where Liggett is a named defendant. Other cigarette manufacturers are also named in these two cases.
Plaintiffs’ allegations of liability in class action cases are based on various theories of recovery, including negligence, gross negligence, strict liability, fraud, misrepresentation, design defect, failure to warn, nuisance, breach of express and implied warranties, breach of special duty, conspiracy, concert of action, violation of deceptive trade practice laws and consumer protection statutes and claims under the federal and state anti-racketeering statutes. Plaintiffs in the class actions seek various forms of relief, including compensatory and punitive damages, treble/multiple damages and other statutory damages and penalties, creation of medical monitoring and smoking cessation funds, disgorgement of profits, and injunctive and equitable relief.
Defenses raised in these cases include, among others, lack of proximate cause, individual issues predominate, assumption of the risk, comparative fault and/or contributory negligence, statute of limitations and federal preemption.

34

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


In November 1997, in Young v. American Tobacco Co., a purported personal injury class action was commenced on behalf of plaintiff and all similarly situated residents in Louisiana who, though not themselves cigarette smokers, allege they were exposed to secondhand smoke from cigarettes that were manufactured by the defendants, including Liggett, and suffered injury as a result of that exposure. The plaintiffs seek to recover an unspecified amount of compensatory and punitive damages. No class certification hearing has been held. A stay order entered on March 16, 2016 stays the case pending completion of the smoking cessation program ordered by the court in Scott v. The American Tobacco Co.
In February 1998, in Parsons v. AC & S Inc., a purported class action was commenced on behalf of all West Virginia residents who allegedly have claims arising from their exposure to cigarette smoke and asbestos fibers. The operative complaint seeks to recover unspecified compensatory and punitive damages on behalf of the putative class. The case is stayed as a result of the December 2000 bankruptcy of three of the defendants.
Health Care Cost Recovery Actions
As of June 30, 2020, one Health Care Cost Recovery Action was pending against Liggett, Crow Creek Sioux Tribe v. American Tobacco Company, a South Dakota case filed in 1997, where the plaintiff seeks to recover damages from Liggett and other cigarette manufacturers based on various theories of recovery as a result of alleged sales of tobacco products to minors. The case is dormant.
The claims asserted in health care cost recovery actions vary, but can include the equitable claim of indemnity, common law claims of negligence, strict liability, breach of express and implied warranty, breach of special duty, fraud, negligent misrepresentation, conspiracy, public nuisance, claims under state and federal statutes governing consumer fraud, antitrust, deceptive trade practices and false advertising, and claims under RICO. Although no specific damage amounts are typically pleaded, it is possible that requested damages might be in the billions of dollars. In these cases, plaintiffs typically assert equitable claims that the tobacco industry was “unjustly enriched” by their payment of health care costs allegedly attributable to smoking and seek reimbursement of those costs. Relief sought by some, but not all, plaintiffs include punitive damages, multiple damages and other statutory damages and penalties, injunctions prohibiting alleged marketing and sales to minors, disclosure of research, disgorgement of profits, funding of anti-smoking programs, additional disclosure of nicotine yields, and payment of attorney and expert witness fees.
Department of Justice Lawsuit
In September 1999, the United States government commenced litigation against Liggett and other cigarette manufacturers in the United States District Court for the District of Columbia. The action sought to recover, among other things, an unspecified amount of health care costs paid and to be paid by the federal government for smoking-related illnesses allegedly caused by the fraudulent and tortious conduct of defendants. In August 2006, the trial court entered a Final Judgment against each of the cigarette manufacturing defendants, except Liggett. The judgment was affirmed on appeal. As a result, the cigarette manufacturing defendants, other than Liggett, are now subject to the trial court’s Final Judgment which ordered, among other things, the issuance of “corrective statements” in various media regarding the adverse health effects of smoking, the addictiveness of smoking and nicotine, the lack of any significant health benefit from smoking “low tar” or “lights” cigarettes, defendants’ manipulation of cigarette design to ensure optimum nicotine delivery and the adverse health effects of exposure to environmental tobacco smoke.
Upcoming Trials
As of June 30, 2020, there were three Individual Actions and one Engle progeny case scheduled for trial through June 30, 2021, where Liggett (and/or the Company) is a named defendant. Trial dates are subject to change and additional cases could be set for trial during this time.
MSA and Other State Settlement Agreements
In March 1996, March 1997 and March 1998, Liggett entered into settlements of smoking-related litigation with 45 states and territories. The settlements released Liggett from all smoking-related claims made by those states and territories, including claims for health care cost reimbursement and claims concerning sales of cigarettes to minors.
In November 1998, Philip Morris, R.J. Reynolds and two other companies (the “Original Participating Manufacturers” or “OPMs”) and Liggett and Vector Tobacco (together with any other tobacco product manufacturer that becomes a signatory, the “Subsequent Participating Manufacturers” or “SPMs”) (the OPMs and SPMs are hereinafter referred to jointly as “PMs”) entered into the Master Settlement Agreement (the “MSA”) with 46 states, the District of Columbia, Puerto Rico, Guam, the United States Virgin Islands, American Samoa and the Northern Mariana Islands (collectively, the “Settling States”) to settle the asserted

35

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


and unasserted health care cost recovery and certain other claims of the Settling States. The MSA received final judicial approval in each Settling State.
As a result of the MSA, the Settling States released Liggett and Vector Tobacco from:
all claims of the Settling States and their respective political subdivisions and other recipients of state health care funds, relating to: (i) past conduct arising out of the use, sale, distribution, manufacture, development, advertising and marketing of tobacco products; (ii) the health effects of, the exposure to, or research, statements or warnings about, tobacco products; and
all monetary claims of the Settling States and their respective subdivisions and other recipients of state health care funds relating to future conduct arising out of the use of, or exposure to, tobacco products that have been manufactured in the ordinary course of business.
The MSA restricts tobacco product advertising and marketing within the Settling States and otherwise restricts the activities of PMs. Among other things, the MSA prohibits the targeting of youth in the advertising, promotion or marketing of tobacco products; bans the use of cartoon characters in all tobacco advertising and promotion; limits each PM to one tobacco brand name sponsorship during any 12-month period; bans all outdoor advertising, with certain limited exceptions; prohibits payments for tobacco product placement in various media; bans gift offers based on the purchase of tobacco products without sufficient proof that the intended recipient is an adult; prohibits PMs from licensing third parties to advertise tobacco brand names in any manner prohibited under the MSA; and prohibits PMs from using as a tobacco product brand name any nationally recognized non-tobacco brand or trade name or the names of sports teams, entertainment groups or individual celebrities.
The MSA also requires PMs to affirm corporate principles to comply with the MSA and to reduce underage use of tobacco products and imposes restrictions on lobbying activities conducted on behalf of PMs. In addition, the MSA provides for the appointment of an independent auditor to calculate and determine the amounts of payments owed pursuant to the MSA.
Under the payment provisions of the MSA, PMs are required to make annual payments of $9,000,000 (subject to applicable adjustments, offsets and reductions including a “Non-Participating Manufacturers Adjustment” or “NPM Adjustment”). These annual payments are allocated based on unit volume of domestic cigarette shipments. The payment obligations under the MSA are the several, and not joint, obligation of each PM and are not the responsibility of any parent or affiliate of a PM.
Liggett has no payment obligations under the MSA except to the extent its market share exceeds a market share exemption of approximately 1.65% of total cigarettes sold in the United States. Vector Tobacco has no payment obligations under the MSA except to the extent its market share exceeds a market share exemption of approximately 0.28% of total cigarettes sold in the United States. Liggett and Vector Tobacco’s domestic shipments accounted for approximately 4.0% of the total cigarettes sold in the United States in 2019. If Liggett’s or Vector Tobacco’s market share exceeds their respective market share exemption in a given year, then on April 15 of the following year, Liggett and/or Vector Tobacco, as the case may be, must pay on each excess unit an amount equal (on a per-unit basis) to that due from the OPMs for that year. On December 30, 2019, Liggett and Vector Tobacco pre-paid $140,000 of their approximate $169,000 2019 MSA obligation, the balance of which was paid in April 2020, subject to applicable disputes or adjustments.
Certain MSA Disputes
NPM Adjustment.  Liggett and Vector Tobacco contend that they are entitled to an NPM Adjustment for each year from 2003 - 2019. The NPM Adjustment is a potential adjustment to annual MSA payments, available when PMs suffer a market share loss to NPMs for a particular year and an economic consulting firm selected pursuant to the MSA determines (or the parties agree) that the MSA was a “significant factor contributing to” that loss. A Settling State that has “diligently enforced” its qualifying escrow statute in the year in question may be able to avoid its allocable share of the NPM Adjustment. For 2003 - 2019, Liggett and Vector Tobacco, as applicable, disputed that they owed the Settling States the NPM Adjustments as calculated by the independent auditor. As permitted by the MSA, Liggett and Vector Tobacco either paid subject to dispute, withheld payment, or paid into a disputed payment account, the amounts associated with these NPM Adjustments.
In June 2010, after the PMs prevailed in 48 of 49 motions to compel arbitration, the parties commenced the arbitration for the 2003 NPM Adjustment. That arbitration concluded in September 2013. It was followed by various challenges filed in state courts by states that did not prevail in the arbitration. Those challenges resulted in reductions, but not elimination of, the amounts awarded.

36

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


The PMs settled most of the disputed NPM Adjustment years with 37 states representing approximately 75% of the MSA share. The 2004 NPM Adjustment arbitration started in 2016 and separate court proceedings continue for states with which the PMs have not settled.
As a result of the settlement charge and arbitration award described above, Liggett and Vector Tobacco reduced cost of sales for years 2013 - 2019 by $48,032. Liggett and Vector Tobacco may be entitled to further adjustments. As of June 30, 2020, Liggett and Vector Tobacco had accrued approximately $13,400 related to the disputed amounts withheld from the non-settling states for 2004 - 2010, which may be subject to payment, with interest, if Liggett and Vector Tobacco lose the disputes for those years. As of June 30, 2020, there remains approximately $41,500 in the disputed payments account relating to Liggett and Vector Tobacco’s 2011 - 2019 NPM Adjustment disputes with the non-settling states. If Liggett and Vector Tobacco lose the disputes for all or any of those years, pursuant to the MSA, no interest would be due on the amounts paid into the disputed payment account.
Other State Settlements.  The MSA replaced Liggett’s prior settlements with all states and territories except for Florida, Mississippi, Texas and Minnesota. Each of these four states, prior to the effective date of the MSA, negotiated and executed settlement agreements with each of the other major tobacco companies, separate from those settlements reached previously with Liggett. Except as described below, Liggett’s agreements with these states remain in full force and effect. These states’ settlement agreements with Liggett contained most favored nation provisions which could reduce Liggett’s payment obligations based on subsequent settlements or resolutions by those states with certain other tobacco companies. Beginning in 1999, Liggett determined that, based on settlements or resolutions with United States Tobacco Company, Liggett’s payment obligations to those four states were eliminated. With respect to all non-economic obligations under the previous settlements, Liggett believes it is entitled to the most favorable provisions as between the MSA and each state’s respective settlement with the other major tobacco companies. Therefore, Liggett’s non-economic obligations to all states and territories are now defined by the MSA.
In 2003, as a result of a dispute with Minnesota regarding its settlement agreement, Liggett agreed to pay $100 a year in any year cigarettes manufactured by Liggett are sold in that state. Further, the Attorneys General for Florida, Mississippi and Texas advised Liggett that they believed Liggett had failed to make payments under the respective settlement agreements with those states. In 2010, Liggett settled with Florida and agreed to pay $1,200 and to make further annual payments of $250 for a period of 21 years, starting in March 2011, with the payments from year 12 forward being subject to an inflation adjustment.
In January 2016, the Attorney General for Mississippi filed a motion in Chancery Court in Jackson County, Mississippi to enforce the March 1996 settlement agreement (the “1996 Agreement”) alleging that Liggett owes Mississippi at least $27,000 in compensatory damages and additional amounts for interest, punitive damages and attorneys’ fees. In April 2017, the Chancery Court ruled that the 1996 Agreement should be enforced and referred the matter to a Special Master for further proceedings to determine the amount of damages, if any, to be awarded.  In June 2018, the Chancery Court granted Liggett’s motion to compel arbitration as to two issues concerning damages and stayed the proceedings before the Special Master pending completion of the arbitration. In March 2019, the arbitration panel issued its final arbitration award on the two issues before it: (i) the panel ruled in favor of Liggett, finding that the $294,000 of proceeds from Eve Holdings’ 1999 brand sale should not be included in Liggett’s pre-tax income; and (ii) ruled in favor of Mississippi on the remaining issue, finding that compensatory damages to Mississippi, if any, would be based on 0.5% of Liggett’s annual pre-tax income for the term of the settlement agreement. Following confirmation of the arbitration award, Mississippi voluntarily dismissed with prejudice its claims for punitive damages and attorneys’ fees.
In July 2019, the parties stipulated that the unpaid principal (exclusive of interest) purportedly due from Liggett to Mississippi pursuant to the 1996 Agreement (from inception through 2019) is approximately $15,500, subject to Liggett’s right to litigate and/or appeal the enforceability of the 1996 Agreement (and all issues other than the calculation of such principal amount). In September 2019, the Special Master held a hearing regarding the state’s claim for approximately $17,500 in prejudgment interest as well as post-judgment interest in amounts to be determined. A decision is pending. Liggett continues to believe that the April 2017 Chancery Court order is in error because the most favored nations provision in the 1996 Agreement eliminated all of Liggett’s payment obligations to Mississippi, and it reserved all rights to appeal this and other issues at the conclusion of the case. In the event Liggett appeals an adverse judgment, the posting of a bond may be required.
Liggett may be required to make additional payments to Mississippi and Texas which could have a material adverse effect on the Company’s consolidated financial position, results of operations and cash flows.

37

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Cautionary Statement  
Management is not able to reasonably predict the outcome of the litigation pending or threatened against Liggett or the Company. Litigation is subject to many uncertainties. Liggett has been found liable in multiple Engle progeny cases and Individual Actions, several of which were affirmed on appeal and satisfied by Liggett. It is possible that other cases could be decided unfavorably against Liggett and that Liggett will be unsuccessful on appeal. Liggett may attempt to settle particular cases if it believes it is in its best interest to do so.
Management cannot predict the cash requirements related to any future defense costs, settlements or judgments, including cash required to bond any appeals, and there is a risk that Liggett may not be able to meet those requirements. An unfavorable outcome of a pending smoking-related case could encourage the commencement of additional litigation. Except as discussed in this Note 9, management is unable to estimate the loss or range of loss that could result from an unfavorable outcome of the cases pending against Liggett or the costs of defending such cases and as a result has not provided any amounts in its consolidated financial statements for unfavorable outcomes.
The tobacco industry is subject to a wide range of laws and regulations regarding the marketing, sale, taxation and use of tobacco products imposed by local, state and federal governments. There have been a number of restrictive regulatory actions, adverse legislative and political decisions and other unfavorable developments concerning cigarette smoking and the tobacco industry. These developments may negatively affect the perception of potential triers of fact with respect to the tobacco industry, possibly to the detriment of certain pending litigation, and may prompt the commencement of additional litigation or legislation.
It is possible that the Company’s consolidated financial position, results of operations and cash flows could be materially adversely affected by an unfavorable outcome in any of the smoking-related litigation.
The activity in the Company’s accruals for the MSA and tobacco litigation for the six months ended June 30, 2020 was as follows:
 
Current Liabilities
 
Non-Current Liabilities
 
Payments due under Master Settlement Agreement
 
Litigation Accruals
 
Total
 
Payments due under Master Settlement Agreement
 
Litigation Accruals
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2020
$
34,116

 
$
4,249

 
$
38,365

 
$
17,275

 
$
20,594

 
$
37,869

Expenses
96,215

 
28

 
96,243

 

 

 

Change in MSA obligations capitalized as inventory
(137
)
 

 
(137
)
 

 

 

Payments
(27,214
)
 
(4,324
)
 
(31,538
)
 

 

 

Reclassification to/(from) non-current liabilities
(855
)
 
3,252

 
2,397

 
855

 
(3,252
)
 
(2,397
)
Interest on withholding

 
238

 
238

 

 
932

 
932

Balance as of June 30, 2020
$
102,125

 
$
3,443

 
$
105,568

 
$
18,130

 
$
18,274

 
$
36,404


38

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


The activity in the Company’s accruals for the MSA and tobacco litigation for the six months ended June 30, 2019 were as follows:
 
Current Liabilities
 
Non-Current Liabilities
 
Payments due under Master Settlement Agreement
 
Litigation Accruals
 
Total
 
Payments due under Master Settlement Agreement
 
Litigation Accruals
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2019
$
36,561

 
$
310

 
$
36,871

 
$
16,383

 
$
21,794

 
$
38,177

Expenses
80,128

 
655

 
80,783

 

 

 

Change in MSA obligations capitalized as inventory
1,813

 

 
1,813

 

 

 

Payments
(31,959
)
 
(355
)
 
(32,314
)
 

 

 

Reclassification to/(from) non-current liabilities
(892
)
 
3,338

 
2,446

 
892

 
(3,338
)
 
(2,446
)
Interest on withholding

 
95

 
95

 

 
1,076

 
1,076

Balance as of June 30, 2019
$
85,651

 
$
4,043

 
$
89,694

 
$
17,275

 
$
19,532

 
$
36,807



Other Matters:

Liggett’s and Vector Tobacco’s management are unaware of any material environmental conditions affecting their existing facilities. Liggett’s and Vector Tobacco’s management believe that current operations are conducted in material compliance with all environmental laws and regulations and other laws and regulations governing cigarette manufacturers. Compliance with federal, state and local provisions regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment, has not had a material effect on the capital expenditures, results of operations or competitive position of Liggett or Vector Tobacco.
Liggett and the Company have received three separate demands for indemnification from Altria Client Services, on behalf of Philip Morris, relating to lawsuits alleging smokers’ use of L&M cigarettes. The indemnification demands are purportedly issued in connection with Eve Holdings’ 1999 sale of certain brands to Philip Morris.
In addition to the foregoing, Douglas Elliman and certain of its subsidiaries are subject to numerous proceedings, lawsuits and claims in connection with their ordinary business activities. Many of these matters are covered by insurance or, in some cases, the Company is indemnified by third parties.
Management is of the opinion that the liabilities, if any, resulting from other proceedings, lawsuits and claims pending against the Company and its consolidated subsidiaries, unrelated to tobacco product liability, should not materially affect the Company’s consolidated financial position, results of operations or cash flows.


39

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


10.
GOODWILL AND OTHER INTANGIBLE ASSETS

The components of Goodwill and other intangible assets, net were as follows:
 
 
December 31,
2019
 
Impairment Losses
 
Amortization
 
June 30,
2020
Goodwill
 
$
78,008

 
$
(46,252
)
 
$

 
$
31,756

 
 
 
 
 
 
 
 
 
Indefinite life intangibles:
 
 
 
 
 
 
 
 
Intangible asset associated with benefit under the MSA
 
107,511

 

 

 
107,511

 
 
 
 
 
 
 
 
 
Trademark - Douglas Elliman
 
80,000

 
(12,000
)
 

 
68,000

 
 
 
 
 
 
 
 
 
Intangibles with a finite life, net
 
474

 

 
(82
)
 
392

 
 
 
 
 
 
 
 
 
  Total goodwill and other intangible assets, net
 
$
265,993

 
$
(58,252
)
 
$
(82
)
 
$
207,659


Goodwill is evaluated for impairment annually or whenever the Company identifies certain triggering events or circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Events or circumstances that might indicate an interim evaluation is warranted include, among other things, unexpected adverse business conditions, macro and reporting unit specific economic factors (for example, interest rate and foreign exchange rate fluctuations, and loss of key personnel), supply costs, unanticipated competitive activities, and acts by governments and courts.
During the first quarter of 2020, the Company determined that a triggering event occurred related to the Douglas Elliman reporting unit due to a decline in sales and profitability projections for the reporting unit driven by the COVID-19 pandemic and related economic disruption. The Company utilized third-party valuation specialists to prepare a quantitative assessment of goodwill and trademark intangible asset related to Douglas Elliman.
For the goodwill testing, the Company utilized an income approach (a discounted cash flows “DCF” method) to estimate the fair value of the Douglas Elliman business. The estimated fair value of the trademark indefinite-life intangible asset related to the Douglas Elliman brand name was determined using an approach that values the Company’s cash savings from having a royalty-free license compared to the market rate it would pay for access to use the trade name.
The third-party quantitative assessments of the goodwill and trademark intangible asset reflected management’s assumptions regarding revenue growth rates, economic and market trends including current expectations of deterioration resulting from the COVID-19 pandemic, changes to cost structures and other expectations about the anticipated short-term and long-term operating results of Douglas Elliman. The quantitative assessments resulted in impairment charges to goodwill of $46,262 and to the trademark intangible asset of $12,000 during the three months ended March 31, 2020. If the Company fails to achieve the financial projections used in the quantitative assessments of fair value or the impacts of COVID-19 are more severe than expected, additional impairment charges could result in future periods, and such impairment charges could be material.


40

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


11.
INCOME TAXES

The Company’s effective income tax rate is based on expected income, statutory rates, valuation allowances against deferred tax assets, and any tax planning opportunities available to the Company. For interim financial reporting, the Company estimates the annual effective income tax rate based on full year projections and applies the annual effective income tax rate against year-to-date pretax income to record income tax expense, adjusted for discrete items, if any. The Company refines annual estimates as new information becomes available. The Company’s tax rate does not bear a relationship to statutory tax rates due to permanent differences, which are primarily related to nondeductible compensation, and state taxes.
The Company’s income tax expense consisted of the following:

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2020
 
2019
 
2020
 
2019
Income before provision for income taxes
$
36,690

 
$
56,766

 
$
32,481

 
$
78,548

Income tax expense using estimated annual effective income tax rate
10,896

 
17,566

 
9,647

 
24,319

Changes in effective tax rates
(12
)
 
(110
)
 

 

Impact of discrete items, net
32

 
3

 
291

 
(111
)
Income tax expense
$
10,916

 
$
17,459

 
$
9,938

 
$
24,208



The discrete items for the three months ended June 30, 2020 primarily relates to income tax expense on the changes in value of certain contingent consideration partially offset by income tax benefit related to stock-based compensation. The discrete items for the six months ended June 30, 2020 relate to income tax benefits on the goodwill and trademark impairment charges, changes in value of certain contingent consideration and stock-based compensation partially offset by the income tax expense related to the equity in earnings from investments associated with the one-time gain on sale of LTS. The discrete items for the three and six months ended June 30, 2019 related to an income tax benefit for stock-based compensation.
On March 27, 2020, the President of the United States signed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act into law. The Act includes several significant tax and payroll-related provisions for corporations, including the usage of net operating losses, bonus depreciation, interest expense, and certain payroll benefits. The Company continues to evaluate the impact this Act will have on its financial statements and required disclosures.
 

41

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


12.
INVESTMENTS AND FAIR VALUE MEASUREMENTS

The Company’s financial assets and liabilities subject to fair value measurements were as follows:

 
 
Fair Value Measurements as of June 30, 2020
Description
 
Total
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 

Significant Other Observable Inputs
(Level 2)
 


Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Money market funds (1)
 
$
455,669

 
$
455,669

 
$

 
$

 
 
 
 
 
 
 
 
 
Commercial paper (1)
 
53,463

 

 
53,463

 

 
 
 
 
 
 
 
 
 
Certificates of deposit (2)
 
2,106

 

 
2,106

 

 
 
 
 
 
 
 
 
 
Money market funds securing legal bonds (2)
 
535

 
535

 

 

 
 
 
 
 
 
 
 
 
Investment securities at fair value
 
 
 
 
 
 
 
 
   Equity securities at fair value
 
 
 
 
 
 
 
 
   Marketable equity securities
 
11,091

 
11,091

 

 

   Mutual funds invested in debt securities
 
22,667

 
22,667

 

 

         Total equity securities at fair value
 
33,758

 
33,758

 

 

    Debt securities available for sale
 
 
 
 
 
 
 
 
U.S. government securities
 
12,754

 

 
12,754

 

Corporate securities
 
37,145

 

 
37,145

 

U.S. government and federal agency
 
4,984

 

 
4,984

 

Commercial mortgage-backed securities
 
2

 

 
2

 

Total debt securities available for sale
 
54,885

 

 
54,885

 

 
 
 
 
 
 
 
 
 
Total investment securities at fair value
 
88,643

 
33,758

 
54,885

 

 
 
 
 
 
 
 
 
 
Long-term investments
 
 
 
 
 
 
 
 
Long-term investment securities at fair value (3)
 
33,232

 

 

 

Total
 
$
633,648

 
$
489,962

 
$
110,454

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Fair value of contingent liability
 
$
1,317

 
$

 
$

 
$
1,317

Total
 
$
1,317

 
$

 
$

 
$
1,317


(1)
Amounts included in Cash and cash equivalents on the condensed consolidated balance sheet, except for $6,310 that is included in Other current assets and $1,907 that is included in Other assets.
(2)
Amounts included in current restricted assets and non-current restricted assets on the condensed consolidated balance sheet.
(3)
In accordance with Subtopic 820-10, investments that are measured at fair value using the NAV practical expedient are not classified in the fair value hierarchy.


42

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


 
 
Fair Value Measurements as of December 31, 2019
Description
 
Total
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 

Significant Other Observable Inputs
(Level 2)
 


Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Money market funds (1)
 
$
307,655

 
$
307,655

 
$

 
$

 
 
 
 
 
 
 
 
 
Commercial paper (1)
 
47,328

 

 
47,328

 

 
 
 
 
 
 
 
 
 
Certificates of deposit (2)
 
2,193

 

 
2,193

 

 
 
 
 
 
 
 
 
 
Money market funds securing legal bonds (2)
 
535

 
535

 

 

 
 
 
 
 
 
 
 
 
Investment securities at fair value
 
 
 
 
 
 
 
 
   Equity securities at fair value
 
 
 
 
 
 
 
 
   Marketable equity securities
 
23,819

 
23,819

 

 

   Mutual funds invested in debt securities
 
22,377

 
22,377

 

 

         Total equity securities at fair value
 
46,196

 
46,196

 

 

    Debt securities available for sale
 
 
 
 
 
 
 
 
U.S. government securities
 
14,660

 

 
14,660

 

Corporate securities
 
54,413

 

 
54,413

 

U.S. government and federal agency
 
6,816

 

 
6,816

 

Commercial mortgage-backed securities
 
382

 

 
382

 

Commercial paper
 
5,887

 

 
5,887

 

Index-linked U.S. bonds
 
779

 

 
779

 

Foreign fixed-income securities
 
508

 

 
508

 

Total debt securities available for sale
 
83,445

 

 
83,445

 

 
 
 
 
 
 
 
 
 
Total investment securities at fair value
 
129,641

 
46,196

 
83,445

 

 
 
 
 
 
 
 
 
 
Long-term investments
 
 
 
 
 
 
 
 
Long-term investment securities at fair value (3)
 
45,781

 

 

 

Total
 
$
533,133

 
$
354,386

 
$
132,966

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Fair value of contingent liability
 
$
3,147

 
$

 
$

 
$
3,147

Fair value of derivatives embedded within convertible debt
 
4,999

 

 

 
4,999

Total
 
$
8,146

 
$

 
$

 
$
8,146


(1)
Amounts included in Cash and cash equivalents on the condensed consolidated balance sheet, except for $4,423 that is included in current restricted assets and $3,160 that is included in non-current restricted assets.
(2)
Amounts included in current restricted assets and non-current restricted assets on the condensed consolidated balance sheet.
(3)
In accordance with Subtopic 820-10, investments that are measured at fair value using the NAV practical expedient are not classified in the fair value hierarchy.

The fair value of the Level 2 certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is the rate offered by the financial institution. The fair value of investment securities at fair value included in Level 1 is based on quoted market prices from various stock exchanges. The Level 2 investment securities at fair value are based on quoted market prices of securities that are thinly traded, quoted prices for identical or similar assets in markets that are not active or inputs other than quoted prices such as interest rates and yield curves.

43

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


The long-term investments are based on NAV per share provided by the partnerships based on the indicated market value of the underlying assets or investment portfolio. In accordance with Subtopic 820-10, these investments are not classified under the fair value hierarchy disclosed above because they are measured at fair value using the NAV practical expedient.
The unobservable inputs related to the valuations of the Level 3 assets and liabilities were as follows at June 30, 2020:
 
 
Quantitative Information about Level 3 Fair Value Measurements
 
 
Fair Value at
 
 
 
 
 
 
 
 
June 30,
2020
 
Valuation Technique
 
Unobservable Input
 
Range (Actual)
 
 
 
 
 
 
 
 
 
Fair value of contingent liability
 
$
1,317

 
Monte Carlo simulation model
 
Estimated fair value of the Douglas Elliman reporting unit
 
$
169,000

 
 
 
 
 
 
Risk-free rate for a 2.50 year term
 
0.17
%
 
 
 
 
 
 
Leverage-adjusted equity volatility of peer firms
 
64.78
%

The unobservable inputs related to the valuations of the Level 3 assets and liabilities were as follows at December 31, 2019:
 
 
Quantitative Information about Level 3 Fair Value Measurements
 
 
Fair Value at
 
 
 
 
 
 
 
 
December 31,
2019
 
Valuation Technique
 
Unobservable Input
 
Range (Actual)
 
 
 
 
 
 
 
 
 
Fair value of derivatives embedded within convertible debt
 
$
4,999

 
Discounted cash flow
 
Assumed annual stock dividend
 
5
%
 
 
 
 
 
 
Assumed remaining cash dividends - Q4 2019 and Q1 2020
 
$0.40/$0.20

 
 
 
 
 
 
Stock price
 
$
13.39

 
 
 
 
 
 
Convertible trading price (as a percentage of par value)
 
103.94
%
 
 
 
 
 
 
Volatility
 
36.94
%
 
 
 
 
 
 
Risk-free rate
 
Term structure of US Treasury Securities
 
 
 
 
 
 
Implied credit spread
 
1.0% - 3.0% (2.0%)

 
 
 
 
 
 
 
 
 
Fair value of contingent liability
 
$
3,147

 
Monte Carlo simulation model
 
Estimated fair value of the Douglas Elliman reporting unit
 
$
271,500

 
 
 
 
 
 
Risk-free rate for a 3-year term
 
1.61
%
 
 
 
 
 
 
Leverage-adjusted equity volatility of peer firms
 
35.56
%


In addition to assets and liabilities that are recorded at fair value on a recurring basis, the Company is required to record assets and liabilities at fair value on a nonrecurring basis. Generally, assets and liabilities are recorded at fair value on a nonrecurring basis as a result of impairment charges. The Company had no nonrecurring nonfinancial assets subject to fair value measurements as of June 30, 2020 and December 31, 2019, respectively, except for investments in real estate ventures that were impaired as of June 30, 2020 and December 31, 2019.



44

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


The Company’s investments in real estate ventures subject to nonrecurring fair value measurements are as follows:
 
 
 
 
Fair Value Measurement Using:
 
 
Three Months Ended June 30, 2020
 
 
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 

Significant Other Observable Inputs
(Level 2)
 


Significant Unobservable Inputs
(Level 3)
Description
 
Impairment Charge
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Investments in real estate ventures
 
$
3,784

 
$
1,980

 
$

 
$

 
$
1,980


The Company estimated the fair value of its investments in real estate ventures using observable inputs such as market pricing based on recent events, however, significant judgment was required to select certain inputs from observed market data. The decrease in the investments in real estate ventures was attributed to the decline in the projected sales prices of the respective real estate venture. The $3,784 of impairment charges were included in equity in losses from real estate ventures for the three months June 30, 2020.
 
 
 
 
Fair Value Measurement Using:
 
 
Year Ended December 31,
2019
 
 
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 

Significant Other Observable Inputs
(Level 2)
 


Significant Unobservable Inputs
(Level 3)
Description
 
Impairment Charge
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
 
 
Investments in real estate ventures
 
$
39,757

 
$
18,335

 
$

 
$

 
$
18,335



The Company estimated the fair value of its investments in real estate ventures using observable inputs such as market pricing based on recent events, however, significant judgment was required to select certain inputs from observed market data. The decrease in the investments in real estate ventures was attributed to the decline in the projected sales prices and the duration of the estimated sell out of the respective real estate ventures. The $39,757 of impairment charges were included in equity in losses from real estate ventures for the year ended December 31, 2019.


13.
SEGMENT INFORMATION

The Company’s business segments for the three and six months ended June 30, 2020 and 2019 were Tobacco and Real Estate. The Tobacco segment consisted of the manufacture and sale of conventional cigarettes. The Real Estate segment included the Company’s investment in New Valley, which includes Douglas Elliman, Escena, Sagaponack and investments in real estate ventures. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.


45

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


Financial information for the Company’s operations before taxes and non-controlling interests for the three and six months ended June 30, 2020 and 2019 were as follows:

 
 
 
Real
 
Corporate
 
 
 
Tobacco
 
Estate
 
and Other
 
Total
Three months ended June 30, 2020
 
 
 
 
 
 
 
Revenues
$
312,510

 
$
133,250

 
$

 
$
445,760

Operating income (loss)
79,309

(1)
(6,875
)
(2)
(5,637
)
 
66,797

Equity in losses from real estate ventures

 
(12,260
)
 

 
(12,260
)
Depreciation and amortization
2,000

 
2,198

 
214

 
4,412

 
 
 
 
 
 
 
 
Three months ended June 30, 2019
 
 
 
 
 
 
 
Revenues
$
294,501

 
$
243,931

 
$

 
$
538,432

Operating income (loss)
68,651

(3)
14,453

 
(6,860
)
 
76,244

Equity in earnings from real estate ventures

 
6,391

 

 
6,391

Depreciation and amortization
1,950

 
2,024

 
250

 
4,224

 
 
 
 
 
 
 
 
Six months ended June 30, 2020
 
 
 
 
 
 
 
Revenues
$
599,579

 
$
300,669

 
$

 
$
900,248

Operating income (loss)
148,495

(4)
(74,350
)
(5)
(12,252
)
 
61,893

Equity in losses from real estate ventures

 
(18,765
)
 

 
(18,765
)
Depreciation and amortization
4,042

 
4,511

 
434

 
8,987

Capital expenditures
2,973

 
3,249

 
20

 
6,242

 


 
 
 
 
 
 
Six months ended June 30, 2019
 
 
 
 
 
 
 
Revenues
$
551,257

 
$
408,099

 
$

 
$
959,356

Operating income (loss)
128,795

(6)
4,044

 
(14,005
)
 
118,834

Equity in earnings from real estate ventures

 
3,952

 

 
3,952

Depreciation and amortization
3,907

 
4,525

 
500

 
8,932

Capital expenditures
2,753

 
3,567

 

 
6,320

 
 
 
 
 
 
 
 

(1) Operating income includes $53 of litigation settlement and judgment expense.
(2) Operating loss includes $2,961 of restructuring charges.
(3) Operating income includes $655 of litigation settlement and judgment expense.
(4) Operating income includes $53 of litigation settlement and judgment expense.
(5) Operating loss includes $58,252 of impairment charges related to the impairments of goodwill and intangible assets and $2,961 of restructuring charges.
(6) Operating income includes $655 of litigation settlement and judgment expense.


46

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited



14. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The condensed consolidating financial information is based upon the following subsidiaries being subsidiary guarantors of unsecured debt securities that may be issued by the Company: VGR Holding LLC; Liggett Group LLC; Liggett Vector Brands LLC; Vector Research LLC; Vector Tobacco Inc.; Liggett & Myers Holdings Inc.; 100 Maple LLC; V.T. Aviation LLC; VGR Aviation LLC; Eve Holdings LLC; Zoom E-Cigs LLC; and DER Holdings LLC. Each of the subsidiary guarantors is 100% owned, directly or indirectly, by the Company, and all guarantees are full and unconditional and joint and several. The Company’s investments in its consolidated subsidiaries are presented under the equity method of accounting.
The Company and the guarantors have filed a shelf registration statement for the offering of debt securities on a delayed or continuous basis and the Company is including this condensed consolidating financial information in connection therewith. Any such debt securities may be issued by the Company and guaranteed by the guarantors, but not by New Valley or any of its subsidiaries, other than DER Holdings LLC.
Presented herein are Condensed Consolidating Balance Sheets as of June 30, 2020 and December 31, 2019, the related Condensed Consolidating Statements of Operations for the three and six months ended June 30, 2020 and 2019, and the related Condensed Consolidating Statements of Cash Flows for the three and six months ended June 30, 2020 and 2019 of Vector Group Ltd. (Parent/Issuer), the guarantor subsidiaries (Subsidiary Guarantors) and the subsidiaries that are not guarantors (Subsidiary Non-Guarantors).





















47

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


CONDENSED CONSOLIDATING BALANCE SHEETS
 
 
 
June 30, 2020
 
 
 
 
 
 
 
Subsidiary
 
 
 
Consolidated
 
Parent/
 
Subsidiary
 
Non-
 
Consolidating
 
Vector Group
 
Issuer
 
Guarantors
 
Guarantors
 
Adjustments
 
Ltd.
ASSETS:
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
261,167

 
$
217,748

 
$
61,448

 
$

 
$
540,363

Investment securities at fair value
88,643

 

 

 

 
88,643

Accounts receivable - trade, net

 
13,222

 
19,538

 

 
32,760

Intercompany receivables
45,946

 

 

 
(45,946
)
 

Inventories

 
98,609

 

 

 
98,609

Income taxes receivable, net

 

 
7,696

 
(7,696
)
 

Other current assets
2,560

 
8,069

 
28,209

 
(475
)
 
38,363

Total current assets
398,316

 
337,648

 
116,891

 
(54,117
)
 
798,738

Property, plant and equipment, net
413

 
32,245

 
44,959

 

 
77,617

Investments in real estate, net

 

 
28,876

 

 
28,876

Long-term investment securities at fair value
33,232

 

 

 

 
33,232

Investments in real estate ventures

 

 
115,377

 

 
115,377

Operating lease right-of-use assets
6,521

 
3,918

 
138,223

 

 
148,662

Investments in consolidated subsidiaries
365,814

 
163,958

 

 
(529,772
)
 

Goodwill and other intangible assets, net

 
107,511

 
100,148

 

 
207,659

Other assets
30,250

 
47,092

 
44,244

 

 
121,586

Total assets
$
834,546

 
$
692,372

 
$
588,718

 
$
(583,889
)
 
$
1,531,747

LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of notes payable and long-term debt
$

 
$
8,816

 
$
8,787

 
$
(8,750
)
 
$
8,853

Intercompany payables

 
167

 
45,779

 
(45,946
)
 

Income taxes payable, net
37,394

 
7,133

 

 
(7,696
)
 
36,831

Current payments due under the Master Settlement Agreement

 
102,125

 

 

 
102,125

Current operating lease liability
754

 
1,694

 
15,820

 

 
18,268

Other current liabilities
45,267

 
223,205

 
63,780

 
(218
)
 
332,034

Total current liabilities
83,415

 
343,140

 
134,166

 
(62,610
)
 
498,111

Notes payable, long-term debt and other obligations, less current portion
1,378,871

 
18,827

 
19,246

 
(18,750
)
 
1,398,194

Non-current employee benefits
51,599

 
9,426

 

 

 
61,025

Deferred income taxes, net
(17,310
)
 
21,756

 
7,992

 

 
12,438

Non-current operating lease liability
6,787

 
2,790

 
149,719

 

 
159,296

Other liabilities, including litigation accruals and payments due under the Master Settlement Agreement
388

 
37,724

 
35,092

 
(1,317
)
 
71,887

Total liabilities
1,503,750

 
433,663

 
346,215

 
(82,677
)
 
2,200,951

Commitments and contingencies


 


 


 


 


Stockholders' (deficiency) equity attributed to Vector Group Ltd.
(669,204
)
 
258,709

 
242,503

 
(501,212
)
 
(669,204
)
Non-controlling interest

 

 

 

 

Total stockholders' (deficiency) equity
(669,204
)
 
258,709

 
242,503

 
(501,212
)
 
(669,204
)
Total liabilities and stockholders' deficiency
$
834,546

 
$
692,372

 
$
588,718

 
$
(583,889
)
 
$
1,531,747




48

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


CONDENSED CONSOLIDATING BALANCE SHEETS
 
 
 
December 31, 2019
 
 
 
 
 
 
 
Subsidiary
 
 
 
Consolidated
 
Parent/
 
Subsidiary
 
Non-
 
Consolidating
 
Vector Group
 
Issuer
 
Guarantors
 
Guarantors
 
Adjustments
 
Ltd.
ASSETS:
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
272,282

 
$
27,178

 
$
71,881

 
$

 
$
371,341

Investment securities at fair value
129,641

 

 

 

 
129,641

Accounts receivable - trade, net

 
15,646

 
21,313

 

 
36,959

Intercompany receivables
44,043

 

 

 
(44,043
)
 

Inventories

 
98,762

 

 

 
98,762

Income taxes receivable, net

 

 
95

 
(95
)
 

Other current assets
9,159

 
9,021

 
26,731

 

 
44,911

Total current assets
455,125

 
150,607

 
120,020

 
(44,138
)
 
681,614

Property, plant and equipment, net
425

 
33,816

 
47,919

 

 
82,160

Investments in real estate, net

 

 
28,317

 

 
28,317

Long-term investment securities at fair value
45,781

 

 

 

 
45,781

Investments in real estate ventures

 

 
131,556

 

 
131,556

Operating lease right-of-use assets
7,085

 
4,830

 
137,663

 

 
149,578

Investments in consolidated subsidiaries
420,353

 
238,040

 

 
(658,393
)
 

Goodwill and other intangible assets, net

 
107,511

 
158,482

 

 
265,993

Other assets
31,022

 
46,416

 
42,652

 

 
120,090

Total assets
$
959,791

 
$
581,220

 
$
666,609

 
$
(702,531
)
 
$
1,505,089

LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of notes payable and long-term debt
$
163,932

 
$
45,210

 
$
10,127

 
$
(10,000
)
 
$
209,269

Current portion of fair value of derivatives embedded within convertible debt
4,999

 

 

 

 
4,999

Intercompany payables

 
236

 
43,807

 
(44,043
)
 

Income taxes payable, net
2,398

 
2,835

 

 
(95
)
 
5,138

Current payments due under the Master Settlement Agreement

 
34,116

 

 

 
34,116

Current operating lease liability
508

 
2,015

 
15,771

 

 
18,294

Other current liabilities
52,065

 
78,947

 
59,202

 
(897
)
 
189,317

Total current liabilities
223,902

 
163,359

 
128,907

 
(55,035
)
 
461,133

Notes payable, long-term debt and other obligations, less current portion
1,377,108

 
20,089

 
20,019

 
(20,000
)
 
1,397,216

Non-current employee benefits
50,806

 
17,047

 

 

 
67,853

Deferred income taxes, net
(14,492
)
 
22,620

 
25,567

 

 
33,695

Non-current operating lease liability
7,558

 
3,402

 
146,003

 

 
156,963

Other liabilities, including litigation accruals and payments due under the Master Settlement Agreement
373

 
41,020

 
34,999

 
(3,147
)
 
73,245

Total liabilities
1,645,255

 
267,537

 
355,495

 
(78,182
)
 
2,190,105

Commitments and contingencies


 


 


 


 


Stockholders' (deficiency) equity attributed to Vector Group Ltd.
(685,464
)
 
313,683

 
310,666

 
(624,349
)
 
(685,464
)
Non-controlling interest

 

 
448

 

 
448

Total stockholders' (deficiency) equity
(685,464
)
 
313,683

 
311,114

 
(624,349
)
 
(685,016
)
Total liabilities and stockholders' deficiency
$
959,791

 
$
581,220

 
$
666,609

 
$
(702,531
)
 
$
1,505,089




49

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

 
 
 
Three Months Ended June 30, 2020
 
 
 
 
 
 
 
Subsidiary
 
 
 
Consolidated
 
  Parent/  
 
Subsidiary
 
Non-
 
Consolidating
 
Vector Group
 
  Issuer  
 
Guarantors
 
Guarantors
 
Adjustments
 
        Ltd.        
Revenues
$

 
$
312,630

 
$
133,250

 
$
(120
)
 
$
445,760

Expenses:
 
 
 
 
 
 
 
 
 
Cost of sales

 
214,067

 
90,818

 

 
304,885

Operating, selling, administrative and general expenses
8,429

 
16,379

 
46,376

 
(120
)
 
71,064

Litigation settlement and judgment expense

 
53

 

 

 
53

Management fee expense

 
3,114

 

 
(3,114
)
 

Restructuring charges

 

 
2,961

 

 
2,961

Operating (loss) income
(8,429
)
 
79,017

 
(6,905
)
 
3,114

 
66,797

Other income (expenses):
 
 
 
 
 
 
 
 
 
Interest expense
(28,666
)
 
(690
)
 
(106
)
 
104

 
(29,358
)
Change in fair value of derivatives embedded within convertible debt
1,669

 

 

 

 
1,669

Equity in losses from real estate ventures

 

 
(12,260
)
 

 
(12,260
)
Equity in earnings from investments
2,207

 

 

 

 
2,207

Equity in earnings in consolidated subsidiaries
46,526

 
(5,042
)
 

 
(41,484
)
 

Management fee income
3,114

 

 

 
(3,114
)
 

Other, net
5,154

 
(78
)
 
2,325

 
234

 
7,635

Income (loss) before provision for income taxes
21,575

 
73,207

 
(16,946
)
 
(41,146
)
 
36,690

Income tax benefit (expense)
4,199

 
(19,644
)
 
4,529

 

 
(10,916
)
Net income (loss)
25,774

 
53,563

 
(12,417
)
 
(41,146
)
 
25,774

Net income (loss) attributed to Vector Group Ltd.
$
25,774

 
$
53,563

 
$
(12,417
)
 
$
(41,146
)
 
$
25,774

Comprehensive income (loss) attributed to Vector Group Ltd.
$
26,531

 
$
53,713

 
$
(12,417
)
 
$
(41,296
)
 
$
26,531




50

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

 
 
 
Three Months Ended June 30, 2019
 
 
 
 
 
 
 
Subsidiary
 
 
 
Consolidated
 
  Parent/  
 
Subsidiary
 
Non-
 
Consolidating
 
Vector Group
 
  Issuer  
 
Guarantors
 
Guarantors
 
Adjustments
 
        Ltd.        
Revenues
$

 
$
294,621

 
$
243,931

 
$
(120
)
 
$
538,432

Expenses:
 
 
 
 
 
 
 
 
 
Cost of sales

 
204,461

 
163,713

 

 
368,174

Operating, selling, administrative and general expenses
9,515

 
18,167

 
65,797

 
(120
)
 
93,359

Litigation settlement and judgment expense

 
655

 

 

 
655

Management fee expense

 
2,992

 

 
(2,992
)
 

Operating (loss) income
(9,515
)
 
68,346

 
14,421

 
2,992

 
76,244

Other income (expenses):
 
 
 
 
 
 
 
 
 
Interest expense
(31,706
)
 
(1,043
)
 
(228
)
 
224

 
(32,753
)
Change in fair value of derivatives embedded within convertible debt
3,788

 

 

 

 
3,788

Equity in earnings from real estate ventures

 

 
6,391

 

 
6,391

Equity in losses from investments
(1,685
)
 

 

 

 
(1,685
)
Equity in earnings in consolidated subsidiaries
66,163

 
15,138

 

 
(81,301
)
 

Management fee income
2,992

 

 

 
(2,992
)
 

Other, net
3,702

 
447

 
632

 

 
4,781

Income before provision for income taxes
33,739

 
82,888

 
21,216

 
(81,077
)
 
56,766

Income tax benefit (expense)
5,568

 
(17,118
)
 
(5,909
)
 

 
(17,459
)
Net income
39,307

 
65,770

 
15,307

 
(81,077
)
 
39,307

Net income attributed to Vector Group Ltd.
$
39,307

 
$
65,770

 
$
15,307

 
$
(81,077
)
 
$
39,307

Comprehensive income attributed to Vector Group Ltd.
$
39,912

 
$
66,004

 
$
15,307

 
$
(81,311
)
 
$
39,912




51

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS


 
 
 
Six Months Ended June 30, 2020
 
 
 
 
 
 
 
Subsidiary
 
 
 
Consolidated
 
  Parent/  
 
Subsidiary
 
Non-
 
Consolidating
 
Vector Group
 
  Issuer  
 
Guarantors
 
Guarantors
 
Adjustments
 
        Ltd.        
Revenues
$

 
$
599,818

 
$
300,669

 
$
(239
)
 
$
900,248

Expenses:
 
 
 
 
 
 
 
 
 
Cost of sales

 
411,357

 
204,151

 

 
615,508

Operating, selling, administrative and general expenses
17,593

 
34,440

 
109,787

 
(239
)
 
161,581

Litigation settlement and judgment expense

 
53

 

 

 
53

Impairments of goodwill and intangible assets

 

 
58,252

 

 
58,252

Management fee expense

 
6,228

 

 
(6,228
)
 

Restructuring charges

 

 
2,961

 

 
2,961

Operating (loss) income
(17,593
)
 
147,740

 
(74,482
)
 
6,228

 
61,893

Other income (expenses):
 
 
 
 
 
 
 
 
 
Interest expense
(63,405
)
 
(1,576
)
 
(222
)
 
218

 
(64,985
)
Change in fair value of derivatives embedded within convertible debt
4,999

 

 

 

 
4,999

Equity in losses from real estate ventures

 

 
(18,765
)
 

 
(18,765
)
Equity in earnings from investments
52,359

 

 

 

 
52,359

Equity in earnings in consolidated subsidiaries
43,185

 
(74,082
)
 

 
30,897

 

Management fee income
6,228

 

 

 
(6,228
)
 

Other, net
(5,700
)
 
2,229

 
2,282

 
(1,831
)
 
(3,020
)
Income (loss) before provision for income taxes
20,073

 
74,311

 
(91,187
)
 
29,284

 
32,481

Income tax benefit (expense)
2,470

 
(36,746
)
 
24,338

 

 
(9,938
)
Net income (loss)
22,543

 
37,565

 
(66,849
)
 
29,284

 
22,543

Net income (loss) attributed to Vector Group Ltd.
$
22,543

 
$
37,565

 
$
(66,849
)
 
$
29,284

 
$
22,543

Comprehensive income (loss) attributed to Vector Group Ltd.
$
23,522

 
$
37,864

 
$
(66,849
)
 
$
28,985

 
$
23,522




52

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS


 
 
 
Six Months Ended June 30, 2019
 
 
 
 
 
 
 
Subsidiary
 
 
 
Consolidated
 
  Parent/  
 
Subsidiary
 
Non-
 
Consolidating
 
Vector Group
 
  Issuer  
 
Guarantors
 
Guarantors
 
Adjustments
 
        Ltd.        
Revenues
$

 
$
551,496

 
$
408,099

 
$
(239
)
 
$
959,356

Expenses:
 
 
 
 
 
 
 
 
 
Cost of sales

 
381,764

 
272,430

 

 
654,194

Operating, selling, administrative and general expenses
19,346

 
34,858

 
131,708

 
(239
)
 
185,673

Litigation settlement and judgment expense

 
655

 

 

 
655

Management fee expense

 
5,985

 

 
(5,985
)
 

Operating (loss) income
(19,346
)
 
128,234

 
3,961

 
5,985

 
118,834

Other income (expenses):
 
 
 
 
 
 
 
 
 
Interest expense
(68,254
)
 
(2,010
)
 
(457
)
 
448

 
(70,273
)
Change in fair value of derivatives embedded within convertible debt
14,137

 

 

 

 
14,137

Equity in earnings from real estate ventures

 

 
3,952

 

 
3,952

Equity in losses from investments
(323
)
 

 

 

 
(323
)
Equity in earnings in consolidated subsidiaries
101,428

 
4,724

 

 
(106,152
)
 

Management fee income
5,985

 

 

 
(5,985
)
 

Other, net
10,285

 
600

 
1,336

 

 
12,221

Income before provision for income taxes
43,912

 
131,548

 
8,792

 
(105,704
)
 
78,548

Income tax benefit (expense)
10,348

 
(32,066
)
 
(2,490
)
 

 
(24,208
)
Net income
54,260

 
99,482

 
6,302

 
(105,704
)
 
54,340

Net income attributed to non-controlling interest

 

 
(80
)
 

 
(80
)
Net income attributed to Vector Group Ltd.
$
54,260

 
$
99,482

 
$
6,222

 
$
(105,704
)
 
$
54,260

Comprehensive income attributed to non-controlling interest
$

 
$

 
$
(80
)
 
$

 
$
(80
)
Comprehensive income attributed to Vector Group Ltd.
$
55,446

 
$
99,951

 
$
6,222

 
$
(106,173
)
 
$
55,446




53

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

 
 
 
Six Months Ended June 30, 2020
 
 
 
 
 
 
 
Subsidiary
 
 
 
Consolidated
 
  Parent/  
 
Subsidiary
 
Non-
 
Consolidating
 
Vector Group
 
Issuer   
 
Guarantors
 
Guarantors
 
Adjustments
 
Ltd.
Net cash provided by (used in) operating activities
$
126,021

 
$
325,721

 
$
(5,489
)
 
$
(104,924
)
 
$
341,329

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Sale of investment securities
19,555

 

 

 

 
19,555

Maturities of investment securities
31,574

 

 

 

 
31,574

Purchase of investment securities
(16,867
)
 

 

 

 
(16,867
)
Proceeds from sale or liquidation of long-term investments
23,407

 

 

 

 
23,407

Purchase of long-term investments
(5,238
)
 

 

 

 
(5,238
)
Investments in real estate ventures

 

 
(3,858
)
 

 
(3,858
)
Distributions from investments in real estate ventures

 

 
5,172

 

 
5,172

Increase in cash surrender value of life insurance policies
(340
)
 
(411
)
 

 

 
(751
)
(Increase) decrease in restricted assets
(13
)
 
100

 

 

 
87

Investments in subsidiaries
(9,164
)
 

 

 
9,164

 

Capital expenditures
(20
)
 
(2,973
)
 
(3,249
)
 

 
(6,242
)
Pay downs of investment securities
415

 

 

 

 
415

Investments in real estate, net

 

 
(679
)
 

 
(679
)
Net cash provided by (used in) investing activities
43,309

 
(3,284
)
 
(2,614
)
 
9,164

 
46,575

Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Proceeds from issuance of debt

 

 
531

 

 
531

Repayments of debt
(169,610
)
 
(204
)
 
(2,653
)
 

 
(172,467
)
Borrowings under revolver

 
130,641

 

 

 
130,641

Repayments on revolver

 
(165,593
)
 

 

 
(165,593
)
Capital contributions received

 
550

 
8,614

 
(9,164
)
 

Intercompany dividends paid

 
(97,259
)
 
(7,665
)
 
104,924

 

Dividends and distributions on common stock
(63,478
)
 

 

 

 
(63,478
)
Distributions to non-controlling interest

 

 
(448
)
 

 
(448
)
Proceeds from issuance of Vector stock
52,563

 

 

 

 
52,563

Other
80

 

 
(75
)
 

 
5

Net cash used in financing activities
(180,445
)
 
(131,865
)
 
(1,696
)
 
95,760

 
(218,246
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(11,115
)
 
190,572

 
(9,799
)
 

 
169,658

Cash, cash equivalents and restricted cash, beginning of period
272,282

 
27,730

 
79,464

 

 
379,476

Cash, cash equivalents and restricted cash, end of period
$
261,167

 
$
218,302

 
$
69,665

 
$

 
$
549,134




54

VECTOR GROUP LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited


CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

 
 
 
Six Months Ended June 30, 2019
 
 
 
 
 
 
 
Subsidiary
 
 
 
Consolidated
 
  Parent/  
 
Subsidiary
 
Non-
 
Consolidating
 
Vector Group
 
Issuer   
 
Guarantors
 
Guarantors
 
Adjustments
 
Ltd.        
Net cash provided by operating activities
$
78,661

 
$
148,639

 
$
10,158

 
$
(139,356
)
 
$
98,102

Cash flows from investing activities:
 
 
 
 
 
 
 
 
 
Sale of investment securities
12,942

 

 

 

 
12,942

Maturities of investment securities
28,610

 

 

 

 
28,610

Purchase of investment securities
(44,222
)
 

 

 

 
(44,222
)
Investments in real estate ventures

 

 
(21,908
)
 

 
(21,908
)
Investments in real estate, net

 

 
(1,153
)
 

 
(1,153
)
Purchase of subsidiaries

 

 
(668
)
 

 
(668
)
Distributions from investments in real estate ventures

 

 
23,200

 

 
23,200

Increase in cash surrender value of life insurance policies
(385
)
 
(404
)
 

 

 
(789
)
(Increase) decrease in restricted assets
(15
)
 
683

 

 

 
668

Pay downs of investment securities
545

 

 

 

 
545

Proceeds from sale of fixed assets

 
8

 

 

 
8

Investments in subsidiaries
(27,482
)
 

 

 
27,482

 

Capital expenditures

 
(2,753
)
 
(3,567
)
 

 
(6,320
)
Net cash used in investing activities
(30,007
)
 
(2,466
)
 
(4,096
)
 
27,482

 
(9,087
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
 
Deferred financing costs

 
(33
)
 

 

 
(33
)
Repayments of debt
(230,000
)
 
(621
)
 
(150
)
 

 
(230,771
)
Borrowings under revolver

 
172,224

 

 

 
172,224

Repayments on revolver

 
(169,727
)
 

 

 
(169,727
)
Capital contributions received

 
575

 
26,907

 
(27,482
)
 

Intercompany dividends paid

 
(102,739
)
 
(36,617
)
 
139,356

 

Dividends and distributions on common stock
(118,748
)
 

 

 

 
(118,748
)
Distributions to non-controlling interest

 

 
(285
)
 

 
(285
)
Net cash used in financing activities
(348,748
)
 
(100,321
)
 
(10,145
)
 
111,874

 
(347,340
)
Net (decrease) increase in cash, cash equivalents and restricted cash
(300,094
)
 
45,852

 
(4,083
)
 

 
(258,325
)
Cash, cash equivalents and restricted cash, beginning of period
474,880

 
23,849

 
93,000

 

 
591,729

Cash, cash equivalents and restricted cash, end of period
$
174,786

 
$
69,701

 
$
88,917

 
$

 
$
333,404




55



ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION    AND RESULTS OF OPERATIONS

(Dollars in Thousands, Except Per Share Amounts)


Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is designed to provide a reader of Vector Group Ltd.’s financial statements with a narrative from our management’s perspective. Our MD&A is divided into the following sections:
Overview
Recent Developments
Results of Operations
Summary of Real Estate Investments
Liquidity and Capital Resources

Please read this discussion along with our MD&A and audited financial statements as of and for the year ended December 31, 2019 and Notes thereto, included in our 2019 Annual Report on Form 10-K, and our Condensed Consolidated Financial Statements and related Notes as of and for the quarterly period and six months ended June 30, 2020 and 2019.

Overview
We are a holding company and are engaged principally in two business segments:
Tobacco: the manufacture and sale of cigarettes in the United States through our Liggett Group LLC (“Liggett”) and Vector Tobacco Inc. (“Vector Tobacco”) subsidiaries, and
Real Estate: the real estate business through our subsidiary New Valley LLC (“New Valley”), which (i) owns Douglas Elliman Realty, LLC (“Douglas Elliman”), (ii) has interests in numerous real estate projects across the United States and (iii) is seeking to acquire or invest in additional real estate properties or projects. Douglas Elliman operates the largest residential brokerage company in the New York metropolitan area and also conducts residential real estate brokerage operations in Florida, California, Connecticut, Massachusetts, Colorado, New Jersey and Texas.
    

Recent Developments
COVID-19 Pandemic. The recent outbreak of the novel coronavirus, COVID-19, which was declared a pandemic by the World Health Organization on March 11, 2020, has led to adverse impacts on the U.S. and global economies and created economic uncertainty. Although much uncertainty still surrounds the pandemic, including its duration and ultimate overall impact on our operations and real estate ventures, we are carefully evaluating potential outcomes and working to mitigate risks. As with many other companies, our operations have been affected by COVID-19. We have implemented remote working for many employees and adopted the social distancing protocols recommended by public health authorities. The following provides a summary of our actions in our two segments - Tobacco and Real Estate - since COVID-19 was declared a pandemic.

Impact of COVID-19 on Tobacco Segment.  To date, we have not experienced any material disruptions to our supply or distribution chains, and have not experienced any material adverse effects associated with governmental actions to restrict consumer movement or business operations. However, our suppliers and members of our distribution chain may be subject to government action requiring facility closures and remote working protocols. The majority of retail stores in which our tobacco products are sold, including convenience stores, have been deemed to be essential businesses by authorities and have remained open.   We continue to monitor the risk that a supplier, a distributor or any other entity within our supply and distribution chain closes temporarily or permanently.

Although our tobacco segment has not been negatively impacted to date by COVID-19, there remains uncertainty as to how the pandemic may ultimately impact the market. We continue to monitor the macro-economic risks of COVID-19 and the effect on tobacco consumers, including purchasing behavior changes and changes in sales volumes and mix within the discount category.  Our EAGLE 20’s brand is priced in the deep discount category and our other brands are primarily priced in the traditional discount category.


56



Impact of COVID-19 on Real Estate Segment.  Douglas Elliman is the largest residential real estate broker in the New York metropolitan area and approximately 70% of its revenues were derived from this region in 2018 and 2019. In addition, New Valley has investments in multiple real estate ventures and properties in the New York metropolitan area, which had a carrying value of $67,058 at June 30, 2020.  Published reports and data indicate that the New York metropolitan area was initially impacted more than any other area in the United States. Consequently, various governmental agencies in the New York metropolitan area and in other markets where Douglas Elliman operates, instituted quarantines, “pause” orders, “shelter-in-place” rules, restrictions on travel and restrictions on the types of businesses that could operate. These restrictions adversely impacted Douglas Elliman’s ability to conduct business during the three months ended June 30, 2020. For example, Douglas Elliman’s agents were restricted from performing in-person showings of properties or conducting open houses in most of Douglas Elliman’s markets from March 2020 to June 2020. Douglas Elliman experienced a severe decline in closed sales volume in New York City beginning in March 2020 which has continued. We anticipate that sales volume in New York City may continue to be slow through the fall of 2020, and possibly longer.

Beginning in April 2020, we made significant operating adjustments at Douglas Elliman, including a reduction of personnel expense of approximately 25% and reductions of other administrative expenses, as well as a reduction, deferral or elimination of certain office lease expenses. While we continue to evaluate other expense reduction measures, to the extent Douglas Elliman’s business improves in the third quarter, we will begin to relinquish, as appropriate, some of the second quarter expense reductions, including advertising and personnel expenses.

The COVID-19 pandemic could continue to have a material impact on our Real Estate segment; the likelihood and magnitude of a material impact increases with the amount of time the virus affects activity levels in locations in which Douglas Elliman operates. Therefore, we are unable to predict the ultimate impact of the COVID-19 pandemic on the future financial condition, results of operations and cash flows from our Real Estate segment.

Ladenburg Thalmann Financial Services Inc. (“LTS”). On November 11, 2019, LTS entered into an Agreement and Plan of Merger with Advisor Group. On February 14, 2020, the merger was completed, and each share of LTS common stock was converted into a cash payment of $3.50 per share. We received proceeds of $53,169 from our 15,191,205 common shares of LTS, and we recorded a pre-tax gain of $53,052 from the transaction in the first quarter of 2020. We also tendered 240,000 shares of LTS’s 8% Series A Cumulative Redeemable Preferred Stock for redemption and received an additional $6,009 in March 2020. At the closing of the transaction, our Executive Vice President resigned as Chairman, President and Chief Executive Officer of LTS, and our management agreement with LTS was terminated.

Maturity of 5.5% Variable Interest Senior Convertible Debentures due 2020. In April 2020, our 5.5% Variable Interest Senior Convertible Debentures due 2020 matured and we retired them with a cash payment for the principal balance of $169,610.

Issuance of Common Stock. On May 14, 2020, we announced the pricing of our underwritten public offering (the “Offering”) of 5,000,000 shares of our common stock. We received approximately $53,000 in proceeds from the offering.

Recent Developments in Litigation
The cigarette industry continues to be challenged on numerous fronts. New cases continue to be commenced against Liggett and other cigarette manufacturers. Liggett could be subjected to substantial liabilities and bonding requirements from litigation relating to cigarette products. Adverse litigation outcomes could have a negative impact on our ability to operate due to their impact on cash flows. It is possible that there could be adverse developments in pending cases including the certification of additional class actions. An unfavorable outcome or settlement of pending tobacco-related litigation could encourage the commencement of additional litigation. In addition, an unfavorable outcome in any tobacco-related litigation could have a material adverse effect on our consolidated financial position, results of operations or cash flows. Liggett could face difficulties in obtaining a bond to stay execution of a judgment pending appeal.

Critical Accounting Policies

There are no material changes except for the items listed below from the critical accounting policies set forth in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K, for the year ended December 31, 2019. Please refer to that section and the information below for disclosures regarding the critical accounting policies related to our business.


57



Current Expected Credit Losses. On January 1, 2020, we adopted ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, therefore, our measurement of credit losses for most financial assets and certain other instruments has been modified as discussed in Note 3 to our condensed consolidated financial statements.

Goodwill and Indefinite Life Assets. Goodwill and intangible assets with indefinite lives are not amortized, but instead are tested for impairment on an annual basis, or whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable.

During the first quarter of 2020, we performed quantitative assessments of the goodwill associated with the Douglas Elliman reporting unit and its trademark intangible asset in conjunction with our quarterly review for indicators of impairment.

Based on the results of these assessments, we determined that the estimated fair value of the Douglas Elliman reporting unit in our Real Estate segment, for which the related goodwill had a carrying value of $78,008, exceeded the fair value, resulting in a non-cash goodwill impairment charge of $46,252. In addition, we recognized a non-cash impairment charge of $12,000 for intangible assets related to the Douglas Elliman trademark. These non-cash impairment charges are the result of consideration of potential impacts of COVID-19, including the possibility of an economic recession, on Douglas Elliman’s business.

If we fail to meet the financial projections used in the quantitative assessments of goodwill and trademark intangible asset in future periods or the impacts of COVID-19 are more severe than expected, this would result in additional impairment charges related to the Company’s goodwill and trademark intangible asset.


Results of Operations

The following discussion provides an assessment of our results of operations, capital resources and liquidity and should be read in conjunction with our condensed consolidated financial statements included elsewhere in this report. The condensed consolidated financial statements include the accounts of Liggett, Vector Tobacco, Liggett Vector Brands, New Valley and other less significant subsidiaries.

For purposes of this discussion and other consolidated financial reporting, our business segments for the three and six months ended June 30, 2020 and 2019 were Tobacco and Real Estate. The Tobacco segment consisted of the manufacture and sale of cigarettes. The Real Estate segment included our investment in New Valley, which includes ownership of Douglas Elliman, investments in real estate and investments in real estate ventures.
 
Three Months Ended
 
Six Months Ended
 
 
June 30,
 
June 30,
 
 
2020
 
2019
 
2020
 
2019
 
Revenues:
 
 
 
 
 
 
 
 
Tobacco
$
312,510

 
$
294,501

 
$
599,579

 
$
551,257

 
Real estate
133,250

 
243,931

 
300,669

 
408,099

 
Total revenues
$
445,760

 
$
538,432

 
$
900,248

 
$
959,356

 
Operating income (loss):
 
 
 
 
 
 
 
 
Tobacco
$
79,309

(1) 
$
68,651

(3) 
$
148,495

(4) 
$
128,795

(6) 
Real estate
(6,875
)
(2) 
14,453

 
(74,350
)
(5) 
4,044

 
Corporate and Other
(5,637
)
 
(6,860
)
 
(12,252
)
 
(14,005
)
 
Total operating income
$
66,797

 
$
76,244

 
$
61,893

 
$
118,834

 
(1) Operating income includes $53 of litigation settlement and judgment expense.
(2) Operating loss includes $2,961 of restructuring charges.
(3) Operating income includes $655 of litigation settlement and judgment expense.
(4) Operating income includes $53 of litigation settlement and judgment expense.
(5) Operating loss includes $58,252 of impairment charges related to the impairments of goodwill and intangible assets and $2,961 of restructuring charges.
(6) Operating income includes $655 of litigation settlement and judgment expense.


58




Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019
Revenues. Total revenues were $445,760 for the three months ended June 30, 2020 compared to $538,432 for the three months ended June 30, 2019. The $92,672 (17.2%) decline in revenues was primarily due to a $110,681 decline in Real Estate revenues, which was primarily related to a decline in Douglas Elliman’s brokerage revenues, offset by a $18,009 increase in Tobacco revenues.
Cost of sales. Total cost of sales was $304,885 for the three months ended June 30, 2020 compared to $368,174 for the three months ended June 30, 2019. The $63,289 (17.2%) decline in cost of sales was primarily due to a $72,895 decline in Real Estate cost of sales, which was primarily related to a decline in Douglas Elliman’s commissions. This was offset by a $9,606 increase in Tobacco cost of sales.
Expenses. Operating expenses were $74,078 for the three months ended June 30, 2020 compared to $94,014 for the same period last year. The $19,936 (21.2%) decline in operating expenses was due to a $16,458 decline in Real Estate expenses, primarily at Douglas Elliman, including restructuring charges of $2,961 for the three months ended June 30, 2020, a $2,255 decline in Tobacco expenses, including a decline in litigation settlement and judgment expense of $602, and a $1,223 decline in Corporate and Other expenses.
Operating income. Operating income was $66,797 for the three months ended June 30, 2020 compared to $76,244 for the same period last year. The $9,447 (12.4%) decline in operating income was due to a $21,328 decline in Real Estate operating income, primarily related to Douglas Elliman. This was offset by a $10,658 increase in Tobacco operating income and a decline of $1,223 in Corporate and Other operating loss.
Other expenses. Other expenses were $30,107 and $19,478 for the three months ended June 30, 2020 and 2019, respectively. For the three months ended June 30, 2020, other expenses primarily consisted of interest expense of $29,358 and equity in losses from real estate ventures of $12,260. This was offset by income of $1,669 from changes in fair value of derivatives embedded within convertible debt, other income of $7,635 and equity in earnings from investments of $2,207. For the three months ended June 30, 2019, other expenses primarily consisted of interest expense of $32,753 and equity in losses from investments of $1,685. This was offset by income of $3,788 from changes in fair value of derivatives embedded within convertible debt, other income of $4,781, and equity in earnings from real estate ventures of $6,391.
Income before provision for income taxes. Income before income taxes was $36,690 and $56,766 for the three months ended June 30, 2020 and 2019, respectively.
Income tax expense. Income tax expense was $10,916 and $17,459 for the three months ended June 30, 2020 and 2019, respectively. Our provision for income taxes in interim periods is based on expected income, statutory rates, permanent differences, valuation allowances against deferred tax assets, and any tax planning opportunities available to us. For interim financial reporting, we estimate the annual effective income tax rate based on full year projections and apply the annual effective income tax rate against year-to-date pretax income to record income tax expense, adjusted for discrete items, if any. We refine annual estimates as new information becomes available. For the three months ended June 30, 2020, the annual effective tax rate applied to year-to-date income resulted in tax expense which was reduced by discrete items. The discrete items of $32 primarily relates to changes in value of certain contingent consideration and stock-based compensation.
Tobacco.
Tobacco revenues. Liggett increased the list price of EAGLE 20’s by $0.11 per pack on June 22, 2020, $0.08 per pack in February 2020, and $0.08 per pack in October 2019. Liggett also increased the list price of PYRAMID, LIGGETT SELECT, EVE and GRAND PRIX by $0.11 per pack on June 22, 2020, $0.08 per pack in February 2020, $0.08 per pack in October 2019, and $0.06 per pack in June 2019.
All of our Tobacco sales were in the discount category in 2020 and 2019. For the three months ended June 30, 2020, Tobacco revenues were $312,510 compared to $294,501 for the three months ended June 30, 2019. Revenues increased by $18,009 (6.1%) due primarily to an increase in the average selling price of our brands for the three months ended June 30, 2020 along with a 1.0% (24.5 million units) increase in sales volume.

59



Tobacco cost of sales. The major components of our Tobacco cost of sales were as follows:
 
 
 
 
Three Months Ended
 
 
 
 
 
June 30,
 
 
 
 
 
2020
 
2019
 
 
 
 
 
 
 
Manufacturing overhead, raw materials and labor
 
$
32,669

 
$
33,197

 
Customer shipping and handling
 
 
1,361

 
1,503

 
Federal Excise Taxes, net
 
 
121,170

 
119,943

 
FDA expense
 
 
6,116

 
6,048

 
MSA expense, net of market share exemption
 
 
52,751

 
43,770

 
Total cost of sales
 
 
$
214,067

 
$
204,461

 
 
 
 
 
 
 
 
 
The Tobacco segment’s MSA expense is included in cost of sales. Under the terms of the MSA, we have no payment obligations except to the extent that our tobacco subsidiaries’ market share of the U.S. Cigarette market exceeds 1.92%. The calculation of our benefit from the MSA is an estimate based on U.S. domestic taxable cigarette shipments. As of June 30, 2020, we estimate taxable shipments in the U.S. will decline by 4.5% in 2020. Our annual MSA liability changes by approximately $1,700 for each percentage change in the estimated shipment volumes in the U.S. market. For the three months ended June 30, 2020, the estimated decline in taxable shipments in excess of the annual MSA inflation adjustment resulted in an increase in cost of sales of approximately $470 because the value of Liggett’s market share exemption declined compared to the three months ended June 30, 2019.
Tobacco gross profit was $98,443 for the three months ended June 30, 2020 compared to $90,040 for the three months ended June 30, 2019. The increase in gross profit for the three months ended June 30, 2020 is primarily attributable to increased pricing associated with the EAGLE 20’s and Pyramid brands. For the three months ended June 30, 2020, EAGLE 20’s remains Liggett’s primary low-cost cigarette brand and its percentage of Liggett’s total unit volume sales has increased from 61% in the three months ended June 30, 2019 to 63% for the three months ended June 30, 2020. Pyramid, Liggett’s second-largest brand, declined from 26% of total unit volume sales in the three months ended June 30, 2019 to 24% for the three months ended June 30, 2020. As a percentage of revenue (excluding Federal Excise Taxes), Tobacco gross profit declined from 51.6% in the 2019 period to 51.4% in the 2020 period primarily as a result of the continued growth of the lower-priced EAGLE 20’s brand as well as a higher MSA expense associated with the increases in unit volume above the market share exemption.  This was offset by price increases.
Tobacco expenses. Tobacco operating, selling, general and administrative expenses, excluding settlements and judgments, were $19,081 and $20,734 for the three months ended June 30, 2020 and 2019, respectively. The decline of $1,653 is primarily due to decreased travel expenses incurred during the COVID-19 pandemic and the timing of compensation expenses. Total tobacco product liability legal expenses, including settlements and judgments, were $1,641 and $2,274 for the three months ended June 30, 2020 and 2019, respectively.
Tobacco operating income. Tobacco operating income was $79,309 for the three months ended June 30, 2020 compared to $68,651 for the same period last year. The increase in operating income for the three months ended June 30, 2020 of $10,658 is primarily attributable to higher gross profit, as discussed above, and lower operating, selling, general and administrative expenses.
Real Estate.
Real Estate revenues. Real Estate revenues were $133,250 and $243,931 for the three months ended June 30, 2020 and 2019, respectively. Real Estate revenues declined by $110,681 (45.4%), primarily related to a decline of $107,080 in Douglas Elliman’s commission income. We believe the decline was attributable to two events: (i) the impact of the COVID-19 pandemic and (ii) the acceleration of real estate closings in the New York City market during the three months ended June 30, 2019 as a result of the increased transfer and “mansion” tax associated with resales of homes of more than $1,000, effective July 1, 2019.

60



Real Estate revenues and cost of sales for the three months ended June 30, 2020 and 2019 were as follows:
 
Three Months Ended
 
June 30,
 
2020
 
2019
Real Estate Revenues:
 
 
 
Commission and other brokerage income
$
123,254

 
$
230,334

Property management revenue
8,832

 
10,218

Title fees
843

 
2,400

Sales on facilities primarily from Escena
321

 
979

  Total real estate revenues
$
133,250

 
$
243,931

 
 
 
 
Real Estate Cost of Sales:
 
 
 
Real estate commissions
$
90,116

 
$
162,192

Cost of sales on facilities primarily from Escena
563

 
871

Title fees
139

 
650

  Total real estate cost of sales
$
90,818

 
$
163,713

___________________________________ 
Brokerage cost of sales. Douglas Elliman real estate commissions decreased by $72,076 for the three months ended June 30, 2020 as a result of a decline in sales volume.
Douglas Elliman’s gross margin on real estate brokerage income declined from 29.6% for the three months ended June 30, 2019 to 26.9% for the three months ended June 30, 2020 primarily as a result of declines in revenues in its development marketing division and existing-home sales in the New York City and Northeast regions, which traditionally earn higher gross margin percentages than the Southeast (Florida) and Western (primarily California) regions.
The COVID-19 pandemic has had a profound effect on the economy and, especially, in the New York metropolitan area, where approximately 70% of Douglas Elliman’s commissions and other brokerage revenues were derived in 2018 and 2019. In response to the pandemic, various governmental agencies in the New York metropolitan area and in other markets where Douglas Elliman operates instituted restrictions on individuals and on the types of businesses that are permitted to operate from March 2020 to June 2020, which adversely impacted Douglas Elliman’s business. We anticipate that sales volume may continue to be slow through the fall of 2020, and possibly longer.
Real Estate expenses. Real Estate expenses, which are primarily expenses at Douglas Elliman, were $49,307 and $65,765 for the three months ended June 30, 2020 and 2019, respectively. For the three months ended June 30, 2020, Real Estate expenses included restructuring charges of $2,961. The restructuring charges were the result of Douglas Elliman realigning its administrative support functions, and office locations as well as adjusting its business model to more efficiently serve its clients. In response to the COVID-19 pandemic, we have implemented significant expense reductions at Douglas Elliman, including a reduction of personnel by approximately 25% as well as reduction, deferral or elimination of leases across the country. As a result of the expense reductions, in additional to personnel expenses, Douglas Elliman’s professional services, advertising, travel and other occupancy expenses were reduced during the three months ended June 30, 2020. While we continue to evaluate other expense reduction measures, to the extent Douglas Elliman’s business improves in the third quarter, we will begin to relinquish, as appropriate, some of the second quarter expense reductions, including advertising and personnel expenses.
Real Estate operating (loss) income. The Real Estate segment had operating loss of $6,875 for the three months ended June 30, 2020 and operating income of $14,453 for the three months ended June 30, 2019. The decline in operating income of $21,328 was primarily related to reduced operating income at Douglas Elliman.
Corporate and Other.
Corporate and Other operating loss. The operating loss at the Corporate and Other segment was $5,637 for the three months ended June 30, 2020 compared to $6,860 for the same period in 2019 and the difference was due primarily to decreased administrative costs related to professional fees and travel expenses.

61




Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019
Revenues. Total revenues were $900,248 for the six months ended June 30, 2020 compared to $959,356 for the six months ended June 30, 2019. The $59,108 (6.2%) decline in revenues was primarily due to a $107,430 decline in Real Estate revenues, which was primarily related to a decrease in Douglas Elliman’s brokerage revenues. This was offset by a $48,322 increase in Tobacco revenues related to an increase in both unit volume and net pricing.
Cost of sales. Total cost of sales was $615,508 for the six months ended June 30, 2020 compared to $654,194 for the six months ended June 30, 2019. The $38,686 (5.9%) decline in cost of sales was primarily due to a $68,279 decline in Real Estate cost of sales, which was primarily related to increases Douglas Elliman’s commissions. This was offset by a $29,593 increase in Tobacco cost of sales primarily related to increased sales volume and higher MSA expense.
Expenses. Operating expenses were $222,847 for the six months ended June 30, 2020 compared to $186,328 for the same period last year. The $36,519 (19.6%) increase was due to a $39,243 increase in Real Estate expenses, including impairment of goodwill and intangible asset charge at Douglas Elliman of $58,252 and restructuring charges of $2,961 for the six months ended June 30, 2020. This was offset by a $971 decline in Tobacco expenses, including a decline in litigation settlement and judgment expense of $602, and a $1,753 decline in Corporate and Other expense.
See Critical Accounting Policies - Goodwill and Indefinite Life Assets for detail of the Douglas Elliman impairment charge.
Operating income. Operating income was $61,893 for the six months ended June 30, 2020 compared to $118,834 for the same period last year, a decline of $56,941 (47.9%). Real Estate operating income declined $78,394 primarily related to the impairments of goodwill and intangible assets of $58,252 at Douglas Elliman and restructuring charges of $2,961. This was offset by an increase in Tobacco operating income of $19,700 and the Corporate and Other operating loss declined $1,753.
Other expenses. Other expenses were $29,412 for the six months ended June 30, 2020 compared to $40,286 for the six months ended June 30, 2019. For the six months ended June 30, 2020, other expenses primarily consisted of interest expense of $64,985, equity in losses from real estate ventures of $18,765 and other expenses of $3,020. This was offset by equity in earnings of investments of $52,359 and income of $4,999 from changes in fair value of derivatives embedded within convertible debt. For the six months ended June 30, 2019, other expenses primarily consisted of interest expense of $70,273 and equity in losses from investments of $323. This was offset by income of $14,137 from changes in fair value of derivatives embedded within convertible debt, other income of $12,221, and equity in earnings from real estate ventures of $3,952.
Income before provision for income taxes. Income before income taxes was $32,481 for the six months ended June 30, 2020 compared to $78,548 for the six months ended June 30, 2019.
Income tax expense. Income tax expense was $9,938 for the six months ended June 30, 2020 compared to $24,208 for the six months ended June 30, 2019. Our provision for income taxes in interim periods is based on expected income, statutory rates, permanent differences, valuation allowances against deferred tax assets, and any tax planning opportunities available to us. For interim financial reporting, we estimate the annual effective income tax rate based on full year projections and apply the annual effective income tax rate against year-to-date pretax income to record income tax expense, adjusted for discrete items, if any. We refine annual estimates as new information becomes available. Our income tax expense for the six months ended June 30, 2020 was increased by discrete items related to income tax benefits on the goodwill and trademark impairment charges, changes in value of certain contingent consideration and stock-based compensation partially offset by the income tax expense related to the equity in earnings from investments associated with the one-time gain on sale of LTS. Our income tax expense for the six months ended June 30, 2019 was decreased by discrete items related to an income tax benefit for stock-based compensation.
Tobacco.
Tobacco revenues. Liggett increased the list price of EAGLE 20’s by $0.11 per pack on June 22, 2020, $0.08 per pack in February 2020, $0.08 per pack in October 2019, and $0.11 per pack in February 2019. Liggett also increased the list price of PYRAMID, LIGGETT SELECT, EVE and GRAND PRIX by $0.11 per pack on June 22, 2020, $0.08 per pack in February 2020, $0.08 per pack in October 2019, $0.06 per pack in June 2019, and $0.11 per pack in February 2019.
All of our Tobacco sales were in the discount category in 2020 and 2019. For the six months ended June 30, 2020, Tobacco revenues were $599,579 compared to $551,257 for the six months ended June 30, 2019. Revenues increased by $48,322 (8.8%) due primarily to an increase in the average selling price of our brands for the six months ended June 30, 2020 along with a 4.4% (196 million units) increase in unit sales volume.

62



Tobacco cost of sales. The major components of our Tobacco cost of sales were as follows:
 
 
 
Six Months Ended
 
 
 
June 30,
 
 
 
2020
 
2019
 
 
 
 
 
Manufacturing overhead, raw materials and labor
 
$
65,534

 
$
61,672

Customer shipping and handling
 
2,833

 
2,995

Federal Excise Taxes, net
 
234,309

 
224,576

FDA expense
 
12,466

 
12,393

MSA expense, net of market share exemption
 
96,215

 
80,128

 
Total cost of sales
 
$
411,357

 
$
381,764

The Tobacco segment’s MSA expense is included in cost of sales. Under the terms of the MSA, we have no payment obligations except to the extent that our tobacco subsidiaries’ market share of the U.S. Cigarette market exceeds 1.92%. The calculation of our benefit from the MSA is an estimate based on U.S. domestic taxable cigarette shipments. As of June 30, 2020, we estimate taxable shipments in the U.S. will decline by 4.5% in 2020. Our annual MSA liability changes by approximately $1,700 for each percentage change in estimated shipment volumes in the U.S. market. For the six months ended June 30, 2020, the estimated decline in taxable shipments in excess of the annual MSA inflation adjustment resulted in an increase in cost of sales of approximately $900 because the value of Liggett’s market share exemption declined compared to the six months ended June 30, 2019.
Tobacco gross profit was $188,222 for the six months ended June 30, 2020 compared to $169,493 for the six months ended June 30, 2019, an increase of $18,729. The increase in gross profit for the six months ended June 30, 2020 was primarily attributable to increased pricing on the EAGLE 20’s and Pyramid brands and increased EAGLE 20’s volume. For the six months ended June 30, 2020, EAGLE 20’s remains Liggett’s primary low-cost cigarette brand and its percentage of Liggett’s total unit volume sales has increased from approximately 59% in the six months ended June 30, 2019 to approximately 63% for the six months ended June 30, 2020. Pyramid, Liggett’s second largest brand, declined from approximately 28% of total unit volume sales in the six months ended June 30, 2019 to 24% for the six months ended June 30, 2020. As a percentage of revenue (excluding Federal Excise Taxes), Tobacco gross profit decreased from 51.9% in the 2019 period to 51.5% in the 2020 period primarily as a result of the continued growth of the lower-priced EAGLE 20’s brand as well as a higher MSA expense associated with the increases in unit volume above the market share exemption. This was offset by price increases.
Tobacco expenses. Tobacco operating, selling, general and administrative expenses, excluding settlements and judgments, were $39,674 for the six months ended June 30, 2020 compared to $40,043 for the six months ended June 30, 2019. The decline of $369 was mainly due to lower travel related expenses partially offset by higher professional fees. Tobacco product liability legal expenses, including settlements and judgments, were $3,191 and $3,737 for the six months ended June 30, 2020 and 2019, respectively.
Tobacco operating income. Tobacco operating income was $148,495 for the six months ended June 30, 2020 compared to $128,795 for the same period last year, an increase of $19,700. The increase in operating income was primarily attributable to higher gross profit, as discussed above.
Real Estate.
Real Estate revenues. Real Estate revenues were $300,669 and $408,099 for the six months ended June 30, 2020 and 2019, respectively. Real Estate revenues declined by $107,430 (26.3%), which was primarily related to a decline of $103,427 in Douglas Elliman’s Commission and other brokerage income, which we believe was because of the impact of the COVID-19 pandemic as well as the impact of the increased “mansion” tax in New York City for the six months ended June 30, 2019, which is discussed in Results of Operations - Three Months ended June 30, 2020 compared to Three Months ended June 30, 2019.
.

63



Real Estate revenues and cost of sales for the six months ended June 30, 2020 and 2019, respectively, were as follows:
 
Six Months Ended
 
June 30,
 
2020
 
2019
Real Estate Revenues:
 
 
 
Commission and other brokerage income
$
279,220

 
$
382,647

Property management revenue
17,611

 
18,569

Title fees
1,699

 
3,633

Sales on facilities primarily from Escena
2,139

 
3,250

  Total real estate revenues
$
300,669

 
$
408,099

 
 
 
 
Real Estate Cost of Sales:
 
 
 
Real estate commissions
$
202,315

 
$
269,542

Cost of sales on facilities primarily from Escena
1,559

 
1,958

Title fees
277

 
930

  Total real estate cost of sales
$
204,151

 
$
272,430

Brokerage cost of sales. Douglas Elliman real estate commissions declined by $67,227 as a result of lower commission and other brokerage income.
Douglas Elliman’s gross margin on real estate brokerage income declined from 29.6% for the six months ended June 30, 2019 to 27.5% for the six months ended June 30, 2020, primarily as a result of declines in revenues in its development marketing division and existing-home sales in the New York City and Northeast regions, which traditionally earn higher gross margin percentages than the Southeast (Florida) and West (primarily California) regions.
See Results of Operations - Three Months ended June 30, 2020 compared to Three Months ended June 30, 2019 for a discussion of the impact of the COVID-19 pandemic on the Real Estate segment.
Real Estate expenses. Real Estate expenses were $170,868 and $131,625 for the six months ended June 30, 2020 and 2019. These expenses included the non-cash impairment of goodwill and intangible assets of $58,252 and restructuring charges of $2,961 at Douglas Elliman for the six months ended June 30, 2020. The non-cash impairment related to the evaluation of potential impacts of the COVID-19 pandemic, including the possibility of an economic recession, on Douglas Elliman’s business. The restructuring charges were the result of Douglas Elliman realigning its administrative support functions, and office locations as well as adjusting its business model to more efficiently serve its clients. In response to the current COVID-19 pandemic, we have implemented significant expense reductions at Douglas Elliman, including a reduction of personnel by approximately 25%, as well as reduction, deferral or elimination of leases across the country. As a result of the expense reductions, in additional to personnel expenses, Douglas Elliman’s professional services, advertising, travel and other occupancy expenses were reduced during the six months ended June 30, 2020. While we continue to evaluate other expense reduction measures, to the extent Douglas Elliman’s business improves in the third quarter, we will begin to relinquish, as appropriate, some of the second quarter expense reductions, including advertising and personnel expenses.
Real Estate operating (loss) income. The Real Estate segment had operating loss of $74,350 and operating income of $4,044 for the six months ended June 30, 2020 and 2019, respectively. The increase in the Real Estate segment’s operating loss was caused by the decreased gross margin discussed above, the impairment of goodwill and intangible assets of $58,252 at Douglas Elliman and restructuring charges of $2,961 at Douglas Elliman offset by the impact of expense-reduction initiatives at Douglas Elliman in 2020.
Corporate and Other.
Corporate and Other loss. The operating loss at the Corporate and Other segment was $12,252 for the six months ended June 30, 2020 compared to $14,005 for the same period in 2019 and the difference was due primarily to decreased administrative costs related to professional fees and travel expenses.

64



Summary of Real Estate Investments
We own and seek to acquire investment interests in various domestic and international real estate projects through debt and equity investments. Our real estate investments primarily include the following projects as of June 30, 2020:
 
(Dollars in Thousands. Area and Unit Information in Ones)
 
Location
Date of Initial Investment
Percentage Owned (1)
Net Cash Invested (Returned)
Cumulative Earnings (Losses)
Carrying Value as of June 30, 2020
Future Capital Commit-
ments from New Valley (2)
Projected Residential and/or Hotel Area
Projected Commercial Space
Projected Number of Residential Lots, Units and/or Hotel Rooms
Actual/Projected Construction Start Date
Projected Construction End Date
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sagaponack
Sagaponack, NY
April 2015
100
%
$
19,024

$

$
19,024

$

TBD

 
N/A

 
1

R
N/A
N/A
Escena, net
Master planned community, golf course, and club house in Palm Springs, CA
March 2008
100
%
2,243

7,609

9,852


450

Acres

 
667
450

R Lots
H
N/A
N/A
Investments in real estate, net
 
 
 
$
21,267

$
7,609

$
28,876

$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments in real estate ventures:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10 Madison Square West (1107 Broadway)
Flatiron District/NoMad neighborhood, Manhattan, NY
October 2011
5.0
%
$
(43,671
)
$
43,671

$

$

260,000

SF
20,000

SF
124

R
August 2012
Completed
11 Beach Street
TriBeCa, Manhattan, NY
June 2012
49.5
%
4,090

5,600

9,690


97,000

SF

 
27

R
May 2014
Completed
20 Times Square (701 Seventh Avenue)
Times Square, Manhattan, NY
August 2012
7.9
%
(7,827
)
7,827



252,000

SF
80,000

SF
452

H
September 2013
Completed
111 Murray Street
TriBeCa, Manhattan, NY
May 2013
9.5
%
6,393

(4,413
)
1,980


330,000

SF
1,700

SF
157

R
September 2014
Completed
160 Leroy Street
West Greenwich Village, Manhattan, NY
March 2013
3.1
%
(1,075
)
1,075



130,000

SF

 
57

R
Fall 2015
Completed
The Dutch (25-19 43rd Avenue)
Long Island City, NY
May 2014
9.9
%
(1,247
)
1,385

138

 
65,000

SF

 
86

R
September 2014
Completed
87 Park (8701 Collins Avenue)
Miami Beach, FL
December 2013
15.0
%
13,138

3,317

16,455


160,000

SF
TBD

 
70

R
October 2015
Completed
125 Greenwich Street
Financial District, Manhattan, NY
August 2014
13.4
%
7,992

(7,992
)


306,000

SF
16,000

SF
273

R
March 2015
TBD
West Hollywood Edition (9040 Sunset Boulevard) (4)
West Hollywood, CA
October 2014
48.5
%
3,949

(6,153
)
(2,204
)

210,000

SF

 
20
190

R
H
May 2015
Completed
The XI (76 Eleventh Avenue)
West Chelsea, Manhattan, NY
May 2015
5.1
%
17,000

(17,000
)


630,000

SF
85,000

SF
236
137

R
H
September 2016
March 2021
Monad Terrace
Miami Beach, FL
May 2015
19.6
%
7,635

(4,831
)
2,804


160,000

SF

 
59

R
May 2016
September 2020
Takanasee (805 Ocean Ave)
Long Branch, NJ
December 2015
22.8
%
6,144

(2,306
)
3,838


63,000

SF

 
13

R
June 2017
TBD
Brookland (15 East 19th St)
Brooklyn, NY
April 2017
9.8
%
402

45

447


24,000

SF

 
33

R
August 2017
Completed
Dime (209 Havemeyer St)
Brooklyn, NY
November 2017
16.5
%
9,145

2,331

11,476


100,000

SF
150,000

SF
177

R
May 2017
September 2020
352 6th Avenue
Brooklyn, NY
February 2019
37.0
%
500

61

561


5,200

SF

 
4

R
September 2019
December 2020
Meatpacking Plaza
Meatpacking District, NY
April 2019
16.9
%
10,692

(1,515
)
9,177


TBD

TBD

TBD

TBD
TBD
The Park on Fifth
Miami Beach, FL
September 2019
38.9
%
14,132

723

14,855


434,000

SF
15,000

SF
302

R
April 2020
August 2023
9 DeKalb
Brooklyn, NY
April 2019
4.2
%
5,000

544

5,544


450,000

SF
120,000

SF
540

R
March 2019
June 2022
West Hialeah
Miami, FL
December 2019
77.8
%
12,522

536

13,058


1,400,000

SF

 
1,369

R
December 2019
February 2024
Condominium and Mixed Use Development
 
 
 
$
64,914

$
22,905

$
87,819

$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Maryland Portfolio
Primarily Baltimore County, MD
July 2012
7.6
%
774

(774
)


N/A

 
N/A

 
5,517

R
N/A
N/A
Apartment Buildings
 
 
 
$
774

$
(774
)
$

$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Park Lane Hotel (36 Central Park South)
Central Park South, Manhattan, NY
November 2013
1.0
%
$
8,682

$
(6,519
)
$
2,163

$

446,000

SF

 
628

H
N/A
N/A
215 Chrystie Street (4)
Lower East Side, Manhattan, NY
December 2012
18.4
%
(4,551
)
4,257

(294
)

246,000

SF

 
367

H
June 2014
Completed
Coral Beach and Tennis Club
Coral Beach, Bermuda
December 2013
49.0
%
6,048

(4,438
)
1,610


52

Acres

 
101

H
N/A
N/A
Parker New York
Central Park South, Manhattan, NY
July 2019
1.0
%
1,000

(56
)
944


TBD

 

 
589
99

H
R
May 2020
February 2022
Hotels
 
 
 
$
11,179

$
(6,756
)
$
4,423

$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
The Plaza at Harmon Meadow
Secaucus, NJ
March 2015
49.0
%
$
4,797

$
(2,721
)
$
2,076

$


219,000

SF

N/A
N /A
Wynn Las Vegas Retail
Las Vegas, NV
December 2016
1.6
%
4,798

2,769

7,567



160,000

SF

N/A
N/A
Commercial
 
 
 
$
9,595

$
48

$
9,643

$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Witkoff GP Partners (3)
Multiple
March 2017
15.0
%
$
11,082

$
(1,038
)
$
10,044

$
4,911

N/A

 
N/A

 
N/A

 
N/A
N/A
1 QPS Tower (23-10 Queens Plaza South)
Long Island City, NY
December 2012
45.4
%
(14,406
)
14,406



N/A

 
N/A

 
N/A

 
March 2014
Completed
Witkoff EB-5 Capital Partners
Multiple
September 2018
49.0
%
516

434

950

8,735

N/A

 
N/A

 
N/A

 
N/A
N/A
Diverse Real Estate Portfolio
 
 
 
$
(2,808
)
$
13,802

$
10,994

$
13,646

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments in real estate ventures
 
 
 
$
83,654

$
29,225

$
112,879

$
13,646



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Carrying Value
 
 
 
$
104,921

$
36,834

$
141,755

 
 
 
 
 
 
 
 
 
(1) The Percentage Owned reflects our estimated current ownership percentage. Our actual ownership percentage as well as the percentage of earnings and cash distributions may ultimately differ as a result of a number of factors including potential dilution, financing or admission of additional partners.
(2) This column only represents capital commitments required under the various joint venture agreements. However, many of the operating agreements provide for the operating partner to call capital. If a joint venture partner, such as New Valley, declines to fund the capital call, then the partner’s ownership percentage could either be diluted or, in some situations, the character of a funding member’s contribution would be converted from a capital contribution to a member loan.
(3) The Witkoff GP Partners venture includes a $2,471 investment in 500 Broadway and a $7,573 investment in Fontainebleau Las Vegas.
(4) Equity in losses in excess of the joint ventures' carrying value were $2,498 as of June 30, 2020, and are classified in Other current liabilities.

65



N/A - Not applicable
SF - Square feet
H - Hotel rooms
TBD -To be determined
R - Residential Units
R Lots - Residential lots
 
 
 
New Valley capitalizes net interest expense into the carrying value of its ventures whose projects were under development. Net capitalized interest costs included in Carrying Value as of June 30, 2020 were $7,547. This amount is included in the “Cumulative Earnings (Losses)” column in the table above. During the six months ended June 30, 2020, New Valley capitalized $2,257 of interest costs and utilized (reversed) $5,307 of previously capitalized interest in connection with the recognition of equity in (losses) earnings, gains and liquidations from various ventures.



66



Liquidity and Capital Resources

Cash, cash equivalents and restricted cash increased by $169,658 for the six months ended June 30, 2020 and decreased by $258,325 for the six months ended June 30, 2019.
Cash provided from operations was $341,329 and $98,102 for the six months ended June 30, 2020 and 2019, respectively. The increase primarily related to increases in working capital, particularly in increased excise tax payables, income tax payables and promotional accruals in the tobacco segment, at June 30, 2020 as well as the proceeds received from the sale of LTS in the 2020 period offset by lower operating income in 2020. The increases in excise tax payables related to the 90-day postponement of the payment due dates of U.S. excise taxes from March 1, 2020 to July 1, 2020. We expect this postponement resulted in an increase to the liquidity of our tobacco segment in the second quarter of 2020 of approximately $131,700 and will result in a corresponding decline in the third quarter of 2020.
Cash provided by investing activities was $46,575 for the six months ended June 30, 2020 and cash used in investing activities was $9,087 for the six months ended June 30, 2019. In the first six months of 2020, cash provided by investing activities was from the sale of investment securities of $19,555, pay downs of investment securities of $415, maturities of investment securities of $31,574, distributions from investments in real estate ventures of $5,172, a decrease in restricted assets of $87, and proceeds from the sale or liquidation of long-term investments of $23,407. This was offset by the purchase of investment securities of $16,867, investments in real estate ventures of $3,858, capital expenditures of $6,242, investments in real estate, net of $679, an increase in cash surrender value of life insurance policies of $751, and purchase of long-term investments of $5,238. In the first six months of 2019, cash used in investing activities was for the purchase of investment securities of $44,222, investments in real estate ventures of $21,908, capital expenditures of $6,320, investments in real estate, net of $1,153, an increase in cash surrender value of life insurance policies of $789, and purchase of subsidiaries of $668. This was offset by the sale of investment securities of $12,942, pay downs of investment securities of $545, maturities of investment securities of $28,610, and distributions from investments in real estate ventures of $23,200, a decrease in restricted assets of $668, and proceeds from the sale of fixed assets of $8.
Cash used in financing activities was $218,246 and $347,340 for the six months ended June 30, 2020 and 2019, respectively. In the first six months of 2020, cash was used for the dividends and distributions on common stock of $63,478, repayments of debt of $172,467, distributions to non-controlling interest of $448, and net repayments of debt under the revolver of $34,952. This was offset by proceeds from issuance of common stock of $52,563, proceeds from debt issuance of $531 and other of $5. In the first six months of 2019, cash was used for the dividends and distributions on common stock of $118,748, repayments of debt of $230,771, distributions to non-controlling interest of $285, deferred financing costs of $33, offset by net borrowings of debt under the revolver of $2,497.
The terms of our 10.5% Senior Notes due 2026 contain covenants that place significant limitations on our ability to pay dividends and distributions in the future. See “10.5% Senior Notes due 2026” below. For the next twelve months beginning June 30, 2020, we have significant liquidity commitments at the corporate level (not including our tobacco and real estate operations) that require the use of existing cash resources. These include cash interest expense of approximately $110,300 on our other debt and other corporate expenses and taxes. In addition, the board continues to evaluate our dividend policy on a quarterly basis. Based on the $0.20 per share quarterly dividend rate in 2020, payment of our quarterly dividend would require cash payments of approximately $128,900 over the next twelve months.

In order to meet these liquidity requirements as well as other liquidity needs in the normal course of business, we have in the past used cash flows from operations as well as existing cash and cash equivalents, which have, in the past, been generated from operations, monetization of investments and proceeds from debt issuances. Should these resources be insufficient to meet upcoming liquidity needs, we may also liquidate investment securities and other long-term investments, or, if available, draw on Liggett’s credit facility. While there are actions we can take to reduce our liquidity needs, there can be no assurance that such measures will be successful. As of June 30, 2020, we had cash and cash equivalents of $540,363 (including $60,921 of cash at Douglas Elliman and $217,590 of cash at Liggett), investment securities, which were carried at $88,643 (see Note 6 to condensed consolidated financial statements), and long-term investments, which were carried at $33,232 (and, including in-transit redemptions at June 30, 2020, with a fair value of $35,380). As discussed elsewhere, we used $169,610 of cash to retire the convertible notes due in April 2020. As of June 30, 2020, our investments in real estate ventures were carried at $115,377 and our investments in real estate, net of accumulated depreciation, were carried at $28,876.

Limitation of interest expense deductible for income taxes. Since 2018, our interest expense that is deductible in the computation of our income tax liability has been limited to a percentage of adjusted taxable income, as defined, with certain exceptions. In 2019 and 2020, the amount is limited to 50% of taxable income before interest, depreciation and amortization and, in 2021, the amount is limited to 30% of taxable income before interest, depreciation and amortization. Beginning in 2022, the amount is limited to 30% of taxable income before interest thereafter for non-excepted trade or businesses. One such excepted trade or

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business is any electing real property trade or business, which portions of our real estate business may qualify. Interest expense allocable to an excepted trade or business is not subject to limitation. If any interest expense is disallowed, we are permitted to carry forward the disallowed interest expense indefinitely. Nonetheless, due to our high degree of leverage, a portion of our interest expense in future years may not be deductible, which could increase the after-tax cost of any new debt financings as well as the refinancing of our existing debt.
Tobacco Litigation. Adverse verdicts have been entered in 16 Engle progeny cases against Liggett. Liggett has paid $39,773, including interest and attorney’s fees, to satisfy the final judgments entered against it. It is possible that additional cases could be decided unfavorably.
Notwithstanding the comprehensive nature of the Engle progeny settlements, 42 Engle progeny cases remain pending. In addition, 54 individual actions are pending. Therefore, we and Liggett may still be subject to periodic adverse judgments which could have a material adverse effect on our consolidated financial position, results of operations and cash flows.
Management cannot predict the cash requirements related to any future settlements or judgments, including cash required to bond any appeals, and there is a risk that those requirements will not be able to be met. Management is unable to make a reasonable estimate of the amount or range of loss that could result from an unfavorable outcome of the cases pending against Liggett or the costs of defending such cases. It is possible that our consolidated financial position, results of operations or cash flows could be materially adversely affected by an unfavorable outcome in any such tobacco-related litigation.
Vector.
6.125% Senior Secured Notes due 2025. In January 2017, we issued $850,000 of our 6.125% Senior Secured Notes due 2025 (“6.125% Senior Secured Notes”). The indenture governing our 6.125% Senior Secured Notes (the “2025 Indenture”) contains covenants that restrict the payment of dividends if our consolidated earnings before interest, taxes, depreciation and amortization (“Consolidated EBITDA”), as defined in the 2025 Indenture, for the most recently ended four full quarters is less than $75,000. The 2025 Indenture also restricts the incurrence of debt if our Leverage Ratio and our Secured Leverage Ratio, as defined in the 2025 Indenture, exceed 3.0 and 1.5, respectively. Our Leverage Ratio is defined in the 2025 Indenture as the ratio of our guaranteeing subsidiaries’ total debt less the fair market value of our cash, investment securities and long-term investments to Consolidated EBITDA, as defined in the 2025 Indenture. Our Secured Leverage Ratio is defined in the 2025 Indenture in the same manner as the Leverage Ratio, except that secured indebtedness is substituted for indebtedness. The following table summarizes the requirements of these financial covenants and the results of the calculation, as defined in the 2025 Indenture.
 
 
Indenture
 
June 30,
2020
Covenant
 
Requirement
 
Consolidated EBITDA, as defined
 
$75,000
 
$367,357
Leverage ratio, as defined
 
<3.0 to 1
 
2.08 to 1
Secured leverage ratio, as defined
 
<1.5 to 1
 
0.61 to 1
As of June 30, 2020 and December 31, 2019, we were in compliance with all debt covenants related to the 2025 Indenture.
10.5% Senior Notes due 2026. On November 2, 2018 and November 18, 2019, respectively, we sold $325,000 and $230,000 of our 10.5% Senior Notes due 2026 in private offerings exempt from the registration requirements of the Securities Act to qualified institutional buyers in accordance with Rule 144A of the Securities Act.
The indenture governing our 10.5% Senior Notes due 2026 (the “2026 Indenture”) restricts our ability to pay dividends and make certain other distributions subject to certain exceptions, including exceptions for (1) dividends and other distributions in an amount up to 50% of our consolidated net income, plus certain specified proceeds received us, if no event of default has occurred, and we are in compliance with a Fixed Charge Coverage Ratio (as defined in the 2026 Indenture) of at least 2.0x, and (2) dividends and other distributions in an unlimited amount, if no event of default has occurred and we are in compliance with a Net Leverage Ratio (as defined in the 2026 Indenture) no greater than 4.0x. As a result, absent an event of default, we can pay dividends if the Net Leverage ratio is below 4.0x, regardless of the value of the Fixed Charge Coverage Ratio at the time. The 2026 Indenture also restricts our ability to incur debt if our Fixed Charge Coverage Ratio is less than 2.0x, and restricts our ability to secure debt other than secured debt incurred pursuant to a Secured Leverage Ratio no greater than 3.75x, unless the 10.5% Senior Notes are secured on an equal and ratable basis. In addition, the 2026 Indenture restricts our ability to spin-off or transfer New Valley and its subsidiaries as a whole, or DER Holdings LLC and its subsidiaries (including Douglas Elliman) as a whole, unless (1) such spin-off or transfer complies with the covenants restricting mergers and asset sales, or (2) our Net Leverage Ratio is no greater than 4.0x. Our Fixed Charge Coverage Ratio is defined in the 2026 Indenture as the ratio of our Consolidated EBITDA to our Fixed Charges (each as defined in the 2026 Indenture). Our Net Leverage Ratio is defined in the 2026 Indenture as the ratio of our and our guaranteeing subsidiaries’ total debt less our cash, cash equivalents, and the fair market value of our investment securities, long-term investments, investments in real estate, net, and investments in real estate ventures, to Consolidated EBITDA, as defined

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in the 2026 Indenture. Our Secured Leverage Ratio is defined in the 2026 Indenture as the ratio of our and our guaranteeing subsidiaries’ total secured debt, to Consolidated EBITDA, as defined in the 2026 Indenture.
Covenant
 
Indenture Requirement
 
June 30,
2020
Consolidated EBITDA, as defined
 
N/A
 
$270,637
Fixed charge coverage ratio, as defined
 
>2.0 to 1
 
2.68 to 1
Net leverage ratio, as defined
 
<4.0 to 1
 
2.16 to 1
Secured leverage ratio, as defined
 
<3.75 to 1
 
3.21 to 1
As of June 30, 2020 and December 31, 2019, we were in compliance with all of the debt covenants related to the 2026 Indenture.
Liggett Credit Facility and Liggett Term Loan Under Credit Facility. As of June 30, 2020, there was no outstanding balance under the Credit Agreement, which was primarily the result of the 90-day postponement of U.S. excise taxes due between March 1, 2020 and June 30, 2020. Availability as determined under the Credit Agreement was $60,000 based on eligible collateral at June 30, 2020. At June 30, 2020, Liggett was in compliance with all covenants under the Credit Agreement; Liggett’s EBITDA, as defined, were $243,545 for the last twelve months ended June 30, 2020.
Anticipated Liquidity Obligations. We and our subsidiaries have significant indebtedness and debt service obligations. As of June 30, 2020, we and our subsidiaries had total outstanding indebtedness of approximately $1,433,200. Of this amount, $850,000 comprised of the outstanding amount under our 6.125% Senior Secured Notes due 2025, and $555,000 comprised of the outstanding amount under our 10.5% Senior Notes due 2026. There is a risk that we will not be able to generate sufficient funds to repay our debt. If we cannot service our fixed charges, it would have a material adverse effect on our business and results of operations.
We currently believe that our tobacco segment will be a positive cash-flow-generating unit and will continue to be able to sustain its operations in 2020 without any significant liquidity concerns. Our real estate segment has historically been a positive cash-flow generating segment, but we do not currently expect our real estate operations to generate positive cash-flow in 2020, primarily due to the COVID-19 pandemic and related economic disruption.
In order to meet the above liquidity requirements as well as other anticipated liquidity needs in the normal course of business, we had cash and cash equivalents of approximately $540,400, investment securities at fair value of approximately $88,600, long-term investments with an estimated value of approximately $35,400, and availability under Liggett’s credit facility of approximately $60,000 at June 30, 2020. Management currently anticipates that these amounts, as well as expected cash flows from our operations, proceeds from public and/or private debt and equity financing to the extent available, management fees and other payments from subsidiaries should be sufficient to meet our liquidity needs over the next 12 months. Depending on market conditions, we may utilize our cash, investment securities and long-term investments to repurchase our 6.125% Senior Secured Notes due 2025 and 10.5% Senior Notes due 2026 in open-market purchases or privately negotiated transactions. We may acquire or seek to acquire additional operating businesses through merger, purchase of assets, stock acquisition or other means, or to make other investments, which may limit our liquidity otherwise available.

Market Risk
We are exposed to market risks principally from fluctuations in interest rates, foreign currency exchange rates and equity prices. We seek to minimize these risks through our regular operating and financing activities and our long-term investment strategy. Our market risk management procedures cover all market risk sensitive financial instruments.
As of June 30, 2020, approximately $27,500 of our outstanding debt at face value had variable interest rates determined by various interest rate indices, which increases the risk of fluctuating interest rates. Our exposure to market risk includes interest rate fluctuations in connection with our variable rate borrowings, which could adversely affect our cash flows. As of June 30, 2020, there was no outstanding balance on the Liggett Credit Facility which also has variable interest rates. As of June 30, 2020, we had no interest rate caps or swaps. Based on a hypothetical 100 basis point increase or decrease in interest rates (1%), our annual interest expense could increase or decrease by approximately $300.
We held debt securities available for sale totaling $54,885 as of June 30, 2020. See Note 6 to our condensed consolidated financial statements. Adverse market conditions could have a significant effect on the value of these investments.
On a quarterly basis, we evaluate our debt securities available for sale and equity securities without readily determinable fair values that do not qualify for the NAV practical expedient to determine whether an impairment has occurred. If so, we also make a determination if such impairment is considered temporary or other-than-temporary. We believe that the assessment of temporary or other-than-temporary impairment is facts-and-circumstances driven. The impairment indicators that are taken into consideration

69



as part of our analysis include (a) a significant deterioration in the earnings performance, credit rating, asset quality, or business prospects of the investee, (b) a significant adverse change in the regulatory, economic, or technological environment of the investee, (c) a significant adverse change in the general market condition of either the geographical area or the industry in which the investee operates, and (d) factors that raise significant concerns about the investee’s ability to continue as a going concern, such as negative cash flows from operations, working capital deficiencies, or noncompliance with statutory capital requirements or debt covenants.

Equity Security Price Risk

As of June 30, 2020, we held various investments in equity securities with a total fair value of $66,990, of which $33,758 represents equity securities at fair value and $33,232 represents long-term investment securities at fair value. The latter securities represent long-term investments in various investment partnerships. These investments are illiquid and their ultimate realization is subject to the performance of the underlying entities. See Note 6 to our condensed consolidated financial statements, respectively, for more details on equity securities at fair value and long-term investment securities at fair value. The impact to our condensed consolidated statement of operations related to equity securities fluctuates based on changes in their fair value.
We record changes in the fair value of equity securities in net income. To the extent that we continue to hold equity securities, our operating results may fluctuate significantly. Based on our equity securities held as of June 30, 2020, a hypothetical decrease of 10% in the price of these equity securities would reduce the fair value of the investments and, accordingly, our net income by approximately $6,699.

New Accounting Pronouncements

Refer to Note 1, Summary of Significant Accounting Policies, to our financial statements for further information on New Accounting Pronouncements.

Legislation and Regulation
There are no material changes from the Legislation and Regulation section set forth in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended December 31, 2019, except as follows. The following paragraph of “Item. 1. Business--Legislation and Regulation-Advertising and Warnings on Packaging” from our Annual Report on Form 10-K, which is referenced therein, is amended and restated in its entirety:  
On March 18, 2020, FDA issued a final rule to require new health warnings on cigarette packages and in cigarette advertisements. This rule requires each cigarette package and advertisement to bear one of eleven textual warning statements accompanied by a corresponding graphic image covering 50% of the area of the front and rear panels of cigarette packages and at least 20% of the area at the top of cigarette advertisements. The rule establishes marketing requirements that include the random and equal display and distribution of the required warnings for cigarette packages and quarterly rotation of the required warnings for cigarette advertisements. The final rule provided for an effective date of June 18, 2021, 15 months after issuance of the final rule. The inclusion of new warnings and rotation requirements pursuant to the final rule would likely increase Liggett’s production costs. On April 3, 2020, Liggett, along with other tobacco companies, commenced an action against the FDA in the United States District Court, District of Texas (Tyler Division) challenging the legality of the graphic warning final rule. On May 8, 2020, the court issued an updated scheduling order and granted a joint motion to postpone the effective date of the final rule by 120 days to October 16, 2021.
We cannot predict whether the court will delay the effective date and/or determine that some or all of the proposed textual and/or graphic warnings, or proposed prominence of the warnings, violate the First Amendment, Administrative Procedure Act, or other legal requirements, or what the impact of such a court ruling would have on the compliance timeline or requirements imposed on industry. 

    
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this report contains “forward-looking statements” within the meaning of the federal securities law. Forward-looking statements include information relating to our intent, belief or current expectations, primarily with respect to, but not limited to:
economic outlook,
capital expenditures,
cost reduction,

70



legislation and regulations,
cash flows,
operating performance,
litigation, and
related industry developments (including trends affecting our business, financial condition and results of operations).
We identify forward-looking statements in this report by using words or phrases such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may be,” “objective,” “plan,” “seek,” “predict,” “project” and “will be” and similar words or phrases or their negatives.
The forward-looking information involves important risks and uncertainties that could cause our actual results, performance or achievements to differ materially from our anticipated results, performance or achievements expressed or implied by the forward-looking statements. Factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, without limitation, the following:
general economic and market conditions and any changes therein, due to acts of war and terrorism or otherwise,
governmental regulations and policies,
adverse changes in global, national, regional and local economic and market conditions, including those related to pandemics and health crises, such as the recent outbreak of COVID-19,
significant changes in the price, availability or quality of tobacco, other raw materials or component parts, including as a result of the COVID-19 pandemic,
potential dilution to our holders of or common stock as a result of issuances of additional shares of common stock to fund our financial obligations and other financing activities,
the impacts of the Tax Cuts and Jobs Act of 2017, including the deductibility of interest expense and the impact of the markets on our Real Estate segment,
effects of industry competition,
impact of business combinations, including acquisitions and divestitures, both internally for us and externally in the tobacco industry,
impact of legislation on our results of operations and product costs, i.e. the impact of federal legislation providing for regulation of tobacco products by FDA,
impact of substantial increases in federal, state and local excise taxes,
uncertainty related to product liability and other tobacco-related litigations including the Engle progeny cases pending in Florida and other individual and class action cases where certain plaintiffs have alleged compensatory and punitive damage amounts ranging into the hundreds of million and even billions of dollars; and,
potential additional payment obligations for us under the MSA and other settlement agreements with the states.

Further information on the risks and uncertainties to our business include the risk factors discussed above in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and under Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the Securities and Exchange Commission.
Although we believe the expectations reflected in these forward-looking statements are based on reasonable assumptions, there is a risk that these expectations will not be attained and that any deviations will be material. The forward-looking statements speak only as of the date they are made.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Market Risk” is incorporated herein by reference.

ITEM 4.    CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered

71



by this report, and, based on their evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective.

There have not been any changes in our internal control over financial reporting that occurred during the second quarter of 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic. We are continually monitoring and assessing the COVID-19 situation on our internal controls to minimize the impact on their design and operating effectiveness.


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PART II

OTHER INFORMATION

Item 1.     Legal Proceedings

Reference is made to Note 9, incorporated herein by reference, to our condensed consolidated financial statements included elsewhere in this report which contains a general description of certain legal proceedings to which our company, or its subsidiaries are a party and certain related matters. Reference is also made to Exhibit 99.1 for additional information regarding the pending smoking-related legal proceedings to which Liggett or us is a party. A copy of Exhibit 99.1 will be furnished without charge upon written request to us at our principal executive offices, 4400 Biscayne Boulevard, 10th Floor, Miami, Florida 33137, Attn. Investor Relations.

Item 1A. Risk Factors

There are no material changes from the risk factors set forth in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2019 and Part II, Item 1A, “Risk Factors,” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, except as set forth below:

New Valley is heavily dependent on the performance of the real estate market in the New York metropolitan area, which has been adversely impacted by COVID-19.

New Valley’s business primarily depends on the performance of the real estate market in the New York metropolitan area. Our real estate brokerage businesses and our investments in real estate developments are largely located in the New York metropolitan area and to a lesser extent in South Florida, Los Angeles, and other markets.

Douglas Elliman’s residential brokerage business primarily depends on volumes of sales transactions and sales prices for residential property in the New York metropolitan area and derived approximately 70% of its revenues in 2019 and 2018 from this region. Published reports and data indicate that the New York metropolitan area was impacted more than any other area in the United States by the COVID-19 pandemic. Consequently, various governmental agencies in the New York metropolitan area, and other markets where Douglas Elliman operates and where our real estate investments are located, instituted quarantines, “pause” orders, “shelter-in-place” rules, restrictions on travel and restrictions on the types of businesses that can operate. For example, Douglas Elliman’s agents were restricted from performing personal showings of properties or conducting open houses in most of Douglas Elliman’s markets from March 2020 to June 2020. As a result of such measures, volumes of residential property sales transactions in the New York metropolitan area have declined significantly, and the aggregate sales commissions earned by Douglas Elliman on sales transactions have correspondingly declined. This has had, and we expect will continue to have, a material adverse effect on Douglas Elliman’s financial condition and results of operations, notwithstanding the mitigating actions we have initiated (including employee-related and other expense-reduction measures) and expect to continue during this crisis.

In addition, property development and investment activities are currently significantly lower than past levels and future growth in the property market in the New York metropolitan area, South Florida, Los Angeles, Las Vegas or elsewhere in the United States are currently uncertain which may have a material adverse effect on New Valley’s real estate investments. As of June 30, 2020, we had investments in or were developing 16 projects in the New York metropolitan area. In addition, during the second quarter of 2020, construction was halted at many of the real estate projects that New Valley has made investments. Adverse developments in national and local economic conditions as a result of the COVID-19 pandemic, as measured by such factors as GDP growth, employment levels, job growth, consumer confidence, interest rates and population growth in the New York metropolitan area and the United States generally, particularly in the regions where our investments and brokerage businesses are located, have reduced, and we expect will continue to reduce demand and depress prices for our properties and services and have had and we expect will continue to have, a material adverse effect on our business, financial condition and results of operations.

We have made significant operating adjustments in Douglas Elliman’s real estate brokerage business, including staff reductions, which could negatively impact the financial success of Douglas Elliman’s brokerage business in the future.

Douglas Elliman’s real estate brokerage offices generate revenue in the form of commissions and service fees. Accordingly, its financial results depend upon the operational and financial success of its brokerage offices and its agents. As a result of the impact of the COVID-19 pandemic on Douglas Elliman’s brokerage business, in April 2020, we made significant operating adjustments at Douglas Elliman, including a reduction of personnel by approximately 25%, which resulted in a reduction in salaries and administrative expenses, as well as reduction, deferral or elimination of leases across the country. As a result of the expense

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reductions, in additional to personnel expenses, Douglas Elliman’s professional services, advertising, travel and other occupancy expenses were reduced during the three months ended June 30, 2020. While such expense-reduction measures were necessary in order to mitigate the on-going financial impacts of the COVID-19 pandemic on Douglas Elliman’s real estate brokerage business, there can be no assurance that we will be able to re-hire those employees in the event that economic conditions improve, and as a result, the staff reductions that we have made could negatively impact the financial success of Douglas Elliman’s brokerage business in the future. Further, while we continue to evaluate other expense reduction measures, to the extent Douglas Elliman’s business improves in the third quarter, we will begin to relinquish, as appropriate, some of the second quarter expense reductions, including advertising and personnel expenses.

The COVID-19 pandemic could continue to have a material impact on our Real Estate segment; the likelihood and magnitude of a material impact increases with the amount of time the virus impacts activity levels in locations in which Douglas Elliman operates. Therefore, we are unable to predict the ultimate impact of the COVID-19 pandemic on the future financial condition, results of operations and cash flows from our Real Estate segment.


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

No equity securities of ours which were not registered under the Securities Act have been issued or sold by us during the three months ended June 30, 2020.

Issuer Purchase of Equity Securities

Our purchase of our common stock during the three months ended June 30, 2020 were as follows:

Period
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April 1 to April 30, 2020

 
$

 

 

May 1 to May 31, 2020
5,423

 
11.44

(1) 

 

June 1 to June 30, 2020

 

 

 

  Total
5,423

 
$
11.44

 

 


(1) Delivery of shares to us in payment of tax withholding in connection with an employee’s vesting in restricted stock. The shares were immediately canceled.

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Item 6.    Exhibits:

Form of Restricted Shares Award Agreement under 2014 Management Incentive Plan.
 
 
Certification of Chief Executive Officer, Pursuant to Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
Certification of Chief Financial Officer, Pursuant to Exchange Act Rule 13a-14(a), as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
Certification of Chief Executive Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
Certification of Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
Material Legal Proceedings.
 
 
101.INS
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
 
 
101.SCH
Inline XBRL Taxonomy Extension Schema
 
 
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase
 
 
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase
 
 
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Inline XBRL Taxonomy Extension Label Linkbase
 
 
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase
 
 
104
Cover Page Interactive Data File (the cover page tabs are embedded within the Inline XBRL document).
* Incorporated by reference


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SIGNATURE

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.


 
 
VECTOR GROUP LTD.
 
 
(Registrant)
 
 
 
 
 
By: /s/ J. Bryant Kirkland III
 
 
J. Bryant Kirkland III
 
 
Senior Vice President, Treasurer and
 
 
Chief Financial Officer
Date:
August 7, 2020
 

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