10-Q 1 form10q.htm 10-Q

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 June 30, 2018

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.)

155 Mineola Boulevard
   
Mineola, NY
 
11501
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (516) 248-1100

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     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
(Do not check if a smaller reporting 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 August 8, 2018, there were 8,719,960 shares outstanding of the registrant’s Class A common stock, par value $0.01 per share, and 7,915,302 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
Financial Statements (Unaudited)
 
     
 
3
     
 
4
     
 
5
     
  6
     
 
7
     
 
9
     
ITEM 2
44
     
ITEM 3
60
     
ITEM 4
61
     
PART II   OTHER INFORMATION
 
     
ITEM 1
62
     
ITEM 1A
62
     
ITEM 2
62
     
ITEM 3
62
     
ITEM 4
62
     
ITEM 5
62
     
ITEM 6
62
     
 
63
 
Item 1.
Financial Statements

Standard Diversified Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(dollars in thousands except share and per share data)
(unaudited)
 
   
June 30,
2018
   
December 31,
2017
 
ASSETS
           
Cash and cash equivalents
 
$
22,882
   
$
18,219
 
Fixed maturities available for sale, at fair value; amortized cost $26,923 in 2018
   
26,494
     
-
 
Equity securities, at fair value; cost: $753 in 2018
   
744
     
-
 
Trade accounts receivable, net of allowances of $47 in 2018 and $17 in 2017
   
5,862
     
3,249
 
Premiums receivable
   
6,258
     
-
 
Inventories
   
76,870
     
63,296
 
Other current assets
   
19,691
     
10,851
 
Property, plant and equipment, net
   
26,838
     
9,172
 
Deferred income taxes
   
-
     
450
 
Deferred financing costs, net
   
974
     
630
 
Intangible assets, net
   
30,371
     
26,436
 
Deferred policy acquisition costs
   
2,392
     
-
 
Goodwill
   
135,341
     
134,620
 
Master Settlement Agreement (MSA) escrow deposits
   
30,229
     
30,826
 
Pension asset
   
-
     
396
 
Other assets
   
2,956
     
569
 
Total assets
 
$
387,902
   
$
298,714
 
                 
LIABILITIES AND EQUITY
               
Reserves for losses and loss adjustment expenses
 
$
25,521
   
$
-
 
Unearned premiums
   
13,350
     
-
 
Advance premiums collected
   
647
     
-
 
Accounts payable
   
13,402
     
3,686
 
Accrued liabilities
   
14,917
     
20,014
 
Current portion of long-term debt
   
9,098
     
7,850
 
Revolving credit facility
   
16,000
     
8,000
 
Notes payable and long-term debt
   
203,389
     
186,190
 
Deferred income taxes
   
1,371
     
-
 
Postretirement benefits
   
3,932
     
3,962
 
Asset retirement obligations
   
2,028
     
-
 
Other long-term liabilities
   
3,429
     
571
 
Total liabilities
   
307,084
     
230,273
 
                 
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;  8,711,972 and 8,348,373 issued and outstanding shares at June 30, 2018 and December 31, 2017, respectively
   
87
     
83
 
Class B common stock, $0.01 par value; authorized shares, 30,000,000; 7,923,290 and 8,041,525 issued and outstanding shares at June 30, 2018 and December 31, 2017, respectively; convertible into Class A shares on a one-for-one basis
   
79
     
81
 
Additional paid-in capital
   
73,794
     
70,813
 
Accumulated other comprehensive loss
   
(2,119
)
   
(1,558
)
Accumulated deficit
   
(22,945
)
   
(26,982
)
Total stockholders' equity
   
48,896
     
42,437
 
Noncontrolling interests
   
31,922
     
26,004
 
Total equity
   
80,818
     
68,441
 
Total liabilities and equity
 
$
387,902
   
$
298,714
 

The accompanying notes are an integral part of the condensed consolidated financial statements.
 
Standard Diversified Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(dollars in thousands except share and per share data)
(unaudited)

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2018
   
2017
   
2018
   
2017
 
Revenues:
                       
Net sales
 
$
81,773
   
$
72,086
   
$
156,121
   
$
138,874
 
Insurance premiums earned
   
7,134
     
-
     
14,451
     
-
 
Net investment income from insurance investments
   
176
     
-
     
370
     
-
 
Other income
   
187
     
-
     
394
     
-
 
Total revenues
   
89,270
     
72,086
     
171,336
     
138,874
 
                                 
Operating costs and expenses:
                               
Cost of sales
   
45,950
     
40,076
     
88,406
     
79,136
 
Selling, general and administrative expenses
   
22,275
     
18,870
     
45,745
     
35,749
 
Incurred losses and loss adjustment expenses
   
5,405
     
-
     
11,217
     
-
 
Other operating expenses
   
1,541
     
-
     
2,830
     
-
 
Total operating costs and expenses
   
75,171
     
58,946
     
148,198
     
114,885
 
Operating income
   
14,099
     
13,140
     
23,138
     
23,989
 
                                 
Interest expense
   
4,110
     
4,050
     
8,106
     
8,983
 
Interest and investment income
   
(270
)
   
(102
)
   
(377
)
   
(216
)
Loss on extinguishment of debt
   
-
     
-
     
2,384
     
6,116
 
Net periodic benefit expense, excluding service cost
   
264
     
24
     
221
     
116
 
Income before income taxes
   
9,995
     
9,168
     
12,804
     
8,990
 
Income tax expense
   
1,908
     
2,795
     
2,717
     
740
 
Net income
   
8,087
     
6,373
     
10,087
     
8,250
 
Net income attributable to noncontrolling interests
   
4,559
     
1,470
     
6,038
     
1,470
 
Net income attributable to Standard Diversified Inc.
 
$
3,528
   
$
4,903
   
$
4,049
   
$
6,780
 
                                 
Net income attributable to SDI per Class A and Class B Common Share – Basic
 
$
0.21
   
$
0.20
   
$
0.24
   
$
0.26
 
Net income attributable to SDI per Class A and Class B Common Share – Diluted
 
$
0.20
   
$
0.20
   
$
0.23
   
$
0.26
 
Weighted Average Class A and Class B Common Shares Outstanding – Basic
   
16,609,828
     
24,314,895
     
16,795,815
     
26,136,568
 
Weighted Average Class A and Class B Common Shares Outstanding – Diluted
   
16,610,654
     
24,329,200
     
16,829,326
     
26,143,760
 

The accompanying notes are an integral part of the condensed consolidated financial statements.
 
Standard Diversified Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(dollars in thousands)
(unaudited)

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2018
   
2017
   
2018
   
2017
 
                         
Net income
 
$
8,087
   
$
6,373
   
$
10,087
   
$
8,250
 
                                 
Other comprehensive income (loss):
                               
Amortization of unrealized pension and postretirement losses, net of tax of $72 and $89 for the three months ended June 30, 2018 and 2017, respectively, and $82 and $89 for the six months ended June 30, 2018 and 2017, respectively.
   
274
     
27
     
304
     
147
 
Unrealized investment (losses) gains, net of tax of $31 and $98 for the three months ended June 30, 2018 and 2017, respectively, and $104 and $141 for the six months ended June 30, 2018 and 2017, respectively.
   
(154
)
   
158
     
(937
)
   
229
 
Unrealized losses on interest rate swaps, net of tax of $162 and $22 in 2018
   
451
     
-
     
(75
)
   
-
 
Other comprehensive income (loss)
   
571
     
185
     
(708
)
   
376
 
Amounts attributable to noncontrolling interests
   
(4,559
)
   
(1,501
)
   
(6,038
)
   
(1,501
)
Comprehensive income attributable to Standard Diversified Inc.
 
$
4,099
   
$
5,057
   
$
3,341
   
$
7,125
 

The accompanying notes are an integral part of the condensed consolidated financial statements.
 
Standard Diversified Inc. and Subsidiaries
Condensed Consolidated Statement of Equity
(dollars in thousands, except share data)
(unaudited)
 
 
      
Standard Diversified Inc. Shareholders
                   
      
Class A Common
Shares
   
Class B Common
Shares
   
Additional
Paid-In
Capital
   
Accumulated
Other
Comprehensive
Loss
   
Accumulated
Deficit
   
Noncontrolling
Interests
   
Total
                           
      
Shares
   
Amount
   
Shares
   
Amount
 
Balance December 31, 2017
   
8,348,373
   
$
83
     
8,041,525
   
$
81
   
$
70,813
   
$
(1,558
)
 
$
(26,982
)
 
$
26,004
   
$
68,441
 
Conversion of Class B common stock into Class A common stock
     
118,235
     
2
     
(118,235
)
   
(2
)
   
-
     
-
     
-
     
-
     
-
   
Issuance of Class A common stock in private placement, net of issuance costs
 
   
181,825
     
2
     
-
     
-
     
1,978
     
-
     
-
     
-
     
1,980
 
 
Issuance of Class A common stock in asset purchase
     
22,727
     
-
     
-
     
-
     
250
     
-
     
-
     
-
     
250
   
SDI restricted stock vesting
 
   
40,812
     
-
     
-
     
-
     
(216
)
   
-
     
-
     
-
     
(216
)
 
Unrecognized pension and postretirement cost adjustment
     
-
     
-
     
-
     
-
     
-
     
155
     
-
     
149
     
304
   
Unrealized loss on investments, net of tax of $104
 
   
-
     
-
     
-
     
-
     
-
     
(689
)
   
-
     
(248
)
   
(937
)
 
Unrealized loss on interest rate swaps, net of tax of $22
     
-
     
-
     
-
     
-
     
-
     
(39
)
   
-
     
(36
)
   
(75
)
 
SDI stock-based compensation
 
   
-
     
-
     
-
     
-
     
501
     
-
     
-
             
501
 
 
Impact of Turning Point equity transactions on APIC and NCI
     
-
     
-
     
-
     
-
     
468
     
-
     
-
     
785
     
1,253
   
Turning Point dividend payable to noncontrolling interests
 
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(770
)
   
(770
)
 
Impact of adoption of ASU 2018-02
     
-
     
-
     
-
     
-
     
-
     
12
     
(12
)
   
-
     
-
   
Net income
 
   
-
     
-
     
-
     
-
     
-
     
-
     
4,049
     
6,038
     
10,087
 
 
Balance June 30, 2018
     
8,711,972
   
$
87
     
7,923,290
   
$
79
   
$
73,794
   
$
(2,119
)
 
$
(22,945
)
 
$
31,922
   
$
80,818
   
 
 
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)

   
Six Months Ended
 
   
June 30,
2018
   
June 30,
2017
 
Cash flows from operating activities:
           
Net income
 
$
10,087
   
$
8,250
 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
               
Loss on extinguishment of debt
   
2,384
     
6,116
 
Loss on sale of property, plant and equipment
   
-
     
17
 
Depreciation expense
   
1,671
     
771
 
Amortization of deferred financing costs
   
689
     
530
 
Amortization of original issue discount
   
-
     
66
 
Amortization of intangible assets
   
472
     
351
 
Deferred income taxes
   
1,443
     
371
 
Stock-based compensation expense
   
1,042
     
295
 
Amortization of bond discount/premium
   
59
     
-
 
Changes in operating assets and liabilities:
               
Trade accounts receivable
   
(2,607
)
   
(621
)
Premiums receivable
   
905
     
-
 
Inventories
   
(10,348
)
   
(4,035
)
Other current assets
   
(4,177
)
   
320
 
Deferred policy acquisition costs
   
(2,392
)
   
-
 
Other assets
   
59
     
(72
)
Reinsurance related assets and liabilities
   
(101
)
   
-
 
Accounts payable
   
10,110
     
(629
)
Accrued postretirement liabilities
   
(71
)
   
(3
)
Reserves for losses and loss adjustment expenses
   
(4,280
)
   
-
 
Unearned and advance premiums
   
563
     
-
 
Accrued expenses and other
   
(6,373
)
   
(6,804
)
Other liabilities
   
(371
)
   
-
 
Net cash (used in) provided by operating activities
   
(1,236
)
   
4,923
 
                 
Cash flows from investing activities:
               
Cash and cash equivalents acquired in reverse acquisition
   
-
     
20,253
 
Proceeds from sale and maturity of fixed maturity securities, available-for-sale
   
2,694
     
-
 
Payments for purchases of fixed maturity securities, available-for-sale
   
(4,288
)
   
-
 
Payments for purchases of equity securities
   
(753
)
   
-
 
Restricted cash, MSA escrow deposits
   
(1,735
)
   
1,012
 
Issuance of note receivable
   
(6,500
)
   
-
 
Acquisitions, net of cash acquired
   
(2,638
)
   
268
 
Capital expenditures
   
(1,046
)
   
(567
)
Net cash (used in) provided by investing activities
   
(14,266
)
   
20,966
 
 
Standard Diversified Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(dollars in thousands)
(unaudited)
 
   
Six Months Ended
 
   
June 30,
2018
   
June 30,
2017
 
Cash flows from financing activities:
           
Proceeds from 2018 first lien term loan
   
158,000
     
-
 
Proceeds from 2018 second lien term loan
   
40,000
     
-
 
Proceeds from 2018 revolving credit facility
   
16,000
     
25,000
 
Payments of (proceeds from) 2017 first lien term loans
   
(140,613
)
   
143,538
 
Payments of (proceeds from) 2017 second lien term loans
   
(55,000
)
   
55,000
 
Payments of financing costs
   
(3,279
)
   
(4,765
)
Payments of 2017 revolving credit facility, net
   
(8,000
)
   
(15,083
)
Payments of first lien term loan
   
-
     
(147,362
)
Payments of second lien term loan
   
-
     
(60,000
)
Payments of  Vapor Beast Note Payable and Vapor Shark loans
   
(2,000
)
   
(1,867
)
Proceeds from borrowings under SDI credit facility, net
   
9,114
     
-
 
Proceeds from release of restricted funds
   
1,107
     
-
 
Share repurchase for tax withholdings on vesting of restricted stock
   
(216
)
   
-
 
Proceeds from issuance of stock
   
1,982
     
-
 
Prepaid Turning Point Brands equity issuance costs
   
-
     
(164
)
Turning Point Brands exercise of stock options
   
607
     
1,097
 
Turning Point Brands redemption of options
   
-
     
(1,636
)
Turning Point Brands surrender of options
   
-
     
(1,000
)
Payments of cash dividends
   
(379
)
   
-
 
Distribution to noncontrolling interest of Turning Point Brands
   
-
     
(4
)
Net cash provided by (used in) financing activities
   
17,323
     
(7,246
)
                 
Net increase in cash
   
1,821
     
18,643
 
                 
Cash, beginning of period
               
Unrestricted
   
18,219
     
2,865
 
Restricted
   
4,709
     
3,889
 
Total cash at beginning of period
 
$
22,928
   
$
6,754
 
                 
Cash, end of period
               
Unrestricted
   
22,882
     
20,496
 
Restricted
   
1,867
     
4,901
 
Total cash at end of period
 
$
24,749
   
$
25,397
 
                 
Supplemental schedule of noncash financing activities:
               
Issuance of SDI shares in asset purchase
 
$
250
     
-
 
Issuance of promissory notes in asset purchases
 
$
8,810
     
-
 
Accrued expenses incurred for issuance of Turning Point Brands stock
 
$
-
   
$
48
 
Common stock issued in connection with reverse acquisition
 
$
-
   
$
18,146
 
 
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 otherwise 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 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”). 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.  The primary reason the transaction was treated as a purchase by Turning Point rather than a purchase by SDI was because SDI was a shell company with limited operations and Turning Point’s stockholders gained majority control of the outstanding voting power of the Company’s equity securities through their collective ownership of a majority of the outstanding shares of Company common stock. Consequently, reverse acquisition accounting has been applied to the transaction. Accordingly, the historical financial statements of Turning Point through May 31, 2017 became the Company’s historical financial statements, including the comparative prior periods. These condensed consolidated financial statements include the results of SDI from June 1, 2017, the date the reverse acquisition was consummated. As of June 30, 2018, SDI had a 51.0% ownership interest in Turning Point.
 
Prior to the consummation of the Contribution and Exchange, SDI amended and restated its certificate of incorporation to provide for, among other things, (i) the reclassification of every 25 shares of its common stock, par value $0.01 per share, into one share of a new class of common stock, par value $0.01 per share, designated as Class A Common Stock (the “Class A Common Stock”) and (ii) the authorization for issuance of an additional class of common stock, par value $0.01 per share, of SDI designated as Class B Common Stock (the “Class B Common Stock”). In connection with the closing of the Contribution and Exchange, SDI declared a dividend of one share of Class B Common Stock for each outstanding share of Class A Common Stock, payable to holders of record of Class A Common Stock on June 2, 2017. The capital structure, including the number and type of shares issued appearing in the consolidated balance sheets for the periods presented, reflects that of the legal parent or accounting acquiree, SDI, including the shares issued to effect the reverse acquisition after the Contribution and Exchange and the capital structure modified by the 1-for-25 exchange ratio of the SDI shares outstanding prior to the consummation of the Contribution and Exchange.

All references in the unaudited condensed consolidated financial statements presented herein to the number of shares and per share amounts of common stock have been retroactively restated to reflect the reclassification of common stock, the shares issued in the Contribution and Exchange and the dividend of Class B Common Stock. For further information, refer to Note 3. Acquisitions. As a result of the consummation of the Contribution and Exchange, SDI is no longer a shell company.

Recent acquisitions

On January 2, 2018, SDI, through its wholly-owned subsidiary, Pillar General Inc. (“Pillar General”), acquired all the outstanding capital stock of Interboro Holdings, Inc. (“Interboro”) for a cash purchase price of $2.5 million. Under the name Maidstone Insurance Company (“Maidstone”), Maidstone offers personal automobile insurance, primarily in the State of New York (See Note 3. Acquisitions).
 
On January 18, 2018, SDI, through its wholly-owned subsidiary, Standard Outdoor LLC, acquired assets consisting of 83 billboard structures located in Alabama, as well as the ground leases and advertising contracts relating to such billboard structures for total consideration with fair value of approximately $9.7 million (See Note 3. Acquisitions).

On February 20, 2018, SDI, through Standard Outdoor LLC, acquired assets consisting of 86 billboard structures located in Georgia and Florida, as well as the ground leases and advertising contracts relating to such billboard structures for total consideration with a fair value of approximately $6.8 million (See Note 3. Acquisitions).
 
Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

SDI is a holding company and its consolidated financial statements include Turning Point and its subsidiaries, Pillar General and its subsidiaries, and Standard Outdoor LLC and its subsidiaries.
 
Turning Point is also a holding company which owns North America Trading Company, Inc. (“NATC”) and its subsidiaries and Turning Point Brands, LLC (“TPLLC”) and its subsidiaries. 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”); and TPLLC and its subsidiaries Intrepid Brands, LLC (“Intrepid”), VaporBeast, LLC (“VaporBeast,” f/k/a Smoke Free Technologies, Inc.), Vapor Shark LLC, and its subsidiaries (collectively, “Vapor Shark,” f/k/a The Hand Media), Vapor Acquisitions Company, LLC (“Vapor Supply”), and Vapor Finance, LLC (“VFIN”).
 
Pillar General, a wholly-owned subsidiary of the Company, owns 100% of Interboro Holdings, Inc. which is a holding company and includes the accounts of its wholly-owned subsidiaries (collectively, “Interboro”) which consist of Interboro Management, Inc. (“Interboro Management”), Maidstone Insurance Company (“Maidstone”), formerly known as AutoOne Insurance Company (“AOIC”) and AIM Insurance Agency Inc. (“AIM”). Maidstone is domiciled in the State of New York and is a property and casualty insurance company which provides automobile insurance.
 
Standard Outdoor LLC, a wholly-owned subsidiary of the Company, and its subsidiaries (collectively, “Standard Outdoor”), 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.
 
The unaudited condensed consolidated financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring adjustments, considered necessary for a fair statement of the financial statements have been included. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

As a result of the consummation of the Contribution and Exchange, the historical financial statements of Turning Point became the Company’s historical financial statements. Accordingly, the historical financial statements of Turning Point are included in the comparative prior periods. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes of SDI as of and for the year ended December 31, 2017 filed on Form 10-K with the Securities and Exchange Commission on March 12, 2018. The operating results of SDI are included in these financial statements beginning on June 1, 2017.

The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions have been eliminated.
 
Certain prior years 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.

Noncontrolling Interests

These condensed consolidated financial statements reflect the application of Accounting Standards Codification Topic 810, Consolidations (“ASC 810”) which establishes accounting and reporting standards that require: (i) the ownership interest in subsidiaries held by parties other than the parent to be clearly identified and presented in the consolidated balance sheet within shareholder’s equity, but separate from the parent’s equity; (ii) the amount of consolidated net income attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face of the consolidated statements of income; and (iii) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently.

SDI acquired a 52.1% interest in Turning Point on June 1, 2017 through a reverse acquisition as described in Note 1. Organization and Description of Business. 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. As of June 30, 2018, SDI had an ownership interest of 51.0% in Turning Point.

Use of Estimates

The preparation of the condensed consolidated financial statements requires the management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the period. The Company’s significant estimates include those affecting the valuation of goodwill and other intangible assets, the adequacy of the Company’s insurance reserves, assumptions used in determining pension and postretirement benefit obligations and deferred income tax valuation allowances. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments that have maturities of three months or less when acquired to be cash equivalents. These investments are both readily convertible to cash and near maturity such that they present insignificant risk of changes in fair value. At times, cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. Management does not consider the cash balances above FDIC limits to be significant risks.

Revenue Recognition

Turning Point: Turning Point adopted Accounting Standard Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP, on January 1, 2018. Turning Point recognizes revenues, net of sales incentives and sales returns, including shipping and handling charges billed to customers, upon delivery of goods to the customer at an amount that it 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.

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’s management views business performance through segments that closely resemble the performance of major product lines. Thus, the primary, and most useful, disaggregation of Turning Point’s contract revenue for the decision-making purposes is the disaggregation by segment which can be found in Note 19. Segment Information. An additional disaggregation of contract revenue by sales channel can also be found within Note 19. Segment Information.
 
Standard Outdoor: The Company’s out-of-home advertising business revenues are derived from billboard space contracts with customers which are currently accounted for as leases under ASC 840, Leases. The Company will continue to account for these revenues under ASC 840, Leases, through December 31, 2018. The Company is still evaluating the impact that ASU No. 2016-12, Leases (Topic 842), effective for the Company on January 1, 2019, will have on its out-of-home advertising business revenues.

Maidstone: Maidstone recognizes revenues from insurance contracts, including premiums and fees, under the guidance in ASC 944, Financial Services-Insurance Premiums. Insurance contracts are out of scope of ASC 606. Maidstone’s premiums, which are recorded at the policy inception, are earned pro rata over the period for which the coverage is provided, generally six months for auto policies. Unearned premiums represent the portion of premiums written that are applicable to the unexpired terms of policies in force. Premiums ceded to other companies pursuant to reinsurance agreements have been reported as a reduction to premiums earned. Take-out fees are received by Maidstone in the form of credits when it writes business from the state assigned pool. These credits can be used by Maidstone to reduce the amount of business it writes from the assigned pool in the future or they can be sold to third-party insurance companies for them to reduce their exposure to the assigned risk pool. Maidstone collects other miscellaneous fees such as installment and late fees. Broker fee income is received from non-affiliated insurance companies for which Maidstone’s management acts as an agent to sell their state mandated obligations for assigned risks. These fees are shown as other income in the condensed consolidated statements of income.

Shipping Costs

The Company records shipping costs incurred as a component of selling, general and administrative expenses. Shipping costs incurred were approximately $3.5 million and $2.3 million for the three months ended June 30, 2018 and 2017, respectively. Shipping costs incurred were approximately $6.7 million and $4.5 million for the six months ended June 30, 2018 and 2017, respectively.

Fair Value

GAAP establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

The three levels of the fair value hierarchy under GAAP are described below:

Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date.

Level 2 – Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 – Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

Derivative Instruments

Foreign Currency Forward Contracts: The Company enters into foreign currency forward contracts to hedge a portion of its exposure to changes in foreign currency exchange rates on inventory purchase commitments. The Company accounts for its forward contracts under the provisions of ASC 815, Derivatives and Hedging. Under the Company’s policy, the Company may hedge up to 100% of its anticipated purchases of inventory in the denominated invoice currency over a forward period not to exceed twelve months. The Company may also, from time to time, hedge up to ninety percent of its non-inventory purchases in the denominated invoice currency. Forward contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by market prices on the measurement date, except any hedge ineffectiveness which is recognized currently in income. Gains and losses on these forward contracts are transferred from other comprehensive income into net income as the related inventories are received. Changes in fair value of any contracts that do not qualify for hedge accounting or are not designated as hedges are recognized currently in income.
 
Interest Rate Swap Agreements: The Company enters into interest rate swap contracts to manage interest rate risk and reduce the volatility of future cash flows. The Company accounts for its interest rate swap contracts under the provisions of ASC 815, Derivatives and Hedging. Swap contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by market prices on the measurement date, except any hedge ineffectiveness which is recognized currently in income. Gains and losses on these swap contracts are transferred from other comprehensive income into net income upon settlement of the derivative position or at maturity of the interest rate swap contract. Changes in fair value of any contracts that do not qualify for hedge accounting or are not designated as hedges are recognized currently in income.

Risks and Uncertainties

Manufacturers and sellers of tobacco products are subject to regulation at the federal, state, and local levels. Such regulations include, among others, labeling requirements, limitations on advertising, and prohibition of sales to minors. The trend in recent years has been toward increased regulation of the tobacco industry. There can be no assurance as to the ultimate content, timing, or effect of any regulation of tobacco products by any federal, state, or local legislative or regulatory body, nor can there be any assurance that any such legislation or regulation would not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

The tobacco industry has experienced, and is experiencing, significant product liability litigation. Most tobacco liability lawsuits have been brought against manufacturers and sellers of cigarettes for injuries allegedly caused by smoking or exposure to smoke. However, several lawsuits have been brought against manufacturers and sellers of smokeless products for injuries to health allegedly caused by use of smokeless products. Typically, such claims assert that use of smokeless products are addictive and causes oral cancer. Additionally, several lawsuits have been brought against manufacturers and distributors of Turning Point’s NewGen products due to malfunctioning devices. There can be no assurance the Company will not sustain losses in connection with such lawsuits and that such losses will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

Master Settlement Agreement Escrow Account

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.  The Company chose to open and fund an escrow account as its method of compliance. It is the Company’s policy to record amounts on deposit in the escrow account for prior years as a non-current asset.  Each year’s annual obligation is required to be deposited in the escrow account by April 15 of the following year. In addition to the annual deposit, many states have elected to require quarterly deposits for the previous quarter’s sales. As of June 30, 2018, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $30.2 million. At December 31, 2017, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $30.8 million. Effective in the third quarter of 2017, the Company no longer sells any product covered under the MSA. Thus, pending a change in legislation, the Company will no longer be required to make deposits to the MSA escrow account.

The Company has chosen to invest a portion of the MSA escrow deposits in U.S. Government securities including TIPS, Treasury Notes, and Treasury Bonds. These investments are classified as available-for-sale and carried at fair value. Realized losses are prohibited under the MSA; any investment in an unrealized loss position will be held until the value is recovered, or until maturity.
 
The following shows the fair value of the MSA escrow account:

   
As of June 30, 2018
   
As of December 31, 2017
 
   
Cost
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
   
Cost
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
Cash and cash equivalents
 
$
1,867
   
$
-
   
$
1,867
   
$
3,602
   
$
-
   
$
3,602
 
U.S. Governmental agency obligations (unrealized loss position < 12 months)
   
2,443
     
(46
)
   
2,397
     
722
     
(17
)
   
705
 
U.S. Governmental agency obligations (unrealized loss position > 12 months)
   
27,757
     
(1,792
)
   
25,965
     
27,733
     
(1,214
)
   
26,519
 
   
$
32,067
   
$
(1,838
)
 
$
30,229
   
$
32,057
   
$
(1,231
)
 
$
30,826
 
 
Fair value for the U.S. Governmental agency obligations are Level 2. The following shows the maturities of the U.S. Governmental agency obligations:

   
As of
 
   
June 30, 2018
   
December 31,
2017
 
Less than five years
 
$
7,114
   
$
7,114
 
Six to ten years
   
19,621
     
17,662
 
Greater than ten years
   
3,465
     
3,679
 
Total U.S. Governmental agency obligations
 
$
30,200
   
$
28,455
 
 
The following shows the amount of deposits by sales year for the MSA escrow account:
 
   
Deposits as of
 
Sales
Year
 
June 30,
2018
   
December 31,
2017
 
1999
 
$
211
   
$
211
 
2000
   
1,017
     
1,017
 
2001
   
1,673
     
1,673
 
2002
   
2,271
     
2,271
 
2003
   
4,249
     
4,249
 
2004
   
3,714
     
3,714
 
2005
   
4,552
     
4,552
 
2006
   
3,847
     
3,847
 
2007
   
4,167
     
4,167
 
2008
   
3,364
     
3,364
 
2009
   
1,626
     
1,626
 
2010
   
406
     
406
 
2011
   
193
     
193
 
2012
   
199
     
199
 
2013
   
173
     
173
 
2014
   
143
     
143
 
2015
   
101
     
101
 
2016
   
81
     
81
 
2017
   
80
     
70
 
Total
 
$
32,067
   
$
32,057
 
 
 Food and Drug Administration (“FDA”)
 
On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”) authorized the FDA to immediately regulate the manufacturing, sale, and marketing of four categories of tobacco products – cigarettes, cigarette tobacco, roll-your-own tobacco, and smokeless tobacco. On August 8, 2016, the FDA deeming regulation became effective. The deeming regulation gave the FDA the authority to additionally regulate cigars, pipe tobacco, electronic cigarettes (“e-cigarettes”), vaporizers, and e-liquids as “deemed” tobacco products under the FSPTCA.

The FDA assesses tobacco product user fees on six classes of regulated tobacco products and computes user fees using a methodology similar to the methodology used by the U.S Department of Agriculture to compute the Tobacco Transition Payment Program (“TTPP,” also known as the “Tobacco Buyout”) assessment. First, the total, annual, congressionally established user fee assessment is allocated among the various classes of tobacco products using the federal excise tax weighted market share of tobacco products subject to regulation. Then, the assessment for each class of tobacco products is divided among individual manufacturers and importers.

Prior to October 1, 2016, these FDA user fees applied only to those products then regulated by the FDA. Effective October 1, 2016, the FDA began additionally applying FDA user fees to newly deemed tobacco products subject to FDA user fees as described above, i.e., cigars and pipe tobacco.

On July 28, 2017, the FDA announced a new direction in regulating tobacco products, including the newly “deemed” markets such as cigars and vapor products. The FDA stated it intends to begin several new rulemaking processes, some of which will outline foundational rules governing the premarket application process for the deemed products, including Substantial Equivalence Applications and Premarket Tobacco Applications. Compliance and related costs could be significant and could increase the costs of operating in our NewGen segment. The original filing deadlines for newly “deemed” products on the market as of August 8, 2016, have been postponed until August 8, 2021, for “combustible” products (e.g., cigar and pipe) and August 8, 2022, for “non-combustible” products (e.g., vapor products). No other significant filing deadlines have been altered at this time. The FDA also acknowledged a “continuum of risk” among tobacco products (i.e., certain tobacco products pose a greater risk to individual and public health than others), that it intends to seek public comment on the role flavors play in attracting youth and the role flavors may play in helping some smokers switch to potentially less harmful forms of nicotine delivery, and that it would be increasing its focus on the regulation of cigarette products. FDA has since published a number of Advanced Notices of Proposed Rulemaking (“ANPRM”) on these subjects.

Stock-Based Compensation

The Company accounts for stock-based compensation using the fair value method, which requires that compensation costs related to employee share-based payment transactions are measured in the financial statements at the fair value on the date of grant and are recognized over the vesting period of the award.

Fixed Maturity Securities

Investments in fixed maturity securities including bonds, loan-backed and structured securities are classified as available-for-sale and reported at fair value. Significant changes in prevailing interest rates and other economic conditions may adversely affect the timing and amount of cash flows on fixed income investments, as well as their related fair values. Fixed maturities are recorded on a trade date basis. Amortization of bond premium and accretion of bond discount are calculated using the scientific method. Changes in fair values of these securities, after deferred income tax effects, are reflected as unrealized gains or losses in accumulated other comprehensive income (loss). Realized gains and losses from the sale of investments are calculated as of the trade date in the consolidated statements of operations and comprehensive loss and are based upon the specific identification of securities sold. Investment income consists of interest and is reported net of investment expenses. Prepayment assumptions are considered when determining the amortization of discount or premium for loan-backed and structured securities.

An investment is considered impaired when the fair value of the investment is less than its cost or amortized cost. When an investment is impaired, the Company must make a determination as to whether the impairment is other than temporary (“OTTI”).
 
With respect to an investment in an impaired fixed maturity security, OTTI occurs if the Company (a) intends to sell the fixed maturity security, (b) more likely than not will be required to sell the fixed maturity security before its anticipated recovery, or (c) it is probable that the Company will be unable to collect all amounts due to the recovery of the entire cost basis of the security. The Company conducts a periodic review to identify and evaluate securities having OTTI, which include the above factors as well as the following: (1) the likelihood of the recoverability of principal and interest for fixed maturity securities (i.e., whether there is a credit loss); (2) the length of time and extent to which the fair value has been less than amortized cost for fixed maturity securities; and (3) the financial condition, near term and long-term prospects for the issuer, including the relevant industry conditions and trends, and implications of rating agency actions and offering prices. If the Company intends to sell the fixed maturity security, or will more likely than not be required to sell the fixed maturity security before the anticipated recovery, a loss in the entire amount of the impairment is reflected in net investment gains (losses) in net income (loss). If the Company determines that it is probable it will be unable to collect all amounts and the Company has no intent to sell the fixed maturity security, a credit loss is recognized in net investment gains (losses) in net income (loss) to the extent that the present value of expected cash flows is less than the amortized cost basis; any difference between fair value and the new amortized cost basis (net of the credit loss) is reflected in other comprehensive income (losses), net of applicable income taxes.

Upon recognizing an OTTI, the new cost basis of the security is the previous amortized cost basis less the OTTI recognized in net investment gains (losses). The new cost basis is not adjusted for any subsequent recoveries in fair value; however, for fixed maturity securities, the difference between the new cost basis and expected cash flows is accreted to net investment gains (losses) over the remaining expected life of the investment.

Equity Securities

In accordance with new accounting guidance, unrealized gains and losses on equity securities are recorded in the statements of income, instead of within other comprehensive income. The Company had net unrealized losses on equity securities of $9, which were included in net investment income on the Company’s consolidated statements of income for the three and six months ended June 30, 2018.

Deferred Policy Acquisition Costs (“DAC”)

Policy acquisition costs, which vary with and are directly related to the production of successful new business, are deferred. The costs deferred consist principally of commissions and policy issuance costs and are amortized into expense as the related premiums are earned.

DAC asset at January 2, 2018
 
$
-
 
Deferred expenses
   
2,691
 
Amortized expenses
   
(299
)
DAC asset at June 30, 2018
 
$
2,392
 

The Company, utilizing assumptions for future expected claims, premium rate increases and interest rates, reviews the recoverability of its deferred acquisition costs on a periodic basis. If the Company determines that the future gross profits of its in-force policies are not sufficient to recover its deferred policy acquisition costs, the Company recognizes a premium deficiency by charging any unamortized acquisition costs to expense to the extent required in order to eliminate the deficiency. If the premium deficiency exceeds the unamortized acquisition costs, then a liability is accrued for the excess deficiency. The Company anticipates investment income as a factor in its premium deficiency reserve calculation.

Premiums Receivable

Premiums and agents’ balances in the course of collection are reported at the amount management expects to collect from outstanding balances. Past due amounts are determined based on contractual terms. Maidstone provides an allowance for doubtful accounts based upon review of outstanding receivables and historical collection information. Maidstone recorded an allowance for doubtful accounts of less than $0.1 million as of June 30, 2018.
 
Investment Income Due and Accrued

Investment income consists of interest, which is recognized on an accrual basis. Due and accrued income is not recorded on fixed maturity securities in default and on delinquent fixed maturities where collection of interest is improbable. As of June 30, 2018, no investment income amounts were excluded from the Company balances.

Incurred Losses and Loss Adjustment Expenses

Incurred losses and loss adjustment expenses (“LAE”) are charged to operations as incurred. The liability for losses and LAE is based upon individual case estimates for reported claims and a factor for incurred but not reported (“IBNR”) claims. Losses, LAE and related liabilities are reported net of estimated salvage and subrogation. Inherent in the estimate of ultimate losses and LAE are expected trends in claim severity and frequency and other factors which may vary significantly as claims are settled; however, management believes that its aggregate provision for losses and LAE at June 30, 2018 is reasonable and adequate to meet the ultimate net cost of covered losses, but such provision is necessarily based on estimates and the ultimate net cost may vary significantly from such estimates. As adjustments to these estimates become necessary, such adjustments are reflected in current operations.

Insurance Company Assessments

Assessments from various state insurance departments are incurred by the insurance company in the normal course of business. Assessments based upon premium volumes are accrued during the year while non-premium assessments are expensed in the period they are reported to the insurance company. There were no significant assessments incurred during the three and six months ended June 30, 2018.

Reinsurance

The Company accounts for reinsurance in accordance with the accounting guidance concerning the accounting and reporting for reinsurance of short-duration contracts. Management believes the Company’s reinsurance arrangements qualify for reinsurance accounting. Reinsurance premiums, losses, LAE and commissions are accounted for on a basis consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. The Company relies on ceded reinsurance to limit its insurance risk.

Reinstatement premiums for the Company’s insurance operations are recognized at the time a loss event occurs, where coverage limits for the remaining life of the contract are reinstated under pre-defined contract terms. The accrual of reinstatement premiums is based on an estimate of losses and LAE, which reflects management’s judgment.

Amounts recoverable from reinsurers are estimated and recognized in a manner consistent with the claims liabilities arising from reinsured policies and incurred but not reported losses. In entering into reinsurance agreements, management considers a variety of factors including the creditworthiness of reinsurers. In preparing consolidated financial statements, management makes estimates of amounts recoverable from reinsurers, which include consideration of amounts, if any, estimated to be uncollectible. As of June 30, 2018, no amounts were deemed to be uncollectible from reinsurers.

As changes in the estimated ultimate liability for loss and LAE are determined, ceded reinsurance premiums may also change based on the terms of the reinsurance agreements. As adjustments to these estimates become necessary, such adjustments are reflected in current operations.

Asset Retirement Obligations

The Company records obligations associated with the retirement of tangible long-lived assets, such as advertising structures, in the period in which the assets are acquired. The liability is capitalized as part of the related long-lived asset’s carrying amount. Over time, accretion of the liability is recognized as an operating expense and the capitalized costs is depreciated over the expected useful life of the related asset. The Company’s asset retirement obligations relate primarily to the dismantlement and removal of the structure, and site reclamation on leased properties. The Company’s management determined a minimum estimated cost to be incurred per billboard structure based on historical experience with respect to the dismantling of the structures and the reclamation of the sites. The Company will continue to assess the adequacy of this liability on a regular basis.
 
Income tax policy

The Company’s insurance subsidiary is taxed at the Federal corporate level applying special rules applicable to property and casualty insurance companies. The insurance company is generally exempt from corporate income tax under state tax law. In lieu of corporate income tax, the insurance company pays a premium tax based on a percentage of direct annual premiums written in each state.

Deferred income taxes are recorded for temporary differences in reporting certain transactions for financial statement and income tax purposes, principally deferred policy acquisition costs, loss and LAE reserves and net operating losses. Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities result from temporary differences between the amounts recorded in the financial statements and the tax basis of the Company’s assets and liabilities.

Recent Accounting Pronouncements Adopted

The Company adopted ASU 2014-09, Revenue from Contracts with Customers (ASC 606), on January 1, 2018, using a modified retrospective adoption method. The guidance in ASC 606 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers and replaces most existing revenue recognition guidance in U.S. GAAP. The adoption of the standard had no effect on the timing or amount of revenue recognition, or on net income.

The Company adopted ASU 2016-01, Financial Instruments (Subtopic 825-10), on January 1, 2018, which provided guidance issued by FASB for the recognition and measurement of financial instruments. The new guidance requires investments in equity securities to be measured at fair value with any changes in valuation reported in net income except for investments that are consolidated or are accounted for under the equity method of accounting. Under prior guidance, the Company reported equity securities, available for sale, at fair value with changes in fair value reported in other comprehensive income. Beginning in 2018, the Company reports equity securities at fair value with changes in fair value reported in the statements of income. The Company had no investments in equity securities as of December 31, 2017.

The Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, on January 1, 2018 using the full retrospective method.  The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result of the adoption of this ASU, the Company’s statements of cash flows include changes in restricted cash, such as changes in the portion of the MSA escrow deposits held in cash.

The Company adopted ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, on January 1, 2018 using the full retrospective method. This ASU requires an entity to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The adoption of this ASU resulted in a reclassification of less than $0.1 million from cost of sales and selling, general, and administrative expenses to net periodic benefit expense (income), excluding service cost, for both periods presented.

The Company adopted ASU 2018-02, Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, on January 1, 2018 on a prospective basis. The amendments in this Update allow a reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (“TCJA”). Consequently, the amendments eliminate the stranded tax effects resulting from the TCJA and will improve the usefulness of information reported to financial statement users. However, because the amendments only relate to the reclassification of the income tax effects of the TCJA, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The amendments in this Update also require certain disclosures about stranded tax effects. The adoption of this ASU resulted in a reclassification of stranded tax effects related to the TCJA from accumulated other comprehensive income to retained earnings of less than $0.1 million during the first quarter of 2018.
 
Recent Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases. ASU 2016-02 requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less for which there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities and should recognize lease expense for such leases generally on a straight-line basis over the lease term. Certain qualitative disclosures along with specific quantitative disclosures will be required, so that users are able to understand more about the nature of an entity’s leasing activities. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. At transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients related to the identification and classification of leases that commenced before the effective date of ASU 2016-02. An entity that elects to use the practical expedients will, in effect, continue to account for leases that commenced before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. The Company is currently evaluating the effect the adoption of this standard will have on its financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, that changes the impairment model for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. Entities will apply the standard’s provisions as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The guidance is effective for the Company for interim and annual periods beginning after December 15, 2019. The Company is currently evaluating the effect the adoption of this standard will have on its financial statements.

In June 2018, the FASB issued ASU 2018-07 intended to reduce cost and complexity and to improve financial reporting for nonemployee share-based payments. Currently, the accounting requirements for nonemployee and employee share-based payment transactions are significantly different. This ASU expands the scope of Topic 718, Compensation-Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, Equity-Equity-Based Payments to Nonemployees. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of this new standard on its condensed consolidated financial statements.
 
Note 3. Acquisitions

Acquisitions by SDI

Maidstone acquisition
 
On January 2, 2018, the Company acquired all the outstanding capital stock of Interboro for cash consideration of $2.5 million. Under the name Maidstone Insurance Company, Maidstone offers personal automobile insurance, primarily in the state of New York. On February 1, 2018, Maidstone began to write homeowners insurance.

The transaction was accounted for as a business combination under the acquisition method of accounting. Accordingly, the tangible and identifiable intangible assets acquired and liabilities assumed were recorded at fair value as of the date of acquisition. The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the date of acquisition:
 
   
At January 2,
2018
as reported
   
Q2'18
Adjustment
   
At January 2,
2018
as adjusted
 
(preliminary)
(in thousands)
     
(in thousands)
   
(preliminary)
(in thousands)
 
Fixed maturities available for sale
 
$
25,386
   
$
-
   
$
25,386
 
Cash and cash equivalents
   
12,795
     
-
     
12,795
 
Investment income due and accrued
   
203
     
-
     
203
 
Premiums receivable
   
7,158
     
-
     
7,158
 
Property, plant and equipment
   
408
     
-
     
408
 
Intangible assets
   
2,100
     
-
     
2,100
 
Other assets
   
615
     
-
     
615
 
Reserves for losses and loss adjustment expenses
   
(29,366
)
   
(435
)
   
(29,801
)
Unearned premiums
   
(12,784
)
   
-
     
(12,784
)
Advance premium collected
   
(651
)
   
-
     
(651
)
Deferred tax liability
   
(420
)
   
-
     
(420
)
Other liabilities
   
(3,230
)
   
-
     
(3,230
)
Total net assets acquired
   
2,214
     
(435
)
   
1,779
 
Consideration exchanged
   
2,500
     
-
     
2,500
 
Goodwill
 
$
286
   
$
435
   
$
721
 

The purchase price allocation has been prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value of the assets acquired and liabilities assumed. These changes could be material and could result in the recognition of a bargain purchase gain or goodwill. The Company is still finalizing the valuation of assets acquired and liabilities assumed and as such, the fair value amounts noted in the table above are preliminary and subject to change. Primary amounts subject to adjustment include, but are not limited to, intangible assets, reserves for losses and loss adjustment expenses and the potential for the recognition of a gain on bargain purchase or a change in the goodwill balance as management has not yet finalized its analysis of the valuation of assets acquired and liabilities assumed. Such changes in the fair values from those listed above could be significant.
 
Any adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the January 2, 2018 acquisition date.
 
The operating results of Maidstone have been included in these condensed consolidated statements since its acquisition date on January 2, 2018 and include net revenues of $7.5 million and $15.2 million and net income of $0.6 million and $1.2 million for the three and six months ended June 30, 2018, respectively.
 
The following supplemental unaudited pro forma information presents the Company’s financial results as if the acquisition of Maidstone had occurred on January 1, 2017:
 
   
Three months ended June 30, 2017
 
   
As reported
   
Maidstone
   
Proforma
 
Total revenue, net
 
$
72,086
   
$
8,936
   
$
81,022
 
Net income (loss) attributable to SDI
 
$
4,903
   
$
(597
)
 
$
4,306
 

 
   
Six months ended June 30, 2017
 
   
As reported
   
Maidstone
   
Proforma
 
Total revenue, net
 
$
138,874
   
$
19,023
   
$
157,897
 
Net income (loss) attributable to SDI
 
$
6,780
   
$
(775
)
 
$
6,005
 
 
Standard Outdoor

On January 18, 2018, the Company, through Standard Outdoor, completed an asset acquisition consisting of 83 billboard structures located in Alabama, as well as the ground leases and advertising contracts relating to such billboard structures for consideration with a fair value of approximately $9.7 million, of which $4.0 million was paid in cash and the remainder is payable under a promissory note with a face value of $6.5 million, net of a fair value discount of $0.9 million. A principal payment of $1.0 million on the promissory note is payable January 1 of each year, beginning January 1, 2019 and ending January 1, 2022, with a $3.5 million final principal payment on January 1, 2023. The promissory note has a 5% fixed interest rate and interest is payable quarterly. The purchase price was primarily attributed to property, plant and equipment consisting of the billboard structures. In conjunction with the asset acquisition, the Company established a preliminary asset retirement obligation of $1.0 million.

On February 20, 2018, the Company, through Standard Outdoor, completed an asset acquisition consisting of 86 billboard structures located in Georgia and Florida, as well as the ground leases and advertising contracts relating to such billboard structures for consideration with a fair value of approximately $6.8 million, of which $3.2 million was paid in cash, $0.2 million was paid with the Company’s Class A common shares and the remainder is payable under a promissory note with a face value of $3.5 million, net of a fair value discount of $0.3 million. A principal payment of $0.9 million on the promissory note is payable March 1, 2019, with the remaining principal paid down monthly through March 1, 2022. The promissory note has a 5% fixed interest rate and interest is payable monthly starting March 1, 2019. The purchase price was primarily attributed to property, plant and equipment consisting of the billboard structures. In conjunction with the asset acquisition, the Company established a preliminary asset retirement obligation of $1.0 million.

Reverse acquisition of Turning Point

On November 25, 2016, SDI and Standard General Master Fund L.P., P Standard General Ltd. and Standard General Focus Fund L.P. (collectively the “SG Parties”), entered into a Contribution and Exchange Agreement, as amended by the: (1) First Amendment to Contribution and Exchange Agreement, dated January 25, 2017, (2) Second Amendment to Contribution and Exchange Agreement, dated April 5, 2017, and (3) Third Amendment to Contribution and Exchange Agreement, dated May 3, 2017 (as amended, the “Contribution and Exchange Agreement”).  Pursuant to the Contribution and Exchange Agreement, the SG Parties agreed to contribute approximately 9,842,373 shares of voting Turning Point Common Stock in exchange for shares of the Company based on an exchange ratio, calculated as of the closing of the Contribution and Exchange, equal to the lesser of (i) the 30-calendar day trailing VWAP of the Turning Point Common Stock divided by the 30-calendar day trailing VWAP of the Common Stock of the Company (as adjusted to reflect the reclassification of the Common Stock of the Company) and (ii) the 30-calendar day trailing VWAP of the Turning Point Common Stock divided by the pro forma book value per share of the Company.

On June 1, 2017, at the consummation of the Contribution and Exchange, the SG Parties contributed to SDI 9,842,373 shares of Turning Point Common Stock, representing a 52.1% ownership interest of Turning Point in exchange for 7,335,018 shares of Class A Common Stock of SDI, based on the exchange ratio described above. Immediately after the consummation of the Contribution and Exchange, SDI distributed a dividend of 7,335,018 shares of Class B Common Stock to the SG Parties. As of June 30, 2018, SDI had an ownership interest of 51.0% in Turning Point.
 
The transaction was accounted for as a recapitalization or reverse acquisition. Turning Point was the accounting acquirer and SDI was the accounting acquiree for financial reporting purposes. Accordingly, the historical financial statements of Turning Point became the Company’s historical financial statements. As such, the historical cost bases of assets and liabilities of Turning Point are maintained in the consolidated financial statements of the merged company and the assets and liabilities of SDI are accounted for at fair value. In this case, since the assets of SDI at the acquisition date consist principally of cash and cash equivalents, there was no significant difference between book value and fair value.

Acquisitions by Turning Point

Vapor Supply
 
On April 30, 2018, Turning Point purchased the assets of Vapor Supply LLC, vaporsupply.com, and some of its affiliates including the Ecig.com domain through its subsidiary Vapor Acquisitions Company, LLC, for total consideration of $4.8 million paid in cash to strengthen its presence within the NewGen segment. Vapor Supply is a business-to-business e-commerce distribution platform servicing independent retail vape shops. Additionally, Vapor Supply manufactures and markets proprietary e-liquids under the DripCo brand and operates company-owned stores in Oklahoma. As of June 30, 2018, Turning Point has not completed the accounting for the acquisition of these assets. The following fair value for working capital (primarily inventory), fixed assets, and trade name are based upon management’s preliminary estimates.

   
Fair Value
 
       
Working capital
 
$
3,163
 
Fixed assets
   
498
 
Trade name
   
1,139
 
Total purchase price
 
$
4,800
 
 
Vapor Shark
 
In March 2017, Turning Point entered into a strategic partnership with Vapor Shark in which Turning Point committed to make a deposit up to $2.5 million to Vapor Shark in exchange for a warrant to purchase 100% of the equity interest in Vapor Shark on or before April 15, 2018.  In the event Turning Point exercised the warrant, Turning Point granted Vapor Shark’s sole shareholder the option to purchase from Vapor Shark the retail stores it owns, effective as of January 1, 2018.  In April 2017, Turning Point entered into a management agreement with Vapor Shark whereby Turning Point obtained control of the operations. Turning Point exercised its warrant on June 30, 2017, and obtained 100% ownership of Vapor Shark as of that date for a nominal purchase price. In January 2018, Turning Point finalized an agreement to pay Vapor Shark’s former sole shareholder total consideration of $1.5 million in exchange for his option to purchase the company-owned stores. Turning Point paid Vapor Shark’s former sole shareholder $1.0 million in February 2018 with the remaining $0.5 million to be paid in 24 monthly installments.

Note 4. Investments

The Company currently classifies all of its investments in debt securities held by Maidstone as available-for-sale and, accordingly, they are carried at estimated fair value. The amortized cost, gross unrealized gains and losses, and fair value of investments in fixed maturity securities at June 30, 2018 are as follows:
 
   
June 30, 2018
 
   
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
U.S. Treasury and U.S. Government
 
$
5,336
   
$
21
   
$
(64
)
 
$
5,293
 
U.S. Tax-exempt Municipal
   
4,361
     
-
     
(68
)
   
4,293
 
Corporate
   
9,737
     
1
     
(168
)
   
9,570
 
Mortgage and Asset-backed Securities
   
7,489
     
-
     
(151
)
   
7,338
 
Total Fixed Maturity Securities
 
$
26,923
   
$
22
   
$
(451
)
 
$
26,494
 

Amortized cost and fair value of fixed maturity securities at June 30, 2018 by contractual maturity are shown below. The actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

   
June 30, 2018
 
   
Amortized Cost
   
Fair Value
 
Due in one year or less
 
$
2,570
   
$
2,568
 
Due after one year through five years
   
10,741
     
10,595
 
Due after five years through ten years
   
6,123
     
5,993
 
Mortgage and Asset-backed Securities
   
7,489
     
7,338
 
Total
 
$
26,923
   
$
26,494
 

The Company uses the services of its investment manager, which uses a proprietary model for loss assumptions and widely accepted models for prepayment assumptions in valuing mortgage-backed and asset-backed securities with inputs from major third-party data providers. The models combine the effects of interest rates, volatility, and prepayment speeds based on various scenarios (Monte Carlo simulations) with resulting effective analytics (spreads, duration, convexity) and cash flows on a monthly basis. Credit sensitive cash flows are calculated using proprietary models, which estimate future loan defaults in terms of timing and severity. Model assumptions are specific to asset class and collateral types and are regularly evaluated and adjusted where appropriate.

At June 30, 2018, fixed maturity securities that were in an unrealized loss position and the length of time that such securities have been in an unrealized loss position, as measured by their prior 12-month fair values, are as follows:

   
June 30, 2018
 
   
Less than 12 Months
 
   
Fair Value
   
Gross Unrealized
Losses
 
Bonds:
           
U.S. Treasury and U.S. Government
 
$
5,100
   
$
(64
)
U.S. Tax-exempt Municipal
   
4,293
     
(68
)
Corporate Bonds
   
8,096
     
(168
)
Mortgage and Asset-backed Securities
   
6,914
     
(151
)
Fixed maturities available for sale
 
$
24,403
   
$
(451
)

The Company has evaluated the unrealized losses on the fixed maturity securities and determined that they are not attributable to credit risk factors. For fixed maturity securities, losses in fair value are viewed as temporary if the fixed maturity security can be held to maturity and it is reasonable to assume that the issuer will be able to service the debt, both as to principal and interest. The Company did not recognize OTTI losses in the period from January 2, 2018 to June 30, 2018.
 
Equity Securities

The cost, gross unrealized gains and losses, and fair value of investments in equity securities at June 30, 2018:

   
June 30, 2018
 
   
Cost or
Amortized Cost
   
Gross
Unrealized
Losses
   
Fair Value
 
Industrial and other
   
253
     
(5
)
   
248
 
Total Common stock
 
$
253
   
$
(5
)
 
$
248
 
                         
Industrial and other
   
500
     
(4
)
   
496
 
Total Preferred stock
 
$
500
   
$
(4
)
 
$
496
 
                         
Total Equities
 
$
753
   
$
(9
)
 
$
744
 
 
The components of net investment income for the period from January 2, 2018 to June 30, 2018 are as follows:

       
Investment Income:
     
Bonds
 
$
303
 
Preferred stocks
   
6
 
Cash and cash equivalents
   
98
 
Other
   
11
 
Total investment income
   
418
 
Less: Investment expenses
   
(48
)
Net investment income
 
$
370
 

For the three months ended June 30, 2018 and for the period from January 2, 2018 to June 30, 2018, Maidstone recognized capital losses related to changes in fair value of $9 on its equity securities.
 
The following tables show how Maidstone’s investments are categorized in the fair value hierarchy as of June 30, 2018:

 
 
June 30, 2018
 
   
Level 1
   
Level 2
   
Level 3
   
Total Fair Value
 
                         
Common Stock
 
$
248
   
$
-
   
$
-
   
$
248
 
Preferred Stocks
   
-
     
496
     
-
     
496
 
Total Equities
   
248
     
496
     
-
     
744
 
Fixed Maturities:
                               
U.S. Treasury and U.S. Government
 
$
-
   
$
5,293
   
$
-
   
$
5,293
 
U.S. Tax-exempt Municipal
   
-
     
4,293
     
-
     
4,293
 
Corporate
   
-
     
9,570
     
-
     
9,570
 
Mortgage and Asset-backed Securities
   
-
     
7,338
     
-
     
7,338
 
Total Fixed Maturities
 
$
-
   
$
26,494
   
$
-
   
$
26,494
 
 
There were no transfers between levels during the three and six months ended June 30, 2018.
 
Restricted Assets

The Company is required to maintain assets on deposit, which primarily consist of cash or fixed maturities, with various regulatory authorities to support its insurance operations. The Company’s insurance subsidiaries maintain assets in trust accounts as collateral for or guarantees for letters of credit to third parties.

The following table details the fair value of the Company’s restricted assets as of June 30, 2018:

Assets used for collateral or guarantees:
     
Deposits with U.S. Regulatory Authorities
 
$
2,613
 

Note 5. Derivative Instruments

Foreign Currency

The Company’s policy is to manage the risks associated with foreign exchange rate movements. The policy allows hedging up to 100% of its anticipated purchases of inventory over a forward period that will not exceed 12 rolling and consecutive months. The Company may, from time to time, hedge currency for non-inventory purchases, e.g., production equipment, not to exceed 90% of the purchase price. The Company executed various forward contracts during the three months ended June 30, 2018, none of which met hedge accounting requirements, for the purchase of €6.3 million. The Company executed various forward contracts during the six months ended June 30, 2018, none of which met hedge accounting requirements, for the purchase of €12.3 million. The Company executed no forward contracts during 2017. At June 30, 2018, and December 31, 2017, the Company had forward contracts for the purchase of €6.3 million and €0 million, respectively.
 
Interest Rate Swap
 
The Company’s policy is to manage interest rate risk by reducing the volatility of future cash flows associated with debt instruments bearing interest at variable rates. In March 2018, the Company executed various interest rate swap agreements for a notional amount of $70 million with an expiration of December 2022. The swap agreements fix LIBOR at 2.755%. The swap agreements met the hedge accounting requirements; thus, any change in fair value is recorded to other comprehensive income. The Company uses the Shortcut Method to account for the swap agreements. The Shortcut Method assumes the hedge to be perfectly effective; thus, there is no ineffectiveness to be recorded in earnings. The swap agreements’ fair values at June 30, 2018, resulted in a liability of $0.1 million included in other long-term liabilities.
 
Note 6. Fair Value of Financial Instruments
 
The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of ASC 825, 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. Refer to Note 2. Summary of Significant Accounting Policies for details on the fair value of investments in Turning Point’s MSA and Note 4. Investments for details on the fair value of investments held by Maidstone.
 
Cash and Cash Equivalents

The Company has used Level 1 inputs to determine the fair value of its cash equivalents. As of June 30, 2018 and December 31, 2017, cost represented fair value of the Company's cash and cash equivalents.

Accounts Receivable

The fair value of accounts receivable approximates their carrying value due to their short-term nature.
 
2018 Revolving Credit Facility

The fair value of the 2018 revolving credit facility approximates its carrying value as the interest rate fluctuates with changes in market rates.

Long-Term Debt

As all of Turning Point’s long-term debt bears interest at variable rates that fluctuate with market rates, the carrying values of its long-term debt instruments approximate their respective fair values. As of June 30, 2018, the fair values of the 2018 First Lien Term Loan and the 2018 Second Lien Term Loan approximated $158.0 million and $40.0 million, respectively. As of December 31, 2017, the fair values of the 2017 First Lien Term Loans and the 2017 Second Lien Term Loan approximated $140.6 million and $56.1 million, respectively.

The fair values of Standard Outdoor’s promissory notes issued as partial consideration in the January and February 2018 asset acquisitions approximate their carrying value as the notes were recorded at fair value at the time of the acquisitions.

The fair value of SDI’s term loan debt issued in January 2018 approximates its carrying value as the interest rate fluctuates with changes in market rates.

Foreign Exchange

The Company had forward contracts for the purchase of €6.3 million at June 30, 2018. The Company had no forward contracts as of December 31, 2017. The fair value of the foreign exchange forward contracts was based upon the quoted market prices and resulted in an insignificant loss for the three and six months ended June 30, 2018. The fair value of the foreign exchange contracts resulted in an asset of less than $0.1 million as of June 30, 2018.

Interest Rate Swaps

The Company had swap contracts for a total notional amount of $70 million at June 30, 2018. The Company had no swap agreements outstanding at December 31, 2017. The fair values of the swap contracts are based upon quoted market prices and resulted in a liability of $0.1 million as of June 30, 2018.

Note 7. Inventories

The components of inventories are as follows:

   
June 30,
2018
   
December 31,
2017
 
Raw materials and work in process
 
$
2,869
   
$
2,545
 
Leaf tobacco
   
36,504
     
30,308
 
Finished goods - smokeless products
   
6,814
     
5,834
 
Finished goods - smoking products
   
11,810
     
14,110
 
Finished goods - electronic / vaporizer products
   
23,384
     
14,532
 
Other
   
755
     
1,290
 
     
82,136
     
68,619
 
LIFO reserve
   
(5,266
)
   
(5,323
)
   
$
76,870
   
$
63,296
 

The inventory valuation allowance was $1.1 million and $0.5 million as of June 30, 2018 and December 31, 2017, respectively.

Note 8. Property, Plant and Equipment

Property, plant and equipment consists of:
 
   
June 30,
2018
   
December 31,
2017
 
Land
 
$
22
   
$
22
 
Building and improvements
   
2,072
     
2,072
 
Leasehold improvements
   
2,036
     
1,873
 
Machinery and equipment
   
12,509
     
12,635
 
Advertising structures
   
17,715
     
329
 
Furniture, fixtures and other
   
4,076
     
3,821
 
     
38,430
     
20,752
 
Accumulated depreciation
   
(11,592
)
   
(11,580
)
   
$
26,838
   
$
9,172
 
 
Note 9. Accrued Liabilities

Accrued liabilities consist of:

   
June 30,
2018
   
December 31,
2017
 
Accrued payroll and related items
 
$
3,489
   
$
5,683
 
Customer returns and allowances
   
2,296
     
2,707
 
Other
   
9,132
     
11,624
 
   
$
14,917
   
$
20,014
 
 
Other liabilities include $0.8 million of SDI and Standard Outdoor related accruals at June 30, 2018. There were $1.3 million of other liabilities related to SDI at December 31, 2017.

Note 10. Liability for Losses and Loss Adjustment Expenses

The liability for unpaid losses and LAE is determined from individual case estimates for reported claims and a factor for IBNR claims. The methods for making such estimates and establishing claim reserves are continually reviewed and adjustments are reflected in the current period. While management believes the liability for unpaid losses and LAE is adequate, the ultimate liability may vary from the amount recorded and the variance may be material to the Company’s financial position and results of operations.

Activity in the liability for losses and LAE is summarized as follows:

Reserve for losses and LAE at January 2, 2018
 
$
29,801
 
Provisions for claims, net of insurance:
       
Incurred related to:
       
Current year
   
11,217
 
Total incurred
   
11,217
 
Deduct payment of claims, net of reinsurance:
       
Paid related to:
       
Prior year
   
9,220
 
Current year
   
6,277
 
Total paid
   
15,497
 
Reserve for losses and LAE at June 30, 2018
 
$
25,521
 
 
The components of the net liability for losses and LAE are as follows:

   
As of June 30, 2018
 
Case basis reserves
 
$
16,896
 
Incurred but not reported reserves
   
8,625
 
Total
 
$
25,521
 

Note 11. Reinsurance

On February 1, 2018, Maidstone began to write homeowners insurance. As a result, it placed two reinsurance contracts: an Excess Multiple Line Reinsurance Contract and a Property Per Risk Automatic Facultative Reinsurance Contract. The use of these reinsurance agreements provides greater diversification of business and minimizes the maximum net loss potential arising from large risks. These agreements provide for recovery of a portion of losses and loss adjustment expenses from several reinsurers.

In addition, Maidstone offers endorsements for equipment breakdown coverage and identity recovery coverage. The premiums and losses related to this coverage are ceded via a 100% quota share reinsurance agreement with an unaffiliated insurance company.

The following is a summary of the amount included in the accompanying condensed consolidated financial statements in connection with ceded reinsurance, all of which are with non-affiliated companies.

   
Period from January
2, 2018 to June 30,
2018
 
Written premiums
 
$
25
 
Premiums earned
 
$
18
 

Maidstone remains obligated for amounts ceded in the event the reinsurer cannot meet its obligation when they become due.

Maidstone evaluates the financial condition of its reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurance to minimize exposure to significant losses from reinsurance insolvency. At June 30, 2018, management did not believe there is a risk of loss as a result of a concentration of risk in its reinsurance program.

At June 30, 2018, Maidstone had no net unsecured reinsurance recoverable from individual unaffiliated reinsurers, which were equal to or greater than 3% of surplus.

Note 12. Notes Payable and Long-Term Debt

Notes payable and long-term debt consists of the following:
 
   
June 30,
2018
   
December 31,
2017
 
2018 First Lien Term Loan
 
$
158,000
   
$
-
 
2018 Second Lien Term Loan
   
40,000
     
-
 
SDI Crystal Term Loan
   
10,000
     
-
 
Standard Outdoor Promissory Notes
   
9,950
     
-
 
2017 First Lien First Out Term Loan
   
-
     
105,875
 
2017 First Lien Second Out Term Loan
   
-
     
34,738
 
2017 Second Lien Term Loan
   
-
     
55,000
 
Note payable - VaporBeast
   
-
     
2,000
 
Total Notes Payable and Long-Term Debt
   
217,950
     
197,613
 
Less deferred finance charges
   
(5,463
)
   
(3,573
)
Less current maturities
   
(9,098
)
   
(7,850
)
   
$
203,389
   
$
186,190
 
 
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 (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 retained the $40 million accordion feature of the 2017 Credit Facility. Proceeds from the 2018 Credit Facility were used to repay, in full, the 2017 Credit Facility. Turning Point incurred a loss on extinguishment of debt of $2.4 million in the first quarter of 2018 as a result of the refinancing.

The 2018 Credit Facility contains customary events of default including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, and change in control defaults. The 2018 Credit Facility also contains certain negative covenants customary for facilities of these types including covenants that, subject to exceptions described in the 2018 Credit Facility, restrict Turning Point’s and its subsidiary guarantors’ ability: (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. Refer to Note 14. Stockholders’ Equity for further information regarding dividend restrictions.

2018 First Lien Credit Facility

The 2018 First Lien Term Loan and the 2018 Revolving Credit Facility bear interest at LIBOR plus a spread of 2.75% to 3.50% based on Turning Point’s senior leverage ratio. The 2018 First Lien Term Loan has quarterly required payments of $2.0 million beginning June 30, 2018, increasing to $3.0 million on June 30, 2020, and increasing to $4.0 million on June 30, 2022. The 2018 First Lien Credit Facility has a maturity date of March 7, 2023. The 2018 First Lien Term Loan is secured by a first priority lien on substantially all of the assets of the borrowers and the guarantors thereunder, including a pledge of Turning Point’s capital stock, other than certain excluded assets (the “Collateral”). The 2018 First Lien Credit Facility contains certain financial covenants including maximum senior leverage ratio of 3.50x with step-downs to 3.00x, a maximum total leverage ratio of 4.50x with step-downs to 4.00x, and a minimum fixed charge coverage ratio of 1.20x. The weighted average interest rate of the 2018 First Lien Term Loan was 5.34% at June 30, 2018. The weighted average interest rate of the 2018 Revolving Credit Facility was 6.05% at June 30, 2018. At June 30, 2018, Turning Point had $16.0 million of borrowings outstanding under the 2018 Revolving Credit Facility. The $34.0 million unused portion of the 2018 Revolving Credit Facility is reduced by a $0.7 million letter of credit with Fifth Third Bank, resulting in $33.3 million of availability under the 2018 Revolving Credit Facility at June 30, 2018.
 
2018 Second Lien Credit Facility

The 2018 Second Lien Credit Facility bears interest at a rate of LIBOR plus 7.00% and has a maturity date of March 7, 2024. The 2018 Second Lien Term Loan is secured by a second priority interest in the Collateral and is guaranteed by the same entities as the 2018 First Lien Term Loan. The 2018 Second Lien Credit Facility contains certain financial covenants including a maximum senior leverage ratio of 3.75x with step-downs to 3.50x, a maximum total leverage ratio of 4.75x with step-downs to 4.50x, and a minimum fixed charge coverage ratio of 1.10x. The weighted average interest rate of the 2018 Second Lien Term Loan was 9.05% at June 30, 2018.

2017 Credit Facility

On February 17, 2017, Turning Point and NATC entered into a $250 million secured credit facility, comprised of (i) a First Lien Credit Facility with Fifth Third Bank, as administrative agent, and other lenders (the “2017 First Lien Credit Facility”), and (ii) a Second Lien Credit Facility with Prospect Capital Corporation, as administrative agent, and other lenders (the “2017 Second Lien Credit Facility,” and together with the 2017 First Lien Credit Facility, the “2017 Credit Facility”). Turning Point used the proceeds of the 2017 Credit Facility to repay, in full, Turning Point’s First Lien Term Loan, Second Lien Term Loan, Revolving Credit Facility and to pay related fees and expenses. As a result of this transaction, Turning Point incurred a loss on extinguishment of debt of $6.1 million during the first quarter of 2017.

Note Payable – VaporBeast

On November 30, 2016, Turning Point issued a note payable to VaporBeast’s shareholders (“VaporBeast Note.”) The VaporBeast Note is $2.0 million principal with 6% interest compounded monthly and matures on May 30, 2018, at which time it was paid in full.

SDI and Standard Outdoor

On February 2, 2018, SDI and its Outdoor advertising subsidiaries (the “Borrowers”) entered into a term loan agreement with Crystal Financial LLC (“Crystal Term Loan”). The Crystal Term Loan provides for an initial term loan of $10.0 million and a commitment to provide additional term loans of up to $15.0 million. Subject to the satisfaction of certain conditions, the Company may request an additional increase in the commitment of up to $25.0 million. The proceeds were used to finance a portion of the acquisition of certain billboard structures, fund certain fees and expenses, and provide working capital for the Borrowers. Any incremental term loans will be used to finance permitted acquisitions. The Crystal Term Loan bears interest at a rate equal to the three-month “Libor Rate” as published in The Wall Street Journal plus 7.25%. Interest under the Crystal Term Loan Agreement is payable monthly and is also subject to an agency fee of $50,000, payable upon execution of the Term Loan Agreement, and annually thereafter. In addition, the Crystal Term Loan was subject to a one-time commitment fee of $350,000, which was paid upon execution of the term loan agreement. The principal balance is payable at maturity, on February 2, 2023.

The obligations of the Borrowers under the Term Loan Agreement are secured by all the assets of the Borrowers, subject to certain exceptions and exclusions as set forth in the Term Loan Agreement and other loan documents.

The Term Loan Agreement contains certain affirmative and negative covenants that are binding on the Borrowers, including, but not limited to, restrictions (subject to specified exceptions and qualifications) on the ability of the Borrowers 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.

In addition, the Term Loan Agreement requires the Borrowers to abide by certain financial covenants. Specifically, the Term Loan Agreement requires that the Borrowers:
 
·
Maintain unrestricted cash and cash equivalents of at least $3,000,000 in accounts subject to account control agreements in favor of the Agent at all times (i) prior to March 31, 2019 and (ii) after March 31, 2019 unless the Fixed Charge Coverage Ratio (as defined in the Term Loan Agreement) is greater than or equal to 1.10 to 1.00.
·
Maintain a Turning Point Consolidated Total Leverage Ratio (as defined in the Term Loan Agreement) of less than 6.00 to 1.00 prior to December 30, 2018, 5.75 to 1.00 from December 31, 2018 to December 30, 2019, and 5.50 to 1.00 starting December 31, 2019 and thereafter.
·
Maintain a Turning Point Consolidated Senior Leverage Ratio (as defined in the Term Loan Agreement) of less than 5.00 to 1.00 prior to December 30, 2018, 4.75 to 1.00 from December 31, 2018 to December 30, 2019, and 4.50 to 1.00 starting December 31, 2019 and thereafter.

Under the Term Loan Agreement, the Borrowers must also not permit amounts outstanding under the Term Loan Agreement to exceed the sum of (i) Billboard Cash Flow (as defined in the Term Loan Agreement) multiplied by the Applicable BCF Multiple (as defined in the Term Loan Agreement) and (ii) the aggregate value of the shares of common stock of Turning Point pledged by the Registrant to the Agent multiplied by 0.35.

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 $3.0 million in unrestricted cash and cash equivalents in accounts subject to control agreements in favor of the Agent, the Company has approximately $4.4 million in unrestricted cash and cash equivalents at June 30, 2018 in those accounts. In August 2018, the Company borrowed an additional $5.0 million under the Crystal Term Loan. This borrowing is subject to the same terms as the initial borrowing.

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. A principal payment of $0.9 million on the promissory note is payable 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 starting March 1, 2019.

Interest expense related to the Standard Outdoor loans of $0.2 million and $0.4 million, including amortization of the discount, was recorded for the three months and six months ended June 30, 2018.

Note 13. Pension and Postretirement Benefit Plans

Turning Point has a defined benefit pension plan. Benefits for the hourly employees’ plan were based on a stated benefit per year of service, reduced by amounts earned in a previous plan. Benefits for the salaried employees plan were based on years of service and the employees’ final compensation. The defined benefit pension plan is frozen. Turning Point’s policy is to make the minimum amount of contributions that can be deducted for federal income taxes. Turning Point expects to make no contributions to the pension plan in 2018. In the second quarter of 2018, the Turning Point made mutually agreed upon lump-sum payments to certain individuals covered by the defined benefit pension plan which resulted in a curtailment loss of approximately $0.3 million during the second quarter of 2018.
 
Turning Point sponsored a defined benefit postretirement plan that covered hourly employees. This plan provides medical and dental benefits. This plan is contributory with retiree contributions adjusted annually.  Turning Point’s policy is to make contributions equal to benefits paid during the year. Turning Point expects to contribute approximately $0.3 million to its postretirement plan in 2018 for the payment of benefits.

The following tables provides the components of net periodic pension and postretirement benefit costs and total costs for the plans:
 
   
Pension Benefits
   
Postretirement Benefits
 
For the three months ended June 30,
 
2018
   
2017
   
2018
   
2017
 
                         
Service cost
 
$
26
   
$
26
   
$
-
   
$
-
 
Interest cost
   
142
     
150
     
29
     
14
 
Expected return on plan assets
   
(253
)
   
(256
)
   
-
     
-
 
Amortization of gains and losses
   
60
     
116
     
(20
)
   
-
 
Curtailment loss
   
306
     
-
     
-
     
-
 
Net periodic benefit cost
 
$
281
   
$
36
   
$
9
   
$
14
 

   
Pension Benefits
   
Postretirement Benefits
 
For the six months ended June 30,
 
2018
   
2017
   
2018
   
2017
 
                         
Service cost
 
$
52
   
$
52
   
$
-
   
$
-
 
Interest cost
   
284
     
320
     
58
     
72
 
Expected return on plan assets
   
(507
)
   
(512
)
   
-
     
-
 
Amortization of gains and losses
   
120
     
236
     
(40
)
   
-
 
Curtailment loss
   
306
     
-
     
-
     
-
 
Net periodic benefit cost
 
$
255
   
$
96
   
$
18
   
$
72
 

Note 14. Stockholders’ Equity

Common Stock

As described in Note 1. Organization and Description of Business, just prior to the Contribution and Exchange, the Company’s issued and outstanding common stock was reclassified such that every 25 shares of common stock became one fully paid and nonassessable share of Class A Common Stock. Any fractional shares were rounded up and an additional share was issued. At the consummation of the Contribution and Exchange, the Company issued 7,335,018 shares of its Class A Common Stock to Turning Point shareholders, in exchange for 9,842,373 shares of Turning Point stock, and 857,714 shares of its Class A Common Stock, in exchange for the Company’s outstanding common stock. The Company also issued 13,700 shares of Class A Common Stock to holders of the Company’s restricted stock, which vested at the time of the Contribution and Exchange. Following the consummation of the Contribution and Exchange, the Company distributed a dividend of one share of Class B Common Stock for each outstanding share of Class A Common Stock, for a total issuance of 8,190,166 shares of Class B Common Stock.

In addition, under the Fifth Amended and Restated Certificate of Incorporation, which became effective at the time of the Contribution and Exchange, the number of authorized shares of the Company’s Common Stock, $0.01 par value per share, was increased from 50,000,000 to 330,000,000, of which 300,000,000 are Class A Common Stock and 30,000,000 are Class B Common Stock. Shares of Class A Common Stock and Class B Common Stock have the same rights and powers, rank equally (including as to dividends and distributions, and upon any liquidation, dissolution or winding up of the Company), share ratably and are identical in all respects and as to all matters. The holders of shares of Class A Common Stock and Class B Common Stock will vote together as a single class on all matters (including the election of directors) submitted to a vote or for the written consent of the stockholders of the Company. Each holder of Class A Common Stock has the right to one vote per share of Class A Common Stock and each holder of Class B Common Stock has the right to ten votes per share of Class B Common Stock. The shares of Class B Common Stock are 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. During the six months ended June 30, 2018, 118,235 shares of Class B Common Stock were converted to Class A 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. No shares of Preferred Stock have been issued.

Common Stock Repurchase Program

On June 29, 2017, the Company’s Board of Directors authorized a program, effective immediately, to repurchase over a period of twelve months 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 the 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. No repurchases of Common Stock were made pursuant to this program since its authorization. The Crystal Term Loan, as described in Note 12. Notes Payable and Long-Term Debt, generally prohibits such repurchases of the Company’s Common Stock.

Equity Issuance

On January 12, 2018, the Company issued 181,825 shares of its Class A common stock in a private placement for gross proceeds of $2.0 million.

In March 2018, the Company granted 18,834 shares of restricted stock with immediate vesting to individuals for services performed. These shares were granted outside of the Company’s 2017 Omnibus Equity Compensation Plan. In June 2018, 37,816 shares of restricted stock vested, with 15,838 shares withheld by the Company as treasury stock to cover the employees’ taxes on the restricted stock vesting. This treasury stock was immediately retired.

Turning Point Dividends

On November 9, 2017, the Board of Directors of Turning Point approved the initiation of a cash dividend to its shareholders. The initial quarterly dividend of $0.04 per common share was paid on December 15, 2017 to shareholders of record at the close of business on November 27, 2017 and $0.4 million was paid to noncontrolling interest holders as a result of this dividend. The most recent dividend of $0.04 per common share was paid on July 13, 2018, to shareholders of record at the close of business on June 25, 2018 and $0.4 million was paid to noncontrolling interest holders as a result of this dividend.

Turning Point 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.
 
Note 15. Share-Based Compensation

The Company has a stock option plan (the “2000 Plan”) which authorizes the granting of incentive and nonqualified stock options and restricted stock units. Incentive stock options are granted at not less than 100% of fair market value at the date of grant (110% for stockholders owning more than 10% of the Company’s common stock). Nonqualified stock options are granted at not less than 85% of fair market value at the date of grant. A maximum of 8,000,000 shares of common stock are issuable under the 2000 Plan. Certain additional options have been granted outside the 2000 Plan. These options generally follow the provisions of the 2000 Plan. The Company issues new shares to satisfy option exercises and the vesting of restricted stock awards.  As of the effective date of the 2017 Plan, described further below, no additional grants will be made under the 2000 Plan.

On June 9, 2017, the Company’s Board of Directors adopted the 2017 Omnibus Equity Compensation Plan (the “2017 Plan”) in order to provide employees of the Company and its subsidiaries, certain consultants and advisors who perform services for the Company or its subsidiaries, and non-employee members of the Board of Directors 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. No awards have been made to date under the 2017 Plan.

The Company also has an Employee Stock Purchase Plan (the “ESPP”). The ESPP allows eligible full-time employees to purchase shares of common stock at 90 percent of the lower of the fair market value of a share of common stock on the first or last day of the quarter. Eligible employees are provided the opportunity to acquire Company common stock during each quarter. No more than 26,447 shares of common stock may be issued under the ESPP. Such stock may be unissued shares or treasury shares of the Company or may be outstanding shares purchased in the open market or otherwise on behalf of the ESPP. The Company’s ESPP is compensatory and therefore, the Company is required to recognize compensation expense related to the discount from market value of shares sold under the ESPP. The Company issues new shares to satisfy shares purchased under the ESPP.

Including the share-based compensation expense of SDI’s subsidiaries, there was share-based compensation expense of $0.6 million and $1.0 million recorded for the three and six months ended June 30, 2018, respectively, and $0.3 million for the three and six months ended June 30, 2017. This expense is a component of selling, general and administrative expense.

No options of SDI were exercised in the three and six month periods ended June 30, 2018 and 2017.

Stock option activity is summarized as follows:

   
Number
of Shares
   
Price Range
 
Weighted
Average Remaining
Contractual term
 
Aggregate
Intrinsic
Value
 
                           
Balance, January 1, 2018
   
7,463
   
$
31.00
 
-
$
56.25
 
2.96 years
       
Granted
   
-
     
-
     
-
           
Cancelled
   
(5,000
)
 
$
31.00
 
-
$
56.25
           
Forfeited
   
-
     
-
     
-
           
Balance, June 30, 2018
   
2,463
   
$
31.00
 
-
$
50.00
 
2.2 years
  $
-
 
Vested and exercisable at June 30, 2018
   
2,463
   
$
31.00
 
-
$
50.00
 
2.2 years
  $
-
 
 
The following table provides additional information about the Company’s stock options outstanding and exercisable at June 30, 2018:
 
   
Options Outstanding
 
Options Exercisable
 
       
Weighted Average
       
Weighted Average
 
Range of
Exercise Prices
 
Number of
Shares
 
Remaining
Contractual Life
 
Exercise
Price
 
Number of
Shares
   
Exercise
Price
 
                             
$
31.00 - $31.25
   
1,400
 
2.9
 
Years
 
$
31.18
   
1,400
   
$
31.18
 
$
45.25 - $46.25
   
1,063
 
1.4
 
Years
 
$
45.63
   
1,063
   
$
45.63
 
$
31.00 - $56.25
   
2,463
 
2.2
 
Years
 
$
37.41
   
2,463
   
$
37.41
 

The Company grants restricted stock awards (“RSA”) which is the right to receive shares. The fair value of RSAs is based on the market price for the stock at the date of grant. During the six months ended June 30, 2018, the Company granted employees of the Company 97,657 shares of restricted stock with vesting terms ranging from 2-3 years. In addition, the Company granted 18,834 shares of restricted stock with immediate vesting to individuals for services performed.
 
The following table summarizes the changes in non-vested RSAs for the six months ended June 30, 2018:

 
Shares
   
Weighted Average
Grant Date
Fair Value
 
Non-vested RSAs at January 1, 2018
   
119,102
   
$
10.62
 
Granted
   
116,491
     
10.70
 
Vested
   
(56,650
)
   
10.62
 
Cancelled/Forfeited
   
(37,203
)
   
10.70
 
Non-vested RSAs at June 30, 2018
   
141,740
   
$
10.67
 

As of June 30, 2018, there was $1.4 million of total unrecognized stock-based compensation expense, related to restricted stock awards, which will be recognized over the weighted-average remaining vesting period of 2.1 years.

Note 16. Income Taxes

On June 1, 2017, SDI consummated the Contribution and Exchange to acquire a 52.1% controlling interest in Turning Point (see Note 3. Acquisitions above). This acquisition was a reverse acquisition, with Turning Point as the accounting acquirer. Accordingly, the historical financial statements of Turning Point through May 31, 2017 became the Company’s historical financial statements, including the comparative prior periods. These consolidated financial statements include the results of SDI from June 1, 2017, the date the reverse acquisition was consummated. However, SDI’s controlling interest does not meet the ownership threshold to file a consolidated federal tax return with Turning Point. Therefore, the parent company will continue to file a separate federal tax return apart from Turning Point.  In the first quarter of 2018, the Company acquired Maidstone, which will be included in the SDI consolidated federal tax return.

SDI has recorded a full valuation allowance as of June 30, 2018, offsetting its U.S. federal and state net deferred tax assets which primarily represent net operating loss carry forwards (“NOLs”). At June 30, 2018, the Company’s management concluded, based upon the evaluation of all available evidence, that it is more likely than not that the U.S. federal and state net deferred tax assets will not be realized.  Due to the reverse acquisition transaction with Turning Point, the Company determined that SDI has experienced a “change in control” as defined in Internal Revenue Code Section 382, which will result in an annual limitation on SDI’s utilization of NOLs in future periods.  The Company is currently evaluating the effects of Section 382 on SDI’s future utilization of its NOLs. The Company’s income tax expense for the three and six months ended June 30, 2018, which reflects only the results of Turning Point.  Turning Point’s effective income tax rate for the three and six months ended June 30, 2018, was 17% and 18%, respectively which includes a tax deduction of $1.6 million and $1.8 million for the three and six months ended June 30, 2018, relating to stock option exercises. Turning Point’s effective income tax rate for the three and six months ended June 30, 2018, also reflected a tax benefit of $0.4 million primarily related to Kentucky corporate income tax changes enacted in April 2018. The significant impacts to the Company regarding the Kentucky changes included a reduction of the corporate tax rate from 6% to 5% and moving to a single sales factor apportionment formula for tax years beginning on and after January 1, 2018.
 
The Company follows the provisions of ASC 740-10-25, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. A tax position must be more-likely-than-not to be sustained upon examination by taxing authorities for those benefits to be recognized. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. As of June 30, 2018, SDI had approximately $523 of unrecognized tax benefits under the provisions of ASC 740-10-25, $517 of which were recorded as a reduction to existing net operating loss and tax credit carry forwards, and therefore require no accrual for interest or penalty. The remaining $6 includes de minimis interest and penalties where required. SDI does not expect that the total amount of unrecognized tax benefits related to positions taken in prior periods will change significantly during the next twelve months. Turning Point has determined that it did not have any uncertain tax positions requiring recognition under the provisions of ASC 740-10-25. The Company’s policy is to recognize interest and penalties accrued on uncertain tax positions, if any, as part of interest expense. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. For federal purposes, SDI’s post-2001 tax years remain open to examination as a result of net operating losses generated during those years that are carried forward to be potentially utilized in future years. For state purposes, the statute of limitations for SDI remains open in a similar manner for states that have generated NOLs. In general, Turning Point is no longer subject to U.S. federal and state tax examinations for years prior to 2014.

On December 22, 2017, H.R. 1, commonly known as the Tax Cuts and Jobs Act (“TCJA”) was signed into law. As a result, the federal corporate income tax rate was reduced from 35% to 21%, effective January 1, 2018. The Company’s 2017 financial results included an SDI-related charge of $3.2 million to income tax expense, offset by a reduction in the valuation allowance of $3.2 million, primarily resulting from re-measuring SDI’s net deferred tax assets to reflect the recently enacted lower tax rate effective January 1, 2018. The rate change also resulted in a re-measurement of the full valuation allowance already established against the deferred tax asset. Turning Point was also required to re-measure its deferred tax assets and liabilities at the newly enacted rate, resulting in $0.2 million of income tax expense for the year ended December 31, 2017.
 
Note 17. Contingencies
 
Other major tobacco companies are defendants in product liability claims. In a number of these cases, the amounts of punitive and compensatory damages sought are significant and could have a material adverse effect on Turning Point’s business and results of operations. Turning Point is a defendant in certain cases which have been dormant for many years, which cases have now been dismissed with prejudice.

Turning Point is subject to several lawsuits alleging personal injuries resulting from malfunctioning vaporizer devices and may be subject to claims in the future relating to other NewGen products. Turning Point is still evaluating these claims and the potential defenses to them. For example, Turning Point did not design or manufacture the products at issue; rather, Turning Point was merely the distributor. Nonetheless, there can be no assurance that Turning Point will prevail in these cases, and they could have a material adverse effect on the financial position, results of operations, or cash flows of Turning Point and the consolidated Company.

Maidstone is a party to lawsuits arising in the normal course of its business. These lawsuits generally seek to establish liability under insurance policies and occasionally seek punitive damages. In the opinion of the Company’s management, none of the cases, individually or collectively, are likely to result in judgments for amounts, after considering established loss reserves and reinsurance, which would have a material adverse effect on the Company’s financial condition or results of operations.
 
Concentrations

Maidstone writes primarily personal automobile and homeowners insurance in New York. Maidstone’s financial position, results of operations and cash flows are susceptible to risks as a result of these concentrations. In addition, Maidstone writes a significant amount of business through brokers and a credit risk exists should any of these brokers be unable to fulfill their obligations with respect to the payment of insurance balances.

The creditworthiness of the counterparty is evaluated by Maidstone, taking into account credit ratings assigned by independent agencies. The credit approval process involves an assessment of factors, including, among others, the counterparty, country and industry credit exposure limits. Collateral may be required, at Maidstone’s discretion, on certain transactions based on the creditworthiness of the counterparty.

The Company’s fixed income investment portfolio is managed in accordance with guidelines that have been tailored to meet specific investment strategies, including standard of diversification, which limit the allowable holdings to any single issue. The Company reported no investment in excess of 10% of the Company’s surplus at June 30, 2018, other than investments issued or guaranteed by the United States government or its agencies.

Note 18. Earnings Per Share

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.

Diluted earnings per share is calculated similarly to basic earnings per share, except that the calculation includes the dilutive effect of the assumed exercise of options issuable under the Company’s stock incentive plans and the Company’s unvested restricted stock awards.

Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares and the weighted average effect of potentially dilutive securities outstanding during the period. Potentially dilutive securities consist of stock options and restricted stock awards and the dilutive effect of such awards is reflected in diluted earnings per share by application of the treasury stock method. Due to the reverse acquisition, the basic weighted average number of common shares outstanding for the three and six months ended June 31, 2017 has been calculated using Turning Point’s historical weighted average number of common shares outstanding multiplied by the conversion ratio used in the reverse acquisition. For the three and six months ended June 30, 2018, the basic weighted average shares outstanding has been calculated using the number of common shares outstanding of SDI from January 1, 2018 through June 30, 2018.

The following tables set forth the computation of basic and diluted net income per share of Class A and Class B common stock (in thousands, except share amounts and per share amounts):

   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2018
   
2017
   
2018
   
2017
 
                         
Basic net income per common share calculation:
                       
Net income attributable to SDI
 
$
3,528
   
$
4,903
   
$
4,049
   
$
6,780
 
                                 
Weighted average Class A common shares outstanding – basic
   
8,632,350
     
12,160,721
     
8,788,230
     
13,069,930
 
Weighted average Class B common shares outstanding – basic
   
7,977,478
     
12,154,174
     
8,007,585
     
13,066,638
 
Weighted average common shares outstanding – basic (1)
   
16,609,828
     
24,314,895
     
16,795,815
     
26,136,568
 
Net income per share of common stock – basic
 
$
0.21
   
$
0.20
   
$
0.24
   
$
0.26
 
 
   
Three Months Ended
June 30,
   
Six Months Ended
June 30,
 
   
2018
   
2017
   
2018
   
2017
 
                         
Diluted net income per common share calculation:
                       
Net income attributable to SDI
 
$
3,528
   
$
4,903
   
$
4,049
   
$
6,780
 
Impact of subsidiary dilutive securities (1)
   
(125
)
   
(73
)
   
(170
)
   
(73
)
Net income attributable to SDI - diluted
 
$
3,403
   
$
4,830
   
$
3,879
   
$
6,707
 
                                 
Weighted average Class A common shares outstanding – basic
   
8,632,350
     
12,160,721
     
8,788,230
     
13,069,930
 
Weighted average Class B common shares outstanding – basic
   
7,977,478
     
12,154,174
     
8,007,585
     
13,066,638
 
Dilutive impact of stock options and restricted stock awards
   
826
     
14,305
     
33,511
     
7,192
 
Weighted average common shares outstanding – diluted
   
16,610,654
     
24,329,200
     
16,829,326
     
26,143,760
 
Net income per share of common stock – diluted
 
$
0.20
   
$
0.20
   
$
0.23
   
$
0.26
 
 
(1)
The Company records and adjustment to net income in the relevant period for the dilutive impact of subsidiary stock-based awards on the Company’s reported net income for purposes of calculating income per share.

The following outstanding securities at June 30, 2018 have been excluded from the computation of diluted weighted average shares outstanding, as they are anti-dilutive:

   
June 30, 2018
 
Stock options
   
2,463
 

Note 19. Segment Information

In accordance with ASC 280, Segment Reporting, the Company has five reportable segments. Three of the Company’s segments are also those of Turning Point: (1) Smokeless products; (2) Smoking products; and (3) NewGen products. The smokeless products segment (i) manufactures and markets moist snuff and (ii) contracts for and markets chewing tobacco products. The smoking products segment (i) imports and markets cigarette papers, tubes, and related products; (ii) imports and markets finished cigars, MYO cigar tobaccos, and cigar wraps; and (iii) processes, packages, markets, and distributes traditional pipe tobaccos. The NewGen products segment (i) markets e-cigarettes, e-liquids, vaporizers, and other related products; (ii) distributes a wide assortment of vaping products to non-traditional retail outlets via VaporBeast and Vapor Shark, and (iii) distributes a wide assortment of vaping related products to individual consumers via Vapor Shark branded retail outlets. The Company’s smoking and smokeless products are distributed primarily through wholesale distributors in the United States while the NewGen products are distributed primarily through e-commerce to non-traditional retail outlets in the United States.
 
Beginning in the first quarter of 2018, as a result of the recently completed acquisition of an insurance company, the Company has an additional segment, Insurance. The Insurance segment represents the Company’s property and casualty insurance business, operated through Maidstone Insurance, a New York domiciled seller of auto and personal lines.

The Company also reports an Other segment, which includes the results of operations of SDI and Standard Outdoor and assets of the consolidated Company not assigned to the five reportable segments. Elimination includes the elimination of intercompany accounts between segments.

Accounting policies of these segments are the same as those of the Company. Segment data for the three Turning Point segments includes a charge allocating Turning Point corporate costs to the three reportable segments based on their respective gross sales. Prior period corporate costs have been allocated in accordance with the current period allocation methodology to conform prior period segment operating income figures to current period presentation. The Company evaluates the performance of its segments and allocates resources to them based on operating income.
 
The tables below present financial information about reported segments:

For the three months ended
 
June 30,
2018
   
June 30,
2017
 
             
Revenues
           
Smokeless Products
 
$
24,410
   
$
22,021
 
Smoking Products
   
29,328
     
27,019
 
NewGen Products
   
27,363
     
23,046
 
Insurance
   
7,497
     
-
 
 Other (4)
   
672
     
-
 
     
89,270
     
72,086
 
                 
Operating Income
               
Smokeless Products (1)
 
$
6,440
   
$
5,302
 
Smoking Products (2)
   
8,781
     
8,965
 
NewGen Products (3)
   
(312
)
   
(734
)
Insurance
   
551
     
-