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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 September 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)
Delaware1-575965-0949535
(State or other jurisdiction of incorporationCommission 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:TradingName of each exchange
Symbol(s)on which registered:
Common stock, par value $0.10 per shareVGRNew 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 filerAccelerated filerNon-accelerated filerSmaller reporting companyEmerging 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 November 2, 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 September 30, 2020 and December 31, 2019
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019
Condensed Consolidated Statements of Stockholders' Deficiency for the three and nine months ended September 30, 2020 and 2019
Condensed Consolidated Statements of Cash Flows for the nine months ended September 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
September 30,
2020
December 31,
2019
ASSETS:
Current assets:
Cash and cash equivalents$451,071 $371,341 
Investment securities at fair value124,092 129,641 
Accounts receivable - trade, net43,999 36,959 
Inventories94,548 98,762 
Other current assets38,713 44,911 
Total current assets752,423 681,614 
Property, plant and equipment, net76,067 82,160 
Investments in real estate, net9,786 28,317 
Long-term investment securities at fair value31,619 45,781 
Investments in real estate ventures102,458 131,556 
Operating lease right-of-use assets147,959 149,578 
Goodwill and other intangible assets, net207,618 265,993 
Other assets115,048 120,090 
Total assets$1,442,978 $1,505,089 
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
Current liabilities:
   Current portion of notes payable and long-term debt$10,684 $209,269 
   Current portion of fair value of derivatives embedded within convertible debt 4,999 
 Current payments due under the Master Settlement Agreement
145,472 34,116 
Income taxes payable, net19,113 5,138 
Current operating lease liability22,485 18,294 
Other current liabilities194,028 189,317 
Total current liabilities391,782 461,133 
Notes payable, long-term debt and other obligations, less current portion1,395,964 1,397,216 
Non-current employee benefits61,341 67,853 
Deferred income taxes, net28,509 33,695 
Non-current operating lease liability159,200 156,963 
Payments due under the Master Settlement Agreement18,130 17,275 
Other liabilities50,171 55,970 
Total liabilities2,105,097 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, 153,293,358 and 148,084,900 shares issued and outstanding
15,329 14,808 
Accumulated deficit(656,781)(678,464)
Accumulated other comprehensive loss(20,667)(21,808)
Total Vector Group Ltd. stockholders' deficiency(662,119)(685,464)
Non-controlling interest 448 
Total stockholders' deficiency(662,119)(685,016)
Total liabilities and stockholders' deficiency$1,442,978 $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 EndedNine Months Ended
September 30,September 30,
2020201920202019
Revenues:
   Tobacco*$318,850 $303,260 $918,429 $854,517 
   Real estate228,981 201,530 529,650 609,629 
       Total revenues547,831 504,790 1,448,079 1,464,146 
Expenses:
 Cost of sales:
   Tobacco*204,101 209,192 615,458 590,956 
   Real estate170,474 136,264 374,625 408,694 
       Total cost of sales374,575 345,456 990,083 999,650 
Operating, selling, administrative and general expenses77,019 92,374 238,600 278,047 
Litigation settlement and judgment expense 240 53 895 
Impairments of goodwill and intangible assets  58,252  
Restructuring charges320  3,281  
Operating income95,917 66,720 157,810 185,554 
Other income (expenses):
Interest expense(28,163)(32,963)(93,148)(103,236)
Change in fair value of derivatives embedded within convertible debt 6,182 4,999 20,319 
Equity in earnings (losses) from investments1,840 (468)54,199 (791)
Equity in (losses) earnings from real estate ventures(8,536)8,050 (27,301)12,002 
Other, net(5,096)2,223 (8,116)14,444 
Income before provision for income taxes55,962 49,744 88,443 128,292 
Income tax expense17,823 13,736 27,761 37,944 
Net income38,139 36,008 60,682 90,348 
Net income attributed to non-controlling interest   (80)
Net income attributed to Vector Group Ltd.$38,139 $36,008 $60,682 $90,268 
Per basic common share:
Net income applicable to common shares attributed to Vector Group Ltd.$0.25 $0.23 $0.39 $0.57 
Per diluted common share:
Net income applicable to common shares attributed to Vector Group Ltd.$0.25 $0.23 $0.39 $0.56 
                                      

* Revenues and cost of sales include federal excise taxes of $120,320, $122,951, $354,629, and $347,527, 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 Nine Months Ended
September 30,September 30,
 2020201920202019
 
Net income$38,139 $36,008 $60,682 $90,348 
Net unrealized (losses) gains on investment securities available for sale:
Change in net unrealized (losses) gains(242)2 (262)725 
Net unrealized losses (gains) reclassified into net income1 (19)434 (56)
Net unrealized (losses) gains on investment securities available for sale(241)(17)172 669 
Net change in pension-related amounts
Amortization of loss463 491 1,390 1,439 
Net change in pension-related amounts463 491 1,390 1,439 
Other comprehensive income222 474 1,562 2,108 
Income tax effect on:
Change in net unrealized (losses) gains on investment securities65 (1)71 (199)
Net unrealized losses (gains) reclassified into net income on investment securities 5 (117)15 
Pension-related amounts(125)(134)(375)(394)
Income tax provision on other comprehensive income(60)(130)(421)(578)
Other comprehensive income, net of tax162 344 1,141 1,530 
Comprehensive income38,301 36,352 61,823 91,878 
Comprehensive income attributed to non-controlling interest   (80)
Comprehensive income attributed to Vector Group Ltd.$38,301 $36,352 $61,823 $91,798 

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-InAccumulated
Other Comprehensive
Non-controlling
Common StockAccumulated
SharesAmountCapitalDeficitLossInterestTotal
Balance as of July 1, 2020153,484,477 $15,348 $ $(663,723)$(20,829)$ $(669,204)
Net income— — — 38,139 — — 38,139 
Total other comprehensive income— — — — 162 — 162 
Distributions and dividends on common stock ($0.20 per share)
— — (366)(31,197)— — (31,563)
Restricted stock grant20,000 2 (2)— — —  
Surrender of shares in connection with restricted stock vesting(211,119)(21)(2,103)— — — (2,124)
Stock-based compensation— — 2,471 — — — 2,471 
Balance as of September 30, 2020153,293,358 $15,329 $ $(656,781)$(20,667)$ $(662,119)
Vector Group Ltd. Stockholders' Deficiency
Additional Paid-InAccumulated
Other Comprehensive
Non-controlling
Common StockAccumulated
SharesAmountCapitalDeficitLossInterestTotal
Balance as of July 1, 2019140,953,900 $14,095 $ $(597,786)$(23,493)$488 $(606,696)
Net income— — — 36,008 — — 36,008 
Total other comprehensive income— — — — 344 — 344 
Distributions and dividends on common stock ($0.38 per share)
— — (414)(58,310)— — (58,724)
Restricted stock grant— — — — — —  
Surrender of shares in connection with restricted stock vesting(200,926)(19)(1,934)— — — (1,953)
Effect of 2019 stock dividend*7,037,649 704 — (704)— —  
Stock-based compensation— — 2,348 — — — 2,348 
Balance as of September 30, 2019147,790,623 $14,780 $ $(620,792)$(23,149)$488 $(628,673)
*    Represents the effect of the September 27, 2019 stock dividend on the third 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-InAccumulated
Other Comprehensive
Non-controlling
Common StockAccumulated
SharesAmountCapitalDeficitLossInterestTotal
Balance as of January 1, 2020148,084,900 $14,808 $ $(678,464)$(21,808)$448 $(685,016)
Impact of adoption of new accounting standards— — — (2,263)— — (2,263)
Net income— — — 60,682 — — 60,682 
Total other comprehensive income— — — — 1,141 — 1,141 
Distributions and dividends on common stock ($0.60 per share)
— — (56,868)(36,816)— — (93,684)
Restricted stock grant425,000 43 (43)— — —  
Surrender of shares in connection with restricted stock vesting(216,542)(22)(2,164)— — — (2,186)
Issuance of common stock, net of offering costs5,000,000 500 52,063 — — — 52,563 
Stock-based compensation— — 7,012 — — — 7,012 
Distributions to non-controlling interest— — — — — (448)(448)
Other — — — 80 — — 80 
Balance as of September 30, 2020153,293,358 $15,329 $ $(656,781)$(20,667)$ $(662,119)
Vector Group Ltd. Stockholders' Deficiency
Additional Paid-InAccumulated
Other Comprehensive
Non-controlling
Common StockAccumulated
SharesAmountCapitalDeficitLossInterestTotal
Balance as of January 1, 2019140,914,642 $14,092 $ $(542,169)$(19,982)$693 $(547,366)
Impact of adoption of new accounting standards— — — 3,147 (4,697)— (1,550)
Net income— — — 90,268 — 80 90,348 
Total other comprehensive income— — — — 1,530 — 1,530 
Distributions and dividends on common stock ($1.14 per share)
— — (4,964)(171,334)— — (176,298)
Restricted stock grant60,000 6 (6)— — —  
Surrender of shares in connection with restricted stock vesting(221,668)(22)(2,152)— — — (2,174)
Effect of 2019 stock dividend*7,037,649 704 — (704)— —  
Stock-based compensation— — 7,122 — — — 7,122 
Distributions to non-controlling interest— — — — — (285)(285)
Balance as of September 30, 2019147,790,623 $14,780 $ $(620,792)$(23,149)$488 $(628,673)
*    Represents the effect of the September 27, 2019 stock dividend on the third 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
Nine Months EndedNine Months Ended
September 30,
2020
September 30,
2019
Net cash provided by operating activities$318,660 $195,349 
Cash flows from investing activities:
Sale of investment securities20,773 16,186 
Maturities of investment securities43,405 45,798 
Purchase of investment securities(64,827)(76,094)
Proceeds from sale or liquidation of long-term investments30,255  
Purchase of long-term investments(9,238)(1,000)
Investments in real estate ventures(6,239)(36,269)
Distributions from investments in real estate ventures11,606 30,934 
Increase in cash surrender value of life insurance policies(723)(773)
Decrease in restricted assets384 661 
Proceeds from sale of fixed assets 17 
Capital expenditures(8,824)(10,158)
Purchase of subsidiaries (323)
Paydowns of investment securities627 828 
Investments in real estate, net(701)(1,910)
Net cash provided by (used in) investing activities16,498 (32,103)
Cash flows from financing activities:
Proceeds from issuance of debt520  
Deferred financing costs (36)
Repayments of debt(173,779)(230,874)
Borrowings under revolver130,686 204,506 
Repayments on revolver(165,639)(221,373)
Dividends and distributions on common stock(97,781)(179,449)
Distributions to non-controlling interest(448)(285)
Proceeds from issuance of Vector stock52,563  
Other (46)
Net cash used in financing activities(253,878)(427,557)
Net increase (decrease) in cash, cash equivalents and restricted cash81,280 (264,311)
Cash, cash equivalents and restricted cash, beginning of period379,476 591,729 
Cash, cash equivalents and restricted cash, end of period$460,756 $327,418 

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”):

Net income for purposes of determining basic EPS was as follows:
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
Net income attributed to Vector Group Ltd.$38,139 $36,008 $60,682 $90,268 
Income attributed to participating securities(708)(2,023)(1,976)(6,052)
Net income applicable to common shares attributed to Vector Group Ltd.$37,431 $33,985 $58,706 $84,216 

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 EndedNine Months Ended
September 30,September 30,
2020201920202019
Net income attributed to Vector Group Ltd.$38,139 $36,008 $60,682 $90,268 
Income attributable to 7.5% Variable Interest Senior Convertible Notes
   (1,246)
Income attributed to participating securities(708)(2,023)(1,976)(6,052)
Net income applicable to common shares attributed to Vector Group Ltd.$37,431 $33,985 $58,706 $82,970 
Basic and diluted EPS were calculated using the following common shares:
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
Weighted-average shares for basic EPS152,216,118 146,703,766 149,541,642 146,562,252 
Plus incremental shares related to convertible debt   961,191 
Plus incremental shares related to stock options and non-vested restricted stock8,470 32,374 32,007 13,782 
Weighted-average shares for diluted EPS152,224,588 146,736,140 149,573,649 147,537,225 

The following non-vested restricted stock and shares issuable upon the conversion of convertible debt were outstanding during the three and nine months ended September 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 EndedNine Months Ended
September 30,September 30,
2020201920202019
  Weighted-average shares of non-vested restricted stock612,538 1,012,285 555,918 1,274,549 
  Weighted-average expense per share$18.29 $18.03 $19.54 $17.95 
  Weighted-average number of shares issuable upon conversion of debt 11,447,061 3,237,522 11,447,061 
  Weighted-average conversion price$ $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 nine months ended September 30, 2020:
Three Months Ended September 30, 2020Nine Months Ended September 30, 2020
Cash Charges:
Employee severance and benefits
$186 $1,785 
Other restructuring expenses
64 282 
250 2,067 
Non-Cash:
Loss on fixed assets associated with consolidation of sales offices
70 1,214 
70 1,214 
  Total restructuring charges$320 $3,281 
All amounts expensed for the three and nine months ended September 30, 2020 are included as Restructuring charges in the Company’s condensed consolidated statements of operations and are all attributable to the Company’s Real Estate segment.
Severance and benefits expensed for the three and nine months ended September 30, 2020 relate entirely to a reduction in administrative positions.
The following table presents the activity under the Real Estate segment restructuring plan for the nine months ended September 30, 2020:
Employee Severance and BenefitsOtherNon-Cash Loss on Fixed AssetsTotal
Accrual balance as of January 1, 2020$ $ $ $ 
Restructuring charges1,785 282 1,214 3,281 
Utilized(1,735)(282)(1,214)(3,231)
Accrual balance as of September 30, 2020$50 $ $ $50 

(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.
10

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited

The Company’s maximum exposure to loss in its investments in unconsolidated VIEs is limited to its investment in the VIE, 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 EndedNine Months Ended
September 30,September 30,
2020201920202019
Interest and dividend income$1,251 $3,083 $5,331 $9,430 
Net gains (losses) recognized on investment securities2,516 (1,487)(4,943)5,601 
Net periodic benefit cost other than the service costs(452)(576)(1,361)(1,692)
Credit loss expense(8,576) (9,008) 
Other income165 1,203 1,865 1,105 
Other, net$(5,096)$2,223 $(8,116)$14,444 

(g)Other Assets:

Other assets consisted of:
September 30,
2020
December 31, 2019
Restricted assets$4,008 $5,241 
Prepaid pension costs32,467 31,686 
Equity-method investments16,240 15,942 
Contract assets, net26,083 18,443 
Other assets36,250 48,778 
Total other assets$115,048 $120,090 
11

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited

(h)Other Current Liabilities:
Other current liabilities consisted of:
September 30,
2020
December 31, 2019
Accounts payable$11,962 $10,222 
Accrued promotional expenses45,966 35,900 
Accrued excise and payroll taxes payable, net2,817 18,653 
Accrued interest33,159 35,756 
Commissions payable28,972 18,378 
Accrued salary and benefits19,059 29,464 
Contract liabilities9,725 9,358 
Allowance for sales returns7,857 7,785 
Other current liabilities34,511 23,801 
Total other current liabilities$194,028 $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:
September 30,
2020
December 31,
2019
Cash and cash equivalents
$451,071 $371,341 
Restricted cash and cash equivalents included in other current assets7,224 4,423 
Restricted cash and cash equivalents included in other assets2,461 3,712 
Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows
$460,756 $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.
(j)    New Accounting Pronouncements:

In March 2020, the Securities and Exchange Commission (“SEC”) adopted final rules that amend the financial disclosure requirement for guarantors of registered debt securities in Rule 3-10 of Regulation S-X. The new Rule 13-01 of Regulation S-X amends and streamlines the disclosures required by guarantors and issuers of guaranteed securities. Among other things, the new disclosures may be located outside the financial statements. The new rule is effective January 4, 2021, and early adoption is permitted. The Company elected to early adopt the new rule on September 30, 2020. Accordingly, the revised condensed consolidating financial information is presented in Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations.
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
12

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited

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”). 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 will adopt for the period
13

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(Dollars in Thousands, Except Per Share Amounts)
Unaudited

ending December 31, 2020. 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 impact of the new guidance 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 impact of the new guidance 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 EndedNine Months Ended
September 30,September 30,
2020201920202019
Tobacco Segment Revenues:
Core Discount Brands - Eagle 20’s, Pyramid, Montego, Grand Prix, Liggett Select, and Eve
$300,487 $283,621 $864,880 $798,272 
Other Brands18,363 19,639 53,549 56,245 
Total tobacco revenues
$318,850 $303,260 $918,429 $854,517 
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(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 September 30, 2020
New York CityNortheastSoutheastWestTotal
Real Estate Segment Revenues:
Commission and other brokerage income - existing home sales$43,039 $58,909 $43,883 $42,000 $187,831 
Commission and other brokerage income - development marketing4,571  5,564 534 10,669 
Property management revenue8,334 250   8,584 
Title fees358 554   912 
Total Douglas Elliman revenue56,302 59,713 49,447 42,534 207,996 
Other real estate revenues 20,500  485 20,985 
  Total real estate revenues$56,302 $80,213 $49,447 $43,019 $228,981 
Three months ended September 30, 2019
New York CityNortheastSoutheastWestTotal
Real Estate Segment Revenues:
Commission and other brokerage income - existing home sales$73,081 $47,066 $25,008 $27,770 $172,925 
Commission and other brokerage income - development marketing6,920  7,614 3,992 18,526 
Property management revenue8,484 184   8,668 
Title fees 1,049   1,049 
Total Douglas Elliman revenue88,485 48,299 32,622 31,762 201,168 
Other real estate revenues   362 362 
  Total real estate revenues$88,485 $48,299 $32,622 $32,124 $201,530 
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(Dollars in Thousands, Except Per Share Amounts)
Unaudited

Nine Months Ended September 30, 2020
New York CityNortheastSoutheastWestTotal
Real Estate Segment Revenues:
Commission and other brokerage income - existing home sales$129,009 $129,264 $97,293 $87,724 $443,290 
Commission and other brokerage income - development marketing18,195  15,033 1,202 34,430 
Property management revenue25,513 682   26,195 
Title fees1,425 1,186   2,611 
Total Douglas Elliman revenue174,142 131,132 112,326 88,926 506,526 
Other real estate revenues 20,500  2,624 23,124 
  Total real estate revenues$174,142 $151,632 $112,326 $91,550 $529,650 
Nine Months Ended September 30, 2019
New York CityNortheastSoutheastWestTotal
Real Estate Segment Revenues:
Commission and other brokerage income - existing home sales$243,061 $118,057 $79,303 $77,952 $518,373 
Commission and other brokerage income - development marketing41,024  10,680 4,021 55,725 
Property management revenue26,699 538   27,237 
Title fees 4,682   4,682 
Total Douglas Elliman revenue310,784 123,277 89,983 81,973 606,017 
Other real estate revenues   3,612 3,612 
  Total real estate revenues$310,784 $123,277 $89,983 $85,585 $609,629 

Contract Balances
The following table provides information about contract assets and contract liabilities from development marketing and commercial leasing contracts with customers:
September 30, 2020December 31, 2019
Receivables, which are included in accounts receivable - trade, net$2,194 $2,129 
Contract assets, net, which are included in other current assets5,965 8,766 
Payables, which are included in other current liabilities1,544 1,663 
Contract liabilities, which are included in other current liabilities9,725 9,358 
Contract assets, net, which are included in other assets26,083 18,443 
Contract liabilities, which are included in other liabilities28,304 29,045 

The Company recognized revenue of $1,451 and $8,109 for the three and nine months ended September 30, 2020, that were included in the contract liabilities balances at December 31, 2019. The Company recognized revenue of $4,722 and $9,753 for the three and nine months ended September 30, 2019, that were included in the contract liabilities balances at December 31, 2018.

16

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(Dollars in Thousands, Except Per Share Amounts)
Unaudited

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 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 September 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 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 $7,715 at September 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 $15,928 and $15,276, including accrued interest receivable of $6,428 and $5,776 at September 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 $12,108 as of September 30, 2020, which reflects the significant current and expected decline in market conditions as of September 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 nine months ended September 30, 2020:
January 1,
2020
Current Period ProvisionWrite-offsRecoveriesSeptember 30,
2020
Allowance for credit losses:
Real estate broker agent receivables
$6,132 $1,724 (1)$141 $ 7,715 
New Valley term loan receivables
3,100 9,008 (2)  12,108 
______________________
(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.

17

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(Dollars in Thousands, Except Per Share Amounts)
Unaudited

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 EndedNine Months Ended
September 30,September 30,
2020201920202019
Operating lease cost$9,475 $9,707 $28,255 $28,212 
Short-term lease cost
218 397 1,007 910 
Variable lease cost
663 715 1,818 2,405 
Finance lease cost:
Amortization
17 67 94 186 
Interest on lease liabilities
4 5 11 12 
Total lease cost
$10,377 $10,891 $31,185 $31,725 

Supplemental cash flow information related to leases was as follows:
Nine Months Ended
September 30,
20202019
Cash paid for amounts included in measurement of lease liabilities:
Operating cash flows from operating leases
$19,376 $28,023 
Operating cash flows from finance leases
11 12 
Financing cash flows from finance leases
86 182 
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
13,711 32,511 
Finance leases
60 159 



18

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(Dollars in Thousands, Except Per Share Amounts)
Unaudited

Supplemental balance sheet information related to leases was as follows:
September 30,December 31,
20202019
Operating leases:
Operating lease right-of-use assets
$147,959 $149,578 
Current operating lease liability
$22,485 $18,294 
Non-current operating lease liability
159,200 156,963 
Total operating lease liabilities
$181,685 $175,257 
Finance leases:
Investments in real estate, net (1)
$73 $88 
Property, plant and equipment, at cost
$127 $127 
Accumulated amortization
(38)(19)
Property and equipment, net
$89 $108 
Current portion of notes payable and long-term debt
$59 $86 
Notes payable, long-term debt and other obligations, less current portion
110 108 
Total finance lease liabilities
$169 $194 
Weighted average remaining lease term:
Operating leases
8.098.46
Finance leases
2.903.01
Weighted average discount rate:
Operating leases
9.28 %10.75 %
Finance leases
7.75 %8.61 %
(1)     Included in Investments in real estate, net on the condensed consolidated balance sheets are financing lease equipment, at cost of $748 and $762 and accumulated amortization of $675 and $674 as of September 30, 2020 and December 31, 2019, respectively.

As of September 30, 2020, maturities of lease liabilities were as follows:
Operating LeasesFinance
Leases
Period Ending December 31:  
Remainder of 2020$6,496 $19 
202141,353 66 
202236,892 61 
202332,417 35 
202426,749 8 
202521,797  
Thereafter96,556  
Total lease payments262,260 189 
 Less imputed interest
(80,575)(20)
Total$181,685 $169 
19

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(Dollars in Thousands, Except Per Share Amounts)
Unaudited

As of September 30, 2020, the Company had $23 in undiscounted lease payments relating to an additional operating lease for equipment that has not yet commenced. The operating lease will commence in the fourth quarter of 2020 with a lease term of 3 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.
As a result of the COVID-19 pandemic, the Company received lease concessions from landlords mostly in the form of rent deferrals and a few in the form of rent abatements during the nine months ended September 30, 2020. The Company elected to treat these deferrals and abatements as lease modifications and the existing lease liabilities were remeasured with a corresponding adjustment to the right-of-use asset on the effective date of the modification. The deferrals varied as to the timing of repayment but all agreements required repayment of the deferrals over the remaining lease terms.

5.    INVENTORIES

Inventories consisted of:
September 30,
2020
December 31,
2019
Leaf tobacco$42,448 $44,516 
Other raw materials5,733 4,669 
Work-in-process645 333 
Finished goods67,211 71,183 
Inventories at current cost116,037 120,701 
LIFO adjustments(21,489)(21,939)
$94,548 $98,762 

All of the Company’s inventories at September 30, 2020 and December 31, 2019 are reported under the LIFO method. The $21,489 LIFO adjustment as of September 30, 2020 decreased the current cost of inventories by $14,761 for Leaf tobacco, $180 for Other raw materials, $24 for Work-in-process and $6,524 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 $20,969 and $20,472 at September 30, 2020 and December 31, 2019, respectively. Federal excise tax capitalized in inventory was $27,648 and $27,676 at September 30, 2020 and December 31, 2019, respectively.
At September 30, 2020, Liggett had tobacco purchase commitments of approximately $17,483. Liggett has a single-source supply agreement for reduced ignition propensity cigarette paper through 2022.


20

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(Dollars in Thousands, Except Per Share Amounts)
Unaudited

6.    INVESTMENT SECURITIES

Investment securities consisted of the following:
September 30,
2020
December 31, 2019
Debt securities available for sale$89,239 $83,445 
Equity securities at fair value:
Marketable equity securities11,897 23,819 
Mutual funds invested in debt securities22,956 22,377 
Long-term investment securities at fair value (1)
31,619 45,781 
          Total equity securities at fair value66,472 91,977 
Total investment securities at fair value155,711 175,422 
Less:
Long-term investment securities at fair value
31,619 45,781 
Current investment securities at fair value124,092 129,641 
Equity-method investments$16,240 $15,942 
(1) These assets are measured at net asset value (“NAV”) as a practical expedient under ASC 820.

Net gains (losses) recognized on investment securities were as follows:
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
Net gains (losses) recognized on equity securities$2,516 $(1,506)$(4,510)$5,545 
Net gains (losses) recognized on debt securities available for sale22 25 (25)67 
Impairment expense(22)(6)(408)(11)
Net gains (losses) recognized on investment securities$2,516 $(1,487)$(4,943)$5,601 
(a) Debt Securities Available for Sale:
The components of debt securities available for sale at September 30, 2020 were as follows:
CostGross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Marketable debt securities$88,336 $903 $ $89,239 


21

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(Dollars in Thousands, Except Per Share Amounts)
Unaudited

The table below summarizes the maturity dates of debt securities available for sale at September 30, 2020.
Investment Type:Fair ValueUnder 1 Year1 Year up to 5 YearsMore than 5 Years
U.S. Government securities$11,412 $9,068 $2,344 $ 
Corporate securities58,481 28,863 29,618  
U.S. mortgage-backed securities5,759 114 5,645  
Commercial paper13,587 13,587   
Total debt securities available for sale by maturity dates
$89,239 $51,632 $37,607 $ 

The components of debt securities available for sale at December 31, 2019 were as follows:
CostGross
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 September 30, 2020 and December 31, 2019, respectively.

Gross realized gains and losses on debt securities available for sale were as follows:
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
Gross realized gains on sales$23 $27 $193 $74 
Gross realized losses on sales(1)(2)(218)(7)
Net gains (losses) recognized on debt securities available for sale$22 $25 $(25)$67 
Impairment expense$(22)$(6)$(408)$(11)

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 nine months ended September 30, 2020 and 2019, respectively:
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
Net gains (losses) recognized on equity securities$2,516 $(1,506)$(4,510)$5,545 
Less: Net (losses) gains recognized on equity securities sold(2)58 (19)468 
Net unrealized gains (losses) recognized on equity securities still held at the reporting date$2,518 $(1,564)$(4,491)$5,077 

22

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(Dollars in Thousands, Except Per Share Amounts)
Unaudited

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 $30,358 and recognized a receivable of $2,438 of in-transit redemptions as of September 30, 2020 related to its long-term investment securities at fair value. The Company classified $30,255 of these distributions as investing cash inflows for the nine months ended September 30, 2020. The remaining distributions were classified as operating cash inflows.

(c) Equity-Method Investments:

Equity-method investments consisted of the following:
 September 30,
2020
December 31, 2019
Mutual fund and hedge funds$16,240 $15,509 
Ladenburg Thalmann Financial Services Inc. (“LTS”) 433 
$16,240 $15,942 

At September 30, 2020, the Company’s ownership percentages in the mutual fund and hedge funds accounted for under the equity method ranged from 6.24% to 36.70%. 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 EndedNine Months Ended
September 30,September 30,
2020201920202019
Mutual fund and hedge funds$1,468 $(632)$775 $(20)
LTS372 139 53,424 (846)
Other 25  75 
Equity in earnings (losses) from investments$1,840 $(468)$54,199 $(791)

The Company received cash distributions of $53,528 (including the $53,169 received by the Company in exchange for the Company’s 15,191,205 common shares of LTS) and $1,495 from the Company’s equity-method investments for the nine months ended September 30, 2020 and 2019, respectively. The Company classified these cash distributions as operating activities on the condensed consolidated statements of cash flows for the nine months ended September 30, 2020 and September 30, 2019, respectively.

23

VECTOR GROUP LTD.
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(Dollars in Thousands, Except Per Share Amounts)
Unaudited

(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 various limited liability companies at September 30, 2020 and December 31, 2019, respectively. The total carrying value of these investments was $5,200 as of September 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 nine months ended September 30, 2020 and 2019, respectively.

    7.    NEW VALLEY LLC

Investments in real estate ventures:

The components of “Investments in real estate ventures” were as follows:
Range of Ownership (1)
September 30, 2020December 31, 2019
Condominium and Mixed Use Development:
            New York City Standard Metropolitan Statistical Area (“SMSA”)
3.1% - 49.5%
$36,252 $51,078 
            All other U.S. areas
15.0% - 77.8%
41,403 55,842 
77,655 106,920 
Hotels:
            New York City SMSA
1.0% - 18.4%
2,892 2,462 
            International49.0%1,767 2,161 
4,659 4,623 
Commercial:
            New York City SMSA49.0%2,271 1,852 
            All other U.S. areas1.6%6,987 7,634 
9,258 9,486 
Other:
15.0% - 49.0%
10,886 10,527 
Investments in real estate ventures$102,458 $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.

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(Dollars in Thousands, Except Per Share Amounts)
Unaudited

Contributions:

The components of New Valley’s contributions to its investments in real estate ventures were as follows:
Nine Months Ended
September 30,
20202019
Condominium and Mixed Use Development:
            New York City SMSA$1,169 $21,760 
            All other U.S. areas4,176 14,000 
5,345 35,760 
Apartment Buildings:
            All other U.S. areas76  
76  
Hotels:
            New York City SMSA294 172 
294 172 
Other:524 337 
Total contributions$6,239 $36,269 

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 nine months ended September 30, 2020 and September 30, 2019. New Valley’s direct investment percentage for these ventures did not significantly change. 

Distributions:

The components of distributions received by New Valley from its investments in real estate ventures were as follows:
Nine Months Ended
September 30,
20202019
Condominium and Mixed Use Development:
            New York City SMSA$1,735 $3,380 
            All other U.S. areas11,060 1,279 
12,795 4,659 
Apartment Buildings:
            All other U.S. areas 79 
 79 
Hotels:
            New York City SMSA 21,572 
 21,572 
Commercial:
            New York City SMSA591 13 
            All other U.S. areas113 160 
704 173 
Other26 8,088 
Total distributions$13,525 $34,571 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited

Of the distributions received by New Valley from its investment in real estate ventures, $1,919 and $3,637 were from distributions of earnings for the nine months ended September 30, 2020 and 2019, respectively, and $11,606 and $30,934 were a return of capital for the nine months ended September 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.

Equity in (Losses) Earnings from Real Estate Ventures:

New Valley recognized equity in (losses) earnings from real estate ventures as follows:
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
Condominium and Mixed Use Development:
            New York City SMSA$(6,835)$2,099 $(15,286)$(1,127)
            All other U.S. areas (1)
(618)4,600 (9,906)2,234 
(7,453)6,699 (25,192)1,107 
Apartment Buildings:
            All other U.S. areas (1)
(208)76 (284)79 
(208)76 (284)79 
Hotels:
            New York City SMSA (1)
(1,119)(102)(1,768)8,132 
            International157 434 (394)70 
(962)332 (2,162)8,202 
Commercial:
            New York City SMSA783 (149)1,010 114 
            All other U.S. areas(519)146 (534)517 
264 (3)476 631 
Other:(177)946 (139)1,983 
Equity in (losses) earnings from real estate ventures$(8,536)$8,050 $(27,301)$12,002 
______________________
(1) The Company recognized a liability, classified in Other current liabilities, of $1,302 as a result of recording equity in losses in excess of the joint ventures' carrying value.

During the nine months ended September 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 nine months ended September 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 three of its New York City SMSA Condominium and Mixed Use Development ventures were less than their carrying value as of September 30, 2020. The Company determined that the impairments were other than temporary. The Company recorded impairment charges as a component of equity in losses from real estate ventures of $6,617 and $10,401 for the three and nine months ended September 30, 2020.

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(Dollars in Thousands, Except Per Share Amounts)
Unaudited

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 values 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 September 30, 2019. The Company determined that the impairmentw were other than temporary. The Company recorded impairment charges as a component of equity in earnings from real estate ventures of $4,445 and $8,311 for the three and nine months ended September 30, 2019.

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 September 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 September 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:
September 30, 2020
Condominium and Mixed Use Development:
            New York City SMSA$36,252 
            All other U.S. areas41,403 
77,655 
Hotels:
            New York City SMSA2,892 
            International1,767 
4,659 
Commercial:
            New York City SMSA2,271 
            All other U.S. areas6,987 
9,258 
Other24,461 
Total maximum exposure to loss$116,033 

New Valley capitalized $932 and $3,188 of interest costs into the carrying value of its ventures whose projects were currently under development for the three and nine months ended September 30, 2020. New Valley capitalized $1,703 and $4,706 of interest costs into the carrying value of its ventures whose projects were currently under development for the three and nine months ended September 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 $8,829 and $15,394 from these projects for the nine months ended September 30, 2020 and 2019, respectively.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited

Investments in Real Estate, net:

The components of “Investments in real estate, net” were as follows:
September 30,
2020
December 31,
2019
Escena, net$9,786 $9,972 
Sagaponack 18,345 
            Investments in real estate, net$9,786 $28,317 

Escena.  The assets of “Escena, net” were as follows:
September 30,
2020
December 31,
2019
Land and land improvements$8,911 $8,910 
Building and building improvements1,926 1,926 
Other1,670 1,659 
 12,507 12,495 
Less accumulated depreciation(2,721)(2,523)
 $9,786 $9,972 

New Valley recorded operating losses of $738 and $965 for the three months ended September 30, 2020 and 2019, respectively, from Escena. New Valley recorded operating losses of $1,010 and $633 for the nine months ended September 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. In August 2020, New Valley sold the project for $20,500 and recognized the revenue in accordance with the scope of ASC Topic 606 since New Valley has no continuing investment or involvement. The sales were presented as revenues and the cost of the investment as cost of goods sold on the condensed consolidated statements of operations.

28

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:
September 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 $3,132 and $3,392
551,868 551,608 
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
94 347 
Other26,773 30,146 
Notes payable, long-term debt and other obligations1,428,735 1,631,387 
Less:
Debt issuance costs
(22,087)(24,902)
Total notes payable, long-term debt and other obligations1,406,648 1,606,485 
Less:
Current maturities(10,684)(209,269)
Amount due after one year$1,395,964 $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 September 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 September 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 September 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 September 30, 2020. Availability, as determined under the Credit Agreement, was approximately $58,800 based on eligible collateral at September 30, 2020. As of September 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 $26,300 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
29

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(Dollars in Thousands, Except Per Share Amounts)
Unaudited

through October 1, 2022. $3,750 of principal has been repaid through September 30, 2020 and the remaining principal is due to be repaid as follows: (1) $1,250 in the remainder of 2020; (2) $12,500 in 2021; and (3) $12,500 in 2022.
Non-Cash Interest Expense — Vector:
Three Months EndedNine Months Ended
September 30,September 30,
2020201920202019
Amortization of debt discount, net$89 $5,746 $5,536 $19,718 
Amortization of debt issuance costs847 1,089 2,894 3,327 
$936 $6,835 $8,430 $23,045 

Fair Value of Notes Payable and Long-Term Debt:
September 30, 2020December 31, 2019
CarryingFairCarryingFair
ValueValueValueValue
Senior Notes$1,401,868 $1,419,309 $1,401,608 $1,409,920 
Variable Interest Senior Convertible Debt  164,334 176,289 
Liggett and other26,867 26,878 65,445 65,456 
Notes payable and long-term debt$1,428,735 $1,446,187 $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 sheets 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 September 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.


30

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 nine months ended September 30, 2020 and 2019, Liggett incurred tobacco product liability legal expenses and costs totaling $4,684 and $5,627, 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 September 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
31

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(Dollars in Thousands, Except Per Share Amounts)
Unaudited

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 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 September 30, 2020, there were 70 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. The following table lists the number of Individual Actions by state:
StateNumber
of Cases
Florida39
Illinois11
Nevada7
New Mexico5
Virgin Islands5
Louisiana2
Massachusetts1

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 September 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
32

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited

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 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.
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 September 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 September 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.
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(Dollars in Thousands, Except Per Share Amounts)
Unaudited

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.
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 September 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 September 30, 2020, there were three Individual Actions (Gordon, Baron and Feld) and one Engle progeny case (Blocker) scheduled for trial through September 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”)
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(Dollars in Thousands, Except Per Share Amounts)
Unaudited

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 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.
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(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 for 2003 - 2022. The 2004 NPM Adjustment arbitration commenced in 2016, with the final individual state hearings likely to occur in April 2021 and a second phase addressing the effect of the settlements to start thereafter. The parties have also selected an arbitration panel to address the NPM Adjustments for 2005-2007 and initial proceedings in that arbitration are likely to commence in 2021. A separate court proceeding regarding Montana remains pending.
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 and by $3,899 for the three and nine months ended September 30, 2020. Liggett and Vector Tobacco may be entitled to further adjustments. As of September 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 September 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.
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(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 nine months ended September 30, 2020 was as follows:
Current LiabilitiesNon-Current Liabilities
Payments due under Master Settlement AgreementLitigation AccrualsTotalPayments due under Master Settlement AgreementLitigation AccrualsTotal
Balance as of January 1, 2020$34,116 $4,249 $38,365 $17,275 $20,594 $37,869 
Expenses
139,393 28 139,421    
Change in MSA obligations capitalized as inventory
32  32 — — — 
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
 330 330  1,422 1,422 
Balance as of September 30, 2020$145,472 $3,535 $149,007 $18,130 $18,764 $36,894 
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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 nine months ended September 30, 2019 were as follows:
Current LiabilitiesNon-Current Liabilities
Payments due under Master Settlement AgreementLitigation AccrualsTotalPayments due under Master Settlement AgreementLitigation AccrualsTotal
Balance as of January 1, 2019$36,561 $310 $36,871 $16,383 $21,794 $38,177 
Expenses
125,911 895 126,806    
Change in MSA obligations capitalized as inventory
2,756  2,756 — — — 
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
 187 187  1,600 1,600 
Balance as of September 30, 2019$132,377 $4,375 $136,752 $17,275 $20,056 $37,331 

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 impact 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.
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(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 LossesAmortizationSeptember 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, net474  (123)351 
  Total goodwill and other intangible assets, net$265,993 $(58,252)$(123)$207,618 

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 $46,252 and to the trademark intangible asset of $12,000. 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.

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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 EndedNine Months Ended
September 30,September 30,
2020201920202019
Income before provision for income taxes$55,962 $49,744 $88,443 $128,292 
Income tax expense using estimated annual effective income tax rate
16,784 14,844 26,497 38,378 
Changes in effective tax rates66 (785)  
Impact of discrete items, net973 (323)1,264 (434)
Income tax expense$17,823 $13,736 $27,761 $37,944 

The discrete items for the three months ended September 30, 2020 relate to income tax expense related to changes in value of certain contingent consideration and stock-based compensation. The discrete items for the nine months ended September 30, 2020 relate to income tax expense related to the equity in earnings from investments associated with the one-time gain on sale of LTS partially offset by the goodwill and trademark impairment charges, changes in value of certain contingent consideration, and stock-based compensation. The discrete items for the three and nine months ended September 30, 2019 are related to the release of certain valuation allowances offset by income tax expense related to state tax audits and 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.
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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 September 30, 2020
DescriptionTotalQuoted 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)
$373,030 $373,030 $ $ 
Commercial paper (1)
39,884  39,884  
Certificates of deposit (2)
2,108  2,108  
Money market funds securing legal bonds (2)
535 535   
Investment securities at fair value
   Equity securities at fair value
   Marketable equity securities
11,897 11,897   
   Mutual funds invested in debt securities
22,956 22,956   
         Total equity securities at fair value
34,853 34,853   
    Debt securities available for sale
U.S. government securities
11,412  11,412  
Corporate securities
58,481  58,481  
U.S. government and federal agency
5,759  5,759  
Commercial paper
13,587 — 13,587 — 
Total debt securities available for sale
89,239  89,239  
Total investment securities at fair value
124,092 34,853 89,239  
Long-term investments
Long-term investment securities at fair value (3)
31,619    
Total$571,268 $408,418 $131,231 $ 
Liabilities:
Fair value of contingent liability$1,064 $ $ $1,064 
Total$1,064 $ $ $1,064 

(1)     Amounts included in Cash and cash equivalents on the condensed consolidated balance sheet, except for $7,224 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 sheets.
(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.
41

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
DescriptionTotalQuoted 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 debt4,999   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 sheets.
(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
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VECTOR GROUP LTD.
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(Dollars in Thousands, Except Per Share Amounts)
Unaudited

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.
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 September 30, 2020:
Quantitative Information about Level 3 Fair Value Measurements
Fair Value at
September 30,
2020
Valuation TechniqueUnobservable InputRange (Actual)
Fair value of contingent liability$1,064 Monte Carlo simulation modelEstimated fair value of the Douglas Elliman reporting unit$169,000 
Risk-free rate for a 2.50 year term
0.14 %
Leverage-adjusted equity volatility of peer firms70.78 %
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 TechniqueUnobservable InputRange (Actual)
Fair value of derivatives embedded within convertible debt$4,999 Discounted cash flowAssumed annual stock dividend5 %
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 %
Volatility36.94 %
Risk-free rateTerm structure of US Treasury Securities
Implied credit spread
1.0% - 3.0% (2.0%)
Fair value of contingent liability$3,147 Monte Carlo simulation modelEstimated 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 firms35.56 %

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 September 30, 2020 and December 31, 2019, respectively, except for investments in real estate ventures that were impaired as of September 30, 2020 and December 31, 2019.
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VECTOR GROUP LTD.
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(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 September 30, 2020Quoted Prices in Active Markets for Identical Assets
(Level 1)

Significant Other Observable Inputs
(Level 2)


Significant Unobservable Inputs
(Level 3)
DescriptionImpairment ChargeTotal
Assets:
Investments in real estate ventures
$6,617 $6,901 $ $ $6,901 

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 $6,617 of impairment charges were included in equity in losses from real estate ventures for the three months September 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)
DescriptionImpairment ChargeTotal
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.


44

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

(Dollars in Thousands, Except Per Share Amounts)
Unaudited

13.    SEGMENT INFORMATION

The Company’s business segments for the three and nine months ended September 30, 2020 and 2019 were Tobacco and Real Estate. The accounting policies of the segments are the same as those described in the summary of significant accounting policies.

Financial information for the Company’s operations before taxes and non-controlling interests for the three and nine months ended September 30, 2020 and 2019 were as follows:
RealCorporate
TobaccoEstateand OtherTotal
Three months ended September 30, 2020
Revenues$318,850 $228,981 $ $547,831 
Operating income (loss)91,319 (1)10,850 (2)(6,252)95,917 
Equity in losses from real estate ventures (8,536) (8,536)
Depreciation and amortization1,965 2,167 214 4,346 
Three months ended September 30, 2019
Revenues$303,260 $201,530 $ $504,790 
Operating income (loss)72,799 (3)628 (6,707)66,720 
Equity in earnings from real estate ventures 8,050  8,050 
Depreciation and amortization1,941 2,240 249 4,430 
Nine months ended September 30, 2020
Revenues$918,429 $529,650 $ $1,448,079 
Operating income (loss)239,814 (4)(63,500)(5)(18,504)157,810 
Equity in losses from real estate ventures (27,301) (27,301)
Depreciation and amortization6,007 6,678 648 13,333 
Capital expenditures3,644 5,160 20 8,824 
Nine months ended September 30, 2019
Revenues$854,517 $609,629 $ $1,464,146 
Operating income (loss)201,594 (6)4,672 (20,712)185,554 
Equity in earnings from real estate ventures 12,002  12,002 
Depreciation and amortization5,848 6,765 749 13,362 
Capital expenditures3,425 6,733  10,158 
(1) Operating income includes $286 of expense from MSA settlement.
(2) Operating income includes $320 of restructuring charges.
(3) Operating income includes $240 of litigation settlement and judgment expense.
(4) Operating income includes $286 of expense from MSA settlement and $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 $3,281 of restructuring charges.
(6) Operating income includes $895 of litigation settlement and judgment expense.

45


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 nine months ended September 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 services, technology and investment 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 services, technologies, 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 and Montego brands are priced in the deep discount category and our other brands are primarily priced in the traditional discount category.

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Impact of COVID-19 on Real Estate Segment.  Douglas Elliman is the largest residential real estate broker in the New York City market and approximately 46% 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 $41,415 at September 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 nine months ended September 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 September 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 declines in New York City may continue during this pandemic.

Beginning in April 2020, we made significant operating adjustments at Douglas Elliman, including a reduction of personnel 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, as Douglas Elliman’s business began to improve in the third quarter, we began to relinquish, as appropriate, some of the second quarter expense reductions, including advertising and personnel expenses. We will continue to evaluate these expense reduction measures.

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 $53,424 from the transaction. 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.

Montego. In August 2020, Liggett expanded the distribution of its Montego deep discount brand by 10 states, primarily located in the southeast. Prior to August 2020, Montego was sold in select targeted markets in four states. Montego’s volume represented 5.6% of Liggett’s unit volume for the nine months ended September 30, 2020 compared to 3.6% for the nine months ended September 30, 2019.

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.
See “Legislation and Regulation” in Item 2 of the MD&A for further information on litigation.


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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.

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. As discussed in Note 10 to our condensed consolidated financial statements, 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 recognized a $58,252 non-cash impairment charge related to the valuation of Douglas Elliman’s goodwill and its trademarks for the nine months ended September 30, 2020. If Douglas Elliman fails to meet the financial projections used in the quantitative assessments or the impacts of COVID-19 are more severe than expected, we may record additional impairment charges related to the Company’s goodwill and trademark intangible assets. To date, Douglas Elliman has met the financial projections used in the quantitative assessments.


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 nine months ended September 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 EndedNine Months Ended
September 30,September 30,
2020201920202019
Revenues:
Tobacco$318,850 $303,260 $918,429 $854,517 
Real estate228,981 201,530 529,650 609,629 
Total revenues
$547,831 $504,790 $1,448,079 $1,464,146 
Operating income (loss):
Tobacco$91,319 (1)$72,799 (3)$239,814 (4)$201,594 (6)
Real estate10,850 (2)628 (63,500)(5)4,672 
Corporate and Other(6,252)(6,707)(18,504)(20,712)
Total operating income
$95,917 $66,720 $157,810 $185,554 
(1) Operating income includes $286 of expense from MSA settlement.
(2) Operating income includes $320 of restructuring charges.
(3) Operating income includes $240 of litigation settlement and judgment expense.
(4) Operating income includes $286 of expense from MSA settlement and $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 $3,281 of restructuring charges.
(6) Operating income includes $895 of litigation settlement and judgment expense.
48



Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
Revenues. Total revenues were $547,831 for the three months ended September 30, 2020 compared to $504,790 for the three months ended September 30, 2019. The $43,041 (8.5%) increase in revenues was primarily due to a $15,590 increase in Tobacco revenues and a $27,451 increase in Real Estate revenues, which was primarily related to the sale of the Sagaponack property.
Cost of sales. Total cost of sales was $374,575 for the three months ended September 30, 2020 compared to $345,456 for the three months ended September 30, 2019. The $29,119 (8.4%) increase in cost of sales was primarily due to a $34,210 increase in Real Estate cost of sales, which was primarily related to the sale of Sagaponack property. This was offset by a $5,091 decline in Tobacco cost of sales.
Expenses. Operating expenses were $77,339 for the three months ended September 30, 2020 compared to $92,614 for the same period last year. The $15,275 (16.5%) decline in operating expenses was due to a $16,981 decline in Real Estate expenses, primarily at Douglas Elliman, including restructuring charges of $320 for the three months ended September 30, 2020 and a $455 decline in Corporate and Other expenses. This was offset by a $2,161 increase in Tobacco expenses.
Operating income. Operating income was $95,917 for the three months ended September 30, 2020 compared to $66,720 for the same period last year. The $29,197 (43.8%) increase in operating income was due to a $18,520 increase in Tobacco operating income, a $10,222 increase in Real Estate operating income, primarily related to Douglas Elliman, and a decline of $455 in Corporate and Other operating loss.
Other expenses. Other expenses were $39,955 and $16,976 for the three months ended September 30, 2020 and 2019, respectively. For the three months ended September 30, 2020, other expenses primarily consisted of interest expense of $28,163, equity in losses from real estate ventures of $8,536 and other expense of $5,096. This was offset by equity in earnings from investments of $1,840. For the three months ended September 30, 2019, other expenses primarily consisted of interest expense of $32,963 and equity in losses from investments of $468. This was offset by income of $6,182 from changes in fair value of derivatives embedded within convertible debt, equity in earnings from real estate ventures of $8,050, and other income of $2,223.
Income before provision for income taxes. Income before income taxes was $55,962 and $49,744 for the three months ended September 30, 2020 and 2019, respectively.
Income tax expense. Income tax expense was $17,823 and $13,736 for the three months ended September 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 September 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 $973 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 $0.13 per pack on November 2, 2020, $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, Eve and Grand Prix by $0.13 per pack on November 2, 2020, $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 September 30, 2020, Tobacco revenues were $318,850 compared to $303,260 for the three months ended September 30, 2019. Revenues increased by $15,590 (5.1%) due primarily to an increase in the average selling price of our brands for the three months ended September 30, 2020 offset by a 2.1% (52.0 million units) decline in sales volume.
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Tobacco cost of sales. The major components of our Tobacco cost of sales were as follows:
Three Months Ended
September 30,
20202019
Manufacturing overhead, raw materials and labor$32,644 $32,863 
Customer shipping and handling1,590 1,446 
Federal Excise Taxes, net120,320 122,951 
FDA expense6,369 6,149 
MSA expense, net of market share exemption43,178 (1)45,783 
Total cost of sales
$204,101 $209,192 
(1) Includes $286 of expense from MSA settlements.

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 September 30, 2020, we estimate taxable shipments in the U.S. will decline by 1.5% in 2020. As a result of the relatively strong U.S. cigarette industry in 2020, the value of Liggett’s market share exemption increased compared to the three months ended September 30, 2019 and resulted in a decrease in cost of sales of $959.
Tobacco gross profit was $114,749 for the three months ended September 30, 2020 compared to $94,068 for the three months ended September 30, 2019. The increase in gross profit for the three months ended September 30, 2020 is primarily attributable to increased pricing associated with the Eagle 20’s and Pyramid brands. For the three months ended September 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 60% in the three months ended September 30, 2019 to 62% for the three months ended September 30, 2020. Pyramid, Liggett’s second-largest brand, declined from 26% of total unit volume sales in the three months ended September 30, 2019 to 23% for the three months ended September 30, 2020. As a percentage of revenue (excluding Federal Excise Taxes), Tobacco gross profit increased from 52.2% in the 2019 period to 57.8% in the 2020 period primarily as a result of price increases and lower MSA expense, partially offset by a continued shift in sales volume to the lower-priced Eagle 20’s brand.
Tobacco expenses. Tobacco operating, selling, general and administrative expenses, excluding settlements and judgments, were $23,430 and $21,029 for the three months ended September 30, 2020 and 2019, respectively. The increase of $2,401 is primarily due to higher professional fees. Total tobacco product liability legal expenses, including settlements and judgments, were $1,493 and $1,890 for the three months ended September 30, 2020 and 2019, respectively.
Tobacco operating income. Tobacco operating income was $91,319 for the three months ended September 30, 2020 compared to $72,799 for the same period last year. The increase in operating income for the three months ended September 30, 2020 of $18,520 is primarily attributable to higher gross profit, as discussed above, partially offset by increased operating, selling, general and administrative expenses.
Real Estate.
Real Estate revenues. Real Estate revenues were $228,981 and $201,530 for the three months ended September 30, 2020 and 2019, respectively. Real Estate revenues increased by $27,451 (13.6%), primarily related to the $20,500 sale of an investment in real estate located in Sagaponack, NY, and an increase of $7,049 in Douglas Elliman’s commission and other brokerage income. Douglas Elliman’s commission and other brokerage income increased as a result of increased revenues in the Southeast region of $18,875, Northeast region, which does not include New York City, of $11,843 and California region of $14,230 and was offset by a $30,042 decline in the New York City region and a $7,857 decline in Development Marketing.
The COVID-19 pandemic has had a significant effect on the economy and, especially, in the New York City market, where approximately 46% 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 markets where Douglas Elliman operates instituted restrictions on individuals and on the types of businesses that were permitted to operate from March 2020 to June 2020, which adversely impacted Douglas Elliman’s business.
50


Real Estate revenues and cost of sales for the three months ended September 30, 2020 and 2019 were as follows:
Three Months Ended
September 30,
20202019
Real Estate Revenues:
Commission and other brokerage income$198,500 $191,451 
Property management revenue8,584 8,668 
Title fees912 1,049 
Revenues from investments in real estate20,500 — 
Sales on facilities primarily from Escena485 362 
  Total real estate revenues$228,981 $201,530 
Real Estate Cost of Sales:
Real estate commissions$149,010 $135,241 
Cost of sales from investments in real estate20,488 — 
Cost of sales on facilities primarily from Escena840 868 
Title fees136 155 
  Total real estate cost of sales$170,474 $136,264 
___________________________________
Real Estate cost of sales. Real Estate cost of sales were $170,474 and $136,264 for the three months ended September 30, 2020 and 2019, respectively. Real Estate cost of sales increased by $34,210, primarily related to $20,488 from the sale of an investment in real estate located in Sagaponack, NY, and a $13,769 increase in Douglas Elliman’s commissions. Douglas Elliman real estate commissions increased by $13,769 for the three months ended September 30, 2020 as a result of an increase in sales volume.
Douglas Elliman’s gross margin on real estate brokerage income declined from 29.4% for the three months ended September 30, 2019 to 24.9% for the three months ended September 30, 2020. This was primarily due to the decline in the percentage of revenues from the New York City region, which traditionally earns higher gross margin percentages than the Southeast (Florida) and Western (primarily California) regions.
Real Estate expenses. Real Estate expenses, which are primarily expenses at Douglas Elliman, were $47,657 and $64,638 for the three months ended September 30, 2020 and 2019, respectively. For the three months ended September 30, 2020, Real Estate expenses included restructuring charges of $320. 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 addition to personnel expenses, Douglas Elliman’s professional services, advertising, travel and other occupancy expenses were reduced during the three months ended September 30, 2020. While we continue to evaluate other expense reduction measures, to the extent Douglas Elliman’s business improves in the fourth quarter, we will begin to relinquish, as appropriate, some of the second quarter expense reductions, including advertising and personnel expenses.
Real Estate operating income. The Real Estate segment had operating income of $10,850 and $628 for the three months ended September 30, 2020 and 2019, respectively. The increase in operating income of $10,222 was primarily related to increased operating income at Douglas Elliman, which was primarily related to expense reductions offset by lower gross margin percentages.
Corporate and Other.
Corporate and Other operating loss. The operating loss at the Corporate and Other segment was $6,252 for the three months ended September 30, 2020 compared to $6,707 for the same period in 2019 and the difference was due primarily to decreased administrative costs related to professional fees and travel expenses.

51


Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
Revenues. Total revenues were $1,448,079 for the nine months ended September 30, 2020 compared to $1,464,146 for the nine months ended September 30, 2019. The $16,067 (1.1%) decline in revenues was primarily due to a $79,979 decline in Real Estate revenues, which was primarily related to a decrease in Douglas Elliman’s brokerage revenues. This was offset by a $63,912 increase in Tobacco revenues related to an increase in both unit volume and net pricing.
Cost of sales. Total cost of sales was $990,083 for the nine months ended September 30, 2020 compared to $999,650 for the nine months ended September 30, 2019. The $9,567 (1.0%) decline in cost of sales was primarily due to a $34,069 decline in Real Estate cost of sales, which was primarily related to increases Douglas Elliman’s commissions. This was offset by a $24,502 increase in Tobacco cost of sales primarily related to increased sales volume and higher MSA expense.
Expenses. Operating expenses were $300,186 for the nine months ended September 30, 2020 compared to $278,942 for the same period last year. The $21,244 (7.6%) increase was due to a $22,262 increase in Real Estate expenses, including impairment of goodwill and intangible asset charge at Douglas Elliman of $58,252 and restructuring charges of $3,281, and a $1,190 increase in Tobacco expenses for the nine months ended September 30, 2020. This was offset by a $2,208 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 $157,810 for the nine months ended September 30, 2020 compared to $185,554 for the same period last year, a decline of $27,744 (15.0%). Real Estate operating income declined $68,172 primarily related to the impairments of goodwill and intangible assets of $58,252 at Douglas Elliman and restructuring charges of $3,281. This was offset by an increase in Tobacco operating income of $38,220 and the Corporate and Other operating loss declined $2,208.
Other expenses. Other expenses were $69,367 for the nine months ended September 30, 2020 compared to $57,262 for the nine months ended September 30, 2019. For the nine months ended September 30, 2020, other expenses primarily consisted of interest expense of $93,148, equity in losses from real estate ventures of $27,301 and other losses of $8,116. This was offset by equity in earnings from investments of $54,199, and income of $4,999 from changes in fair value of derivatives embedded within convertible debt. For the nine months ended September 30, 2019, other expenses primarily consisted of interest expense of $103,236 and equity in losses from investments of $791. This was offset by income of $20,319 from changes in fair value of derivatives embedded within convertible debt, other income of $14,444 and equity in earnings from real estate ventures of $12,002.
Income before provision for income taxes. Income before income taxes was $88,443 for the nine months ended September 30, 2020 compared to $128,292 for the nine months ended September 30, 2019.
Income tax expense. Income tax expense was $27,761 for the nine months ended September 30, 2020 compared to $37,944 for the nine months ended September 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 nine months ended September 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, stock-based compensation, and state tax audits 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 nine months ended September 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 $0.13 per pack on November 2, 2020, $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 $0.13 per pack on November 2, 2020, $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 nine months ended September 30, 2020, Tobacco revenues were $918,429 compared to $854,517 for the nine months ended September 30, 2019. Revenues increased by $63,912 (7.5%) due primarily to an increase in the average selling price of our brands for the nine months ended September 30, 2020 along with a 2.1% (144 million units) increase in unit sales volume.
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Tobacco cost of sales. The major components of our Tobacco cost of sales were as follows:
Nine Months Ended
September 30,
20202019
Manufacturing overhead, raw materials and labor$98,178 $94,535 
Customer shipping and handling4,423 4,441 
Federal Excise Taxes, net354,629 347,527 
FDA expense18,835 18,542 
MSA expense, net of market share exemption139,393 (1)125,911 
    Total cost of sales$615,458 $590,956 
(1) Includes $286 of expense from MSA settlements.
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 September 30, 2020, we estimate taxable shipments in the U.S. will decline by 1.5% in 2020. As a result of the relatively strong U.S. cigarette industry in 2020, the value of Liggett’s market share exemption increased compared to the nine months ended September 30, 2019 and resulted in a decrease in cost of sales of $2,771.
Tobacco gross profit was $302,971 for the nine months ended September 30, 2020 compared to $263,561 for the nine months ended September 30, 2019, an increase of $39,410. The increase in gross profit for the nine months ended September 30, 2020 was primarily attributable to increased pricing on the Eagle 20’s and Pyramid brands and increased Eagle 20’s volume. For the nine months ended September 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 60% in the nine months ended September 30, 2019 to approximately 62% for the nine months ended September 30, 2020. Pyramid, Liggett’s second largest brand, declined from approximately 27% of total unit volume sales in the nine months ended September 30, 2019 to approximately 23% for the nine months ended September 30, 2020. As a percentage of revenue (excluding Federal Excise Taxes), Tobacco gross profit increased from 52.0% in the 2019 period to 53.7% in the 2020 period primarily as a result of price and volume increases partially offset by a continued shift in sales volume to the lower-priced Eagle 20’s brand.
Tobacco expenses. Tobacco operating, selling, general and administrative expenses, excluding settlements and judgments, were $63,104 for the nine months ended September 30, 2020 compared to $61,072 for the nine months ended September 30, 2019. The increase of $2,032 was mainly due to higher professional fees offset by lower travel related expenses. Tobacco product liability legal expenses, including settlements and judgments, were $4,684 and $5,627 for the nine months ended September 30, 2020 and 2019, respectively.
Tobacco operating income. Tobacco operating income was $239,814 for the nine months ended September 30, 2020 compared to $201,594 for the same period last year, an increase of $38,220. The increase in operating income was primarily attributable to higher gross profit, as discussed above, partially offset by increased operating, selling, general and administrative expenses.
Real Estate.
Real Estate revenues. Real Estate revenues were $529,650 and $609,629 for the nine months ended September 30, 2020 and 2019, respectively. Real Estate revenues declined by $79,979 (13.1%), which was primarily related to a decline of $96,378 in Douglas Elliman’s Commission and other brokerage income, which we believe was primarily due to the impact of the COVID-19 pandemic, which is discussed in Results of Operations - Three Months ended September 30, 2020 compared to Three Months ended September 30, 2019. Douglas Elliman’s commission and other brokerage income declined as a result of a $114,052 decline in revenues from the New York City region and a $21,295 decline in revenues from Development Marketing, offset by increased revenues in the Southeast region of $17,990, Northeast region, which does not include New York City, of $11,207 and California region of $ 9,772. This was partially offset by $20,500 from the sale of the investment in real estate located in Sagaponack, NY.
.
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Real Estate revenues and cost of sales for the nine months ended September 30, 2020 and 2019, respectively, were as follows:
Nine Months Ended
September 30,
20202019
Real Estate Revenues:
Commission and other brokerage income$477,720 $574,098 
Property management revenue26,195 27,237 
Title fees2,611 4,682 
Revenues from investments in real estate20,500 — 
Sales on facilities primarily from Escena2,624 3,612 
  Total real estate revenues$529,650 $609,629 
Real Estate Cost of Sales:
Real estate commissions$351,325 $404,783 
Cost of sales from investments in real estate20,488 — 
Cost of sales on facilities primarily from Escena2,399 2,826 
Title fees413 1,085 
  Total real estate cost of sales$374,625 $408,694 
Real Estate cost of sales. Real Estate cost of sales were $374,625 and $408,694 for the nine months ended September 30, 2020 and 2019, respectively. Real Estate cost of sales declined by $34,069, primarily related to $53,458 decline in Douglas Elliman’s commissions offset by $20,488 from the sale of an investment in real estate located in Sagaponack, NY. Douglas Elliman real estate commissions declined by $53,458 as a result of lower commission and other brokerage income.
Douglas Elliman’s gross margin on real estate brokerage income declined from 29.5% for the nine months ended September 30, 2019 to 26.5% for the nine months ended September 30, 2020. This was primarily due to the decline in the percentage of revenues from the New York City region, which traditionally earns higher gross margin percentages than the Southeast (Florida) and Western (primarily California) regions.
See Results of Operations - Three Months ended September 30, 2020 compared to Three Months ended September 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 $218,525 and $196,263 for the nine months ended September 30, 2020 and 2019. These expenses included the non-cash impairment of goodwill and intangible assets of $58,252 and restructuring charges of $3,281 at Douglas Elliman for the nine months ended September 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 nine months ended September 30, 2020. While we continue to evaluate other expense reduction measures, to the extent Douglas Elliman’s business improves in the fourth 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 $63,500 and operating income of $4,672 for the nine months ended September 30, 2020 and 2019, respectively. The Real Estate segment’s operating loss was primarily caused by the impairment of goodwill and intangible assets of $58,252 at Douglas Elliman, the decreased gross margin percentages discussed above, and restructuring charges of $3,281 at Douglas Elliman; it was 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 $18,504 for the nine months ended September 30, 2020 compared to $20,712 for the same period in 2019 and the difference was due primarily to decreased administrative costs related to professional fees and travel expenses.
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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 September 30, 2020:
(Dollars in Thousands. Area and Unit Information in Ones)
LocationDate of Initial InvestmentPercentage Owned (1)Net Cash Invested (Returned)Cumulative Earnings (Losses)Carrying Value as of September 30, 2020Future Capital Commit-
ments from New Valley (2)
Projected Residential and/or Hotel AreaProjected Commercial SpaceProjected Number of Residential Lots, Units and/or Hotel RoomsActual/Projected Construction Start DateProjected Construction End Date
Escena, netMaster planned community, golf course, and club house in Palm Springs, CAMarch 2008100 %2,182 7,604 9,786 — 450 Acres— 667
450
R Lots
H
N/AN/A
Investments in real estate, net$2,182 $7,604 $9,786 $— 
Investments in real estate ventures:
10 Madison Square West (1107 Broadway)Flatiron District/NoMad neighborhood, Manhattan, NYOctober 20115.0 %$(43,671)$43,671 $— $— 260,000 SF20,000 SF124 RAugust 2012Completed
11 Beach StreetTriBeCa, Manhattan, NYJune 201249.5 %4,090 2,811 6,901 — 97,000 SF— 27 RMay 2014Completed
20 Times Square (701 Seventh Avenue)Times Square, Manhattan, NYAugust 20127.9 %(7,827)7,827 — — 252,000 SF80,000 SF452 HSeptember 2013Completed
111 Murray Street TriBeCa, Manhattan, NYMay 20139.5 %6,393 (4,413)1,980 — 330,000 SF1,700 SF157 RSeptember 2014Completed
160 Leroy StreetWest Greenwich Village, Manhattan, NYMarch 20133.1 %(1,075)1,075 — — 130,000 SF— 57 RFall 2015Completed
The Dutch (25-19 43rd Avenue)Long Island City, NYMay 20149.9 %(1,247)1,385 138 65,000 SF— 86 RSeptember 2014Completed
87 Park (8701 Collins Avenue)Miami Beach, FLDecember 201315.0 %7,292 2,914 10,206 — 160,000 SFTBD70 ROctober 2015Completed
125 Greenwich StreetFinancial District, Manhattan, NYAugust 201413.4 %7,992 (7,992)— — 306,000 SF16,000 SF273 RMarch 2015TBD
West Hollywood Edition (9040 Sunset Boulevard) (4)West Hollywood, CAOctober 201448.5 %5,963 (6,153)(190)— 210,000 SF— 20
190
R
H
May 2015Completed
The XI (76 Eleventh Avenue)West Chelsea, Manhattan, NYMay 20155.1 %17,000 (17,000)— — 630,000 SF85,000 SF236
137
R
H
September 2016June 2021
Monad TerraceMiami Beach, FLMay 201519.6 %7,635 (4,644)2,991 — 160,000 SF— 59 RMay 2016January 2021
Takanasee (805 Ocean Ave)Long Branch, NJDecember 201522.8 %6,144 (6,144)— — 63,000 SF— 13 RJune 2017TBD
Brookland (15 East 19th St)Brooklyn, NYApril 20179.8 %402 44 446 — 24,000 SF— 33 RAugust 2017Completed
Dime (209 Havemeyer St)Brooklyn, NYNovember 201716.5 %9,145 2,308 11,453 — 100,000 SF150,000 SF177 RMay 2017November 2020
352 6th AvenueBrooklyn, NYFebruary 201937.0 %500 71 571 — 5,200 SF— RSeptember 2019December 2020
Meatpacking PlazaMeatpacking District, NYApril 201916.9 %10,692 (1,573)9,119 — TBDTBDTBDTBDTBD
The Park on FifthMiami Beach, FLSeptember 201938.9 %14,132 762 14,894 — 482,000 SF15,000 SF330 RApril 2020August 2023
9 DeKalbBrooklyn, NYApril 20194.2 %5,000 644 5,644 — 450,000 SF120,000 SF540 RMarch 2019June 2022
West HialeahMiami, FLDecember 201977.8 %12,522 790 13,312 — 1,400,000 SF— 1,369 RDecember 2019February 2024
Condominium and Mixed Use Development
$61,082 $16,383 $77,465 $— 
Maryland PortfolioPrimarily Baltimore County, MDJuly 20127.6 %774 (982)(208)— N/AN/A5,517 RN/AN/A
Apartment Buildings
$774 $(982)$(208)$— 
Park Lane Hotel (36 Central Park South)Central Park South, Manhattan, NYNovember 20131.0 %$8,682 $(6,699)$1,983 $— 446,000 SF— 628 HN/AN/A
215 Chrystie Street (4)Lower East Side, Manhattan, NYDecember 201218.4 %(4,257)3,353 (904)— 246,000 SF— 367 HJune 2014Completed
Coral Beach and Tennis ClubCoral Beach, BermudaDecember 201349.0 %6,048 (4,281)1,767 — 52 Acres— 101 HN/AN/A
Parker New YorkCentral Park South, Manhattan, NYJuly 20191.0 %1,000 (91)909 — TBD— 589
99
H
R
May 2020February 2022
Hotels
$11,473 $(7,718)$3,755 $— 
The Plaza at Harmon MeadowSecaucus, NJMarch 201549.0 %$4,209 $(1,938)$2,271 $— — 219,000 SF— N/AN /A
Wynn Las Vegas RetailLas Vegas, NVDecember 20161.6 %4,737 2,250 6,987 — — 160,000 SF— N/AN/A
Commercial
$8,946 $312 $9,258 $— 
Witkoff GP Partners (3)
MultipleMarch 201715.0 %$11,154 $(1,228)$9,926 $4,840 N/AN/AN/AN/AN/A
1 QPS Tower (23-10 Queens Plaza South)Long Island City, NYDecember 201245.4 %(14,406)14,406 — — N/AN/AN/AMarch 2014Completed
Witkoff EB-5 Capital PartnersMultipleSeptember 201849.0 %516 444 960 8,735 N/AN/AN/AN/AN/A
Diverse Real Estate Portfolio
$(2,736)$13,622 $10,886 $13,575 
Investments in real estate ventures
$79,539 $21,617 $101,156 $13,575 
Total Carrying Value
$81,721 $29,221 $110,942 
(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 $2,495 investment in 500 Broadway and a $7,431 investment in Fontainebleau Las Vegas.
(4) Equity in losses in excess of the joint ventures' carrying value were $ 1,302 as of September 30, 2020, and are classified in Other current liabilities.
N/A - Not applicableSF - Square feetH - Hotel roomsTBD -To be determinedR - Residential UnitsR Lots - Residential lots
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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 September 30, 2020 were $7,582. This amount is included in the “Cumulative Earnings (Losses)” column in the table above. During the nine months ended September 30, 2020, New Valley capitalized $3,188 of interest costs and utilized (reversed) $6,203 of previously capitalized interest in connection with the recognition of equity in (losses) earnings, gains and liquidations from various ventures.


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Liquidity and Capital Resources

Cash, cash equivalents and restricted cash increased by $81,280 for the nine months ended September 30, 2020 and decreased by $264,311 for the nine months ended September 30, 2019.
Cash provided from operations was $318,660 and $195,349 for the nine months ended September 30, 2020 and 2019, respectively. The increase primarily related to proceeds received from the sale of LTS, changes in operating income, after adjusting for the non-cash impairment charges in the 2020 period and increases in working capital, particularly in increased income tax payables and MSA liability.
Cash provided by investing activities was $16,498 for the nine months ended September 30, 2020 and cash used in investing activities was $32,103 for the nine months ended September 30, 2019. In the first nine months of 2020, cash provided by investing activities was from the sale of investment securities of $20,773, paydowns of investment securities of $627, maturities of investment securities of $43,405, distributions from investments in real estate ventures of $11,606, a decrease in restricted assets of $384, and proceeds from the sale or liquidation of long-term investments of $30,255. This was offset by the purchase of investment securities of $64,827, investments in real estate ventures of $6,239, capital expenditures of $8,824, investments in real estate, net of $701, an increase in cash surrender value of life insurance policies of $723, and purchase of long-term investments of $9,238. In the first nine months of 2019, cash used in investing activities was for the purchase of investment securities of $76,094, investments in real estate ventures of $36,269, capital expenditures of $10,158, investments in real estate, net of $1,910, an increase in cash surrender value of life insurance policies of $773, purchase of long-term investments of $1,000, and purchase of subsidiaries of $323. This was offset by the sale of investment securities of $16,186, paydowns of investment securities of $828, maturities of investment securities of $45,798, and distributions from investments in real estate ventures of $30,934, a decrease in restricted assets of $661, and proceeds from the sale of fixed assets of $17.
Cash used in financing activities was $253,878 and $427,557 for the nine months ended September 30, 2020 and 2019, respectively. In the first nine months of 2020, cash was used for the dividends and distributions on common stock of $97,781, repayments of debt of $173,779, net repayments of debt under the revolver of $34,953, and distributions to non-controlling interest of $448. This was offset by proceeds from issuance of common stock of $52,563 and proceeds from debt issuance of $520. In the first nine months of 2019, cash was used for the dividends and distributions on common stock of $179,449, repayments of debt of $230,874, distributions to non-controlling interest of $285, deferred financing costs of $36, net repayments of debt under the revolver of $16,867, and other of $46.
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 September 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 and equity 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 September 30, 2020, we had cash and cash equivalents of $451,071 (including $75,683 of cash at Douglas Elliman and $147,617 of cash at Liggett), investment securities, which were carried at $124,092 (see Note 6 to condensed consolidated financial statements), and long-term investments, which were carried at $31,619 (including in-transit redemptions of $2,438 at September 30, 2020, with a fair value of $34,057). As discussed elsewhere, we used $169,610 of cash to retire the convertible notes due in April 2020. As of September 30, 2020, our investments in real estate ventures were carried at $102,458 and our investment in real estate, net of accumulated depreciation, was carried at $9,786.

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 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
57


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, 70 individual actions are pending in state court. 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”) in a private offering, exempt from the registration requirements of the Securities Act, to qualified institutional buyers in accordance with Rule 144A of the Securities Act and to persons outside of the United States in accordance with Regulation S under the Securities Act. The 6.125% Senior Secured Notes are guaranteed by all of our wholly owned domestic subsidiaries that are engaged in the conduct of our cigarette business. 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.
IndentureSeptember 30,
2020
CovenantRequirement
Consolidated EBITDA, as defined$75,000$412,070
Leverage ratio, as defined<3.0 to 12.02 to 1
Secured leverage ratio, as defined<1.5 to 10.71 to 1

As of September 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 and to persons outside of the United States in accordance with Regulation S under the Securities Act. The 10.5% Senior Secured Notes due 2026 are guaranteed by all of our wholly owned domestic subsidiaries that are engaged in the conduct of our cigarette business and DER Holdings LLC.
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
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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 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.
CovenantIndenture RequirementSeptember 30,
2020
Consolidated EBITDA, as definedN/A$300,064
Fixed charge coverage ratio, as defined>2.0 to 12.9 to 1
Net leverage ratio, as defined<4.0 to 12.23 to 1
Secured leverage ratio, as defined<3.75 to 12.89 to 1
As of September 30, 2020 and December 31, 2019, we were in compliance with all of the debt covenants related to the 2026 Indenture.
Guarantor Summarized Financial Information. Vector Group Ltd. (the “Issuer”) and its wholly-owned domestic subsidiaries that are engaged in the conduct of our cigarette business (the “Subsidiary Guarantors”) have filed a shelf registration statement for the offering of debt and equity securities on a delayed or continuous basis and we are including this condensed consolidating financial information in connection therewith. Any such debt securities may be issued by us and guaranteed by our Subsidiary Guarantors with the exception of New Valley or any of its subsidiaries, other than DER Holdings LLC (the “Nonguarantor Subsidiaries”). Both the Subsidiary Guarantors and Nonguarantor Subsidiaries are wholly-owned by the Issuer. The Condensed Consolidating Balance Sheet as of September 30, 2020 and the related Condensed Consolidating Statement of Operations for the nine months ended September 30, 2020 of the Issuer, Subsidiary Guarantors and Nonguarantor Subsidiaries are set forth in Exhibit 99.2.
Presented herein are the Summarized Combined Balance Sheets as of September 30, 2020 and December 31, 2019 and the related Summarized Combined Statement of Operations for the nine months ended September 30, 2020 for the Issuer and the Subsidiary Guarantors (collectively, the “Obligor Group”). The summarized combined financial information is presented after the elimination of: (i) intercompany transactions and balances among the Obligor Group, and (ii) equity in earnings from and investments in the Nonguarantor Subsidiaries.

Summarized Combined Balance Sheets:

September 30,
2020
December 31,
2019
Assets:
Current assets625,615 561,689 
Noncurrent assets261,845 276,886 
Intercompany receivables from Nonguarantor Subsidiaries47,450 44,043 
Liabilities:
Current liabilities305,102 387,261 
Noncurrent liabilities1,511,906 1,525,531 
Intercompany payable to Nonguarantor Subsidiaries24,245 — 

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Summarized Combined Statements of Operations:

Nine Months Ended
September 30,
2020
Revenues918,787 
Cost of sales615,458 
Operating income221,459 
Net income131,584 
Liggett Credit Facility and Liggett Term Loan Under Credit Facility. As of September 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 $58,823 based on eligible collateral at September 30, 2020. At September 30, 2020, Liggett was in compliance with all covenants under the Credit Agreement; Liggett’s EBITDA, as defined, were $245,155 for the last twelve months ended September 30, 2020.
Anticipated Liquidity Obligations. We and our subsidiaries have significant indebtedness and debt service obligations. As of September 30, 2020, we and our subsidiaries had total outstanding indebtedness of approximately $1,431,900. 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 it may not 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 $451,100, investment securities at fair value of approximately $124,100, long-term investments with an estimated value of approximately $34,100, and availability under Liggett’s credit facility of approximately $58,800 at September 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. 
We continue to evaluate our capital structure and current market conditions related to our capital structure. 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.
Furthermore, we may access the capital markets to refinance our 6.125% Senior Secured Notes due 2025. We are presently able to redeem such bonds at price of 103.063% and the redemption price declines to 101.531% on February 1, 2021 and 100% on February 1, 2022. There can be no assurance that we would be able to continue to issue debt at a lower interest rate than our historical borrowing levels in the future and, in the event we pursue any capital markets activities, our ability to complete any debt or equity offering would be subject to market conditions.
 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 September 30, 2020, approximately $26,300 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 September 30, 2020, there was no outstanding balance on the Liggett Credit Facility which also has variable interest
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rates. As of September 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 $89,239 as of September 30, 2020. See Note 6 to our condensed consolidated financial statements. Adverse market conditions could have a significant impact 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 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 September 30, 2020, we held various investments in equity securities with a total fair value of $66,472, of which $34,853 represents equity securities at fair value and $31,619 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 September 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 $6,647.

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:  
    Advertising and Warnings on Packaging
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,
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or other legal requirements, or what the impact of such a court ruling would have on the compliance timeline or requirements imposed on industry. 
Certain States may Attempt to Pass Minimum Price Legislation.
The State of Colorado placed a referendum, called Proposition EE, for taxes on cigarettes, tobacco and nicotine products on the November 3, 2020 ballot. Proposition EE was approved by the voters. In addition to raising the Colorado state excise tax on cigarettes, Proposition EE includes a provision that fixes the minimum retail price of cigarettes in Colorado at $7.00 per pack beginning January 1, 2021, thus reducing the competitive advantage of our Company’s discount priced cigarettes in the Colorado marketplace. We commenced litigation against Colorado challenging the legality of the minimum price provision contained in Proposition EE, the outcome of which cannot be predicted. Although no other state has adopted a fixed minimum retail price law for cigarettes, other states may attempt to do so if the minimum price provision in Proposition EE is determined by the courts to be legal. In the event that litigation challenging the minimum price legislation is not successful or other states pass similar legislation that withstands judicial scrutiny, the result could have a material adverse effect on our future financial condition, results of operations and cash flows.
    
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,
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,
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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 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 third 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 June 30, 2020, except as set forth below:

Certain States may attempt to pass minimum price legislation.

The state of Colorado placed a referendum, called Proposition EE, for taxes on cigarettes, tobacco and nicotine products on the November 3, 2020 ballot. Proposition EE was approved by the voters. In addition to raising the Colorado state excise tax on cigarettes, Proposition EE includes a provision that fixes the minimum retail price of cigarettes in Colorado at $7.00 per pack beginning January 1, 2021, thus reducing the competitive advantage of our Company’s discount priced cigarettes in the Colorado marketplace. We commenced litigation against Colorado challenging the legality of the minimum price provision contained in Proposition EE, the outcome of which cannot be predicted. Although no other state has adopted a fixed minimum retail price law, other states may attempt to do so if the minimum price provision in Proposition EE is determined by the courts to be legal. In the event that litigation challenging the minimum price legislation is not successful or other states pass similar legislation that withstands judicial scrutiny, the result could have a material adverse effect on our future financial condition, results of operations and cash flows.

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 New York City and elsewhere in the surrounding New York metropolitan area.

Douglas Elliman’s business primarily depends on sales transactions for residential property in the New York City market and it derived approximately 46% 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. These measures may occur again as we head into colder weather. As a result of such measures, volumes of residential property sales transactions in the New York metropolitan area, and specifically, New York City, have declined significantly, and the aggregate sales commissions earned by Douglas Elliman on sales transactions in the New York City area have correspondingly declined. Although there has been improvement in the suburban New York markets, and, in particular, the Hamptons, and, recently, the New York City market, this has had, and may 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 pandemic.

In addition, property development and investment activities have been significantly lower than past levels and improvement in the markets where New Valley operates is uncertain. This may have a material adverse effect on New Valley’s real estate investments. As of September 30, 2020, we had investments in or were developing 14 projects in New York City. In addition, during the second quarter of 2020, construction was halted at many of the real estate projects where New Valley is invested. The construction that was halted as a result of the COVID-19 pandemic has since resumed, although the delays may
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adversely impact those 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 have impacted our investments through reduced demand and depressed prices and we anticipate that this will have a material adverse effect on our Real Estate segment, and its 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 a reduction, deferral or elimination of leases across the country. As a result of the expense reductions, in addition to personnel expenses, Douglas Elliman’s professional services, advertising, travel and other occupancy expenses were reduced during the second and third quarters of 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 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, as Douglas Elliman’s business began to improve in the third quarter, we began to relinquish, as appropriate, some of the second quarter expense reductions, including advertising and personnel expenses and to the extent Douglas Elliman’s business continues to improve in the fourth quarter, we will continue to do so.

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 September 30, 2020.

Issuer Purchase of Equity Securities

Our purchase of our common stock during the three months ended September 30, 2020 were as follows:
PeriodTotal Number of Shares PurchasedAverage Price Paid per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July 1 to July 31, 2020211,119 $10.06 (1)— — 
August 1 to August 31, 2020— — — — 
September 1 to September 30, 2020— — — — 
  Total211,119 $10.06 — — 

(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:
List of Subsidiary Guarantors
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.
Condensed Consolidating Financial Statements of Vector Group Ltd.
101.INSXBRL 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.SCHInline XBRL Taxonomy Extension Schema
101.CALInline XBRL Taxonomy Extension Calculation Linkbase
101.DEFInline XBRL Taxonomy Extension Definition Linkbase
101.LABInline XBRL Taxonomy Extension Label Linkbase
101.PREInline XBRL Taxonomy Extension Presentation Linkbase
104Cover 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:November 6, 2020
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