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EX-32.1 - EXHIBIT 32.1 - STANDARD DIVERSIFIED INC.ex32_1.htm
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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
TABLE OF CONTENTS

     
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
Condensed Consolidated Balance Sheets
(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
Condensed Consolidated Statements of Loss
(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
Condensed Consolidated Statements of Comprehensive Loss
(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
Condensed Consolidated Statements of Equity
(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
Condensed Consolidated Statements of Cash Flows
(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
Notes to Condensed Consolidated Financial Statements
(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 shareholders equity, but separate from the parents 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 parents 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 Points 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 Points 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 managements 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 Points 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 Companys 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 Points 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 Points 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 FDAs 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 Points 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 FDAs 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 applications 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 Companys 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 Points 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 Solaces 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 managements 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 Companys 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 Companys 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.

Note 6. Fair Value of Financial Instruments

The estimated fair value amounts have been determined by the Company using the methods and assumptions described below. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Cash and Cash Equivalents

Cash and cash equivalents are, by definition, short-term. Thus, the carrying amount is a reasonable estimate of fair value.

Accounts Receivable

The fair value of accounts receivable approximates their carrying value due to their short-term nature.

2018 Revolving Credit Facility

The fair value of Turning Points 2018 Revolving Credit Facility approximates its carrying value as the interest rate fluctuates with changes in market rates.

Long-Term Debt

Turning Points 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 Outdoors 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 SDIs 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 Companys 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
 

Turning Point

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 Points 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 Points 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 Points 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 issuers 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 IVGs 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 Points 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 Points 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 Companys outstanding common stock. The Company also issued 13,700 shares of Class A common stock to holders of the Companys 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 Companys 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.

Note 16. Share-Based Compensation

On June 9, 2017, the Companys 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 Companys 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 SDIs 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