0001140361-18-042867.txt : 20181109 0001140361-18-042867.hdr.sgml : 20181109 20181109165535 ACCESSION NUMBER: 0001140361-18-042867 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 127 CONFORMED PERIOD OF REPORT: 20180930 FILED AS OF DATE: 20181109 DATE AS OF CHANGE: 20181109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STANDARD DIVERSIFIED INC. CENTRAL INDEX KEY: 0000911649 STANDARD INDUSTRIAL CLASSIFICATION: TOBACCO PRODUCTS [2100] IRS NUMBER: 561581761 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36696 FILM NUMBER: 181173786 BUSINESS ADDRESS: STREET 1: 155 MINEOLA BOULEVARD CITY: MINEOLA STATE: NY ZIP: 11501 BUSINESS PHONE: (516) 248-1100 MAIL ADDRESS: STREET 1: 155 MINEOLA BOULEVARD CITY: MINEOLA STATE: NY ZIP: 11501 FORMER COMPANY: FORMER CONFORMED NAME: STANDARD DIVERSIFIED OPPORTUNITIES INC. DATE OF NAME CHANGE: 20170602 FORMER COMPANY: FORMER CONFORMED NAME: SPECIAL DIVERSIFIED OPPORTUNITIES INC. DATE OF NAME CHANGE: 20130717 FORMER COMPANY: FORMER CONFORMED NAME: SPECIAL DIVERSIFIED OPPORTUNITIES INC DATE OF NAME CHANGE: 20130717 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 September 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
Emerging growth company
   

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes       No  

At November 2, 2018, there were 9,093,634 shares outstanding of the registrant’s Class A common stock, par value $0.01 per share, and 7,815,652 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
47
     

ITEM 3
64
     

ITEM 4
65
     
PART II   OTHER INFORMATION
 
     

ITEM 1
66
     

ITEM 1A
66
     

ITEM 2
66
     

ITEM 3
66
     

ITEM 4
66
     

ITEM 5
66
     

ITEM 6
66
     

 
67

Item1.
Financial Statements

Standard Diversified Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(dollars in thousands except share and per share data)
(unaudited)

   
September 30,
2018
   
December 31,
2017
 
ASSETS
           
Cash and cash equivalents
 
$
18,520
   
$
18,219
 
Fixed maturities available for sale, at fair value; amortized cost $34,492 in 2018
   
33,908
     
-
 
Equity securities, at fair value; cost: $753 in 2018
   
804
     
-
 
Trade accounts receivable, net of allowances of $44 in 2018 and $17 in 2017
   
6,808
     
3,249
 
Premiums receivable
   
6,245
     
-
 
Inventories
   
89,433
     
63,296
 
Other current assets
   
14,998
     
10,851
 
Property, plant and equipment, net
   
28,068
     
9,172
 
Deferred income taxes
   
-
     
450
 
Deferred financing costs, net
   
922
     
630
 
Intangible assets, net
   
38,206
     
26,436
 
Deferred policy acquisition costs
   
2,384
     
-
 
Goodwill
   
147,464
     
134,620
 
Master Settlement Agreement (MSA) escrow deposits
   
29,926
     
30,826
 
Pension asset
   
-
     
396
 
Other assets
   
2,877
     
569
 
Total assets
 
$
420,563
   
$
298,714
 
                 
LIABILITIES AND EQUITY
               
Reserves for losses and loss adjustment expenses
 
$
24,741
   
$
-
 
Unearned premiums
   
13,160
     
-
 
Advance premiums collected
   
519
     
-
 
Accounts payable
   
9,943
     
3,686
 
Accrued liabilities
   
18,336
     
20,014
 
Current portion of long-term debt
   
9,299
     
7,850
 
Revolving credit facility
   
30,000
     
8,000
 
Notes payable and long-term debt
   
210,427
     
186,190
 
Deferred income taxes
   
2,598
     
-
 
Postretirement benefits
   
3,916
     
3,962
 
Asset retirement obligations
   
2,028
     
-
 
Other long-term liabilities
   
1,959
     
571
 
Total liabilities
   
326,926
     
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; 9,031,641 and 8,348,373 issued and outstanding shares at September 30, 2018 and December 31, 2017, respectively
   
90
     
83
 
Class B common stock, $0.01 par value; authorized shares, 30,000,000; 7,818,645 and 8,041,525 issued and outstanding shares at September 30, 2018 and December 31, 2017, respectively; convertible into Class A shares on a one-for-one basis
   
78
     
81
 
Additional paid-in capital
   
79,338
     
70,813
 
Accumulated other comprehensive loss
   
(2,503
)
   
(1,558
)
Accumulated deficit
   
(21,577
)
   
(26,982
)
Total stockholders' equity
   
55,426
     
42,437
 
Noncontrolling interests
   
38,211
     
26,004
 
Total equity
   
93,637
     
68,441
 
Total liabilities and equity
 
$
420,563
   
$
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 data)
(unaudited)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2018
   
2017
   
2018
   
2017
 
Revenues:
                       
Net sales
 
$
84,035
   
$
73,352
   
$
240,156
   
$
212,226
 
Insurance premiums earned
   
7,088
     
-
     
21,539
     
-
 
Net investment income
   
309
     
-
     
679
     
-
 
Other income
   
163
     
-
     
557
     
-
 
Total revenues
   
91,595
     
73,352
     
262,931
     
212,226
 
                                 
Operating costs and expenses:
                               
Cost of sales
   
47,742
     
40,386
     
136,147
     
119,522
 
Selling, general and administrative expenses
   
24,492
     
19,606
     
70,237
     
55,355
 
Incurred losses and loss adjustment expenses
   
5,790
     
-
     
17,007
     
-
 
Other operating expenses
   
2,682
     
-
     
5,512
     
-
 
Total operating costs and expenses
   
80,706
     
59,992
     
228,903
     
174,877
 
Operating income
   
10,889
     
13,360
     
34,028
     
37,349
 
                                 
Interest expense
   
4,450
     
4,023
     
12,556
     
13,002
 
Interest and investment income
   
(243
)
   
(157
)
   
(620
)
   
(369
)
Loss on extinguishment of debt
   
-
     
-
     
2,384
     
6,116
 
Net periodic benefit (income) expense, excluding service cost
   
(45
)
   
58
     
176
     
174
 
Income before income taxes
   
6,727
     
9,436
     
19,532
     
18,426
 
Income tax expense
   
1,436
     
3,110
     
4,153
     
3,850
 
Net income
   
5,291
     
6,326
     
15,379
     
14,576
 
Net income attributable to noncontrolling interests
   
3,924
     
3,576
     
9,962
     
5,046
 
Net income attributable to Standard Diversified Inc.
 
$
1,367
   
$
2,750
   
$
5,417
   
$
9,530
 
                                 
Net income attributable to SDI per Class A and Class B Common Share – Basic
 
$
0.08
   
$
0.17
   
$
0.33
   
$
0.42
 
Net income attributable to SDI per Class A and Class B Common Share – Diluted
 
$
0.08
   
$
0.16
   
$
0.31
   
$
0.41
 
Weighted Average Class A and Class B Common Shares Outstanding – Basic
   
16,677,412
     
16,399,796
     
16,618,823
     
22,853,762
 
Weighted Average Class A and Class B Common Shares Outstanding – Diluted
   
16,741,660
     
16,410,672
     
16,661,809
     
22,880,941
 

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
September 30,
   
Nine Months Ended
September 30,
 
   
2018
   
2017
   
2018
   
2017
 
                         
Net income
 
$
5,291
   
$
6,326
   
$
15,379
   
$
14,576
 
                                 
Other comprehensive income (loss):
                               
Amortization of unrealized pension and postretirement losses, net of tax of $3 and $43 for the three months ended September 30, 2018 and 2017, respectively, and $85 and $132 for the nine months ended September 30, 2018 and 2017, respectively.
   
10
     
71
     
314
     
218
 
Unrealized investment (losses) gains, net of tax of $69 and $8 for the three months ended September 30, 2018 and 2017, respectively, and $173 and $150 for the nine months ended September 30, 2018 and 2017, respectively.
   
(385
)
   
12
     
(1,322
)
   
241
 
Unrealized losses on interest rate swaps, net of tax of $70 and $92 in 2018
   
(233
)
   
-
     
(308
)
   
-
 
Other comprehensive (loss) income
   
(608
)
   
83
     
(1,316
)
   
459
 
Amounts attributable to noncontrolling interests
   
(3,924
)
   
(3,576
)
   
(9,962
)
   
(5,046
)
Comprehensive income attributable to Standard Diversified Inc.
 
$
759
   
$
2,833
   
$
4,101
   
$
9,989
 

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
   
222,880
     
3
     
(222,880
)
   
(3
)
   
-
     
-
     
-
     
-
     
-
   
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 under ATM, net of issuance costs
   
209,370
     
2
     
-
     
-
     
3,166
     
-
             
-
     
3,168
 
 
Issuance of Class A common stock in asset purchase
   
22,727
     
-
     
-
     
-
     
250
     
-
     
-
     
-
     
250
   
SDI restricted stock vesting
   
46,466
     
-
     
-
     
-
     
(216
)
   
-
     
-
     
-
     
(216
)
 
Unrecognized pension and postretirement cost adjustment
   
-
     
-
     
-
     
-
     
-
     
160
     
-
     
154
     
314
   
Unrealized loss on investments, net of tax of $173
   
-
     
-
     
-
     
-
     
-
     
(960
)
   
-
     
(362
)
   
(1,322
)
 
Unrealized loss on interest rate swaps, net of tax of $92
   
-
     
-
     
-
     
-
     
-
     
(157
)
   
-
     
(151
)
   
(308
)
 
SDI stock-based compensation
   
-
     
-
     
-
     
-
     
680
     
-
     
-
     
-
     
680
 
 
Impact of Turning Point equity transactions on APIC and NCI
   
-
     
-
     
-
     
-
     
2,667
     
-
     
-
     
3,768
     
6,435
   
Turning Point dividend payable to noncontrolling interests
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
(1,164
)
   
(1,164
)
 
Impact of adoption of ASU 2018-02
   
-
     
-
     
-
     
-
     
-
     
12
     
(12
)
   
-
     
-
   
Net income
   
-
     
-
     
-
     
-
     
-
     
-
     
5,417
     
9,962
     
15,379
 
 
Balance September 30, 2018
   
9,031,641
   
$
90
   

7,818,645
   
$
78
   
$
79,338
   
$
(2,503
)
 
$
(21,577
)
 
$
38,211
   
$
93,637
   

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)

   
Nine Months Ended
September 30,
 
   
2018
   
2017
 
Cash flows from operating activities:
           
Net income
 
$
15,379
   
$
14,576
 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
               
Loss on extinguishment of debt
   
2,384
     
6,116
 
Loss on sale of property, plant and equipment
   
-
     
17
 
Depreciation expense
   
2,497
     
1,200
 
Amortization of deferred financing costs
   
986
     
834
 
Amortization of intangible assets
   
755
     
527
 
Deferred income taxes
   
2,806
     
1,847
 
Stock-based compensation expense
   
1,586
     
630
 
Amortization of bond discount/premium
   
62
     
-
 
Changes in operating assets and liabilities:
               
Trade accounts receivable
   
(3,564
)
   
(837
)
Premiums receivable
   
884
     
-
 
Inventories
   
(18,840
)
   
(970
)
Other current assets and other assets
   
(5,610
)
   
2,156
 
Deferred policy acquisition costs
   
(2,384
)
   
-
 
Reinsurance related assets and liabilities
   
(89
)
   
-
 
Accounts payable and other liabilities
   
4,692
     
(2,292
)
Accrued postretirement liabilities
   
(107
)
   
(18
)
Reserves for losses and loss adjustment expenses
   
(5,475
)
   
-
 
Unearned and advance premiums
   
244
     
-
 
Accrued liabilities and other
   
(5,971
)
   
(7,106
)
Net cash (used in) provided by operating activities
   
(9,765
)
   
16,680
 
                 
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
   
3,339
     
-
 
Payments for purchases of fixed maturity securities, available-for-sale
   
(12,510
)
   
-
 
Payments for purchases of equity securities
   
(753
)
   
-
 
Restricted cash, MSA escrow deposits
   
(2,234
)
   
320
 
Issuance of note receivable
   
(6,500
)
   
-
 
Receipt of note receivable repayment including prepayment penalty
   
7,475
     
-
 
Acquisitions, net of cash acquired
   
(16,991
)
   
(22
)
Capital expenditures
   
(1,591
)
   
(1,052
)
Net cash (used in) provided by investing activities
 
$
(29,765
)
 
$
19,499
 

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

Standard Diversified Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Continued)
(dollars in thousands)
(unaudited)

   
Nine Months Ended
September 30,
 
   
2018
   
2017
 
Cash flows from financing activities:
           
Proceeds from 2018 first lien term loan, net
 
$
156,000
   
$
-
 
Proceeds from 2018 second lien term loan
   
40,000
     
-
 
Proceeds from 2018 revolving credit facility
   
30,000
     
-
 
(Payments of) proceeds from 2017 first lien term loans, net
   
(140,613
)
   
142,075
 
(Payments of) proceeds from 2017 second lien term loans, net
   
(55,000
)
   
55,000
 
(Payments of) proceeds from 2017 revolving credit facility, net
   
(8,000
)
   
15,550
 
Payments of VaporBeast Note Payable and Vapor Shark loans
   
(2,000
)
   
(1,867
)
Proceeds from release of restricted funds
   
1,107
     
-
 
Payments of financing costs
   
(3,286
)
   
(4,783
)
Payments of first lien term loan
   
-
     
(147,362
)
Payments of second lien term loan
   
-
     
(60,000
)
Payments of revolving credit facility
   
-
     
(15,083
)
Proceeds from borrowings under SDI credit facility, net
   
14,113
     
-
 
Payment to terminate acquired capital lease
   
(170
)
   
-
 
Shares repurchase for tax withholding on vesting of restricted stock
   
(216
)
   
-
 
Proceeds from issuance of stock
   
5,148
     
-
 
Prepaid Turning Point Brands equity issuance costs
   
-
     
(394
)
Turning Point Brands exercise of options
   
779
     
1,371
 
Turning Point Brands redemption of options
   
(623
)
   
(1,740
)
Turning Point Brands surrender of options
   
-
     
(1,000
)
Payment of Turning Point cash dividends
   
(749
)
   
-
 
Distribution to noncontrolling interest of Turning Point Brands
   
-
     
(4
)
Net cash provided by (used in) financing activities
   
36,490
     
(18,237
)
                 
Net (decrease) increase in cash
 
(3,040
)
 
17,942
 
                 
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
   
18,520
     
20,487
 
Restricted
   
1,368
     
4,209
 
Total cash at end of period
 
$
19,888
   
$
24,696
 
                 
Supplemental schedule of noncash investing and financing activities:
               
Issuance of SDI shares in business combination
 
$
5,542
   
$
39
 
Common stock issued in connection with reverse acquisition
 
$
-
   
$
16,917
 

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

Standard Diversified Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except where designated and per share data)
(unaudited)

Note 1.
Organization and Description of Business

The accompanying condensed consolidated financial statements include the results of operations of Standard Diversified Inc. (“SDI”), a holding company, and its 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 September 30, 2018, SDI had a 50.4 % 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. Upon the consummation of the Contribution and Exchange, SDI ceased to be 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 Holdings”) 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).

On September 5, 2018, Turning Point, acquired International Vapor Group, LLC (“IVG”) for total consideration of $23.7 million. IVG markets and sells a broad array of proprietary and third-party vapor products directly to adult consumers through an online platform under brand names such as VaporFi, South Beach Smoke, and Direct Vapor. IVG operates company-owned stores under the VaporFi brand and also operates as a franchisor to franchisee-owned stores. The acquisition of IVG adds a significant business-to-consumer distribution platform to Turning Point’s NewGen portfolio.

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 Atlantic 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”), Vapor Beast, 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”), Vapor Finance, LLC (“VFIN”), and International Vapor Group and its subsidiaries (collectively, “IVG”).

Pillar General, a wholly-owned subsidiary of the Company, owns 100% of Interboro Holdings 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, 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 nine months ended September 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 September 30, 2018, SDI had an ownership interest of 50.4 % 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 20. Segment Information. An additional disaggregation of contract revenue by sales channel can also be found within Note 20. 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 $3.8 million and $2.9 million for the three months ended September 30, 2018 and 2017, respectively. Shipping costs incurred were approximately $10.5 million and $7.4 million for the nine months ended September 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 September 30, 2018, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $29.9 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 September 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
 
$
1,368
   
$
-
   
$
1,368
   
$
3,602
   
$
-
   
$
3,602
 
U.S. Governmental agency obligations (unrealized loss position < 12 months)
   
3,181
     
(53
)
   
3,128
     
722
     
(17
)
   
705
 
U.S. Governmental agency obligations (unrealized loss position > 12 months)
   
27,514
     
(2,084
)
   
25,430
     
27,733
     
(1,214
)
   
26,519
 
   
$
32,063
   
$
(2,137
)
 
$
29,926
   
$
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
 
   
September 30,
2018
   
December 31,
2017
 
Less than one year
 
$
1,499
   
$
-
 
Less than five years
   
9,600
     
7,114
 
Six to ten years
   
15,141
     
17,662
 
Greater than ten years
   
4,455
     
3,679
 
Total U.S. Governmental agency obligations
 
$
30,695
   
$
28,455
 

The following shows the amount of deposits by sales year for the MSA escrow account:

   
Deposits as of
 
Sales
Year
 
September 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
   
1,619
     
1,626
 
2010
   
406
     
406
 
2011
   
193
     
193
 
2012
   
199
     
199
 
2013
   
173
     
173
 
2014
   
143
     
143
 
2015
   
101
     
101
 
2016
   
81
     
81
 
2017
   
83
     
70
 
Total
 
$
32,063
   
$
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 gains on equity securities of $51, which were included in net investment income on the Company’s consolidated statements of income for the three and nine months ended September 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
   
3,950
 
Amortized expenses
   
(1,566
)
DAC asset at September 30, 2018
 
$
2,384
 

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.

Premium 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 September 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 September 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 September 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 nine months ended September 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 September 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. The insurance subsidiary will be included in SDI’s consolidated tax return.

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, so there was no impact to the consolidated financial statements upon adoption.

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 $0.1 million and $0.2 million from cost of sales and selling, general, and administrative expenses to net periodic benefit (income) expense, excluding service cost, for the three and nine months ended September 30, 2017, respectively.

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. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. This ASU allows entities to not recast comparative periods in transition to ASC 842 and instead report the comparative periods presented in the period of adoption under ASC 840. The ASU also includes a practical expedient for lessors to not separate the lease and non-lease components of a contract. The amendments in this ASU are effective in the same time-frame as ASU 2016-02 as discussed above. While the Company is still in the process of quantifying the impact to the consolidated balance sheet upon adoption, the Company expects to report increased assets and liabilities as a result of recognizing right-of-use assets and lease liabilities related to the Company’s operating lease agreements discussed in the Company’s 2017 Annual Report on Form 10-K. However, the Company does not expect adoption of ASU 2016-02 and ASU 2018-11 to have a material impact on its consolidated statements of income as the majority, if not all, of the Company’s leases are expected to remain operating in nature.

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-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.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The final rule is effective for all filings made on or after November 5, 2018.  The staff of the SEC has indicated it would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments. The Company anticipates its first presentation of changes in stockholders’ equity as required under the new guidance will be included in its Form 10-Q for the quarter ending March 31, 2019.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, which modifies certain disclosure requirements on fair value measurements in ASC 820. This ASU is effective for interim and annual periods beginning after December 15, 2019 and early adoption is permitted. The Company is currently evaluating the effect that ASU 2018-13 will have on its consolidated financial statement disclosures.

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
   
Adjustments
   
At January 2,
2018
as adjusted
 
   
(preliminary)
         
(preliminary)
 
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
)
   
(850
)
   
(30,216
)
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
     
(850
)
   
1,364
 
Consideration exchanged
   
2,500
     
-
     
2,500
 
Goodwill
 
$
286
   
$
850
   
$
1,136
 

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 financial statements since its acquisition date on January 2, 2018 and include net revenues of $7.6 million and $22.8 million and net (loss) income of $(0.9) million and $0.3 million for the three and nine months ended September 30, 2018, respectively.

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 September 30, 2018, SDI had an ownership interest of 50.4 % 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

IVG

On September 5, 2018, Turning Point acquired 100% of the equity interest of IVG for total consideration of $23.7 million satisfied through $14.4 million paid in cash, 153,079 shares of Turning Point common stock with a fair value of $5.3 million, and a $4.0 million note payable to IVG’s former owners (“IVG Note”) which matures 18 months from the acquisition date. All principal and accrued and unpaid interest under the IVG Note is subject to indemnification obligations of the sellers pursuant to the International Vapor Group Stock Purchase Agreement dated as of September 5, 2018. The arrangement includes an additional $4.5 million of earnouts with both performance-based and service-based conditions payable to former IVG owners who became employees of Turning Point as a result of the acquisition. The portion of earnout payments a recipient will receive will be calculated by reference to certain performance metrics not to exceed a two-year period as specified within the acquisition agreement. Turning Point recorded earnout expense of approximately $0.4 million within the consolidated statement of income for the three months ended September 30, 2018, based on the probability of achieving the performance conditions.

IVG markets and sells a broad array of proprietary and third-party vapor products directly to adult consumers through an online platform under brand names such as VaporFi, South Beach Smoke, and Direct Vapor. IVG operates company-owned stores under the VaporFi brand and also operates as a franchisor to franchisee-owned stores. The acquisition of IVG adds a significant business-to-consumer distribution platform to the Turning Point’s NewGen portfolio. As of September 30, 2018, Turning Point had not completed the accounting for the acquisition. The following purchase price and goodwill are based on the excess of the acquisition price over the estimated fair value of the tangible and intangible assets acquired and are based on management’s preliminary estimates.

   
As of
September 30,
2018
(preliminary)
 
Total purchase price
 
$
24,292
 
Adjustments to purchase price:
       
Cash aquired
   
(391
)
Working capital
   
(245
)
Adjusted purchase price
   
23,656
 
         
Assets acquired:
       
Working capital
   
2,681
 
Fixed assets
   
1,296
 
Intangible assets
   
8,140
 
Capital lease obligation
   
(169
)
Net asset acquired
   
11,948
 
         
Goodwill
 
$
11,708
 

The goodwill of $11.7 million consists of the synergies and scale expected from combining the operations and is currently deductible for tax purposes.

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. As of September 30, 2018, Turning Point had 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
 
$
3,181
 
Fixed assets
   
498
 
Trade name
   
1,121
 
Total purchase price
 
$
4,800
 

Pro Forma Information – Maidstone, IVG and Vapor Supply

The following table presents unaudited pro forma information as if the acquisitions of IVG and Vapor Supply, as well as Maidstone, had occurred on January 1, 2017. The table below has been prepared for comparative purposes only and is not necessarily indicative of the actual results that would have been attained had the acquisition occurred as of the beginning of the periods presented, nor is it indicative of future results. Furthermore, the unaudited proforma information does not reflect management's estimate of any revenue-enhancing opportunities or anticipated cost savings as a result of the integration and consolidation of the IVG acquisition. Amortization of fair value, interest on debt, and income tax adjustments are included in the numbers below.

The operating results of IVG and Vapor Supply have been included in these condensed consolidated financial statements since their acquisition dates and include net sales of $9.7 million, loss before income taxes of less than $0.1 million and net loss of less than $0.1 million for the nine months ended September 30, 2018.

The following shows pro forma amounts for the nine months ended September 30, 2018 and 2017. It does not include adjustments for amounts attributable to noncontrolling interests.

   
Pro Forma Consolidated
 
   
Nine months ended
September 30,
 
   
2018
   
2017
 
Net sales
 
$
306,218
   
$
298,496
 
Income before income taxes
   
19,630
     
18,261
 
Net income
   
15,460
     
14,112
 

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 terminating 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 through February 2020.

Note 4.
Investments

Debt Securities

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 September 30, 2018 are as follows:

   
September 30, 2018
 
   
Amortized Cost
   
Gross Unrealized
Gains
   
Gross Unrealized
Losses
   
Fair Value
 
U.S Treasury and U.S Government
 
$
5,243
   
$
-
   
$
(69
)
 
$
5,174
 
U.S. Tax-exempt municipal
   
4,670
     
-
     
(96
)
   
4,574
 
Corporate
   
15,033
     
6
     
(208
)
   
14,831
 
Mortgage and asset-backed securities
   
9,546
     
-
     
(217
)
   
9,329
 
Total Fixed Maturity Securities
 
$
34,492
   
$
6
   
$
(590
)
 
$
33,908
 

Amortized cost and fair value of fixed maturity securities at September 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.

   
September 30, 2018
 
   
Amortized Cost
   
Fair Value
 
Due in one year or less
 
$
2,957
   
$
2,954
 
Due after one year through five years
   
12,423
     
12,238
 
Due after five years through ten years
   
9,160
     
8,983
 
Due after ten years
   
406
     
403
 
Mortgage and asset-backed securities
   
9,546
     
9,330
 
Total
 
$
34,492
   
$
33,908
 

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 September 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:

   
September 30, 2018
 
   
Less Than 12 Months
 
   
Fair Value
   
Gross
Unrealized
Losses
 
Bonds:
           
U.S. Treasury and U.S. Government
 
$
5,174
   
$
(69
)
U.S. Tax-exempt municipal
   
4,574
     
(96
)
Corporate bonds
   
13,475
     
(208
)
Mortgage and asset-backed securities
   
8,668
     
(217
)
Total Fixed maturities available for sale
 
$
31,891
   
$
(590
)

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 September 30, 2018.

Equity Securities

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

   
September 30, 2018
 
   
Cost or
Amortized Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair Value
 
                         
Industrial and other
 
$
253
   
$
59
   
$
-
   
$
312
 
Total Common stock
   
253
     
59
     
-
     
312
 
                                 
Industrial and other
   
500
     
-
     
(8
)
   
492
 
Total Preferred stock
   
500
     
-
     
(8
)
   
492
 
                                 
Total Equities
 
$
753
   
$
59
   
$
(8
)
 
$
804
 

Net investment income

The components of net investment income for the period from January 2, 2018 to September 30, 2018 are as follows:


   
Period from
January 2, 2018 to
September 30, 2018
 
Investment income:
     
Bonds
 
$
520
 
Common stocks
   
85
 
Preferred stocks
   
4
 
Cash and cash equivalents
   
144
 
Other
   
-
 
Total investment income
   
753
 
Less: Investment expenses
   
(74
)
Net investment income
 
$
679
 

For the three months ended September 30, 2018 and for the period from January 2, 2018 to September 30, 2018, Maidstone recognized capital gains related to changes in fair value of $51 on its equity securities and capital losses related to changes in fair value of $5 on its bond securities.

Fair value disclosures

The following tables show how Maidstone’s investments are categorized in the fair value hierarchy as of September 30, 2018:

   
September 30, 2018
 
   
Level 1
   
Level 2
   
Level 3
   
Total Fair Value
 
                         
Common Stock
 
$
312
   
$
-
   
$
-
   
$
312
 
Preferred Stocks
   
-
     
492
     
-
     
492
 
Total Equities:
   
312
     
492
     
-
   
$
804
 
Fixed Maturities:
                               
U.S. Treasury and U.S. Government
 
$
-
   
$
5,174
   
$
-
   
$
5,174
 
U.S. Tax-exempt municipal
   
-
     
4,574
     
-
     
4,574
 
Corporate
   
-
     
14,831
     
-
     
14,831
 
Mortgage and asset-backed securities
   
-
     
9,329
     
-
     
9,329
 
Total Fixed Maturities
 
$
-
   
$
33,908
   
$
-
   
$
33,908
 

There were no transfers between levels during the three months ended September 30, 2018 or from the period from January 2, 2018 to September 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 September 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 September 30, 2018, none of which met hedge accounting requirements, for the purchase of €2.3 million. The Company executed various forward contracts during the nine months ended September 30, 2018, none of which met hedge accounting requirements, for the purchase of €14.5 million. The Company executed no forward contracts during 2017. At September 30, 2018, and December 31, 2017, the Company had forward contracts for the purchase of €5.5 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 September 30, 2018, resulted in a liability of $0.4 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 September 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.

Note Payable – IVG

The fair value of the IVG Note approximates its carrying value of $4.0 million due to the recency of the note’s issuance, September 5, 2018, relative to the end of the quarter, September 30, 2018.

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 September 30, 2018, the fair values of the 2018 First Lien Term Loan and the 2018 Second Lien Term Loan approximated $156.0 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 value of the IVG Note approximates its carrying value of $4.0 million due to the recency of the note’s issuance, September 5, 2018, relative to the end of the quarter, September 30, 2018.

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 and the additional amount issued in August 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 €5.5 million at September 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 nine months ended September 30, 2018. The fair value of the foreign exchange contracts resulted in a liability of less than $0.1 million as of September 30, 2018.

Interest Rate Swaps

The Company had swap contracts for a total notional amount of $70 million at September 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 $0.4 million as of September 30, 2018.

Note 7.
Inventories

The components of inventories are as follows:

   
September 30,
2018
   
December 31,
2017
 
Raw materials and work in process
 
$
3,285
   
$
2,545
 
Leaf tobacco
   
34,873
     
30,308
 
Finished goods - smokeless products
   
7,313
     
5,834
 
Finished goods - smoking products
   
13,604
     
14,110
 
Finished goods - electronic / vaporizer products
   
35,103
     
14,532
 
Other
   
722
     
1,290
 
     
94,900
     
68,619
 
LIFO reserve
   
(5,467
)
   
(5,323
)
   
$
89,433
   
$
63,296
 

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

Note 8.
Property, Plant and Equipment

Property, plant and equipment consists of:


 
September 30,
2018
   
December 31,
2017
 
Land
 
$
22
   
$
22
 
Building and improvements
   
2,320
     
2,072
 
Leasehold improvements
   
2,064
     
1,873
 
Machinery and equipment
   
13,275
     
12,635
 
Advertising structures
   
17,913
     
329
 
Furniture, fixtures and other
   
4,944
     
3,821
 
     
40,538
     
20,752
 
Accumulated depreciation
   
(12,470
)
   
(11,580
)
   
$
28,068
   
$
9,172
 

Note 9.
Other Current Assets

Other current assets consist of:

   
September 30,
2018
   
December 31,
2017
 
Inventory deposits
 
$
9,251
   
$
3,797
 
Other
   
5,747
     
7,054
 
   
$
14,998
   
$
10,851
 

On May 18, 2018, Turning Point entered into an arrangement with a supplier which manufactures and distributes vapor products whereby the supplier received a $6.5 million loan with a maturity date of May 18, 2019. The note was secured by the supplier’s assets and accrued interest at an annual rate of 15% with quarterly interest payments due to the Company which began in August 2018. In September 2018, the supplier repaid the full outstanding balance of the loan in addition to a $1.0 million early termination fee which was recorded as a reduction to selling, general, and administrative expenses.

Note 10.
Accrued Liabilities

Accrued liabilities consist of:


 
September 30,
2018
   
December 31,
2017
 
Accrued payroll and related items
 
$
4,142
   
$
5,683
 
Customer returns and allowances
   
2,353
     
2,707
 
Other
   
11,841
     
11,624
 
 
 
$
18,336
   
$
20,014
 

Note 11.
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:

   
Period from
January 2, 2018
to September 30, 2018
 
Reserve for losses and LAE at January 2, 2018
 
$
30,216
 
Provision for claims, net of insurance:
       
Incurred related to:
       
Current year
   
17,007
 
Total incurred
   
17,007
 
Deduct payment of claims, net of reinsurance:
       
Paid related to:
       
Prior year
   
11,815
 
Current year
   
10,667
 
Total paid
   
22,482
 
Reserve for losses and LAE at September 30, 2018
 
$
24,741
 

The components of the net liability for losses and LAE are as follows:

   
As of September 30, 2018
 
Case basis reserves
 
$
16,343
 
Incurred but not reported reserves
   
8,398
 
Total
 
$
24,741
 

Note 12.
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 September 30, 2018
 
Written premiums
 
$
89
 
Premiums earned
 
$
80
 

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 September 30, 2018, management did not believe there was a risk of loss as a result of a concentration of risk in its reinsurance program.

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

Note 13.
Notes Payable and Long-Term Debt

Notes payable and long-term debt consists of the following:

   
September 30,
2018
   
December 31,
2017
 
2018 First Lien Term Loan
 
$
156,000
   
$
-
 
2018 Second Lien Term Loan
   
40,000
     
-
 
SDI Crystal Term Loan
   
15,000
     
-
 
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 - IVG
   
4,000
     
-
 
Note payable - VaporBeast
   
-
     
2,000
 
Total Notes Payable and Long-Term Debt
   
224,950
     
197,613