Attached files
file | filename |
---|---|
EX-32.1 - EXHIBIT 32.1 - STANDARD DIVERSIFIED INC. | ex32_1.htm |
EX-31.2 - EXHIBIT 31.2 - STANDARD DIVERSIFIED INC. | ex31_2.htm |
EX-31.1 - EXHIBIT 31.1 - STANDARD DIVERSIFIED INC. | ex31_1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 March 31, 2020
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the Transition Period From _________ to _________
Commission File Number 001-36696
STANDARD DIVERSIFIED INC.
(Exact name of registrant as specified in its charter)
Delaware
|
56-1581761
|
|
(State or other jurisdiction of incorporation or organization)
|
(I.R.S. employer identification no.)
|
767 5th Avenue, 12th Floor
|
||
New York, NY
|
10153
|
|
(Address of principal executive offices)
|
(Zip Code)
|
Registrant’s telephone number, including area code: (212) 922-3752
Former name, former address and former fiscal year, if changed since last report:
N/A
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
|
Trading
Symbol
|
Name of each
exchange on which registered
|
||
Class A Common Stock, $0.01 par value
|
SDI
|
NYSE American
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer ☐
|
Accelerated filer ☐
|
||
Non-accelerated filer ☒
|
Smaller reporting company ☒
|
||
Emerging growth company ☐
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
At April 29, 2020, there were 8,884,183 shares outstanding of the registrant’s Class A common stock, par value $0.01 per share, and 7,699,124 shares outstanding of the registrant’s Class B common
stock, par value $0.01 per share.
STANDARD DIVERSIFIED INC. AND SUBSIDIARIES
Page No.
|
|||
PART I FINANCIAL INFORMATION
|
|||
ITEM 1
|
3 |
||
3
|
|||
4
|
|||
5
|
|||
6
|
|||
7
|
|||
9
|
|||
ITEM 2
|
46
|
||
ITEM 3
|
61
|
||
ITEM 4
|
61
|
||
PART II OTHER INFORMATION
|
|||
ITEM 1
|
61
|
||
ITEM 1A
|
62
|
||
ITEM 2
|
63
|
||
ITEM 3
|
63
|
||
ITEM 4
|
63
|
||
ITEM 5
|
64
|
||
ITEM 6
|
64
|
||
65
|
PART I
|
FINANCIAL INFORMATION
|
Item 1. |
Financial Statements
|
Standard Diversified Inc. and Subsidiaries
(dollars in thousands except per share data)
March 31,
2020
|
December 31,
2019
|
|||||||
ASSETS
|
||||||||
Current assets:
|
||||||||
Cash and cash equivalents
|
$
|
107,054
|
$
|
105,841
|
||||
Trade accounts receivable, net of allowances of $373 in 2020 and $280 in 2019
|
4,520
|
7,213
|
||||||
Inventories
|
69,195
|
70,979
|
||||||
Other current assets
|
19,043
|
16,391
|
||||||
Current assets - discontinued operations
|
-
|
33,948
|
||||||
Total current assets
|
199,812
|
234,372
|
||||||
Property, plant and equipment, net
|
29,433
|
30,160
|
||||||
Right of use assets
|
15,526
|
14,490
|
||||||
Deferred financing costs, net
|
860
|
890
|
||||||
Goodwill
|
154,282
|
154,282
|
||||||
Other intangible assets, net
|
33,590
|
34,088
|
||||||
Master Settlement Agreement (MSA) escrow deposits
|
32,074
|
32,074
|
||||||
Other assets
|
10,858
|
10,690
|
||||||
Total assets
|
$
|
476,435
|
$
|
511,046
|
||||
LIABILITIES AND EQUITY
|
||||||||
Current liabilities:
|
||||||||
Accounts payable
|
$
|
17,015
|
$
|
13,855
|
||||
Accrued liabilities
|
30,510
|
27,638
|
||||||
Current portion of long-term debt
|
13,743
|
16,977
|
||||||
Current liabilities - discontinued operations
|
1,254
|
33,301
|
||||||
Total current liabilities
|
62,522
|
91,771
|
||||||
Notes payable and long-term debt
|
297,475
|
299,569
|
||||||
Deferred income taxes
|
1,495
|
1,572
|
||||||
Lease liabilities
|
13,997
|
13,262
|
||||||
Asset retirement obligations
|
2,100
|
2,100
|
||||||
Other long-term liabilities
|
4,762
|
2,523
|
||||||
Total liabilities
|
382,351
|
410,797
|
||||||
Commitments and contingencies
|
||||||||
Equity:
|
||||||||
Preferred stock, $0.01 par value; authorized shares 50,000,000; -0- issued and outstanding shares
|
-
|
-
|
||||||
Class A common stock, $0.01 par value; authorized shares, 300,000,000; 8,884,183 issued and outstanding at March 31, 2020 and 9,012,515 issued and 8,931,332 outstanding at
December 31, 2019
|
89
|
90
|
||||||
Class B common stock, $0.01 par value; authorized shares, 30,000,000; 7,699,124 and 7,701,975 issued and outstanding at March 31, 2020 and December 31, 2019, respectively; convertible into Class A shares on a one-for-one basis
|
77
|
77
|
||||||
Additional paid-in capital
|
82,494
|
84,862
|
||||||
Class A treasury stock, 81,183 common shares at cost as of December 31, 2019
|
-
|
(1,103
|
)
|
|||||
Accumulated other comprehensive loss
|
(2,425
|
)
|
(1,722
|
)
|
||||
Accumulated deficit
|
(38,553
|
)
|
(35,236
|
)
|
||||
Total stockholders’ equity
|
41,682
|
46,968
|
||||||
Noncontrolling interests
|
52,402
|
53,281
|
||||||
Total equity
|
94,084
|
100,249
|
||||||
Total liabilities and equity
|
$
|
476,435
|
$
|
511,046
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
Standard Diversified Inc. and Subsidiaries
(dollars in thousands except per share data)
(unaudited)
Three Months Ended March 31,
|
||||||||
2020
|
2019
|
|||||||
Revenues:
|
||||||||
Net sales
|
$
|
91,368
|
$
|
92,309
|
||||
Operating costs and expenses:
|
||||||||
Cost of sales
|
49,928
|
51,784
|
||||||
Selling, general and administrative expenses
|
34,777
|
30,733
|
||||||
Total operating costs and expenses
|
84,705
|
82,517
|
||||||
Operating income
|
6,663
|
9,792
|
||||||
Interest expense, net
|
5,863
|
4,473
|
||||||
Investment income
|
(91
|
)
|
(144
|
)
|
||||
Net periodic benefit income, excluding service cost
|
(87
|
)
|
(11
|
)
|
||||
Income before income taxes
|
978
|
5,474
|
||||||
Income tax expense
|
946
|
1,774
|
||||||
Net income from continuing operations
|
32
|
3,700
|
||||||
Net income attributable to noncontrolling interests
|
(1,637
|
)
|
(3,260
|
)
|
||||
Net (loss) income from continuing operations attributable to Standard Diversified Inc.
|
(1,605
|
)
|
440
|
|||||
Net loss from discontinued operations, net of tax
|
(1,712
|
)
|
(3,983
|
)
|
||||
Net loss attributable to Standard Diversified Inc.
|
$
|
(3,317
|
)
|
$
|
(3,543
|
)
|
||
Net (loss) income from continuing operations attributable to SDI per Class A and Class B Common Share – Basic
|
$
|
(0.10
|
)
|
$
|
0.03
|
|||
Net (loss) income from continuing operations attributable to SDI per Class A and Class B Common Share – Diluted
|
$
|
(0.10
|
)
|
$
|
0.02
|
|||
Net loss from discontinued operations per Class A and Class B Common Share – Basic
|
$
|
(0.10
|
)
|
$
|
(0.24
|
)
|
||
Net loss from discontinued operations per Class A and Class B Common Share – Diluted
|
$
|
(0.10
|
)
|
$
|
(0.24
|
)
|
||
Net loss attributable to SDI per Class A and Class B Common Share – Basic
|
$
|
(0.20
|
)
|
$
|
(0.21
|
)
|
||
Net loss attributable to SDI per Class A and Class B Common Share – Diluted
|
$
|
(0.20
|
)
|
$
|
(0.21
|
)
|
||
Weighted Average Class A and Class B Common Shares Outstanding – Basic
|
16,629,349
|
16,863,621
|
||||||
Weighted Average Class A and Class B Common Shares Outstanding – Diluted
|
16,629,349
|
16,907,647
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
Standard Diversified Inc. and Subsidiaries
(dollars in thousands)
(unaudited)
Three Months Ended March 31,
|
||||||||
2020
|
2019
|
|||||||
Net income from continuing operations
|
$
|
32
|
$
|
3,700
|
||||
Other comprehensive (loss) income:
|
||||||||
Amortization of unrealized pension and postretirement gain (loss), net of tax of $2 and $1, for the three months ended March 31, 2020 and 2019, respectively
|
9
|
(4
|
)
|
|||||
Unrealized gain on investments, net of tax of $0 and $93, for the three months ended March 31, 2020 and 2019, respectively
|
102
|
968
|
||||||
Unrealized loss on interest rate swaps, net of tax of $624 and $182 for the three months ended March 31, 2020 and 2019, respectively
|
(1,615
|
)
|
(476
|
)
|
||||
Other comprehensive (loss) income
|
(1,504
|
)
|
488
|
|||||
Comprehensive (loss) income from continuing operations
|
(1,472
|
)
|
4,188
|
|||||
Amounts attributable to noncontrolling interests
|
(836
|
)
|
(3,221
|
)
|
||||
Net loss from discontinued operations
|
(1,712
|
)
|
(3,983
|
)
|
||||
Comprehensive loss attributable to Standard Diversified Inc.
|
$
|
(4,020
|
)
|
$
|
(3,016
|
)
|
The accompanying notes are an integral part of the condensed consolidated financial statements
Standard Diversified Inc. and Subsidiaries
(dollars in thousands, except share data)
(unaudited)
Standard Diversified Inc. Shareholders
|
||||||||||||||||||||||||||||||||||||||||||||
Class A Common
Shares
|
Class B Common
Shares
|
Class A Treasury
Shares
|
Additional
Paid-In
Capital
|
Accumulated Other
Comprehensive
Loss
|
Accumulated
Deficit
|
Noncontrolling
Interests
|
Total
|
|||||||||||||||||||||||||||||||||||||
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
|||||||||||||||||||||||||||||||||||||||
Balance December 31, 2019
|
9,012,515
|
$
|
90
|
7,701,975
|
$
|
77
|
(81,183
|
)
|
$
|
(1,103
|
)
|
$
|
84,862
|
$
|
(1,722
|
)
|
$
|
(35,236
|
)
|
$
|
53,281
|
$
|
100,249
|
|||||||||||||||||||||
Conversion of Class B common stock into Class A common stock
|
2,851
|
-
|
(2,851
|
)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||||||||||
Unrecognized pension and postretirement cost adjustment, net of tax of $2
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
5
|
-
|
4
|
9
|
|||||||||||||||||||||||||||||||||
Unrealized gain on investments, net of tax of $0
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
102
|
-
|
-
|
102
|
|||||||||||||||||||||||||||||||||
Unrealized loss on interest rate swaps, net of tax of $624
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(810
|
)
|
-
|
(805
|
)
|
(1,615
|
)
|
||||||||||||||||||||||||||||||
SDI stock-based compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
178
|
-
|
-
|
-
|
178
|
|||||||||||||||||||||||||||||||||
Impact of Turning Point equity transactions on APIC and NCI
|
-
|
-
|
-
|
-
|
-
|
-
|
(737
|
)
|
-
|
-
|
(1,209
|
)
|
(1,946
|
)
|
||||||||||||||||||||||||||||||
Turning Point dividend payable to noncontrolling interests
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(506
|
)
|
(506
|
)
|
|||||||||||||||||||||||||||||||
Share repurchases
|
-
|
-
|
-
|
-
|
(50,000
|
)
|
(707
|
)
|
-
|
-
|
-
|
-
|
(707
|
)
|
||||||||||||||||||||||||||||||
Retirement of treasury stock
|
(131,183
|
)
|
(1
|
)
|
-
|
-
|
131,183
|
1,810
|
(1,809
|
)
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||||||||
Net (loss) income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,317
|
)
|
1,637
|
(1,680
|
)
|
|||||||||||||||||||||||||||||||
Balance March 31, 2020
|
8,884,183
|
$
|
89
|
7,699,124
|
$
|
77
|
-
|
$
|
-
|
$
|
82,494
|
$
|
(2,425
|
)
|
$
|
(38,553
|
)
|
$
|
52,402
|
$
|
94,084
|
|||||||||||||||||||||||
Balance December 31, 2018
|
9,156,293
|
$
|
92
|
7,801,995
|
$
|
78
|
(103,492
|
)
|
$
|
(1,440
|
)
|
$
|
81,260
|
$
|
(1,683
|
)
|
$
|
(24,613
|
)
|
$
|
41,035
|
$
|
94,729
|
|||||||||||||||||||||
Conversion of Class B common stock into Class A common stock
|
48,429
|
-
|
(48,429
|
)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||||||||||
Unrecognized pension and postretirement cost adjustment, net of tax of $1
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(2
|
)
|
-
|
(2
|
)
|
(4
|
)
|
||||||||||||||||||||||||||||||
Unrealized gain on investments, net of tax of $93
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
768
|
-
|
200
|
968
|
|||||||||||||||||||||||||||||||||
Unrealized loss on interest rate swaps, net of tax of $182
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(239
|
)
|
-
|
(237
|
)
|
(476
|
)
|
||||||||||||||||||||||||||||||
SDI stock-based compensation
|
-
|
-
|
-
|
-
|
-
|
-
|
180
|
-
|
-
|
-
|
180
|
|||||||||||||||||||||||||||||||||
Impact of Turning Point equity transactions on APIC and NCI
|
-
|
-
|
-
|
-
|
-
|
-
|
261
|
-
|
-
|
363
|
624
|
|||||||||||||||||||||||||||||||||
Turning Point dividend payable to noncontrolling interests
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(444
|
)
|
(444
|
)
|
|||||||||||||||||||||||||||||||
Share repurchases
|
-
|
-
|
-
|
-
|
(40,100
|
)
|
(576
|
)
|
-
|
-
|
-
|
-
|
(576
|
)
|
||||||||||||||||||||||||||||||
Retirement of treasury stock
|
(143,592
|
)
|
(1
|
)
|
-
|
-
|
143,592
|
2,016
|
(2,015
|
)
|
-
|
-
|
-
|
-
|
||||||||||||||||||||||||||||||
Net (loss) income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(3,543
|
)
|
3,260
|
(283
|
)
|
|||||||||||||||||||||||||||||||
Balance March 31, 2019
|
9,061,130
|
$
|
91
|
7,753,566
|
$
|
78
|
-
|
$
|
-
|
$
|
79,686
|
$
|
(1,156
|
)
|
$
|
(28,156
|
)
|
$
|
44,175
|
$
|
94,718
|
The accompanying notes are an integral part of the condensed consolidated financial statements
Standard Diversified Inc. and Subsidiaries
(dollars in thousands)
(unaudited)
Three Months Ended March 31,
|
||||||||
2020
|
2019
|
|||||||
Cash flows from operating activities:
|
||||||||
Net income from continuing operations
|
$
|
32
|
$
|
3,700
|
||||
Net loss from discontinued operations
|
(1,712
|
)
|
(3,983
|
)
|
||||
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
Loss on disposal of property, plant and equipment
|
-
|
23
|
||||||
Loss on disposal of Insurance segment
|
1,045
|
-
|
||||||
Depreciation expense
|
1,166
|
830
|
||||||
Amortization of deferred financing costs and debt discount
|
2,328
|
366
|
||||||
Amortization of other intangible assets
|
498
|
431
|
||||||
Deferred income taxes
|
545
|
(29
|
)
|
|||||
Stock-based compensation expense
|
633
|
646
|
||||||
Non-cash lease expense
|
77
|
-
|
||||||
Changes in operating assets and liabilities:
|
||||||||
Accounts receivable
|
2,690
|
(1,677
|
)
|
|||||
Inventories
|
1,784
|
366
|
||||||
Other current assets
|
(2,233
|
)
|
3,090
|
|||||
Other assets
|
(130
|
)
|
(427
|
)
|
||||
Accounts payable
|
3,195
|
8,646
|
||||||
Accrued postretirement liabilities
|
(27
|
)
|
(9
|
)
|
||||
Accrued liabilities and other
|
2,522
|
(4,104
|
)
|
|||||
Net cash provided by operating activities of continuing operations
|
14,125
|
11,852
|
||||||
Net cash used in operating activities of discontinued operations
|
(2,543
|
)
|
(929
|
)
|
||||
Net cash provided by operating activities
|
11,582
|
10,923
|
||||||
Cash flows from investing activities:
|
||||||||
Cash outflow from disposal of Insurance segment
|
(4,939
|
)
|
-
|
|||||
Capital expenditures
|
(877
|
)
|
(901
|
)
|
||||
Restricted cash, MSA escrow deposits
|
-
|
1,702
|
||||||
Net cash (used in) provided by investing activities from continuing operations
|
(5,816
|
)
|
801
|
|||||
Net cash provided by (used in) investing activities of discontinued operations
|
102
|
(216
|
)
|
|||||
Net cash (used in) provided by investing activities
|
(5,714
|
)
|
585
|
The accompanying notes are an integral part of the condensed consolidated financial statements
Standard Diversified Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(dollars in thousands)
(unaudited)
Three Months Ended March 31,
|
||||||||
2020
|
2019
|
|||||||
Cash flows from financing activities:
|
||||||||
Payments of 2018 first lien term loan
|
(2,000
|
)
|
(2,000
|
)
|
||||
Payments of 2018 revolving credit facility
|
-
|
(12,000
|
)
|
|||||
Payments of IVG Note
|
(4,240
|
)
|
-
|
|||||
Payments of Standard Outdoor promissory note
|
(1,206
|
)
|
(966
|
)
|
||||
Payments of financing costs
|
(168
|
)
|
-
|
|||||
Turning Point exercise of stock options
|
227
|
187
|
||||||
Turning Point redemption of options
|
-
|
(12
|
)
|
|||||
Turning Point dividend to noncontrolling interests
|
(443
|
)
|
(437
|
)
|
||||
Turning Point repurchase of common shares
|
(2,627
|
)
|
-
|
|||||
SDI repurchase of common shares
|
(707
|
)
|
(1,385
|
)
|
||||
Share repurchase for tax withholdings on vesting of restricted stock
|
(117
|
)
|
-
|
|||||
Net cash used in financing activities
|
(11,281
|
)
|
(16,613
|
)
|
||||
Net decrease in cash
|
(5,413
|
)
|
(5,105
|
)
|
||||
Cash, beginning of period
|
||||||||
Unrestricted
|
105,841
|
15,611
|
||||||
Restricted
|
32,074
|
2,361
|
||||||
Discontinued operations
|
6,626
|
5,590
|
||||||
Total cash at beginning of period
|
144,541
|
23,562
|
||||||
Cash, end of period
|
||||||||
Unrestricted
|
107,054
|
9,950
|
||||||
Restricted
|
32,074
|
4,062
|
||||||
Discontinued operations
|
-
|
4,445
|
||||||
Total cash at end of period
|
$
|
139,128
|
$
|
18,457
|
||||
Supplemental schedule of noncash financing activities:
|
||||||||
Turning Point accrued expenses incurred for financing costs
|
$
|
13
|
$
|
-
|
||||
Turning Point dividend to noncontrolling interests declared not paid
|
$
|
506
|
$
|
444
|
The accompanying notes are an integral part of the condensed consolidated financial statements
Standard Diversified Inc. and Subsidiaries
(dollars in thousands, except where designated and per share data)
(unaudited)
Note 1. Organization and Description of Business
The accompanying condensed consolidated financial statements include the results of operations of Standard Diversified Inc. (“SDI”), a holding company, and its
consolidated subsidiaries (collectively, the “Company”). SDI (f/k/a Standard Diversified Opportunities Inc., Special Diversified Opportunities Inc., and Strategic Diagnostics
Inc.) was incorporated in the State of Delaware in 1990., and, until 2013, engaged in bio-services and industrial bio-detection (collectively, the “Life Sciences Business”).
On July 12, 2013, SDI sold substantially all of its rights, title and interest in substantially all of its non-cash assets related to the Life Sciences Business and became a “shell company,” as such term is defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended.
On June 1, 2017, SDI consummated a Contribution and Exchange Transaction (the “Contribution and Exchange”) to acquire a
52.1% controlling interest in Turning Point Brands, Inc. (“Turning Point” or “TPB”). The transaction was accounted for as a recapitalization or reverse acquisition. Turning
Point was the accounting acquirer for financial reporting purposes, notwithstanding the legal form of the transaction. As a result of the consummation of the Contribution and Exchange, SDI is no longer a shell company. As of March 31, 2020, SDI has a
50.2% ownership interest in Turning Point. On April 7, 2020, the Company entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), by and among the Company, TPB and Standard Merger Sub,
LLC, a wholly-owned subsidiary of the TPB (“Merger Sub”). The Merger Agreement provides for, among other things, (i) the merger of SDI with and into Merger Sub (the “Merger”), with Merger Sub surviving the Merger as a wholly-owned subsidiary of
TPB. See Note 22, “Subsequent Events” for further information.
On January 14, 2020, the New York State Department of Financial Services (“NYSDFS”) filed a petition for Maidstone Insurance (“Maidstone”), one of SDI’s wholly-owned subsidiaries, to enter an order
of liquidation pursuant to Article 74 of the New York Consolidated Insurance Law (“Order of Liquidation”) in the Supreme Court of the State of New York, County of Nassau (the “Court”) with respect to Maidstone. On January 21, 2020, the Court issued
an order to show cause establishing February 13, 2020 as the date of a hearing before the Court with respect to the Order of Liquidation. On February 13, 2020, the Court conducted a hearing with respect to the Order of Liquidation and, thereafter,
approved the Order of Liquidation. As of February 13, 2020, the control and net assets of Maidstone vested with the New York State Liquidation Bureau (“NYS Liquidation Bureau”). The Company determined that the disposal of Maidstone and its Insurance
segment operations represents a strategic shift that had a major effect on the Company’s results of operations and, as a result, reclassified the Insurance segment as discontinued operations. See Note 3, “Discontinued Operations” for further
information.
On April 7, 2020, SDI transferred all of its equity interests in Standard Outdoor LLC (“Standard Outdoor”), which constituted 100% of the outstanding equity interests,
to Billboards LLC, a commonly controlled affiliate of Standard General, the Company’s controlling shareholder. See Note 22, “Subsequent Events” for further information.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
SDI is a holding company and its condensed consolidated financial statements include Turning Point and its subsidiaries, Pillar General Inc. (“Pillar General”) and its subsidiaries, which include
Maidstone, and Standard Outdoor and its subsidiaries.
Turning Point is also a holding company which owns North Atlantic Trading Company, Inc. (“NATC”), and its subsidiaries and
Turning Point Brands, LLC (“TPLLC”), and its subsidiaries and Turning Point Brands (Canada), Inc. (“TPBC”).
Except where the context indicates otherwise, references to Turning Point include Turning Point; NATC and its subsidiaries National Tobacco Company, L.P. (“NTC”), National
Tobacco Finance, LLC (“NTFLLC”), North Atlantic Operating Company, Inc. (“NAOC”), North Atlantic Cigarette Company, Inc. (“NACC”), and RBJ Sales, Inc. (“RBJ”); TPLLC and its
subsidiaries Intrepid Brands, LLC (“Intrepid”), TPB Beast, LLC (“VaporBeast”), TPB Shark, LLC, and its subsidiaries (collectively, “Vapor Shark”), TPB International, LLC and its subsidiaries (collectively, “IVG”), Nu-X Ventures LLC (“Nu-X”), Nu-Tech
Holdings LLC (“Nu-Tech”), and South Beach Holdings, LLC (“South Beach”); and TPBC.
Standard Outdoor, a wholly-owned subsidiary of the Company, and its subsidiaries, consists of Standard Outdoor Southeast I LLC, Standard Outdoor Southeast II LLC and Standard Outdoor Southwest LLC.
Standard Outdoor is an out-of-home advertising business with billboard structures located in Texas, Alabama, Georgia and Florida. As discussed in Note 1, on April 7, 2020, the Company transferred its equity interests in Standard Outdoor. See Note 22,
“Subsequent Events” for further information.
As disclosed in Note 1, as of February 13, 2020, the Company completed the disposal of Maidstone, which represented the operations of its Insurance segment. The condensed consolidated financial
statements, including the comparative periods presented, have been adjusted to remove the Insurance segment, which has been treated as discontinued operations in accordance with generally accepted accounting principles in the United States (“GAAP”).
See Note 3, “Discontinued Operations” for further information.
As a result of the disposal of its Insurance segment, the Company only had four reportable segments remaining, see Note 20, “Segment Information” for further information on the Company’s reportable
segments. Unless noted otherwise, discussion in these notes to the condensed consolidated financial statements pertain to the Company’s continuing operations.
The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with the accounting practices described in the Company’s audited consolidated financial
statements as of and for the year ended December 31, 2019. In the opinion of management, the unaudited interim condensed consolidated financial statements included herein contain all adjustments necessary to
present fairly the financial position, results of operations, and cash flows of the Company for the periods indicated. Such adjustments, other than nonrecurring adjustments separately disclosed, are of a normal and recurring nature. The operating
results for interim periods are not necessarily indicative of results to be expected for a full year or future interim periods. The unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited
consolidated financial statements and accompanying notes as of and for the year ended December 31, 2019. The accompanying interim condensed consolidated financial statements are presented in accordance with the rules and regulations of the Securities
and Exchange Commission and, accordingly, do not include all the disclosures required by GAAP with respect to annual financial statements.
Certain prior year amounts have been reclassified to conform to the current year’s presentation. The changes did not have an impact on the Company’s consolidated financial position, results of
operations, or cash flows in any of the periods presented.
The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have
been eliminated.
Noncontrolling Interests
These condensed consolidated financial statements reflect the application of Accounting Standards Codification (“ASC”) Topic
810, Consolidations, which establishes accounting and reporting standards that require: (i) the ownership interest in subsidiaries held by parties other than the parent to be clearly
identified and presented in the consolidated balance sheet within shareholder’s equity, but separate from the parent’s equity; (ii) the amount of consolidated net (loss) income
attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face of the consolidated statements of (loss) income; and (iii) changes in a parent’s ownership interest
while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently.
SDI acquired a 52.1% interest in Turning Point on June 1, 2017 through the Contribution and Exchange. As of March 31, 2020, SDI has a 50.2% ownership interest in Turning Point. Amounts pertaining to
the noncontrolling ownership interest held by third parties in the financial position and operating results of the Company are reported as noncontrolling interests in the accompanying condensed consolidated financial statements.
Revenue Recognition
Turning Point
Turning Point recognizes revenues, which includes excise taxes and shipping and handling charges billed to customers, net of cash discounts for prompt payment, sales returns and incentives, upon
delivery of goods to the customer – at which time Turning Point’s performance obligation is satisfied – at an amount that Turning Point
expects to be entitled to in exchange for those goods in accordance with the five-step analysis outlined in Topic 606: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the
transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied. Turning Point excludes from the transaction price, sales taxes and value-added taxes
imposed at the time of sale (which do not include excise taxes on smokeless tobacco, cigars or vaping products billed to customers).
Turning Point records an allowance for sales returns, based principally on historical volume and return rates, which is included in accrued liabilities on the condensed consolidated balance sheets.
Turning Point records sales incentives, which consist of consumer incentives and trade promotion activities, as a reduction in revenues (a portion of which is based on amounts estimated as being due to wholesalers, retailers and consumers at the end
of the period) based principally on historical volume and utilization rates. Expected payments for sales incentives are included in accrued liabilities on the consolidated balance sheets.
A further requirement of ASU 2014-09 is for entities to disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of
revenue and cash flows are affected by economic factors. Turning Point management views business performance through segments that closely resemble the performance of major product lines. Thus, the primary and most useful disaggregation of Turning
Point’s contract revenue for decision making purposes is the disaggregation by segment which can be found in Note 20, “Segment Information.”
An additional disaggregation of contract revenue by sales channel can be found within Note 20 as well.
Discontinued Operations
A business is classified as discontinued operations if the disposal represents a strategic shift that will have a major effect on operations or financial results and meets the criteria to be
classified as held for sale or is disposed of by sale or otherwise. Significant judgments are involved in determining whether a business meets the criteria for discontinued operations reporting and the period in which these criteria are met. In the
period a component of an entity has been disposed of or classified as held for sale, the results of operations for the periods presented are reclassified into separate line items in the statements of operations. Assets and liabilities are also
reclassified into separate line items on the related balance sheets for the periods presented. The statements of cash flows for the periods presented are also reclassified to reflect the results of discontinued operations as separate line items. ASU
2014-08 requires that only a disposal of a component of an entity, or a group of components of an entity, that represents a strategic shift that has, or will have, a major effect on the reporting entity’s operations and financial results be reported
in the financial statements as discontinued operations. ASU 2014-08 also provides guidance on the financial statement presentations and disclosures of discontinued operations.
Shipping Costs
The Company records shipping costs incurred as a component of selling, general and administrative expenses. Shipping costs incurred were approximately $5.3 million and $4.3 million for the three
months ended March 31, 2020 and 2019, respectively.
Fair Value
GAAP establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy
gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).
The three levels of the fair value hierarchy under GAAP are described below:
Level 1 - Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date.
Level 2 - Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive
markets; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
Level 3 - Unobservable inputs which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement
date.
Derivative Instruments
Foreign Currency Forward Contracts: Turning Point enters into foreign currency forward contracts to hedge a portion of its exposure to changes
in foreign currency exchange rates on inventory purchase commitments. The Company accounts for its forward contracts under the provisions of ASC 815, Derivatives and Hedging. Under Turning
Point’s policy, the Turning Point may hedge up to 100% of its anticipated purchases of inventory in the denominated invoice currency over a forward period not to exceed twelve months. The Company may also, from
time to time, hedge up to ninety percent of its non-inventory purchases in the denominated invoice currency. Forward contracts that qualify as hedges are adjusted to their fair value through other comprehensive loss as determined by market prices on
the measurement date, except any hedge ineffectiveness which is recognized currently in income. Gains and losses on these forward contracts are transferred from other comprehensive loss into net income as the related inventories are received. Changes
in fair value of any contracts that do not qualify for hedge accounting or are not designated as hedges are recognized currently in income.
Interest Rate Swap Agreements: Turning Point enters into interest rate swap contracts to manage interest rate risk and reduce the volatility
of future cash flows. Turning Point accounts for its interest rate swap contracts under the provisions of ASC 815, Derivatives and Hedging. Swap contracts that qualify as hedges are adjusted to their fair value through other comprehensive loss as
determined by market prices on the measurement date, except any hedge ineffectiveness which is recognized currently in income. Gains and losses on these swap contracts are transferred from other comprehensive loss into net income upon settlement of
the derivative position or at maturity of the interest rate swap contract. Changes in fair value of any contracts that do not qualify for hedge accounting or are not designated as hedges are recognized currently in income.
Risks and Uncertainties
Manufacturers and sellers of tobacco products are subject to regulation at the federal, state, and local levels. Such regulations include, among others, labeling requirements, limitations on
advertising, and prohibition of sales to minors. The tobacco industry is likely to continue to be heavily regulated. There can be no assurance as to the ultimate content, timing, or effect of any regulation of tobacco products by any federal, state,
or local legislative or regulatory body, nor can there be any assurance that any such legislation or regulation would not have a material adverse effect on the Company’s financial position, results of operations,
or cash flows. Recently, several state governors have reacted to perceived issues around nicotine vapor products by unilaterally, without regard to the legislative process, proclaiming bans on vapor products, particularly those that are flavored.
Many of these executive actions have been challenged and temporarily restrained, but no assurance can be given that such state or local flavor bans will not be enacted or ultimately upheld. Indeed, in a number of states, targeted flavor bans,
particularly with regard to vapor products, have been enacted legislatively. Depending on the number and location of such bans, that legislation or regulation could have a material adverse effect on Turning Point’s financial position, results of
operations or cash flows. Food and Drug Administration (“FDA”) continues to consider various restrictive regulations around Turning Point’s products, including targeted flavor bans; however, the details, timing,
and ultimate implementation of such measures remain unclear.
The tobacco industry has experienced, and is experiencing, significant product liability litigation. Most tobacco liability lawsuits have been brought against manufacturers and sellers of cigarettes
for injuries allegedly caused by smoking or exposure to smoke. However, several lawsuits have been brought against manufacturers and sellers of smokeless products for injuries to health allegedly caused by use of smokeless products. Typically, such
claims assert that use of smokeless products is addictive and causes oral cancer. Additionally, several lawsuits have been brought against manufacturers and distributors of NewGen products due to malfunctioning devices. There can be no assurance
Turning Point will not sustain losses in connection with such lawsuits and that such losses will not have a material adverse effect on Turning Point’s financial position, results of operations, or cash flows.
Master Settlement Agreement
Pursuant to the Master Settlement Agreement (the “MSA”) entered into in November 1998 by most states (represented by their attorneys general acting through the National Association of Attorneys
General) and subsequent states’ statutes, a “cigarette manufacturer” (which is defined to include a manufacturer of make-your-own (“MYO”) cigarette tobacco) has the option of either becoming a signatory to the MSA or opening, funding, and maintaining
an escrow account to have funds available for certain potential tobacco-related liabilities with sub-accounts on behalf of each settling state. Such companies are entitled to direct the investment of the escrowed funds and withdraw any appreciation,
but cannot withdraw the principal for twenty-five years from the year of each annual deposit, except to withdraw funds deposited pursuant to an individual state’s escrow statute to pay a final judgement to that state’s plaintiffs in the event of such
a final judgement against Turning Point. Turning Point chose to open and fund an escrow account as its method of compliance. It is the Company’s policy to record amounts on deposit in the escrow account for prior years as a non-current asset. Each
year’s annual obligation is required to be deposited in the escrow account by April 15 of the following year. In addition to the annual deposit, many states have elected to require quarterly deposits for the previous quarter’s sales. As of March 31,
2020 and December 31, 2019, Turning Point had on deposit approximately $32.1 million, the fair value of which was approximately $32.1 million. Effective in the third quarter of 2017, Turning Point no longer sells any product covered under the MSA.
Thus, absent a change in legislation, Turning Point will no longer be required to make deposits to the MSA escrow account.
Turning Point has chosen to invest a portion of the MSA escrow, from time to time, in U.S. Government securities including Treasury Inflation-Protected Securities, Treasury Notes, and
Treasury Bonds. These investments are classified as available-for-sale and carried at fair value. Realized losses are prohibited under the MSA; any investment in an unrealized loss position will be held until the value is recovered, or until
maturity. All monies at March 31, 2020 and December 31, 2019 were held in money market savings accounts.
The following shows the amount of deposits by sales year for the MSA escrow account:
(Dollar amounts in thousands)
|
Deposits as of
|
|||||||
Sales Year
|
March 31, 2020
|
December 31, 2019
|
||||||
1999
|
$
|
211
|
$
|
211
|
||||
2000
|
1,017
|
1,017
|
||||||
2001
|
1,673
|
1,673
|
||||||
2002
|
2,271
|
2,271
|
||||||
2003
|
4,249
|
4,249
|
||||||
2004
|
3,714
|
3,714
|
||||||
2005
|
4,553
|
4,553
|
||||||
2006
|
3,847
|
3,847
|
||||||
2007
|
4,167
|
4,167
|
||||||
2008
|
3,364
|
3,364
|
||||||
2009
|
1,619
|
1,619
|
||||||
2010
|
406
|
406
|
||||||
2011
|
193
|
193
|
||||||
2012
|
199
|
199
|
||||||
2013
|
173
|
173
|
||||||
2014
|
143
|
143
|
||||||
2015
|
101
|
101
|
||||||
2016
|
91
|
91
|
||||||
2017
|
83
|
83
|
||||||
Total
|
$
|
32,074
|
$
|
32,074
|
Food and Drug Administration
On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (“TCA”) authorized the Food and Drug Administration
(“FDA”) to immediately regulate the manufacturing, sale, and marketing of four categories of tobacco products - cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless tobacco.
Under the TCA, tobacco product user fees are assessed on six classes of regulated tobacco products. The user fees are computed using a methodology similar to the methodology used by the U.S
Department of Agriculture to compute the Tobacco Transition Payment Program (“TTPP,” also known as the “Tobacco Buyout”) assessment. First, the total, annual, congressionally established user fee assessment is allocated among the various classes of tobacco products using the federal excise tax weighted market share of tobacco products subject to
regulation. Then, the assessment for each class of tobacco products is divided among individual manufacturers and importers.
In August 2016, the FDA’s regulatory authority under the TCA was extended to all tobacco products not previously covered, including: (i) certain NewGen products
(such as electronic cigarettes, vaporizers and e-liquids) and their components or parts (such as tanks, coils and batteries); (ii) cigars and their components or parts (such as cigar tobacco); (iii) pipe tobacco; (iv) hookah products; and (v) any other tobacco product “newly deemed” by the FDA. These “deeming regulations” apply to all products made or derived from tobacco intended for human consumption, but excluding accessories of
tobacco products (such as lighters). Accordingly, the FDA has since regulated Turning Point’s pipe tobacco, cigar, and cigar wrap products as well as its vapor products containing tobacco-derived nicotine and
products intended or reasonably expected to be used to consume such e-liquids.
Under the deeming regulations, the FDA has responsibility for conducting premarket review of “new tobacco products” -
defined as those products not commercially marketed in the United States as of February 15, 2007. There are three pathways for obtaining premarket authorization, including submission of a premarket tobacco product application (“PMTA”).
When the FDA initially issued the deeming regulations, it recognized that many products in the deemed categories that were already on the market qualified as “new
tobacco products” and lacked a marketing order. In August 2017, the FDA issued an authorization until specified deadlines had passed. Under the August 2017 Guidance, compliance dates vary depending upon the type
of application submitted, but all newly-deemed products require an application no later than August 8, 2021, for “combustible” products (e.g. cigar and pipe), and August 8,
2022, for “non-combustible” products (e.g. vapor products) with the exception of “grandfathered”
products (products in commerce as of February 15, 2007) which are already authorized.
On March 27, 2018, several public health organizations filed a lawsuit (the “Maryland Lawsuit”) challenging the August 2017
Guidance. The plaintiffs asserted, among other arguments, that the modification to the deeming regulations included in the August 2017 Guidance conflicts with the TCA and exceeds FDA’s statutory authority. The
plaintiffs also expressed concern that the August 2017 Guidance allows vapor products to remain marketed for a significant period of time without required premarket review.
The court found in favor of the plaintiffs in May 2019 and vacated the August 2017 Guidance. On July 12, 2019, the court issued its remedy order (the “Remedy
Order”). Specifically, the court ordered that: (1) for all deemed new tobacco products, marketers must file applications within 10 months of the Remedy Order to continue marketing such products; (2) such a product
may remain on the market pending FDA review of a timely filed application for a period not to exceed one year from the date of the application’s submission; (3) in its discretion, the FDA may enforce the premarket
review requirements against such products for which marketers do not file applications within 10 months; and (4) the FDA will have the ability to exempt deemed new tobacco products from these application submission requirements for good cause, on a
case-by-case basis. On October 24, 2019, FDA filed a Notice of Appeal from the Remedy Order and other actions adverse to FDA. The court-ordered modification to the compliance policy remains subject to change as a result of potential appeals or
litigation brought or pending in other venues.
In January 2020, the FDA indicated it intended to maintain this deadline irrespective of the outcome of the pending appeal in the Maryland Lawsuit. On March 30, 2020, however, citing the impacts of
the worldwide COVID-19 pandemic on both FDA and industry, FDA requested a modification to the Remedy Order that would extend the May 12, 2020, deadline for filing premarket applications by 120 days to September 9, 2020. After several procedural
steps, the Remedy Order was modified on April 22, 2020, to reflect the new deadline, and since then, FDA has stated it will update relevant Guidance documents to reflect this new timeline.
On September 11, 2019, President Donald Trump and the Department of Health and Human Services Secretary, Alex Azar, indicated FDA would adopt a regulatory policy restricting all flavors in vapor
products. In January 2020, FDA issued a Guidance document (the “January 2020 Guidance”) that stated it would be prioritizing enforcement of several categories of electronic
nicotine delivery systems (“ENDS”) products: (1) flavored, cartridge-based ENDS products (other than tobacco- or menthol-flavored ENDS products); (2) ENDS products for which
the manufacturer has failed to take (or is failing to take) adequate measures to prevent minors’ access; (3) ENDS products targeted to minors or whose marketing is likely to promote the use of ENDS by minors; and
(4) ENDS products offered for sale after the May 12, 2020, premarket application deadline for which the manufacturer has not submitted a premarket application. The policy outlined several factors the agency would consider in its enforcement of
flavored cigars going forward but did not drastically restrict those products as it had considered in its March 2019 Guidance proposal. The FDA’s policy on these and other regulated products may change or expand over time in ways not yet known and
may significantly impact Turning Point’s products or our PMTA filings. For example, as noted above, the FDA recently acted to modify the deadline for premarket applications from May 12, 2020, to September 9, 2020.
As a result of the implementation of the modified Remedy Order, Turning Point would not be permitted to continue marketing its existing line of vapor products that the FDA regulates as tobacco
products past September 9, 2020, unless it files an application for each such product by that date. Turning Point expects to be able to make appropriate PMTA applications by the deadlines and to supplement and complete the applications within FDA’s
discretionary timeline. A successful PMTA must demonstrate that the subject product is “appropriate for the protection of public health,” taking into account the effect of the marketing of the product on all sub-populations. On September 25, 2019,
FDA published a proposed rule outlining certain required elements of PMTA filings. This rule is not yet final, and its requirements may shift before being finalized. Turning Point believes it has products that meet the requisite standard and that it
will be able to efficiently produce satisfactory PMTA filings. However, there is no assurance that the FDA’s guidance or ultimate regulation will not change, the Remedy Order will not be further altered or that unforeseen circumstances will not arise
that prevent Turning Point from filing applications or otherwise increase the amount of time and money it is required to spend to successfully file all necessary PMTAs. Even if Turning Point successfully file all of its PMTAs in a timely manner, no
assurance can be given that the applications will ultimately be successful. Given the shorter time frame mandated by the Remedy Order, which if not amended or successfully appealed may result in the prioritization of meeting requisite deadlines by
selecting high priority SKUs, Turning Point’s inventory position, and future revenues may be adversely impacted.
In addition, Turning Point currently distributes many third-party manufactured vapor products for which it will be completely dependent on the manufacturer complying with the premarket filing
requirements. There can be no assurances that some products that Turning Point currently distribute will be able to be sold to end consumers after September 2020. While Turning Point will take measures to pursue regulatory compliance for its own
privately-branded or proprietary vape products that compete with these third-party products, there is no assurance that such proprietary products would be as successful in the marketplace or can fully displace third-party products that are currently
being distributed by Turning Point, which could adversely affect its results of operations and liquidity.
Recent Accounting Pronouncements Adopted
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial
instruments held by financial institutions and other organizations. This ASU applies to financial assets measured at amortized cost, including loans, held-to-maturity debt securities, net investments in leases, and trade accounts receivable as well
as certain off-balance sheet credit exposures, such as loan commitments. The ASU replaced the previous incurred loss impairment methodology with a methodology to reflect current expected credit losses and requires consideration of a broader range of
reasonable and supportable information to explain credit loss estimates. The guidance was adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The
ASU was effective for the Company beginning in the first quarter of 2020. The ASU did not have an impact on the Company’s financial statements and related disclosures.
In August 2018, the FASB issued ASU 2018-15, Intangibles
— Goodwill and Other — Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. ASU 2018-15 aligns the
requirements for capitalizing implementation costs in a cloud computing arrangement service contract with the requirements for capitalizing implementation costs incurred for an internal-use software license. The guidance is effective for interim
and annual periods beginning after December 15, 2019, with early adoption permitted. The Company adopted ASU 2018-15 effective January 1, 2020. The ASU did not have an impact
on the Company’s financial statements and related disclosures.
Recent Accounting Pronouncements Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12 to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approach for intra-period tax allocation,
the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This ASU will be effective beginning
in the first quarter of the Company’s fiscal year 2021. Early adoption is permitted. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be
applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The Company is currently evaluating the impact this ASU will have on the financial statements and related
disclosures, as well as the timing of adoption.
Note 3. Discontinued Operations
As of February 13, 2020, as a result of the approval of the Order of Liquidation, the control and net assets of Maidstone vested with the NYS Liquidation Bureau. The Company determined that the
disposal of Maidstone and its Insurance segment operations represented a strategic shift that had a major effect on the Company’s results of operations and, as a result, have reported the disposal as discontinued operations. As such, amounts related
to the Insurance Segment presented on the condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019 and condensed consolidated statements of operations for the period from January 1, 2020 to February 13, 2020 and the three
months ended March 31, 2019 have been reclassified as discontinued operations. In addition, the goodwill impairment charge of $2.8 million recorded during the first quarter of 2019 related to the Insurance segment has been reclassified to
discontinued operations. The Company recorded a loss on disposal of the Insurance segment of $1.0 million. The table below provide a reconciliation of the loss on disposal as of February 13, 2020:
(In thousands)
|
As of February 13, 2020
|
|||
Assets
|
||||
Cash and cash equivalents
|
$
|
4,939
|
||
Fixed maturities available for sale, at fair value; amortized cost
|
21,661
|
|||
Equity securities, at fair value
|
1,119
|
|||
Premiums receivable
|
2,564
|
|||
Property, plant and equipment, net
|
191
|
|||
Deferred policy acquisition costs
|
601
|
|||
Other assets
|
1,060
|
|||
Total assets
|
32,135
|
|||
Liabilities
|
||||
Reserves for losses and loss adjustment expenses
|
24,846
|
|||
Unearned premiums
|
5,427
|
|||
Advance premiums collected
|
469
|
|||
Accrued expenses
|
864
|
|||
Other long-term liabilities
|
484
|
|||
Total liabilities
|
32,090
|
|||
Net assets disposed
|
45
|
|||
Accrued expenses related to exit of Insurance segment
|
1,000
|
|||
Loss on disposal of Insurance segment
|
$
|
1,045
|
As a result of the disposal of the Insurance segment, the Company incurred expected costs of approximately $1.0 million related to its exit of the Insurance segment. The $1.0 million represents the
Company’s best estimate of the costs to be incurred in connection with the exit. These final costs could be different and such differences could be material. These costs are included in the calculation of the loss on disposal in the table above.
The related assets and liabilities of the Insurance Segment are presented as assets and liabilities of discontinued operations in the condensed consolidated balance sheets as of March 31, 2020 and
December 31, 2019. The following table provides details of the carrying amounts of major classes of assets and liabilities related to discontinued operations as of March 31, 2020 and December 31, 2019:
(In thousands)
|
March 31, 2020
|
December 31, 2019
|
||||||
ASSETS OF DISCONTINUED OPERATIONS
|
||||||||
Cash and cash equivalents
|
$
|
-
|
$
|
6,626
|
||||
Fixed maturities available for sale, at fair value; amortized cost
|
-
|
21,680
|
||||||
Equity securities, at fair value
|
-
|
1,075
|
||||||
Premiums receivable
|
-
|
2,440
|
||||||
Property, plant and equipment, net
|
-
|
208
|
||||||
Right-of-use assets
|
-
|
13
|
||||||
Deferred policy acquisition costs
|
-
|
993
|
||||||
Other assets
|
-
|
913
|
||||||
Total assets
|
$
|
-
|
$
|
33,948
|
||||
LIABILITIES OF DISCONTINUED OPERATIONS
|
||||||||
Reserves for losses and loss adjustment expenses
|
$
|
-
|
$
|
25,393
|
||||
Unearned premiums
|
-
|
5,818
|
||||||
Advance premiums collected
|
-
|
318
|
||||||
Accrued expenses
|
1,254
|
891
|
||||||
Current portion of operating lease liabilities
|
-
|
34
|
||||||
Other long-term liabilities
|
-
|
847
|
||||||
Total liabilities
|
$
|
1,254
|
$
|
33,301
|
The following table provides details of the amounts reflected in loss from discontinued operations, net of tax in the condensed consolidated statements of operations for the three months ended March 31, 2020 and 2019:
Three Months Ended March 31
|
||||||||
(In thousands)
|
2020
|
2019
|
||||||
Revenues:
|
||||||||
Insurance premiums earned
|
$
|
1,959
|
$
|
7,149
|
||||
Net investment income
|
66
|
335
|
||||||
Other income
|
83
|
219
|
||||||
Total revenues of discontinued operations
|
2,108
|
7,703
|
||||||
Operating costs and expenses:
|
||||||||
Incurred losses and loss adjustment expenses
|
1,674
|
6,564
|
||||||
Impairment loss on goodwill and other intangibles
|
-
|
2,826
|
||||||
Loss on disposal of Insurance segment
|
1,045
|
-
|
||||||
Other operating expenses
|
1,101
|
2,716
|
||||||
Total operating costs and expenses
|
3,820
|
12,106
|
||||||
Operating loss of discontinued operations
|
(1,712
|
)
|
(4,403
|
)
|
||||
Loss before income taxes
|
(1,712
|
)
|
(4,403
|
)
|
||||
Income tax benefit
|
-
|
(420
|
)
|
|||||
Net loss of discontinued operations, net of tax
|
$
|
(1,712
|
)
|
$
|
(3,983
|
)
|
The components of cash flow provided by or used in operating, investing and financing activities resulting from discontinued operations are presented as separate line items on the accompanying
condensed consolidated statements of cash flows for the three months ended March 31, 2020 and 2019.
Accounting Policies of Amounts Reclassified to Discontinued Operations
Deferred Policy Acquisition Costs
Maidstone’s policy acquisition costs, which varied with and were directly related to the production of successful new business, were deferred. The costs deferred consisted principally of
commissions and policy issuance costs and were amortized into expense as the related premiums were earned.
Incurred Losses and Loss Adjustment Expenses
Incurred losses and loss adjustment expenses (“LAE”) were charged to operations when incurred. The liability for losses and LAE was based upon individual case estimates for reported claims and a
factor for incurred but not reported (“IBNR”) claims. Losses, LAE and related liabilities were reported net of estimated salvage and subrogation.
Investments Reclassified to Discontinued Operations
Debt Securities
Maidstone classified all of its investments in fixed maturity debt securities as available-for-sale and, accordingly, they were carried at estimated fair value. The amortized cost, gross unrealized
gains and losses, and fair value of investments in fixed maturity securities were as follows as of:
(In thousands)
|
Amortized Cost
|
Gross Unrealized
Gains
|
Gross Unrealized
Losses
|
Fair Value
|
||||||||||||
December 31, 2019
|
||||||||||||||||
U.S. Treasury and U.S. Government
|
$
|
11,253
|
$
|
30
|
$
|
-
|
$
|
11,283
|
||||||||
U.S. Tax-exempt municipal
|
2,508
|
76
|
-
|
2,584
|
||||||||||||
Corporate
|
3,907
|
82
|
-
|
3,989
|
||||||||||||
Mortgage and asset-backed securities
|
3,760
|
64
|
-
|
3,824
|
||||||||||||
Total Fixed Maturity Securities
|
$
|
21,428
|
$
|
252
|
$
|
-
|
$
|
21,680
|
Fixed maturity securities that were in an unrealized loss position and the length of time that such securities had been in an unrealized loss position, as measured by their prior 12-month fair values, were as follows
as of:
Less Than 12 Months
|
12 Months or More
|
Total
|
||||||||||||||||||||||
(In thousands)
|
Fair Value
|
Gross Unrealized
Losses
|
Fair Value
|
Gross Unrealized
Losses
|
Fair Value
|
Gross Unrealized
Losses
|
||||||||||||||||||
December 31, 2019
|
||||||||||||||||||||||||
Bonds:
|
||||||||||||||||||||||||
U.S. Treasury and U.S. Government
|
$
|
3,698
|
$
|
(386
|
)
|
$
|
-
|
$
|
-
|
$
|
3,698
|
$
|
(386
|
)
|
||||||||||
Mortgage and asset-backed securities
|
-
|
-
|
59
|
(32
|
)
|
59
|
(32
|
)
|
||||||||||||||||
Total fixed maturities available for sale
|
$
|
3,698
|
$
|
(386
|
)
|
$
|
59
|
$
|
(32
|
)
|
$
|
3,757
|
$
|
(418
|
)
|
Maidstone had evaluated the unrealized losses on the fixed maturity securities and determined that they were not attributable to credit risk
factors. For fixed maturity securities, losses in fair value were viewed as temporary if the fixed maturity security could be held to maturity and it was reasonable to assume that the issuer would be able to service the debt, both as to principal
and interest. Maidstone did not recognize OTTI losses during the year ended December 31, 2019.
Net investment income
Maidstone had $0.1 million and $0.3 million of net investment income for the period from January 1, 2020 to February 13, 2020 (the date of disposal) and the three months ended March 31, 2019, respectively.
Fair value disclosures
The following tables show how Maidstone’s investments were categorized in the fair value hierarchy as of December 31, 2019:
(In thousands)
|
Level 1
|
Level 2
|
Level 3
|
Total Fair Value
|
||||||||||||
December 31, 2019
|
||||||||||||||||
Common stock
|
$
|
255
|
$
|
-
|
$
|
-
|
$
|
255
|
||||||||
Preferred stocks
|
-
|
820
|
-
|
820
|
||||||||||||
Total equities:
|
$
|
255
|
$
|
820
|
$
|
-
|
$
|
1,075
|
||||||||
Fixed maturities:
|
||||||||||||||||
U.S. treasury and U.S. government
|
$
|
11,283
|
$
|
-
|
$
|
-
|
$
|
11,283
|
||||||||
U.S. tax-exempt municipal
|
-
|
2,584
|
-
|
2,584
|
||||||||||||
Corporate
|
-
|
3,989
|
-
|
3,989
|
||||||||||||
Mortgage and asset-backed securities
|
-
|
3,824
|
-
|
3,824
|
||||||||||||
Total fixed maturities
|
$
|
11,283
|
$
|
10,397
|
$
|
-
|
$
|
21,680
|
There were no transfers between levels during the period from January 1, 2020 to February 13, 2020 (the date of disposal).
Restricted Assets
The insurance subsidiaries maintained assets in trust accounts as collateral for or guarantees for letters of credit to third parties. As of December 31, 2019,
the carrying value of deposits the Company had on deposit with U.S. regulatory authorities was $2.8 million.
Liability for Losses and Loss Adjustment Expenses
The liability for losses and loss adjustment expenses disclosures below relate to the current and prior period presentation of the Insurance segment, which as of February 13, 2020, was disposed of
and classified as a discontinued operation. Activity in the liability for losses and LAE is summarized as follows:
(In thousands)
|
For the Period Ended
February 13, 2020
|
Three Months Ended
March 31, 2019
|
||||||
Reserve for losses and LAE at beginning of period
|
$
|
25,393
|
$
|
27,330
|
||||
Provision for claims, net of insurance:
|
||||||||
Incurred related to:
|
||||||||
Prior year
|
231
|
622
|
||||||
Current year
|
1,443
|
5,871
|
||||||
Total incurred
|
1,674
|
6,493
|
||||||
Deduct payment of claims, net of reinsurance:
|
||||||||
Paid related to:
|
||||||||
Prior year
|
1,851
|
4,743
|
||||||
Current year
|
370
|
2,096
|
||||||
Total paid
|
2,221
|
6,839
|
||||||
Reserve for losses and LAE at end of period
|
$
|
24,846
|
$
|
26,984
|
The components of the net liability for losses and LAE were as follows as of:
(In thousands)
|
February 13, 2020
|
December 31, 2019
|
||||||
Case basis reserves
|
$
|
11,784
|
$
|
12,078
|
||||
Incurred but not reported reserves
|
13,062
|
13,315
|
||||||
Total
|
$
|
24,846
|
$
|
25,393
|
Contingencies
Maidstone was a party to lawsuits arising in the normal course of its business. These lawsuits would generally seek to establish liability under insurance policies and occasionally seek punitive
damages. In August 2019, Maidstone consented to the entry of an order of liquidation pursuant to Article 74 of the Order of Liquidation with the NYSDFS. On January 14, 2020, the NYSDFS filed a petition for an Order of
Liquidation in the Court with respect to Maidstone and on February 13, 2020, the Court conducted a hearing with respect to the Order of Liquidation and, thereafter, approved the Order of Liquidation. As a result of this approval, the
Company reclassified its Insurance segment to discontinued operations.
Note 4. Acquisitions
Acquisitions by Turning Point
Solace Technologies
In July 2019, Turning Point purchased the assets of E-Vape 12, Inc and Solace Technologies LLC (“Solace”) for $9.4 million
in total consideration, comprised of $7.7 million in cash, $1.1 million earn-out fair value, and $0.5 million holdback for 18 months, which was adjusted by $0.2 million for a working capital deficiency. The earn-out consists of 44,295 shares of
Turning Point’s common stock to be issued to the former owners upon the achievement of certain annual milestones. Immediately following the acquisition, 88,582 performance based restricted stock units with a
fair value of $4.62 million were issued to former owners who became employees. See Note 16, “Share-Based Compensation”, for further details. Solace is an innovative product development company that has grown from the creator of one of the leading
vape juice brands in the industry into a leader of alternative ingredients product development. Turning Point intends to incorporate Solace’s innovative products as well as the legacy vapor products into its
Nu-X development engine. As of March 31, 2020, Turning Point had not completed the accounting for the acquisition. The following purchase price and goodwill and other intangibles are based on the excess of the acquisition price over the estimated
fair value of the tangible assets acquired and are based on management’s preliminary estimates:
|
(preliminary)
|
|||
Total consideration transferred
|
$
|
9,405
|
||
Adjustments to consideration transferred:
|
||||
Cash acquired
|
(45
|
)
|
||
Working capital
|
(235
|
)
|
||
Adjusted consideration transferred
|
9,125
|
|||
Assets acquired:
|
||||
Working capital (primarily AR and inventory)
|
1,132
|
|||
Fixed assets and other long term assets
|
414
|
|||
Intangible assets
|
1,352
|
|||
Other liabilities
|
(209
|
)
|
||
Net assets acquired
|
2,689
|
|||
Goodwill
|
$
|
6,436
|
The goodwill of $6.4 million consists of the synergies and scale expected from combining the operations and is currently deductible for tax purposes.
Note 5. Derivative Instruments
Foreign Currency
The Company’s policy is to manage the risks associated with foreign exchange rate movements. The policy allows hedging up to 100% of its anticipated purchases
of inventory over a forward period that will not exceed 12 rolling and consecutive months. The Company may, from time to time, hedge currency for non-inventory purchases, e.g., production equipment, not to exceed 90% of the purchase price. The
Company did not execute any forward contracts during the three months ended March 31, 2020 and 2019.
Interest Rate Swaps
The Company’s policy is to manage interest rate risk by reducing the volatility of future cash flows associated with debt instruments bearing interest at
variable rates. In March 2018, the Company executed various interest rate swap agreements for a notional amount of $70 million with an expiration of December 2022. The swap agreements fix LIBOR at 2.755%. The swap agreements met the hedge
accounting requirements; thus, any change in fair value is recorded to other comprehensive income. The Company uses the Shortcut Method to account for the swap agreements. The Shortcut Method assumes the hedge to be perfectly effective; thus, there
is no ineffectiveness to be recorded in earnings. The swap agreements’ fair values at March 31, 2020 and December 31, 2019, resulted in a liability of $4.8 million and $2.5 million, respectively, included in other long-term liabilities.
The estimated fair value amounts have been determined by the Company using the methods and assumptions described below. However, considerable judgment is required to interpret
market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value amounts.
Cash and Cash Equivalents
Cash and cash equivalents are, by definition, short-term. Thus, the carrying amount is a reasonable estimate of fair value.
Accounts Receivable
The fair value of accounts receivable approximates their carrying value due to their short-term nature.
2018 Revolving Credit Facility
The fair value of Turning Point’s 2018 Revolving Credit Facility approximates its carrying value as the interest rate fluctuates with changes in market rates.
Long-Term Debt
Turning Point’s 2018 Credit Facility bears interest at variable rates that fluctuate with market rates, the carrying values of
the long-term debt instruments approximate their respective fair values. As of March 31, 2020, the fair value of the 2018 First Lien Term Loan approximated $144.0 million. As of December 31, 2019, the fair value of the 2018 First Lien Term Loan
approximated $146.0 million.
The Convertible Senior Notes bear interest at a rate of 2.50% per year and the fair value approximated $141.6 million, with a carrying value of $172.5 million as of March 31, 2020. As of December
31, 2019, the fair value of the Convertible Senior Notes approximated $140.1 million, with a carrying value of $172.5 million.
The fair value of Standard Outdoor’s promissory notes issued as partial consideration in the January and February 2018 asset acquisitions approximated $6.9
million as of March 31, 2020 and $8.0 million as of December 31, 2019.
The fair value of SDI’s term loan debt issued in September 2019 approximates its carrying value as the interest rate fluctuates with changes in market rates.
See Note 12, “Notes Payable and Long-Term Debt”, for further information regarding the Company’s long-term debt.
Interest Rate Swaps
Turning Point had swap contracts for a total notional amount of $70 million as of March 31, 2020 and December 31, 2019. The fair values of the swap contracts are based upon quoted market prices and
resulted in a liability of $4.8 million and $2.5 million as of March 31, 2020 and December 31, 2019, respectively.
Note 7. Inventories
The components of inventories are as follows as of:
(In thousands)
|
March 31, 2020
|
December 31, 2019
|
||||||
Raw materials and work in process
|
$
|
6,574
|
$
|
7,050
|
||||
Leaf tobacco
|
36,900
|
32,763
|
||||||
Finished goods - Smokeless products
|
5,907
|
5,680
|
||||||
Finished goods - Smoking products
|
11,081
|
13,138
|
||||||
Finished goods - NewGen products
|
13,535
|
17,111
|
||||||
Other
|
950
|
989
|
||||||
Gross inventory
|
74,947
|
76,731
|
||||||
LIFO reserve
|
(5,752
|
)
|
(5,752
|
)
|
||||
Net inventory
|
$
|
69,195
|
$
|
70,979
|
The inventory valuation allowance was $19.2 million and $21.5 million as of March 31, 2020 and December 31, 2019, respectively.
Inventory reserves increased in the fourth quarter 2019 as a result of additional reserves necessary for products in Turning Point’s NewGen segment primarily from increased regulation.
Note 8. Other Current Assets
Other current assets consist of the following as of:
(In thousands)
|
March 31, 2020
|
December 31, 2019
|
||||||
Inventory deposits
|
$
|
5,616
|
$
|
4,012
|
||||
Prepaid taxes
|
3,250
|
3,673
|
||||||
Other
|
10,177
|
8,706
|
||||||
$
|
19,043
|
$
|
16,391
|
Note 9. Property, Plant and Equipment
Property, plant and equipment consist of the following as of:
(In thousands)
|
March 31, 2020
|
December 31, 2019
|
||||||
Land
|
$
|
22
|
$
|
22
|
||||
Building and improvements
|
2,655
|
2,655
|
||||||
Leasehold improvements
|
2,511
|
2,567
|
||||||
Machinery and equipment
|
15,103
|
14,532
|
||||||
Advertising structures
|
18,650
|
18,650
|
||||||
Furniture and fixtures
|
8,307
|
8,502
|
||||||
Gross property, plant and equipment
|
47,248
|
46,928
|
||||||
Accumulated depreciation
|
(17,815
|
)
|
(16,768
|
)
|
||||
Net property, plant and equipment
|
$
|
29,433
|
$
|
30,160
|
Note 10. Other Assets
Other assets consist of the following as of:
(In thousands)
|
March 31, 2020
|
December 31, 2019
|
||||||
Equity investments
|
$
|
5,421
|
$
|
5,421
|
||||
Pension assets
|
1,753
|
1,686
|
||||||
Other
|
3,684
|
3,583
|
||||||
Total
|
$
|
10,858
|
$
|
10,690
|
In July 2019, Turning Point obtained a 30% stake in Canadian distribution entity, ReCreation Marketing (“ReCreation”), for $1.0 million paid at closing. Turning Point also received options to
acquire up to a 50% ownership position in ReCreation.
Note 11. Accrued Liabilities
Accrued liabilities consist of the following as of:
(In thousands)
|
March 31, 2020
|
December 31, 2019
|
||||||
Accrued payroll and related items
|
$
|
6,144
|
$
|
5,267
|
||||
Customer returns and allowances
|
5,537
|
6,160
|
||||||
Taxes payable
|
1,508
|
705
|
||||||
Lease liabilities
|
2,745
|
2,453
|
||||||
Accrued interest
|
1,241
|
2,236
|
||||||
Other
|
13,335
|
10,817
|
||||||
Total
|
$
|
30,510
|
$
|
27,638
|
Note 12. Notes Payable and Long-Term Debt
Notes payable and long-term debt consist of the following as of:
(In thousands)
|
March 31, 2020
|
December 31, 2019
|
||||||
2018 First Lien Term Loan
|
$
|
144,000
|
$
|
146,000
|
||||
Convertible Senior Notes
|
172,500
|
172,500
|
||||||
SDI GACP Term Loan
|
25,000
|
25,000
|
||||||
Standard Outdoor Promissory Notes
|
7,242
|
8,447
|
||||||
Note payable - IVG
|
-
|
4,240
|
||||||
Gross notes payable and long-term debt
|
348,742
|
356,187
|
||||||
Less deferred finance charges
|
(7,191
|
)
|
(7,558
|
)
|
||||
Less debt discount
|
(30,333
|
)
|
(32,083
|
) |
||||
Less current maturities
|
(13,743
|
)
|
(16,977
|
)
|
||||
Net notes payable and long-term debt
|
$
|
297,475
|
$
|
299,569
|
2018 Credit Facility
On March 7, 2018, Turning Point entered into a $250 million credit facility consisting of a $160 million 2018 First Lien Term Loan with Fifth Third Bank, as
administrative agent, and other lenders, and a $50 million 2018 Revolving Credit Facility (collectively, the “2018 First Lien Credit Facility”) in addition to a $40 million
2018 Second Lien Term Loan (the “2018 Second Lien Credit Facility,” and, together with the 2018 First Lien Credit Facility, the “2018 Credit Facility”) with Prospect Capital
Corporation, as administrative agent, and other lenders. The 2018 Credit Facility contains a $40 million accordion feature.
The 2018 Credit Facility contains customary events of default including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material
indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, and change in control defaults. The 2018 Credit Facility also contains certain negative
covenants customary for facilities of these types including covenants that, subject to exceptions described in the 2018 Credit Facility, restrict the ability of Turning Point and its subsidiary guarantors: (i) to pledge assets, (ii) to incur
additional indebtedness, (iii) to pay dividends, (iv) to make distributions, (v) to sell assets, and (vi) to make investments.
2018 First Lien Credit Facility: The 2018 First Lien Term Loan and the 2018 Revolving Credit Facility
bear interest at LIBOR plus a spread of 2.75% to 3.50% based on Turning Point’s senior leverage ratio. The 2018 First Lien Term Loan has quarterly required payments of $2.0 million beginning June 30, 2018,
increasing to $3.0 million on June 30, 2020, and increasing to $4.0 million on June 30, 2022. The 2018 First Lien Credit Facility has a maturity date of March 7, 2023. The 2018 First Lien Term Loan is secured by a first priority lien on
substantially all of the assets of the borrowers and the guarantors thereunder, including a pledge of Turning Point’s capital stock, other than certain excluded assets (the “Collateral”). In connection with the Convertible Senior Notes offering, Turning Point entered into a First Amendment (“the Amendment”) to the First Lien Credit Agreement, with Fifth Third Bank, as administrative agent, and other lenders and certain other lender parties thereto. The Amendment was entered into primarily to permit Turning Point to issue up to
$200 million of convertible senior notes, enter into certain capped call transactions in connection with the issuance of such notes and to use the proceeds from the issuance of the notes to repay amounts outstanding under Turning Point’s 2018 Second Lien Credit Facility and use the remaining proceeds for acquisitions and investments. In connection with the Amendment, fees of $0.7 million were incurred. The 2018 First Lien Credit Facility contains
certain financial covenants, which were amended in connection with the Convertible Senior Notes offering in the third quarter 2019. The covenants include maximum senior leverage ratio of 3.00x with step-downs to 2.50x, a maximum total leverage
ratio of 5.50x with step-downs to 5.00x, and a minimum fixed charge coverage ratio of 1.20x. In the first quarter of 2020, the financial covenants were amended to permit certain add-backs related to PMTA in the definition of Consolidated EBITDA for
the period of October 1, 2019 until September 30, 2020. In connection with the amendment, fees of $0.2 million were incurred. Based on an excess cash covenant for the facility, a principal payment of $4.5 million was due in the second quarter of
2019. All parties agreed to waive the payment, resulting in consent fees of $0.1 million. The weighted average interest rate of the 2018 First Lien Term Loan was 3.74% as of March 31, 2020. As of March 31, 2020, Turning Point had no borrowings
outstanding under the 2018 Revolving Credit Facility. The $50.0 million unused portion of the 2018 Revolving Credit Facility is reduced by letters of credit from Fifth Third Bank totaling $3.7 million, resulting in $46.3 million of availability
under the 2018 Revolving Credit Facility as of March 31, 2020.
2018 Second Lien Credit Facility: The 2018 Second Lien Credit Facility bore interest at a rate of LIBOR plus 7.00% and had a maturity date of
March 7, 2024. The 2018 Second Lien Term Loan was secured by a second priority interest in the Collateral and was guaranteed by the same entities as the 2018 First Lien Term Loan. Based on an excess cash covenant for the facility, a $4.5 million
principal payment was made in the second quarter 2019, resulting in a $0.2 million loss on extinguishment of debt. Turning Point used a portion of the proceeds from the issuance of the Convertible Senior Notes to prepay all outstanding amounts
related to the 2018 Second Lien Credit Facility in the third quarter 2019. The principal paid in the third quarter amounted to $35.5 million, and the transaction resulted in a $1.1 million loss on extinguishment of debt.
Convertible Senior Notes
In July 2019, Turning Point closed an offering of $172.5 million in aggregate principal amount of 2.50% Convertible Senior Notes due July 15, 2024 (the “Convertible
Senior Notes”). The Convertible Senior Notes bear interest at a rate of 2.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. The Convertible
Senior Notes will mature on July 15, 2024, unless earlier repurchased, redeemed or converted. The Convertible Senior Notes are senior unsecured obligations of Turning Point.
The Convertible Senior Notes are convertible into approximately 3,202,808 shares of Turning Point voting common stock under certain circumstances prior to maturity at a conversion rate of 18.567
shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.86 per share, subject to adjustment under certain conditions, but will not be adjusted for any accrued and unpaid interest.
Upon conversion, Turning Point may pay cash, shares of common stock or a combination of cash and stock, as determined by Turning Point at its discretion. The conditions required to allow the holders to convert their Convertible Senior Notes were
not met as of March 31, 2020.
Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a
manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the Convertible Senior Notes, Turning Point separated the Convertible Senior Notes into
liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component,
which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the Convertible Senior Notes and the fair value of the liability component of the Convertible Senior Notes. The excess of the principal
amount of the liability component over its carrying amount (“debt discount”), $35.0 million, will be amortized to interest expense using an effective interest rate of 7.5%
over the expected life of the Convertible Senior Notes. The equity component is not remeasured as long as it continues to meet the criteria for equity classification. Interest expense includes $1.8 million of amortization for the three months ended
March 31, 2020.
In accounting for the issuance costs related to the issuance of the Convertible Senior Notes, Turning Point allocated the total amount incurred to the liability and equity components based on their
relative fair values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the Convertible Senior Notes, $4.7 million, and the debt issuance
costs attributable to the equity component, $1.2 million, are netted with the equity component of stockholders’ equity.
In connection with the Convertible Senior Notes offering, Turning Point entered into privately negotiated capped call transactions with certain financial institutions. The capped call transactions
have a strike price of $53.86 per and a cap price of $82.86 per, and are exercisable when, and if, the Convertible Senior Notes are converted. Turning Point paid $20.53 million for these capped calls and charged that amount to additional paid-in
capital.
Note Payable - IVG
In September 2018, Turning Point issued a note payable to IVG’s former shareholders (“IVG Note”).
The IVG Note was $4.0 million principal with 6.0% interest compounding annually and matured on March 5, 2020. All principal and accrued and unpaid interest under the IVG Note were subject to indemnification obligations of the sellers pursuant to
the International Vapor Group Stock Purchase Agreement dated as of September 5, 2018. The carrying amount of the IVG Note, $4.2 million, was deposited into an escrow account pending agreement with the sellers of any indemnification obligations.
SDI and Standard Outdoor
SDI
On September 18, 2019, the Company entered into a Term Loan Agreement (the “Term Loan Agreement”) with GACP II, L.P., a
Delaware limited partnership (the “Agent”), as administrative agent and collateral agent for the financial institutions (the “Lenders”). The Term Loan Agreement provided for a term loan of $25.0 million (the “Term Loan”).
The Term Loan bears interest at a rate equal to the three-month “Libor Rate” as published in The Wall Street Journal plus
9.00%. Interest under the Term Loan Agreement is payable monthly with the principal balance due on September 18, 2024. The Term Loan was subject to a closing fee of $0.5 million, which was paid upon execution of the Term Loan Agreement.
Additionally, the Term Loan is subject to an agent monitoring fee of $25 thousand, payable quarterly. An early termination fee shall be due at any time if on or prior to the third anniversary of the closing of the Term Loan, the Company prepays or
repays (whether voluntarily or mandatorily), or is required to prepay or repay, the Term Loan in whole or in part. Prior to the first anniversary of the closing of the Term Loan, the early termination fee is the greater of (a) 2.0% of amount of the
Term Loan or $0.5 million, or (b) the interest on the Term Loan that would have accrued during the first year following closing, less actual interest payments paid through the date of prepayment. Any time after the first anniversary of the closing
of the Term Loan and prior to the third anniversary, the early termination fee reduces to 1.0% of the amount of the Term Loan or $0.25 million. The obligations of the Company under the Term Loan Agreement are secured by all of the shares of Turning
Point stock owned by the Company. In connection with the closing of the proposed Merger with Turning Point, as more fully described in Note 22, we expect to prepay the Term Loan at the time of the Merger. The
Merger is subject to customary closing conditions, including approval by holders of a majority of the aggregate voting power of the SDI Common Stock and the receipt of any applicable regulatory approvals. The Company expects the transaction to
close in the summer of 2020. If the closing of the Merger were to occur on or around June 30, 2020, it would incur an early termination fee of approximately $0.6 million and this amount would reduce, over time, to its
floor of $0.5 million, if prepayment occurs on or before September 18, 2020. The Company has classified the Term Loan as a non-current liability as of March 31, 2020 as the Merger is still subject to customary closing conditions, including
approval by holders of a majority of the aggregate voting power of the SDI Common Stock and the receipt of any applicable regulatory approvals. In order to raise the capital needed, along with its existing cash on hand, to retire such liabilities,
including this indebtedness, the Company may consider a variety of transactions, including a sale of a portion of the shares of TPB Common Stock that the Company owns. The Term Loan Agreement contains certain affirmative and negative covenants that
are binding on the Company, including, but not limited to, restrictions (subject to specified exceptions and qualifications) on the ability of the Company to incur indebtedness, to create liens, to merge or consolidate, to make dispositions, to pay
dividends or make distributions, to make investments, to pay any subordinated indebtedness, to enter into certain transactions with affiliates or to make capital expenditures. The Term Loan Agreement contains customary events of default (which are
in some cases subject to certain exceptions, thresholds, notice requirements and grace periods). The Term Loan Agreement also contains certain representations, warranties and conditions, in each case as set forth in the Term Loan Agreement.
With respect to the maintenance of at least $2.0 million in unrestricted cash and cash equivalents in accounts subject to control agreements in favor of the Agent, as of March 31, 2020, the Company
had approximately $7.1 million in unrestricted cash and cash equivalents in those accounts.
On September 18, 2019, in connection with entering into the Term Loan Agreement, the Company repaid in full all amounts outstanding under the term loan agreement with Crystal Financial LLC
(“Crystal Term Loan”). The Company capitalized $0.6 million of deferred financing costs associated with closing on the Term Loan.
Interest expense related to the Term Loan and the Crystal Term Loan of $0.7 million and $0.4 million, including amortization of the discount, was recorded for the three months ended March 31, 2020
and 2019, respectively.
Standard Outdoor
On January 18, 2018, as partial consideration for an asset purchase of 83 billboard structures located in Alabama, as well as the ground leases and advertising contracts relating to such billboard
structures, the Company issued a promissory note with a face value of $6.5 million. The promissory note was recorded net of a discount of $0.9 million, representing the difference between the face value and fair value at issuance. This discount
will be amortized into interest expense using the effective interest rate method over the term of the promissory note. A principal payment of $1.0 million on the promissory note is payable January 1 of each year, beginning January 1, 2020 and
ending January 1, 2022, with a $3.5 million final principal payment on January 1, 2023. The promissory note has a 5% fixed coupon interest rate and interest is payable quarterly.
On February 20, 2018, as partial consideration for an asset purchase of 86 billboard structures located in Georgia and Florida, as well as the ground leases and advertising contracts relating to
such billboard structures, the Company issued a promissory note with a face value of $3.5 million. The promissory note was recorded net of a discount of $0.3 million, representing the difference between the face value and fair value at issuance.
This discount will be amortized into interest expense using the effective interest rate method over the term of the promissory note. Principal payments began on March 1, 2019, with the remaining principal paid down monthly through March 1, 2022.
The promissory note has a 5% fixed coupon interest rate and interest is payable monthly.
Interest expense related to the Standard Outdoor loans of $0.2 million, including amortization of the discount, was recorded for the three months ended March 31, 2020 and 2019.
The following table summarizes the consolidated scheduled principal repayments subsequent to March 31, 2020:
(In thousands)
|
Future Minimum
Principal
Payments
|
|||
2020
|
$
|
9,633
|
||
2021
|
13,882
|
|||
2022
|
16,227
|
|||
2023
|
111,500
|
|||
2024
|
197,500
|
|||
thereafter
|
-
|
|||
Total
|
$
|
348,742
|
On April 7, 2020, the Company transferred its equity interest in Standard Outdoor, which included the transfer of the remaining $7.2 million of Standard Outdoor’
outstanding indebtedness, included in the table above. See Note 22, “Subsequent Events” for further information.
Note 13. Leases
As of January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). The main impact to the financial statements is the recognition of lease liabilities and right of use assets.
Turning Point
Turning Point’s leases consist primarily of leased property for its manufacturing warehouse, head offices and retail space as well as vehicle leases. In general, Turning Point does not recognize
any renewal periods within the lease terms as there are not significant barriers to ending the lease at the initial term. Lease and non-lease components are accounted for as a single lease component.
Standard Outdoor
Standard Outdoor leases land and constructs a billboard that it owns, or leases an existing billboard owned by a third party. Standard Outdoor does recognize certain renewal periods to match the
remaining useful life of its billboard structures. From a lessor perspective, Standard Outdoor has operating leases related to customers that use its billboards to advertise; however, these lessees are typically considered to be short-term (less
than 12 months) and are not cyclical with the same lessee.
Leases with an initial term of 12 months or less are not recorded on the condensed consolidated balance sheets. Lease expense for these leases is recognized on a straight-line basis over the lease
term.
The components of lease expense consist of the following:
(In thousands)
|
Three Months Ended
March 31, 2020
|
Three Months Ended
March 31, 2019
|
||||||
Operating lease cost:
|
||||||||
Cost of sales
|
$
|
349
|
$
|
192
|
||||
Selling, general and administrative
|
431
|
669
|
||||||
Variable lease cost (1)
|
376
|
298
|
||||||
Short-term lease cost
|
83
|
54
|
||||||
Sublease income
|
(30
|
)
|
(30
|
)
|
||||
Total
|
$
|
1,209
|
$
|
1,183
|
(1) |
Variable lease cost primarily includes elements of a contract that do not represent a good or service, but for which the lessee is responsible for paying.
|
Supplemental balance sheet information related to leases consist of the following as of:
(In thousands)
|
March 31, 2020
|
December 31, 2019
|
||||||
Assets:
|
||||||||
Right of use assets
|
$
|
15,526
|
$
|
14,490
|
||||
Total leased assets
|
$
|
15,526
|
$
|
14,490
|
||||
Liabilities:
|
||||||||
Current lease liabilities (1)
|
$
|
2,745
|
$
|
2,453
|
||||
Long-term lease liabilities
|
13,997
|
13,262
|
||||||
Total lease liabilities
|
$
|
16,742
|
$
|
15,715
|
(1) |
Reported within accrued liabilities on the condensed consolidated balance sheet.
|
|
March 31, 2020
|
December 31, 2019
|
||||||
Consolidated weighted average remaining lease term - operating leases
|
8.4 years
|
8.7 years
|
||||||
Consolidated weighted average discount rate - operating leases
|
6.45
|
%
|
6.67
|
%
|
Nearly all the lease contracts for the Company do not provide a readily determinable implicit rate. For these contracts, the Company estimated the incremental borrowing rate based
on information available upon adoption of ASU 2016-02. The Company applied a consistent method in periods after the adoption of ASU 2016-02 to estimate the incremental borrowing rate.
As of March 31, 2020, future maturities of lease liabilities consist of the following:
Year
|
Payments
(in thousands) |
|||
2020
|
$
|
2,987
|
||
2021
|
3,703
|
|||
2022
|
3,080
|
|||
2023
|
2,639
|
|||
2024
|
1,457
|
|||
Thereafter
|
8,151
|
|||
Total lease payments
|
22,017
|
|||
Less: Imputed interest
|
5,275
|
|||
Present value of lease liabilities
|
$
|
16,742
|
On April 7, 2020, the Company transferred its equity interest in Standard Outdoor, which included the transfer of $2.5 million of lease liabilities included in the tables above. See
Note 22, “Subsequent Events” for further information.
During the first quarter, Turning Point entered into a number of additional operating leases related to vehicles for business use. These changes resulted in additional lease liabilities of $1.6
million as of March 31, 2020.
Note 14. Pension and Postretirement Benefit Plans
Turning Point has a defined benefit pension plan. Benefits for hourly employees were based on a stated benefit per year of service, reduced by
amounts earned in a previous plan. Benefits for salaried employees were based on years of service and the employees’ final compensation. The defined benefit pension plan is frozen. Turning Point’s policy is to make the minimum amount of contributions that can be deducted for federal income taxes. Turning Point expects to make no contributions to the pension plan in 2020. In October 2019, Turning Point
elected to terminate the defined benefit pension plan, effective December 31, 2019 with final distributions to be made in 2020.
Turning Point sponsored a defined benefit postretirement plan that covered hourly employees. This plan provides medical and dental benefits. This plan is contributory with retiree contributions
adjusted annually. Turning Point’s policy is to make contributions equal to benefits paid during the year. Turning Point does not expect to contribute to its postretirement plan in 2020 for the payment of
benefits. In October 2019, Turning Point amended the plan to cease benefits effective June 30, 2020.
The following table provides the components of net periodic pension and postretirement benefit costs and total costs for the plans:
Three Months Ended March 31,
|
||||||||||||||||
|
Pension Benefits
|
Post-Retirement Benefits
|
||||||||||||||
(In thousands)
|
2020
|
2019
|
2020
|
2019
|
||||||||||||
Service cost
|
$
|
-
|
$
|
26
|
$
|
-
|
$
|
-
|
||||||||
Interest cost
|
95
|
130
|
-
|
25
|
||||||||||||
Expected return on plan assets
|
(161
|
)
|
(161
|
)
|
-
|
-
|
||||||||||
Amortization of losses (gains)
|
36
|
37
|
(57
|
)
|
(42
|
)
|
||||||||||
Net periodic benefit (income) cost
|
$
|
(30
|
)
|
$
|
32
|
$
|
(57
|
)
|
$
|
(17
|
)
|
Note 15. Stockholders’ Equity
Common Stock
At the consummation of the Contribution and Exchange, the Company issued 7,335,018 shares of its Class A common stock to Turning Point shareholders, in exchange for 9,842,373 shares of Turning
Point stock, and 857,714 shares of its Class A common stock, in exchange for the Company’s outstanding common stock. The Company also issued 13,700 shares of Class A common stock to holders of the Company’s restricted stock, which vested at the time of the Contribution and Exchange. Following the consummation of the Contribution and Exchange, the Company distributed a dividend of one share of Class B common stock
for each outstanding share of Class A common stock, for a total issuance of 8,190,166 shares of Class B common stock. In addition, under the Fifth Amended and Restated Certificate of Incorporation, which became effective at the time of the
Contribution and Exchange, the number of authorized shares of the Company’s common stock, $0.01 par value per share, was increased from 50,000,000 to 330,000,000, of which 300,000,000 are Class A common stock
and 30,000,000 are Class B common stock.
The Company has two classes of common stock, Class A and Class B; shares of Class B common stock are convertible into shares of Class A common stock at any time, on a one-for-one basis. Shares of
Class A common stock and Class B common stock have the same rights and powers, rank equally, share ratably and are identical in all respects and as to all matters, except that (i) each share of Class B common stock shall have the right to 10 votes
per share and (ii) the shares of Class B common stock shall be convertible into shares of Class A common stock automatically upon the transfer of such shares of Class B common stock, with certain exceptions, or upon the affirmative vote of holders
of two-thirds of the then outstanding shares of Class B common stock or voluntarily by the holder of such shares of Class B common stock.
The Sixth Amended and Restated Certificate of Incorporation was approved by the Company’s stockholders by partial written consent
on July 14, 2017, and in accordance with the rules of the Securities and Exchange Commission and Delaware corporation law regarding approval by partial written consent, became effective when filed with the Secretary of State of the State of
Delaware on August 18, 2017.
Preferred Stock
On May 30, 2017, under the Fifth Amended and Restated Certificate of Incorporation, the Company increased the number of authorized shares of the Company’s Preferred Stock, $0.01 par
value per share, from 19,664,362 to 50,000,000, all of which is designated as blank check preferred stock. No changes with respect to preferred stock were made in the Sixth Amended and Restated Certificate of Incorporation.
Common Stock Repurchase Program
On June 29, 2017, the Company’s Board of Directors (the “Board”) authorized a program, effective immediately, to repurchase shares of the Company’s Class A common stock or Class B common stock, par
value $0.01 per share, constituting, in the aggregate, up to 5% of the outstanding shares of common stock. Shares of common stock may be repurchased in the open market or through negotiated transactions. The program may be terminated or suspended
at any time at the discretion of the Company.
The time of purchases and the exact number of shares to be purchased, if any, will depend on market conditions. The repurchase program does not include specific price targets or timetables. The
Company intends to finance the purchases using available working capital.
Pursuant to this program, repurchases of 50,000 shares of common stock were made during the three months ended March 31, 2020 for a cost of $0.7 million at an average
price of $14.15 per share. During the three months ended March 31, 2019, 40,100 shares were repurchased for a cost of $0.6 million at an average price of $14.02 per share.
Treasury Stock
During the three months ended March 31, 2020, the Company retired 131,183 shares of Class A treasury stock, 81,183 of which were included in Class A treasury stock at December 31,
2019. As of March 31, 2020, the Company had no shares remaining in treasury stock.
Turning Point Dividends and Share Repurchase
Turning Point’s most recent dividend of $0.05 per common share was paid on April 10, 2020, to shareholders of record at the close of business on March 20, 2020.
Dividends are classified as restricted payments within the 2018 Credit Facility. Turning Point is generally permitted to make restricted payments provided that, at the time of payment, or as a
result of payment, Turning Point is not in default on its debt covenants. Additional restrictions limit the aggregate amount of restricted, quarterly dividends during a fiscal year to the aggregate amount of mandatory and voluntary principal
payments made on the priority term loans during the fiscal year.
On February 25, 2020, Turning Point’s Board of Directors approved a $50.0 million share repurchase authorization, which is intended for opportunistic execution based upon a variety of factors
including market dynamics. The authorization is subject to the ongoing discretion of the Turning Point Board of Directors. The total number of Turning Point shares repurchased during the three months ended March 31, 2020 was 134,130 shares for a
total cost of $2.6 million and an average price per share of $19.59.
On June 9, 2017, the Company’s Board of Directors adopted the 2017 Omnibus Equity Compensation Plan (the “2017 Plan”) in order to provide employees of the Company and its subsidiaries, certain consultants and advisors who perform services for the Company or its subsidiaries, and non-employee members of the Board of the Company
with the opportunity to receive grants of incentive stock options, nonqualified stock options, stock appreciation rights, stock awards, stock units, and other stock-based awards. The Board authorized 1,000,000 shares of the Class A common stock of
the Company to be issued under the Plan. The Plan was approved by the Company’s stockholders by partial written consent on July 14, 2017, and in accordance with the rules of the Securities and Exchange Commission and Delaware corporation law
regarding approval by partial written consent, became effective on August 17, 2017. As of March 31, 2020, the Company had 982,183 shares available for grant under the 2017 Plan.
The Company also has an Employee Stock Purchase Plan (the “ESPP”). The ESPP allows eligible full-time employees to
purchase shares of common stock at 90 percent of the lower of the fair market value of a share of common stock on the first or last day of the quarter. Eligible employees are provided the opportunity to acquire Company common stock during each
quarter. No more than 26,447 shares of common stock may be issued under the ESPP. Such stock may be unissued shares or treasury shares of the Company or may be outstanding shares purchased in the open market or otherwise on behalf of the ESPP. The
Company’s ESPP is compensatory and therefore, the Company is required to recognize compensation expense related to the discount from market value of shares sold under the ESPP. The Company issues new shares to
satisfy shares purchased under the ESPP.
Including the share-based compensation expense of SDI’s subsidiaries, the Company recorded share-based compensation expense of $0.6 million recorded for the
three months ended March 31, 2020 and 2019. This expense is a component of selling, general and administrative expense in the condensed consolidated statements of income (loss).
No options of SDI were exercised during the three months ended March 31, 2020 or 2019.
Information with respect to the adjusted activity of outstanding stock options is summarized as follows:
Number
of Shares
|
Price Range
|
Weighted
Average Remaining
Contractual term
|
||||||||||||
Balance, January 1, 2020
|
2,463
|
$
|
31.00
|
$
|
46.25
|
|||||||||
Cancelled
|
(1,063
|
)
|
45.25
|
46.25
|
||||||||||
Balance, March 31, 2020
|
1,400
|
31.00
|
31.25
|
1.1 years
|
||||||||||
Vested and exercisable at March 31, 2020
|
1,400
|
$
|
31.00
|
$
|
31.25
|
1.1 years
|
The following table provides additional information about the Company’s stock options outstanding and exercisable as of March 31, 2020:
Options Outstanding and exercisable
|
|||||||||||||||
Weighted Average
|
|||||||||||||||
Range of
Exercise Prices
|
Number of
Shares
|
Remaining
Contractual Life
|
Exercise
Price
|
||||||||||||
$
|
31.00 - $31.25
|
1,400
|