2018 First Lien Credit Facility: The 2018 First Lien Term Loan and the 2018 Revolving Credit Facility bear interest at LIBOR plus a spread of 2.75% to 3.50% based on Turning Point’s senior leverage ratio. The 2018 First Lien Term Loan has quarterly required payments of $2.0 million beginning June 30, 2018, increasing to $3.0 million on June 30, 2020, and increasing to $4.0 million on June 30, 2022. The 2018 First Lien Credit Facility has a maturity date of March 7, 2023. The 2018 First Lien Term Loan is secured by a first priority lien on substantially all of the assets of the borrowers and the guarantors thereunder, including a pledge of Turning Point’s capital stock, other than certain excluded assets (the “Collateral”). In connection with the Senior Notes offering, Turning Point entered into a First Amendment (the “Amendment”) to the First Lien Credit Agreement, with Fifth Third Bank, as administrative agent, and other lenders and certain other lending other lending parties thereto. The Amendment was entered into primarily to permit Turning Point to issue up to $200 million of convertible senior notes, enter into certain capped call transactions in connection with the issuance of such notes and to use the proceeds from the issuance of the notes to repay amounts outstanding under Turning Point’s Second Lien Credit Agreement and use the remaining proceeds for acquisitions and investments. In connection with the Amendment, fees of $0.7 million were incurred. The 2018 First Lien Credit Facility contains certain financial covenants, includingwhich were amended in connection with the Convertible Senior Notes offering in the third quarter 2019. The covenants include maximum senior leverage ratio of 3.50x3.00x with step-downs to 3.00x,2.50x, a maximum total leverage ratio of 4.50x5.50x with step-downs to 4.00x,5.00x, and a minimum fixed charge coverage ratio of 1.20x.In the first quarter of 2020, the financial covenants were amended to permit certain add-backs related to PMTA in the definition of Consolidated EBITDA for the period of October 1, 2019 until September 30, 2020. Based on an excess cash covenant for the facility, a principal payment of $4.5 million was due in the second quarter 2019. All parties agreed to waive the payment, resulting in consent fees of $0.1 million. The weighted average interest rate of the 2018 First Lien Term Loan was 5.77% at4.55% as of December 31, 2018. The weighted average interest rate2019. As of the 2018 Revolving Credit Facility was 5.79% at December 31, 2018. At December 31, 2018,2019, Turning Point had $26.0 million ofno borrowings outstanding under the 2018 Revolving Credit Facility. The $24.0$50.0 million unused portion of the 2018 Revolving Credit Facility is reduced by a $1.3 million letterletters of credit withfrom Fifth Third Bank totaling $3.7 million, resulting in $22.7$46.3 million of availability under the 2018 Revolving Credit Facility at December 31, 2018.2019.
2018 Second Lien Credit Facility: The 2018 Second Lien Credit Facility bearsbore interest at a rate of LIBOR plus 7.00% and hashad a maturity date of March 7, 2024. The 2018 Second Lien Term Loan iswas secured by a second priority interest in the Collateral and iswas guaranteed by the same entities as the 2018 First Lien Term Loan. The 2018 Second Lien Credit Facility containscontained certain financial covenants including a maximum senior leverage ratio of 3.75x with step-downs to 3.50x, a maximum total leverage ratio of 4.75x with step-downs to 4.50x, and a minimum fixed charge coverage ratio of 1.10x. The weighted average interest rateBased on an excess cash covenant for the facility, a $4.5 million principal payment was made in the second quarter 2019, resulting in $0.2 million loss on extinguishment of debt. Turning Point used a portion of the proceeds from the issuance of the Convertible Senior Notes to prepay all outstanding amounts related to the 2018 Second Lien Term Loan was 9.46%Credit Facility in the third quarter 2019. The principal paid in the third quarter 2019 amounted to $35.5 million, and the transaction resulted in a $1.1 million loss on extinguishment of debt.
Convertible Senior Notes
In July 2019, Turning Point closed an offering of $172.5 million in aggregate principal amount of 2.50% Convertible Senior Notes due July 15, 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes bear interest at a rate of 2.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. The Convertible Senior Notes will mature on July 15, 2024, unless earlier repurchased, redeemed or converted. The Convertible Senior Notes are senior unsecured obligations.
The Convertible Senior Notes are convertible into approximately 3,202,808 shares of Turning Point voting common stock under certain circumstances prior to maturity at a conversion rate of 18.567 shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.86 per share, subject to adjustment under certain conditions, but will not be adjusted for any accrued and unpaid interest. Upon conversion, Turning Point may pay cash, shares of its common stock or a combination of cash and stock, as determined by Turning Point at its discretion. The conditions required to allow the holders to convert their Convertible Senior Notes were not met as of December 31, 2018.2019.
Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the Convertible Senior Notes, Turning Point separated the Convertible Senior Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the Convertible Senior Notes and the fair value of the liability component of the Convertible Senior Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”), $35.0 million, will be amortized to interest expense using an effective interest rate of 7.5% over the expected life of the Convertible Senior Notes. The equity component is not remeasured as long as it continues to meet the criteria for equity classification. Interest expense includes $2.9 million of amortization for the year ended December 31, 2019.
In accounting for the debt issuance costs related to the issuance of the Convertible Senior Notes, Turning Point allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to the interest expense using the effective interest method over the expected life of the Convertible Senior Notes, $4.7 million, and the debt issuance costs attributable to the equity component, $1.2 million, are netted with the equity component of stockholders’ equity.
In connection with the Convertible Senior Notes offering, Turning Point entered into privately negotiated capped call transactions with certain financial institutions. The capped call transactions have a strike price of $53.86 per and a cap price of $82.86 per and are exercisable when and if the Convertible Senior Notes are converted. Turning Point paid $20.53 million for these capped calls and charged that amount to additional paid-in capital.
Note Payable – IVG
In September 2018, Turning Point issued a note payable to IVG’s former shareholders (“IVG Note”). The IVG Note is $4.0 million principal with 6.0% interest compounding annually and matures on March 5, 2020. The IVG Note is subject to customary defaults including defaults for nonpayment, nonperformance, any material breach under the purchase agreement, and bankruptcy or insolvency. The carrying amount of the IVG Note is $4.2 million as of December 31, 2019.
On September 18, 2019, we entered into a Term Loan Agreement (the “Term Loan Agreement”) with GACP II, L.P., a Delaware limited partnership (the “Agent”), as administrative agent and collateral agent for the financial institutions (the “Lenders”). The Term Loan Agreement provides for a term loan of $25.0 million (the “Term Loan”). The Term Loan will be used to (a) repay, in full, all outstanding indebtedness under the Crystal Term Loan (defined below), (b) finance the purchase of common stock of Turning Point, (c) finance the repurchase of our common stock, (d) fund certain fees and expenses, and (e) provide working capital.
The Term Loan bears interest at a rate equal to the three-month “Libor Rate” as published in The Wall Street Journal plus 9.00%. Interest under the Term Loan Agreement is payable monthly with the principal balance due on September 18, 2024. The Term Loan was subject to a closing fee of $0.5 million, which was paid upon execution of the Term Loan Agreement. Additionally, the Term Loan is subject to an agent monitoring fee of $25,000, payable quarterly. An early termination fee shall be due at any time if on or prior to the third anniversary of the closing of the Term Loan, we prepay or repay (whether voluntarily or mandatorily), or is required to prepay or repay, the Term Loan in whole or in part. Our obligations under the Term Loan Agreement are secured by all the shares of Turning Point stock owned by the Company.
On February 2, 2018, we and our Outdoor advertising subsidiaries (the “Borrowers”) entered into a term loan agreement with Crystal Financial LLC (“Crystal Term Loan”). The Crystal Term Loan providesprovided for an initial term loan of $10.0 million and a commitment to provide additional term loans of up to $15.0 million. Subject to the satisfaction of certain conditions, we may request an additional increase in the commitment of up to $25.0 million. The proceeds were used to finance a portion of the acquisition of certain billboard structures, fund certain fees and expenses, and provide working capital for the Borrowers. Any incremental term loans will be used to finance permitted acquisitions. The Crystal Term Loan bearsbore interest at a rate equal to the three-month “Libor Rate” as published in The Wall Street Journal plus 7.25%. Interest under the Crystal Term Loan agreement iswas payable monthly and iswas also subject to an agency fee of $50,000, payable upon execution of the Crystal Term Loan agreement, and annually thereafter. In addition, the Crystal Term Loan was subject to a one-time commitment fee of $350,000, which was paid upon execution of the term loan agreement. The principal balance iswas payable at maturity, on February 2, 2023. In August 2018, we borrowed an additional $5.0 million under the Crystal Term Loan. This borrowing is subject to the same terms as the initial borrowing.
The obligations of On September 18, 2019, in connection with entering into the BorrowersTerm Loan, all amounts outstanding under the Crystal Term Loan agreement are secured by allwere repaid. The repayment resulted in a $1.0 million loss on extinguishment of debt for the assetsthird quarter of the Borrowers, subject to certain exceptions and exclusions as set forth in the Crystal Term Loan agreement and other loan documents.2019.
Standard Outdoor Promissory Notes
On January 18, 2018, as partial consideration for an asset purchase of 83 billboard structures located in Alabama, as well as the ground leases and advertising contracts relating to such billboard structures, we issued a promissory note with a face value of $6.5 million. The promissory note was recorded net of a discount of $0.9 million, representing the difference between the face value and fair value at issuance. A principal payment of $1.0 million on the promissory note is payable January 1 of each year, beginning with a payment that was made on January 1, 2020 and ending January 1, 2022, with a $3.5 million final principal payment on January 1, 2023. The promissory note has a 5% fixed coupon interest rate and interest is payable quarterly.
On February 20, 2018, as partial consideration for an asset purchase of 86 billboard structures located in Georgia and Florida, as well as the ground leases and advertising contracts relating to such billboard structures, we issued a promissory note with a face value of $3.5 million. The promissory note was recorded net of a discount of $0.3 million, representing the difference between the face value and fair value at issuance. A principal payment of $0.9 million on the promissory note was paid on March 1, 2019, with the remaining principal paid down monthly through March 1, 2022. The promissory note has a 5% fixed coupon interest rate and interest is payable monthly after March 1, 2019.
Distribution Agreements
For a description of our material distribution agreements, see “Business—Distribution and Supply Agreements.”
Master Settlement Agreement
On November 23, 1998, the major U.S. cigarette manufacturers, Philip Morris USA, Inc., Brown & Williamson Tobacco Corporation, Lorillard Tobacco Company and R.J. Reynolds Tobacco Company, entered into the MSA with attorneys general representing states that agreed to settle certain recovery actions (the “Settling States”). In order to be in compliance with the MSA and subsequent states’ statutes, Turning Point was required to fund an escrow account with each of the Settling States based on the number of cigarettes or cigarette equivalents (which is measured by pounds of MYO cigarette smoking tobacco) sold in such state. Funding of the escrow deposit by Turning Point in 2018 was less than $0.1 million in respect of sales of smoking products in 2017. Turning Point estimates the total deposits relating to 2018 sales will be less than $0.1 million. Under current MSA legislation, Turning Point will not be required to make escrow deposits after making deposits for 2017 sales as its last remaining product line subject to MSA legislation, MYO cigarette smoking tobacco, was discontinued in the third quarter of 2017. Each year’s deposit will be released from escrow after 25 years. Turning Point is scheduled to begin receiving payments as ourits escrow deposits are released from escrow beginning in 2024.
The following table summarizes Turning Point’s escrow deposit balances (in thousands) by sales year as of:
| | Deposits as of | | |
(Dollar amounts in thousands) | | | Deposits as of December 31, | |
| | | | | | | | 2019 | | | 2018 | |
1999 | | $ | 211 | | | $ | 211 | | | $ | 211 | | | $ | 211 | |
2000 | | | 1,017 | | | | 1,017 | | | 1,017 | | | 1,017 | |
2001 | | | 1,673 | | | | 1,673 | | | 1,673 | | | 1,673 | |
2002 | | | 2,271 | | | | 2,271 | | | 2,271 | | | 2,271 | |
2003 | | | 4,249 | | | | 4,249 | | | 4,249 | | | 4,249 | |
2004 | | | 3,714 | | | | 3,714 | | | 3,714 | | | 3,714 | |
2005 | | | 4,552 | | | | 4,552 | | | 4,553 | | | 4,552 | |
2006 | | | 3,847 | | | | 3,847 | | | 3,847 | | | 3,847 | |
2007 | | | 4,167 | | | | 4,167 | | | 4,167 | | | 4,167 | |
2008 | | | 3,364 | | | | 3,364 | | | 3,364 | | | 3,364 | |
2009 | | | 1,619 | | | | 1,626 | | | 1,619 | | | 1,619 | |
2010 | | | 406 | | | | 406 | | | 406 | | | 406 | |
2011 | | | 193 | | | | 193 | | | 193 | | | 193 | |
2012 | | | 199 | | | | 199 | | | 199 | | | 199 | |
2013 | | | 173 | | | | 173 | | | 173 | | | 173 | |
2014 | | | 143 | | | | 143 | | | 143 | | | 143 | |
2015 | | | 101 | | | | 101 | | | 101 | | | 101 | |
2016 | | | 91 | | | | 81 | | | 91 | | | 91 | |
2017 | | | 83 | | | | 70 | | | | 83 | | | | 83 | |
Total | | $ | 32,073 | | | $ | 32,057 | | | $ | 32,074 | | | $ | 32,073 | |
Off-balance Sheet Arrangements
During 2019, Turning Point did not execute any forward contracts. During 2018, Turning Point executed various forward contracts, none of which met hedge accounting requirements, for the purchase of €14.5 million with maturity dates ranging from March 2018 to January 2019. During 2017, Turning Point executed no forward contracts. During 2016, we executed various forward contracts, none of which met hedge accounting, for the purchase of €5.6 million with maturity dates from January 26, 2017 to July 17, 2017. At December 31, 2019 and 2018, and 2017, Turning Point had forward contracts for the purchase of €0.0 million and €1.5 million, and €0 million, respectively. Turning Point had swap contracts for a total notional amount of $70 million at December 31, 2019 and 2018. The fair values of the swap contracts are based upon quoted market prices and resulted in a liability of $2.5 million and $0.9 million, respectively, as of December 31, 2018. The fair values of2019 and 2018, which is included in other long-term liabilities in the swap contracts are based upon quoted market prices and resulted in a liability of $0.9 million as of December 31, 2018.consolidated balance sheets.
Contractual Obligations
The following table summarizes the Company’s contractual obligations at December 31, 2018 (in thousands):
| | Payments due by period | |
| | | | | | | | | | | | | | | |
| | Total | | | Less than 1 year | | | 1-3 years | | | 4-5 years | | | More than 5 years | |
Long-term debt obligations, including interest | | $ | 284,707 | | | $ | 22,373 | | | $ | 76,265 | | | $ | 145,375 | | | $ | 40,694 | |
Operating lease obligations | | | 9,071 | | | | 2,462 | | | | 3,549 | | | | 421 | | | | 2,639 | |
Purchase obligations | | | 37,705 | | | | 37,705 | | | | - | | | | - | | | | - | |
Net assets acquired | | $ | 331,483 | | | $ | 62,540 | | | $ | 79,814 | | | $ | 145,796 | | | $ | 43,333 | |
Inflation
We believe that any effect of inflation at current levels will be minimal. Historically, Turning Point has been able to increase prices at a rate equal to or greater than the ratethat of inflation and believes it will continue to be able to do so for the foreseeable future. In addition, Turning Point has been able to maintain a relatively stable, variable cost structure for ourits products due, in part, to its successful procurement activities regardingwith regard to its tobacco products and, in part, to its existing contractual agreement for the purchase of its premium cigarette papers.
Item 7A. | Qualitative and Quantitative and Qualitative Disclosures Aboutabout Market Risk |
Foreign Currency SensitivityNot applicable.
Turning Point’s inventory purchases from Bolloré are denominated in euros. Accordingly, Turning Point has exposure to potentially adverse movements in the euro exchange rate. In addition, Bolloré provides a contractual hedge against catastrophic currency fluctuation in Turning Point’s agreement. Turning Point does not use derivative financial instruments for speculative trading purposes, nor does Turning Point hedge its foreign currency exposure in a manner that offsets the effects of changes in foreign exchange rates.
Turning Point regularly reviews its foreign currency risk and hedging programs and may as part of that review determine at any time to change its hedging policy. During 2018, Turning Point executed various forward contracts, none of which met hedge accounting requirements, for the purchase of €14.5 million with maturity dates ranging from March 2018 to January 2019. At December 31, 2018, Turning Point had forward contracts for the purchase of €1.5 million. A 10% change in the euro to U.S. dollars exchange rate would change pre-tax income by approximately $1.8 million per year. None of our other subsidiaries have significant exposure to foreign exchange risk.
Credit Risk
At December 31, 2018 and 2017, the Company had bank deposits, including Turning Point’s MSA escrows, in excess of federally insured limits of approximately $15.4 million and $20.4 million, respectively. Turning Point has chosen to invest a portion of the MSA escrows in U.S. Government securities including Treasury Notes and Treasury Bonds.
Turning Point sells its products to distributors, retail establishments, and individual consumers (via online sales from 2016 acquisition VaporBeast, 2017 acquisition Vapor Shark, and 2018 acquisitions Vapor Supply and IVG) throughout the U.S. and also have sales of Zig-Zag® premium cigarette papers in Canada. In 2018, 2017, and 2016, Turning Point had no customers that accounted for more than 10% of its net sales. Turning Point performs periodic credit evaluations of its customers and generally does not require collateral on trade receivables. Historically, Turning Point has not experienced significant losses due to customer credit issues.
Maidstone evaluates the creditworthiness of its counterparties, taking into account credit ratings assigned by independent agencies. The credit approval process involves an assessment of factors, including, among others, the counterparty, country and industry credit exposure limits. Collateral may be required, at the discretion of Maidstone, on certain transactions based on the creditworthiness of the counterparty.
Interest Rate Sensitivity
Turning Point has exposure to interest rate volatility principally relating to interest rate changes applicable to loans under its 2018 Credit Facility. As of December 31, 2018, all of Turning Point’s debt with the exception of the IVG Note Payable bears interest at variable rates. However, Turning Point had swap contracts for a total notional amount of $70 million at December 31, 2018. The fair values of the swap contracts are based upon quoted market prices and resulted in a liability of $0.9 million as of December 31, 2018. Turning Point believes that the effect, if any, of reasonably possible near-term changes in interest rates on the consolidated financial position, results of operations or cash flows would not be significant. A 1% change in the interest rate would change pre-tax income by approximately $1.5 million per year.
SDI also has exposure to interest rate volatility beginning in the first quarter of 2018 as a result of the Crystal Term Loan. The Crystal Term Loan bears interest at variable rates based on a rate equal to the three-month Libor Rate plus 7.25%. A 1% increase in the interest rate would change pre-tax income by approximately $0.2 million per year. We believe the effect, if any, of reasonably possible near-term changes in interest rates on our consolidated financial position, results of operations, or cash flows would not be significant.
Maidstone’s primary exposure to market risk is interest rate sensitivity, which is affected by changes in the general level of U.S. interest rates, particularly because its investments are primarily in marketable debt securities. Maidstone’s available-for-sale securities are subject to interest rate risk and will fall in value if market interest rates increase. Due to the short-term duration of our investment portfolio an immediate 10% change in interest rates would not have a material effect on the fair market value of Maidstone’s portfolio.
Item 8. | Financial Statements and Supplementary Data |
The following consolidated financial statements and supplemental quarterly financial data of the Company and its subsidiaries are included as part of this Form 10-K:
| Page |
| |
Report of Independent Registered Public Accounting Firm | 6866
|
Consolidated Balance Sheets as of December 31, 20182019 and 20172018 | 6967
|
Consolidated Statements of Operations(Loss) Income for each of the years in the three-yeartwo-year period ended December 31, 20182019 | 7068
|
Consolidated Statements of Stockholders’Comprehensive (Loss) Income for each of the years in the two-year period ended December 31, 2019 | 69
|
Consolidated Statements of Equity for each of the years in the three-yeartwo-year period ended December 31, 20182019 | 7270
|
Consolidated Statements of Cash Flows for each of the years in the three-yeartwo-year period ended December 31, 20182019 | 7371
|
Notes to Consolidated Financial Statements | 7674
|
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Standard Diversified Inc.: Inc:
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Standard Diversified Inc. and its subsidiaries (the Company) as of December 31, 20182019 and 2017,2018, the related consolidated statements of (loss) income, comprehensive (loss) income, changes in stockholders’stockholders' equity (deficit) and cash flows for each of the three years in the periodthen ended, December 31, 2018, and the related notes to the consolidated financial statements and Schedule I (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182019 and 2017,2018, and the results of its operations and its cash flows for each of the three years in the periodthen ended, December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’sCompany's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ RSM US LLP
We have served as the Company’sCompany's auditor since 2006.
Greensboro, North Carolina
March 11, 201916, 2020
Standard Diversified Inc. and Subsidiaries
Consolidated Balance Sheets
(dollars in thousands except share and per share data)
| | December 31, 2019 | | | December 31, 2018 | |
ASSETS | | | | | | |
Cash and cash equivalents | | $ | 112,467 | | | $ | 21,201 | |
Fixed maturities available for sale, at fair value; amortized cost of $21,428 in 2019 and $32,474 in 2018 | | | 21,680 | | | | 32,132 | |
Equity securities, at fair value; cost: $1,099 in 2019 and $794 in 2018 | | | 1,075 | | | | 693 | |
Trade accounts receivable, net of allowances of $280 in 2019 and $42 in 2018 | | | 7,213 | | | | 2,901 | |
Premiums receivable | | | 2,440 | | | | 5,858 | |
Inventories | | | 70,979 | | | | 91,237 | |
Other current assets | | | 16,391 | | | | 15,045 | |
Property, plant and equipment, net | | | 30,368 | | | | 27,741 | |
Right of use assets | | | 14,503 | | | | - | |
Deferred financing costs, net | | | 890 | | | | 870 | |
Deferred policy acquisition costs | | | 993 | | | | 2,279 | |
Goodwill | | | 154,282 | | | | 146,696 | |
Other intangible assets, net | | | 34,088 | | | | 38,325 | |
Master Settlement Agreement (MSA) escrow deposits | | | 32,074 | | | | 30,550 | |
Other assets | | | 11,603 | | | | 6,415 | |
Total assets | | $ | 511,046 | | | $ | 421,943 | |
| | | | | | | | |
LIABILITIES AND EQUITY | | | | | | | | |
Reserves for losses and loss adjustment expenses | | $ | 25,393 | | | $ | 27,330 | |
Unearned premiums | | | 5,818 | | | | 12,707 | |
Advance premiums collected | | | 318 | | | | 500 | |
Accounts payable | | | 14,746 | | | | 9,225 | |
Accrued liabilities | | | 27,672 | | | | 23,883 | |
Current portion of long-term debt | | | 16,977 | | | | 9,431 | |
Revolving credit facility | | | - | | | | 26,000 | |
Notes payable and long-term debt | | | 299,569 | | | | 208,616 | |
Deferred income taxes | | | 1,572 | | | | 2,711 | |
Postretirement benefits | | | - | | | | 3,096 | |
Lease liabilities | | | 13,262 | | | | - | |
Asset retirement obligations | | | 2,100 | | | | 2,028 | |
Other long-term liabilities | | | 3,370 | | | | 1,687 | |
Total liabilities | | | 410,797 | | | | 327,214 | |
| | | | | | | | |
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; 9,012,515 issued and 8,931,332 outstanding at December 31, 2019 and 9,156,293 issued and 9,052,801 outstanding at December 31, 2018 | | | 90 | | | | 92 | |
Class B common stock, $0.01 par value; authorized shares, 30,000,000; 7,701,975 and 7,801,995 issued and outstanding at December 31, 2019 and 2018, respectively; convertible into Class A shares on a one-for-one basis | | | 77 | | | | 78 | |
Additional paid-in capital | | | 84,862 | | | | 81,260 | |
Class A treasury stock, 81,183 and 103,492 common shares at cost as of December 31, 2019 and 2018, respectively | | | (1,103 | ) | | | (1,440 | ) |
Accumulated other comprehensive loss | | | (1,722 | ) | | | (1,683 | ) |
Accumulated deficit | | | (35,236 | ) | | | (24,613 | ) |
Total stockholders’ equity | | | 46,968 | | | | 53,694 | |
Noncontrolling interests | | | 53,281 | | | | 41,035 | |
Total equity | | | 100,249 | | | | 94,729 | |
Total liabilities and equity | | $ | 511,046 | | | $ | 421,943 | |
The accompanying notes are an integral part of the consolidated financial statements.
Standard Diversified Inc. and Subsidiaries
Consolidated Statements of (Loss) Income
(dollars in thousands except share data and per share data)
| | Year Ended December 31, | |
| | 2019 | | | 2018 | |
Revenues: | | | | | | |
Net sales | | $ | 364,807 | | | $ | 335,128 | |
Insurance premiums earned | | | 25,072 | | | | 28,648 | |
Net investment income | | | 935 | | | | 851 | |
Other income | | | 964 | | | | 1,158 | |
Total revenues | | | 391,778 | | | | 365,785 | |
| | | | | | | | |
Operating costs and expenses: | | | | | | | | |
Cost of sales | | | 227,787 | | | | 192,336 | |
Selling, general and administrative expenses | | | 115,692 | | | | 99,479 | |
Incurred losses and loss adjustment expenses | | | 24,350 | | | | 25,221 | |
Impairment loss on goodwill and other intangible assets | | | 2,826 | | | | - | |
Other operating expenses | | | 8,527 | | | | 8,631 | |
Total operating costs and expenses | | | 379,182 | | | | 325,667 | |
Operating income | | | 12,596 | | | | 40,118 | |
| | | | | | | | |
Interest expense, net | | | 20,194 | | | | 17,237 | |
Interest and investment income | | | (2,749 | ) | | | (736 | ) |
Loss on extinguishment of debt | | | 2,267 | | | | 2,384 | |
Net periodic benefit (income) expense, excluding service cost | | | (4,961 | ) | | | 131 | |
(Loss) income before income taxes | | | (2,155 | ) | | | 21,102 | |
Income tax expense | | | 1,624 | | | | 6,285 | |
Net (loss) income | | | (3,779 | ) | | | 14,817 | |
Net income attributable to noncontrolling interests | | | (6,844 | ) | | | (12,436 | ) |
Net (loss) income attributable to Standard Diversified Inc. | | $ | (10,623 | ) | | $ | 2,381 | |
| | | | | | | | |
Net (loss) income attributable to SDI per Class A and Class B Common Share – Basic | | $ | (0.63 | ) | | $ | 0.14 | |
Net (loss) income attributable to SDI per Class A and Class B Common Share – Diluted | | $ | (0.64 | ) | | $ | 0.13 | |
Weighted Average Class A and Class B Common Shares Outstanding – Basic | | | 16,798,066 | | | | 16,697,542 | |
Weighted Average Class A and Class B Common Shares Outstanding – Diluted | | | 16,798,066 | | | | 16,747,585 | |
The accompanying notes are an integral part of the consolidated financial statements.
Standard Diversified Inc. and Subsidiaries
Consolidated Balance SheetsStatements of Comprehensive (Loss) Income
(dollars in thousands except share data)thousands)
| | | | | | |
ASSETS | | | | | | |
Cash and cash equivalents | | $ | 21,201 | | | $ | 18,219 | |
Fixed maturities available for sale, at fair value; amortized cost $32,474 in 2018 | | | 32,132 | | | | - | |
Equity securities, at fair value; cost: $794 in 2018 | | | 693 | | | | - | |
Trade accounts receivable, net of allowances of $42 in 2018 and $17 in 2017 | | | 2,901 | | | | 3,249 | |
Premiums receivable | | | 5,858 | | | | - | |
Inventories | | | 91,237 | | | | 63,296 | |
Other current assets | | | 15,045 | | | | 10,851 | |
Property, plant and equipment, net | | | 27,741 | | | | 9,172 | |
Deferred income taxes | | | - | | | | 450 | |
Deferred financing costs, net | | | 870 | | | | 630 | |
Intangible assets, net | | | 38,325 | | | | 26,436 | |
Deferred policy acquisition costs | | | 2,279 | | | | - | |
Goodwill | | | 146,696 | | | | 134,620 | |
Master Settlement Agreement (MSA) escrow deposits | | | 30,550 | | | | 30,826 | |
Other assets | | | 6,415 | | | | 965 | |
Total assets | | $ | 421,943 | | | $ | 298,714 | |
| | | | | | | | |
LIABILITIES AND EQUITY | | | | | | | | |
Reserves for losses and loss adjustment expenses | | $ | 27,330 | | | $ | - | |
Unearned premiums | | | 12,707 | | | | - | |
Advance premiums collected | | | 500 | | | | - | |
Accounts payable | | | 9,225 | | | | 3,686 | |
Accrued liabilities | | | 23,883 | | | | 20,014 | |
Current portion of long-term debt | | | 9,431 | | | | 7,850 | |
Revolving credit facility | | | 26,000 | | | | 8,000 | |
Notes payable and long-term debt | | | 208,616 | | | | 186,190 | |
Deferred income taxes | | | 2,711 | | | | - | |
Postretirement benefits | | | 3,096 | | | | 3,962 | |
Asset retirement obligations | | | 2,028 | | | | - | |
Other long-term liabilities | | | 1,687 | | | | 571 | |
Total liabilities | | | 327,214 | | | | 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; 9,156,293 issued and 9,052,801 outstanding shares at December 31, 2018 and 8,348,373 issued and outstanding at December 31, 2017 | | | 91 | | | | 83 | |
Class B common stock, $0.01 par value; authorized shares, 30,000,000; 7,801,995 and 8,041,525 issued and outstanding shares at December 31, 2018 and December 31, 2017, respectively; convertible into Class A shares on a one-for-one basis | | | 78 | | | | 81 | |
Additional paid-in capital | | | 81,261 | | | | 70,813 | |
Class A Treasury stock, 103,492 and 0 common shares at cost at December 31, 2018 and 2017 | | | (1,440 | ) | | | - | |
Accumulated other comprehensive loss | | | (1,683 | ) | | | (1,558 | ) |
Accumulated deficit | | | (24,613 | ) | | | (26,982 | ) |
Total stockholders’ equity | | | 53,694 | | | | 42,437 | |
Noncontrolling interests | | | 41,035 | | | | 26,004 | |
Total equity | | | 94,729 | | | | 68,441 | |
Total liabilities and equity | | $ | 421,943 | | | $ | 298,714 | |
| | Year Ended December 31, | |
| | 2019 | | | 2018 | |
| | | | | | |
Net (loss) income | | $ | (3,779 | ) | | $ | 14,817 | |
| | | | | | | | |
Other comprehensive (loss) income: | | | | | | | | |
Amortization of unrealized pension and postretirement losses, net of tax of $136 and $435, for the years ended December 31, 2019 and 2018, respectively | | | (1,150 | ) | | | 1,361 | |
Unrealized gain (loss) on investments, net of tax of $505 and $31, for the years ended December 31, 2019 and 2018, respectively | | | 1,754 | | | | (607 | ) |
Unrealized loss on interest rate swaps, net of tax of $377 and $204, for the years ended December 31, 2019 and 2018, respectively | | | (1,261 | ) | | | (682 | ) |
Other comprehensive (loss) income | | | (657 | ) | | | 72 | |
Comprehensive (loss) income | | | (4,436 | ) | | | 14,889 | |
Amounts attributable to noncontrolling interests | | | (6,226 | ) | | | (12,645 | ) |
Comprehensive (loss) income attributable to Standard Diversified Inc. | | $ | (10,662 | ) | | $ | 2,244 | |
The accompanying notes are an integral part of the consolidated financial statements.
Standard Diversified Inc. and Subsidiaries
Consolidated Statements of IncomeEquity
(dollars in thousands except share data)thousands)
| | Year Ended December 31, | |
| | 2018 | | | 2017 | | | 2016 | |
Revenues: | | | | | | | | | |
Net sales | | $ | 335,128 | | | $ | 285,801 | | | $ | 206,228 | |
Insurance premiums earned | | | 28,648 | | | | - | | | | - | |
Net investment income | | | 851 | | | | - | | | | - | |
Other income | | | 1,158 | | | | - | | | | - | |
Total revenues | | | 365,785 | | | | 285,801 | | | | 206,228 | |
| | | | | | | | | | | | |
Operating costs and expenses: | | | | | | | | | | | | |
Cost of sales | | | 192,336 | | | | 160,835 | | | | 105,683 | |
Selling, general and administrative expenses | | | 99,479 | | | | 77,865 | | | | 56,626 | |
Incurred losses and loss adjustment expenses | | | 25,221 | | | | - | | | | - | |
Other operating expenses | | | 8,631 | | | | - | | | | - | |
Total operating costs and expenses | | | 325,667 | | | | 238,700 | | | | 162,309 | |
Operating income | | | 40,118 | | | | 47,101 | | | | 43,919 | |
| | | | | | | | | | | | |
Interest expense | | | 17,237 | | | | 16,904 | | | | 26,739 | |
Interest and investment income | | | (736 | ) | | | (517 | ) | | | (886 | ) |
Loss on extinguishment of debt | | | 2,384 | | | | 6,116 | | | | 2,824 | |
Net periodic benefit expense, excluding service cost | | | 131 | | | | 180 | | | | 334 | |
Income before income taxes | | | 21,102 | | | | 24,418 | | | | 14,908 | |
Income tax expense (benefit) | | | 6,285 | | | | 7,280 | | | | (12,005 | ) |
Net income | | | 14,817 | | | | 17,138 | | | | 26,913 | |
Net income attributable to noncontrolling interests | | | (12,436 | ) | | | (6,761 | ) | | | - | |
Net income attributable to Standard Diversified Inc. | | $ | 2,381 | | | $ | 10,377 | | | $ | 26,913 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Net income attributable to SDI per Class A and Class B Common Share – Basic | | $ | 0.14 | | | $ | 0.49 | | | $ | 1.10 | |
Net income attributable to SDI per Class A and Class B Common Share – Diluted | | $ | 0.13 | | | $ | 0.48 | | | $ | 1.05 | |
Weighted Average Class A and Class B Common Shares Outstanding – Basic | | | 16,697,542 | | | | 21,223,884 | | | | 24,549,060 | |
Weighted Average Class A and Class B Common Shares Outstanding – Diluted | | | 16,747,585 | | | | 21,289,466 | | | | 25,700,615 | |
| | Standard Diversified Inc. Shareholders | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A Common Shares | | | Class B Common Shares | | | Class A Treasury Shares | | | Additional
Paid-In Capital | | | Accumulated Other Comprehensive Loss | | | Accumulated Deficit | | | Noncontrolling Interests | | | Total | |
| | | | | | | | | | | | | | | | | | |
| | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | |
Balance December 31, 2017 | | | 8,348,373 | | | $ | 83 | | | | 8,041,525 | | | $ | 81 | | | | - | | | $ | - | | | $ | 70,813 | | | $ | (1,558 | ) | | $ | (26,982 | ) | | $ | 26,004 | | | $ | 68,441 | |
Vesting of SDI restricted stock | | | 50,756 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (334 | ) | | | - | | | | - | | | | - | | | | (334 | ) |
Conversion of Class B common stock into Class A common stock | | | 239,530 | | | | 3 | | | | (239,530 | ) | | | (3 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Issuance of Class A common stock in asset purchase | | | 22,727 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 250 | | | | - | | | | - | | | | - | | | | 250 | |
Issuance of Class A common stock under ATM, net of issuance costs | | | 313,082 | | | | 3 | | | | - | | | | - | | | | - | | | | - | | | | 4,827 | | | | - | | | | - | | | | - | | | | 4,830 | |
Issuance of Class A common stock in private placement, net of issuance costs | | | 181,825 | | | | 3 | | | | - | | | | - | | | | - | | | | - | | | | 1,978 | | | | - | | | | - | | | | - | | | | 1,981 | |
Repurchase of SDI common shares | | | - | | | | - | | | | - | | | | - | | | | (103,492 | ) | | | (1,440 | ) | | | - | | | | - | | | | - | | | | - | | | | (1,440 | ) |
Unrecognized pension and postretirement cost adjustment, net of tax of $435 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 687 | | | | - | | | | 674 | | | | 1,361 | |
Unrealized loss on investments, net of tax of $31 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (479 | ) | | | - | | | | (128 | ) | | | (607 | ) |
Unrealized loss on interest rate swaps, net of tax of $204 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (345 | ) | | | - | | | | (337 | ) | | | (682 | ) |
SDI stock-based compensation | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 893 | | | | - | | | | - | | | | - | | | | 893 | |
Impact of Turning Point equity transactions on APIC and NCI | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,833 | | | | - | | | | - | | | | 3,995 | | | | 6,828 | |
Impact of adoption of ASU 2018-02 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 12 | | | | (12 | ) | | | - | | | | - | |
Turning Point dividend paid to noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,609 | ) | | | (1,609 | ) |
Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,381 | | | | 12,436 | | | | 14,817 | |
Balance December 31, 2018 | | | 9,156,293 | | | $ | 92 | | | | 7,801,995 | | | $ | 78 | | | | (103,492 | ) | | $ | (1,440 | ) | | $ | 81,260 | | | $ | (1,683 | ) | | $ | (24,613 | ) | | $ | 41,035 | | | $ | 94,729 | |
Vesting of SDI restricted stock, net | | | 49,002 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (452 | ) | | | - | | | | - | | | | - | | | | (452 | ) |
Conversion of Class B common stock into Class A common stock | | | 100,020 | | | | - | | | | (100,020 | ) | | | (1 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1 | ) |
Unrecognized pension and postretirement cost adjustment, net of tax of $136 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (576 | ) | | | - | | | | (574 | ) | | | (1,150 | ) |
Unrealized gain on investments, net of tax of $505 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,169 | | | | - | | | | 585 | | | | 1,754 | |
Unrealized loss on interest rate swaps, net of tax of $377 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (632 | ) | | | - | | | | (629 | ) | | | (1,261 | ) |
SDI stock-based compensation | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 711 | | | | - | | | | - | | | | - | | | | 711 | |
Impact of Turning Point equity transactions on APIC and NCI | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 7,180 | | | | - | | | | - | | | | 7,827 | | | | 15,007 | |
Turning Point dividend payable to noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,807 | ) | | | (1,807 | ) |
Share repurchases | | | - | | | | - | | | | - | | | | - | | | | (270,491 | ) | | | (3,501 | ) | | | - | | | | - | | | | - | | | | - | | | | (3,501 | ) |
Retirement of treasury stock | | | (292,800 | ) | | | (2 | ) | | | - | | | | - | | | | 292,800 | | | | 3,838 | | | | (3,837 | ) | | | - | | | | - | | | | - | | | | (1 | ) |
Net (loss) income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (10,623 | ) | | | 6,844 | | | | (3,779 | ) |
Balance December 31, 2019 | | | 9,012,515 | | | $ | 90 | | | | 7,701,975 | | | $ | 77 | | | | (81,183 | ) | | $ | (1,103 | ) | | $ | 84,862 | | | $ | (1,722 | ) | | $ | (35,236 | ) | | $ | 53,281 | | | $ | 100,249 | |
The accompanying notes are an integral part of the consolidated financial statements.
Standard Diversified Inc. and Subsidiaries
Consolidated Statements of Comprehensive IncomeCash Flows
(dollars in thousands)
| | Year Ended December 31, | |
| | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | |
Net income | | $ | 14,817 | | | $ | 17,138 | | | $ | 26,913 | |
| | | | | | | | | | | | |
Other comprehensive income: | | | | | | | | | | | | |
Amortization of unrealized pension and postretirement losses, net of tax of $435 in 2018, $543 in 2017 and $0 in 2016 | | | 1,361 | | | | 889 | | | | 413 | |
Unrealized (loss) gain on investments, net of tax of $31 in 2018, $114 in 2017 and $582 in 2016 | | | (607 | ) | | | 187 | | | | (950 | ) |
Unrealized loss on interest rate swaps, net of tax of $204 in 2018 | | | (682 | ) | | | - | | | | - | |
Other comprehensive income
| | | 72 | | | | 1,076 | | | | (537 | ) |
Comprehensive income
| | | 14,889 | | | | 18,214 | | | | 26,376 | |
Amounts attributable to noncontrolling interests | | | (12,645 | ) | | | (6,761 | ) | | | - | |
Comprehensive income attributable to Standard Diversified Inc. | | $ | 2,244 | | | $ | 11,453 | | | $ | 26,376 | |
The accompanying notes are an integral part of the consolidated financial statements.
| | Year Ended December 31, | |
| | 2019 | | | 2018 | |
Cash flows from operating activities: | | | | | | |
Net (loss) income | | $ | (3,779 | ) | | $ | 14,817 | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | | | |
Loss on extinguishment of debt | | | 2,267 | | | | 2,384 | |
Loss on disposal of property, plant and equipment | | | 7 | | | | - | |
Depreciation expense | | | 4,021 | | | | 3,355 | |
Amortization of deferred financing costs and debt discount | | | 4,870 | | | | 1,507 | |
Amortization of other intangible assets | | | 1,749 | | | | 1,281 | |
Deferred income taxes | | | (4,639 | ) | | | 2,565 | |
Stock-based compensation expense | | | 4,340 | | | | 2,152 | |
Impairment loss on goodwill and other intangible assets
| | | 2,826 | | | | - | |
Turning Point impairment loss
| | | 301
| | | | -
| |
Turning Point non-cash lease expense | | | 357 | | | | - | |
Turning Point gain on postretirement plan termination | | | (4,915 | ) | | | - | |
Turning Point gain on CASH investment | | | (2,000 | ) | | | - | |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (3,906 | ) | | | 679 | |
Inventories | | | 21,036 | | | | (20,650 | ) |
Other current assets | | | (965 | ) | | | (4,687 | ) |
Other assets | | | (2,992 | ) | | | - | |
Accounts payable | | | 6,551 | | | | 2,752 | |
Accrued postretirement liabilities | | | (168 | ) | | | (97 | ) |
Accrued liabilities and other | | | (20 | )
| | | (888 | ) |
Premiums receivable | | | 3,942 | | | | 788 | |
Deferred policy acquisition costs | | | 1,286 | | | | (2,279 | ) |
Reserves for losses and loss adjustment expenses | | | (1,938 | ) | | | (3,341 | ) |
Unearned and advance premiums | | | (7,071 | ) | | | (228 | ) |
Net cash provided by operating activities | | | 21,160 | | | | 110 | |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Acquisitions, net of cash acquired | | | (8,324 | ) | | | (16,243 | ) |
Capital expenditures | | | (4,875 | ) | | | (2,564 | ) |
Proceeds from sale and maturity of fixed maturity securities, available-for-sale | | | 21,629 | | | | 6,746 | |
Payments for purchases of fixed maturity securities, available-for-sale | | | (9,408 | ) | | | (13,910 | ) |
Payments for investments | | | (1,421 | ) | | | (2,000 | ) |
Payments for purchases of equity securities | | | (306 | ) | | | (1,593 | ) |
Restricted cash, MSA escrow deposits | | | 29,718 | | | | (1,241 | ) |
Proceeds from sale of property, plant, and equipment | | | 123 | | | | - | |
Issuance of note receivable | | | - | | | | (6,500 | )
|
Repayment of note receivable | | | - | | | | 6,500 |
|
Net cash provided by (used in) investing activities | | | 27,136 | | | | (30,805 | ) |
Standard Diversified Inc. and Subsidiaries
Consolidated StatementStatements of EquityCash Flows
(dollars in thousands)
| | Standard Diversified Inc. Shareholders | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Class A Common Shares | | | Class B Common Shares | | | Class A Treasury Shares | | | Additional Paid-In Capital | | | Accumulated Other Comprehensive Loss | | | Accumulated Deficit | | | Noncontrolling Interests | | | Total | |
| | | | | | | | | | | | | | | | | | |
| | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | |
Balance January 1, 2016 | | | 858,964 | | | $ | 9 | | | | 842,698 | | | $ | 9 | | | | (16,266 | ) | | $ | (555 | ) | | $ | 13,237 | | | $ | (3,512 | ) | | $ | (90,800 | ) | | $ | - | | | $ | (81,612 | ) |
Unrecognized pension and postretirement cost adjustment | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 413 | | | | - | | | | - | | | | 413 | |
Unrealized loss on investments, net of tax of $582 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (950 | ) | | | - | | | | - | | | | (950 | ) |
Turning Point stock compensation expense | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 117 | | | | - | | | | - | | | | - | | | | 117 | |
Turning Point restricted stock compensation expense | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 50 | | | | - | | | | - | | | | - | | | | 50 | |
Turning Point member unit compensation expense | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 13 | | | | - | | | | - | | | | - | | | | 13 | |
Turning Point warrants exercised | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 4 | | | | - | | | | - | | | | - | | | | 4 | |
Turning Point stock issued in IPO | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 53,635 | | | | - | | | | - | | | | - | | | | 53,635 | |
Turning Point stock issued in exchange for debt | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 41,293 | | | | - | | | | - | | | | - | | | | 41,293 | |
Turning Point restricted stock grant, net of forfeitures | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 259 | | | | - | | | | - | | | | - | | | | 259 | |
Exercise of Turning Point options | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 169 | | | | - | | | | - | | | | - | | | | 169 | |
Redemption of Turning Point options | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (85 | ) | | | - | | | | - | | | | - | | | | (85 | ) |
Redemption of Intrepid options by Turning Point | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (326 | ) | | | - | | | | (335 | ) | | | - | | | | (661 | ) |
Redemption of Intrepid warrants by Turning Point | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (2,750 | ) | | | - | | | | (2,750 | ) | | | - | | | | (5,500 | ) |
Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 26,913 | | | | - | | | | 26,913 | |
Balance December 31, 2016 | | | 858,964 | | | $ | 9 | | | | 842,698 | | | $ | 9 | | | | (16,266 | ) | | $ | (555 | ) | | $ | 105,616 | | | $ | (4,049 | ) | | $ | (66,972 | ) | | $ | - | | | $ | 34,058 | |
Vesting of SDI restricted stock | | | 13,700 | | | | - | | | | 13,700 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Issuance of Class A and Class B Common shares to former holders of Turning Point Brands shares in reverse acquisition | | | 7,335,018 | | | | 73 | | | | 7,335,018 | | | | 73 | | | | - | | | | - | | | | 16,771 | | | | - | | | | - | | | | - | | | | 16,917 | |
Allocation of Turning Point Brands equity to noncontrolling interests as part of reverse acquisition | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (50,234 | ) | | | 1,788 | | | | 29,613 | | | | 18,833 | | | | - | |
Conversion of Class B common stock into Class A common stock | | | 149,891 | | | | 1 | | | | (149,891 | ) | | | (1 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Issuance of Class A common stock in business combination | | | 3,757 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 39 | | | | - | | | | - | | | | - | | | | 39 | |
Issuance of Class A common stock for services performed | | | 3,309 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 34 | | | | - | | | | - | | | | - | | | | 34 | |
Retirement of Class A treasury shares | | | (16,266 | ) | | | - | | | | - | | | | - | | | | 16,266 | | | | 555 | | | | (555 | ) | | | - | | | | - | | | | - | | | | - | |
Unrecognized pension and postretirement cost adjustment, net of tax of $543 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 523 | | | | - | | | | 366 | | | | 889 | |
Unrealized gain on investments, net of tax of $114 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 180 | | | | - | | | | 7 | | | | 187 | |
SDI stock-based compensation | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 249 | | | | - | | | | - | | | | - | | | | 249 | |
Impact of Turning Point equity transactions on APIC and NCI | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (547 | ) | | | - | | | | - | | | | (140 | ) | | | (687 | ) |
Turning Point acquisition of noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (560 | ) | | | - | | | | - | | | | 560 | | | | - | |
Turning Point distribution to noncontrolling interest | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (4 | ) | | | (4 | ) |
Turning Point dividend paid to noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (379 | ) | | | (379 | ) |
Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 10,377 | | | | 6,761 | | | | 17,138 | |
Balance December 31, 2017 | | | 8,348,373 | | | $ | 83 | | | | 8,041,525 | | | $ | 81 | | | | - | | | $ | - | | | $ | 70,813 | | | $ | (1,558 | ) | | $ | (26,982 | ) | | $ | 26,004 | | | $ | 68,441 | |
Vesting of SDI restricted stock | | | 50,756 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (334 | ) | | | - | | | | - | | | | - | | | | (334 | ) |
Conversion of Class B common stock into Class A common stock | | | 239,530 | | | | 3 | | | | (239,530 | ) | | | (3 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Issuance of Class A common stock in asset purchase | | | 22,727 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 250 | | | | - | | | | - | | | | - | | | | 250 | |
Issuance of Class A common stock under ATM, net of issuance costs | | | 313,082 | | | | 3 | | | | - | | | | - | | | | - | | | | - | | | | 4,827 | | | | - | | | | - | | | | - | | | | 4,830 | |
Issuance of Class A common stock in private placement, net of issuance costs | | | 181,825 | | | | 2 | | | | - | | | | - | | | | - | | | | - | | | | 1,978 | | | | - | | | | - | | | | - | | | | 1,980 | |
Repurchase of SDI common shares | | | - | | | | - | | | | - | | | | - | | | | (103,492 | ) | | | (1,440 | ) | | | - | | | | - | | | | - | | | | - | | | | (1,440 | ) |
Unrecognized pension and postretirement cost adjustment, net of tax of $435 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 687 | | | | - | | | | 674 | | | | 1,361 | |
Unrealized loss on investments, net of tax of $31 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (479 | ) | | | - | | | | (128 | ) | | | (607 | ) |
Unrealized loss on interest rate swaps, net of tax of $204 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (345 | ) | | | - | | | | (337 | ) | | | (682 | ) |
SDI stock-based compensation | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 893 | | | | - | | | | - | | | | - | | | | 893 | |
Impact of Turning Point equity transactions on APIC and NCI | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,834 | | | | - | | | | - | | | | 3,995 | | | | 6,829 | |
Impact of adoption of ASU 2018-02 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 12 | | | | (12 | ) | | | - | | | | - | |
Turning Point dividend paid to noncontrolling interests | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (1,609 | ) | | | (1,609 | ) |
Net income | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,381 | | | | 12,436 | | | | 14,817 | |
Balance December 31, 2018 | | | 9,156,293 | | | $ | 91 | | | | 7,801,995 | | | $ | 78 | | | | (103,492 | ) | | $ | (1,440 | ) | | $ | 81,261 | | | $ | (1,683 | ) | | $ | (24,613 | ) | | $ | 41,035 | | | $ | 94,729 | |
The accompanying notes are an integral part of the consolidated financial statements.
| | Year Ended December 31, | |
| | 2019 | | | 2018 | |
Cash flows from financing activities: | | | | | | |
Payments of 2018 first lien term loan | | | (8,000 | ) | | | (6,000 | ) |
(Payments of) proceeds from 2018 second lien term loan | | | (40,000 | ) | | | 40,000 | |
(Payments of) proceeds from 2018 revolving credit facility | | | (26,000 | ) | | | 26,000 | |
Payments of Standard Outdoor promissory note | | | (1,502 | ) | | | - | |
(Payments of) proceeds from Crystal term loan | | | (15,000 | ) | | | 14,039 | |
Proceeds from GACP term loan | | | 25,000 | | | | - | |
Proceeds from Convertible Senior Notes | | | 172,500 | | | | - | |
Proceeds from 2018 first lien term loan | | | - | | | | 160,000 | |
(Payments of) proceeds from 2017 second lien term loans, net | | | - | | | | (55,000 | ) |
Payments of financing costs | | | (8,019 | ) | | | (3,286 | ) |
(Payments of) proceeds from 2017 revolving credit facility, net | | | - | | | | (8,000 | ) |
Payment to terminate acquired capital lease | | | - | | | | (170 | ) |
(Payments of) proceeds from 2017 first lien term loan | | | - | | | | (140,613 | ) |
Turning Point exercise of stock options | | | 738 | | | | 833 | |
Turning Point payments for call options | | | (20,528 | ) | | | - | |
Turning Point redemption of stock options | | | (12 | ) | | | (623 | ) |
Turning Point surrender of stock options | | | (84 | ) | | | - | |
Turning Point dividend to noncontrolling interests | | | (1,759 | ) | | | (1,137 | ) |
Proceeds from issuance of SDI stock | | | - | | | | 6,810 | |
Repurchase of SDI common shares | | | (4,310 | ) | | | (631 | ) |
Payments of Vapor Beast Note Payable and Vapor Shark loans | | | - | | | | (2,000 | ) |
Proceeds from release of restricted funds | | | - | | | | 1,107 | |
Share repurchase for tax withholdings on vesting of restricted stock | | | (336 | ) | | | - | |
Net cash provided by financing activities | | | 72,688 | | | | 31,329 | |
| | | | | | | | |
Net increase in cash | | | 120,984 | | | | 634 | |
| | | | | | | | |
Cash, beginning of period | | | | | | | | |
Unrestricted | | | 21,201 | | | | 18,219 | |
Restricted | | | 2,356 | | | | 4,704 | |
Total cash at beginning of period | | | 23,557 | | | | 22,923 | |
| | | | | | | | |
Cash, end of period | | | | | | | | |
Unrestricted | | | 112,467 | | | | 21,201 | |
Restricted | | | 32,074 | | | | 2,356 | |
Total cash at end of period | | $ | 144,541 | | | $ | 23,557 | |
Standard Diversified Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
| | Year Ended December 31, | |
| | 2018 | | | 2017 | | �� | 2016 | |
Cash flows from operating activities: | | | | | | | | | |
Net income | | $ | 14,817 | | | $ | 17,138 | | | $ | 26,913 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | |
Loss on extinguishment of debt | | | 2,384 | | | | 6,116 | | | | 2,824 | |
Loss on sale of property, plant and equipment | | | - | | | | 150 | | | | - | |
Depreciation expense | | | 3,355 | | | | 1,642 | | | | 1,227 | |
Amortization of deferred financing costs and debt discount | | | 1,433 | | | | 1,071 | | | | 2,143 | |
Amortization of other intangible assets | | | 1,281 | | | | 702 | | | | 58 | |
Interest incurred but not paid on PIK Toggle Notes | | | - | | | | - | | | | 3,422 | |
Interest incurred but not paid on 7% Senior Notes | | | - | | | | - | | | | 329 | |
Interest paid on PIK Toggle Notes | | | - | | | | - | | | | (9,893 | ) |
Reserve of note receivable | | | - | | | | - | | | | 430 | |
Deferred income taxes | | | 2,565 | | | | 5,181 | | | | (12,719 | ) |
Stock-based compensation expense | | | 2,152 | | | | 969 | | | | 180 | |
Amortization of bond discount/premium
| | | 74
| | | | -
| | | | -
| |
Changes in operating assets and liabilities: | | | | | | | | | | | | |
Accounts receivable | | | 679 | | | | (1,068 | ) | | | 2,072 | |
Inventories | | | (20,650 | ) | | | 495 | | | | (12,513 | ) |
Other current assets | | | (4,687 | ) | | | 1,263 | | | | 1,361 | |
Other assets | | | - | | | | (336 | ) | | | (100 | ) |
Accounts payable | | | 2,752 | | | | (5,702 | ) | | | 3,631 | |
Accrued postretirement liabilities | | | (97 | ) | | | (24 | ) | | | (172 | ) |
Accrued expenses and other | | | (888 | ) | | | (2,651 | ) | | | (65 | ) |
Premiums receivable | | | 788 | | | | - | | | | - | |
Deferred policy acquisition costs | | | (2,279 | ) | | | - | | | | - | |
Reserves for losses and loss adjustment expenses | | | (3,341 | ) | | | - | | | | - | |
Unearned and advance premiums | | | (228 | ) | | | - | | | | - | |
Net cash provided by operating activities | |
| 110 | | |
| 24,946 | | |
| 9,128 | |
| | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | |
Cash and cash equivalents acquired in reverse acquisition | | | - | | | | 20,253 | | | | - | |
Acquisitions, net of cash acquired | | | (16,243 | ) | | | (22 | ) | | | (23,625 | ) |
Capital expenditures | | | (2,564 | ) | | | (2,021 | ) | | | (3,207 | ) |
Payments for investments | | | (2,000 | ) | | | (179 | ) | | | - | |
Proceeds from sale and maturity of fixed maturity securities, available-for-sale | | | 6,746 | | | | - | | | | - | |
Payments for purchases of fixed maturity securities, available-for-sale | | | (13,910 | ) | | | - | | | | - | |
Payments for purchases of equity securities | | | (1,593 | ) | | | - | | | | - | |
Restricted cash, MSA escrow deposits | | | (1,241 | ) | | | 816 | | | | (29,056 | ) |
Issuance of note receivable | | | (6,500 | ) | | | - | | | | - | |
Repayment of note receivable | | | 6,500 | | | | -
| | | | -
| |
Net cash (used in) provided by investing activities | | | (30,805 | ) | | | 18,847 | | | | (55,888 | ) |
Standard Diversified Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
| | Year Ended December 31, | |
| | 2018 | | | 2017 | | | 2016 | |
Cash flows from financing activities: | | | | | | | | | |
Proceeds from 2018 first lien term loan
| | | 160,000 | | | | - | | | | - | |
Payments of 2018 first lien term loan
| | | (6,000 | ) | | | - | | | | - | |
Proceeds from 2018 second lien term loan | | | 40,000 | | | | - | | | | - | |
Proceeds from 2018 revolving credit facility | | | 26,000 | | | | - | | | | - | |
Proceeds from borrowings under SDI term loan
| | | 14,039 | | | | - | | | | - | |
Proceeds from (payments of) 2017 revolving credit facility | | | (8,000 | ) | | | 8,000 | | | | - | |
Proceeds from (payments of) 2017 first lien term loans, net | | | (140,613 | ) | | | 140,613 | | | | - | |
Proceeds from (payments of) 2017 second lien term loans, net | | | (55,000 | ) | | | 55,000 | | | | - | |
Payment of financing costs | | | (3,286 | ) | | | (4,783 | ) | | | (450 | ) |
Payments of (proceeds from) revolving credit facility, net | | | - | | | | (15,083 | ) | | | 15,016 | |
Payment of first lien term loan | | | - | | | | (147,362 | ) | | | (4,388 | ) |
Payment of second lien term loan | | | - | | | | (60,000 | ) | | | (20,000 | ) |
Payments of Vapor Shark loans | | | - | | | | (1,867 | ) | | | - | |
Prepaid Turning Point Brands equity issuance costs | | | - | | | | (453 | ) | | | - | |
Payment of PIK Toggle Notes | | | - | | | | - | | | | (24,107 | ) |
Payment to terminate acquired capital lease | | | (170 | ) | | | - | | | | - | |
Redemption of subsidiary options by Turning Point Brands | | | - | | | | - | | | | (661 | ) |
Redemption of subsidiary warrants by Turning Point Brands | | | - | | | | - | | | | (5,500 | ) |
Turning Point Brands exercise of stock options | | | 833 | | | | 1,431 | | | | 169 | |
Turning Point Brands exercise of warrants | | | - | | | | - | | | | 4 | |
Turning Point Brands redemption of options | | | (623 | ) | | | (1,740 | ) | | | (85 | ) |
Turning Point Brands surrender of options | | | - | | | | (1,000 | ) | | | - | |
Proceeds from issuance of SDI stock | | | 6,810 | | | | - | | | | - | |
Proceeds from issuance of Turning Point Brands stock | | | - | | | | - | | | | 55,736 | |
Payments of VaporBeast Note Payable | | | (2,000 | ) | | | - | | | | - | |
Turning Point Brands dividend to noncontrolling interests | | | (1,137 | ) | | | (375 | ) | | | - | |
Repurchase of SDI common shares | | | (631 | ) | | | - | | | | - | |
Proceeds from release of restricted funds | | | 1,107 | | | | - | | | | - | |
Distribution to noncontrolling interest of Turning Point Brands | | | - | | | | (4 | ) | | | - | |
Net cash provided by (used in) financing activities | | | 31,329 | | | | (27,623 | ) | | | 15,734 | |
| | | | | | | | | | | | |
Net increase (decrease) in cash | |
| 634 | | |
| 16,170 | | |
| (31,026 | ) |
| | | | | | | | | | | | |
Cash, beginning of period | | | | | | | | | | | | |
Unrestricted | | | 18,219 | | | | 2,865 | | | | 4,835 | |
Restricted | | | 4,704 | | | | 3,888 | | | | 32,944 | |
Total cash at beginning of period | | | 22,923 | | | | 6,753 | | | | 37,779 | |
| | | | | | | | | | | | |
Cash, end of period | | | | | | | | | | | | |
Unrestricted | | | 21,201 | | | | 18,219 | | | | 2,865 | |
Restricted | | | 2,356 | | | | 4,704 | | | | 3,888 | |
Total cash at end of period | | $ | 23,557 | | | $ | 22,923 | | | $ | 6,753 | |
Standard Diversified Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(dollars in thousands)
| | Year Ended December 31, | | |
| | 2018 | | | 2017 | | | 2016 | | |
| | | | | | | | | | | Year Ended December 31, | |
Supplemental disclosures of cash flow information: | | | | | | | | | | | 2019 | | | 2018 | |
Cash paid during the period for interest | | $ | 15,664 | | | $ | 15,828 | | | $ | 34,553 | | | $ | 14,047 | | | $ | 15,664 | |
Cash paid during the period for income taxes, net | | $ | 3,215 | | | $ | 1,811 | | | $ | 623 | | | $ | 11,332 | | | $ | 3,215 | |
| | | | | | | | | | | | | | | | | | |
Supplemental schedule of noncash investing activities: | | | | | | | | | | | | | | | | | | |
Conversion of PIK Toggle Notes to equity | | $ | - | | | $ | - | | | $ | 29,014 | | |
Conversion of 7% Senior Notes to equity | | $ | - | | | $ | - | | | $ | 10,074 | | |
Issuance of Turning Point Brands restricted stock | | $ | - | | | $ | - | | | $ | 279 | | |
Turning Point investment in General Wireless | | | $ | - | | | $ | 421 | |
| | | | | | | | | | | | | | | | | | |
Supplemental schedule of noncash financing activities: | | | | | | | | | | | | | | | | | | |
SDI shares withheld on restricted stock vesting to cover income taxes | | $ | 216 | | | $ | - | | | $ | - | | | $ | 117
| | | $ | 216 | |
Unsettled SDI share repurchases included in accounts payable | | $ | 809 | | | $ | - | | | $ | - | | | $ | - | | | $ | 809 | |
Common stock issued in connection with reverse acquisition | | $ | - | | | $ | 16,917 | | | $ | - | | |
Turning Point dividend to noncontrolling interests declared not paid | | | $ | 481 | | | $ | 454 | |
Issuance of SDI and Turning Point shares in acquisition | | $ | 5,792 | | | $ | 39 | | | $ | - | | | $ | 5,792 | | | $ | 5,792 | |
Issuance of promissory notes in asset purchases | | $ | 8,810 | | | $ | - | | | $ | - | | | $ | 8,810 | | | $ | 8,810 | |
The accompanying notes are an integral part of the consolidated financial statements.
Standard Diversified Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(dollars in thousands, except where designated and per share data)
Note 1. Organization and Description of Business
The accompanying consolidated financial statements include the results of operations of Standard Diversified Inc. (“SDI”), a holding company, and its consolidated subsidiaries (collectively, “the Company”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 consolidated financial statements include the results of SDI from June 1, 2017, the date the reverse acquisition was consummated. As of December 31, 2018,2019, SDI has a 50.3%50.0% ownership interest in Turning Point.
PriorOn November 18, 2019, the Company announced that it intends to pursue a merger with Turning Point (the “Merger”). Pursuant to the consummationMerger, which would be a statutory merger implemented via Delaware law and which is intended to constitute a tax-free “downstream reorganization” for U.S. federal income tax purposes, the Company would be merged with and into a wholly owned subsidiary of Turning Point with Turning Point as the survivor of the Contribution and Exchange, SDI amended and restated its certificateMerger. Pursuant to the Merger, holders of incorporation to providethe Company’s common stock would receive, in return for among other things, (i) the reclassification of every 25their Company common stock, shares of itsthe 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”)Turning Point. The details 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”). Prior to the closingtiming of the Contributionproposed merger have not yet been determined, 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, reflectsthere can be no assurance that of the legal parentany definitive agreement will be executed 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. There was no change to Turning Point’s historical total stockholders’ equity as a result of the reverse acquisition.that any transaction will be approved or consummated.
All references in the 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. Refer to Note 3, Acquisitions and Investments, for further information. As a result of the consummation of the Contribution and Exchange, SDI is no longer a shell company.
Note 2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
SDI is now a holding company and its consolidated financial statements include Turning Point and its consolidated subsidiaries.subsidiaries, Pillar General Inc. (“Pillar General”) and its subsidiaries, and Standard Outdoor LLC (“Standard Outdoor”) and its subsidiaries.
Turning Point is also a holding company which owns North Atlantic Trading Company, Inc. (“NATC”), and its subsidiaries and Turning Point Brands, LLC (“TPLLC”), and its subsidiaries.subsidiaries and Turning Point Brands (Canada), Inc. (“TPBC”). Except where the context indicates otherwise, references to Turning Point include Turning Point; NATC and its subsidiaries National Tobacco Company, L.P. (“NTC”), National Tobacco Finance, LLC (“NTFLLC”), North Atlantic Operating Company, Inc. (“NAOC”), North Atlantic Cigarette Company, Inc. (“NACC”), and RBJ Sales, Inc. (“RBJ”); and TPLLC and its subsidiaries Intrepid Brands, LLC (“Intrepid”), VaporTPB Beast, LLC (“VaporBeast,” f/k/a Smoke Free Technologies, Inc.VaporBeast”), VaporTPB Shark, LLC, and its subsidiaries (collectively, “Vapor Shark,” f/k/a The Hand Media), Vapor Acquisitions Company, LLC (“Vapor Supply”Shark”), Vapor Finance, LLC (“VFIN”), andTPB International, Vapor Group, LLC and its subsidiaries (collectively, “IVG”). On January 15, 2019, Turning Point announced the formation of, and Nu-X Ventures LLC (“Nu-X”), a subsidiary of TPLLC..
Turning Point is a leading, independent provider of Other Tobacco Products (“OTP”) in the U.S and was the 6th largest competitor in terms of total OTP consumer units sold during 2018. Turning Point sells a wide range of products across the OTP spectrum; however, it does not sell cigarettes. Turning Point’s portfolio of brands includes some of the most widely recognized names in the OTP industry, such as Zig-Zag®, Beech-Nut®, Stoker’s®, Trophy®, VaporBeast®, Vapor Shark®, and VaporFi®. Turning Point currently ships to approximately 800 distributors with an additional 100 secondary, indirect wholesalers in the U.S. that carry and sell our products.
Pillar General, a wholly-owned subsidiary of the Company as of January 2, 2018, 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 iswas a property and casualty insurance company which providesprovided automobile insurance andinsurance. Maidstone was acquired by the Companydisposed of on January 2, 2018.February 13, 2020.
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 consolidated financial statements include the accounts of the Company, its subsidiaries, all of which are wholly-owned, and the results of Vapor Shark from April 1, 2017, through June 30, 2017.wholly owned. All significant intercompany transactions have been eliminated. Vapor Shark was a variable interest entity (“VIE”) for which Turning Point was considered
Certain prior years’ amounts have been reclassified to conform to the primary beneficiary due to an April 2017 management agreement in which Turning Point was granted the right to purchase equity of Vapor Shark. Turning Pointcurrent year’s presentation. The changes did not own Vapor Shark during the second quarter of 2017; however, Vapor Shark’s financial results are included inhave an impact on the Company’s consolidated results as a VIE. On June 30, 2017, Turning Point exercised a warrant to purchase allof operations or cash flows in any of the issued and outstanding equityperiods presented.
Use of Vapor Shark. Beginning June 30, 2017, Vapor Shark became a wholly owned subsidiary of Turning Point.Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
As a result The Company’s significant estimates include but are not limited to those affecting the valuation of goodwill and other intangible assets, the adequacy of the consummationCompany’s insurance reserves, assumptions used in determining pension and postretirement benefit obligations, deferred income tax valuation allowances and the valuation 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. The operatinginventory, including reserves. Actual results of SDI are included in these financial statements beginning on June 1, 2017.
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 results of operations or cash flows in any of the periods presented.could differ from those estimates.
Noncontrolling Interests
These consolidated financial statements reflect the application of Accounting Standards Codification (“ASC”) 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 (loss) income attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face of the consolidated statements of (loss) income; and (iii) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently.
SDI acquired a 52.1% interest in Turning Point on June 1, 2017 through a reverse acquisition as described in Note 1.the Contribution and Exchange. 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 consolidated financial statements. As of December 31, 2018, SDI has an ownership interest of 50.3% in Turning Point.
Revenue Recognition
Turning Point: Turning PointThe Company adopted Accounting Standards 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
Turning Point recognizes revenues, net of sales incentiveswhich includes excise taxes and sales returns, including shipping and handling charges billed to customers, net of cash discounts for prompt payment, sales returns and sales incentives, upon delivery of goods to the customer—at which time Turning Point’s performance obligation is satisfied—at an amount that Turning Point expects to be entitled to in exchange for those goods in accordance with the five-step analysis outlined in Topic 606: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied. Turning Point excludes from the transaction price, sales taxes and value-added taxes imposed at the time of sale (which do not include excise taxes on smokeless tobacco, cigars, or vaping products billed to customers).
77Turning Point records an allowance for sales returns, based principally on historical volume and return rates, which is included in accrued liabilities on the consolidated balance sheets. Turning Point records sales incentives, which consist of consumer incentives and trade promotion activities, as a reduction in revenues (a portion of which is based on amounts estimated as being due to wholesalers, retailers and consumers at the end of the period) based principally on historical volume and utilization rates. Expected payments for sales incentives are included in accrued liabilities on the consolidated balance sheets.
A further requirement of ASU 2014-09 is for entities to disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. Turning Point’sPoint 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-makingdecision making purposes is the disaggregation by segment which can be found in Note 23. Segment25, “Segment Information.” An additional disaggregation of contract revenue by sales channel can also be found within Note 23. Segment Information.25 as well.
Standard Outdoor:Outdoor
The Company’s out-of-home advertising revenues are primarily derived from providing advertising space to customers on its physical billboards or other outdoor structures. Standard Outdoor generally (i) owns the physical structures on which it displays advertising copy for customers, (ii) holds the legal permits to display advertising thereon, and (iii) leases the underlying sites. BillboardAs of January 1, 2019, billboard display revenues are currently recognized under ASC 840,842, the lease accounting standard, as rental income on a straight-line basis over the customer lease term.
Maidstone
Maidstone recognizes revenues from insurance contracts, including premiums and fees, under the guidance in ASC 944, Financial Services-Insurance Premiums. 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 consolidated statements of (loss) income.
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.
Shipping Costs
The Company records shipping costs incurred as a component of selling, general and administrative expenses. Shipping costs incurred were approximately $18.1 million and $15.1 million $10.4 millionfor the years ended December 31, 2019 and $6.5 million in 2018, 2017 and 2016, respectively.
Research and Development and Quality Assurance Costs
Research and development and quality assurance costs are expensed as incurred. These expenses, classified as selling, general and administrative expenses, were approximately $2.5 million $2.3 millionfor the years ended December 31, 2019 and $2.0 million in 2018, 2017 and 2016, respectively.2018.
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.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) method for approximately 49.1%49.4% of the inventories and first-in, first-out (“FIFO”) for the remaining inventories.inventories as of December 31, 2019. Inventories that are measured using the LIFO method are stated at the lower of cost or market. Inventories that are measured using the FIFO method are stated at the lower of cost or net realizable value. Leaf tobacco is presented in current assets in accordance with standard industry practice, notwithstanding the fact that such tobaccos are carried longer than one year for the purpose of curing.
Property, Plant and Equipment:Equipment
Property, plant and equipment are stated at cost less accumulated depreciation and impairment. Depreciation is provided using the straight-line method over the lesser of the estimated useful lives of the assets or the life of the leases for leasehold improvements (4 to 7 years for machinery, equipment and furniture, 10 to 15 years for leasehold improvements, 15 years for billboards and up to 15 years for buildings and building improvements). Expenditures for repairs and maintenance are charged to expense as incurred. The costs of major renewals and improvements are capitalized and depreciated over their estimated useful lives. Upon disposition of fixed assets, the costs and related accumulated depreciation amounts are relieved. Any resulting gain or loss is reflected in operations during the period of disposition.
Long-lived assets are reviewed for impairment when changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Goodwill and Other Intangible Assets:Assets
The Company follows the provisions of ASC 350, Intangibles – Goodwill and Other in accounting for goodwill and other intangible assets. Goodwill and indefinite-lived intangible assets are reviewed for impairment annually on December 31, or more frequently if certain indicators are present, in accordance with ASC 350-20-35 and ASC 350-30-35, respectively. If the carrying value of a reporting unit including goodwill exceeds its fair value, which is determined using the discounted cash flows, goodwill oris considered impaired. The amount of impairment loss is measured as the difference between the carrying value and the fair value of the reporting unit, but is limited to the total goodwill allocated to the reporting unit. If the carrying value of an indefinite-life intangible asset exceeds its fair value, which is determined using the discounteddiscontinued cash flows method andor relief-from-royalty, the relief-from-royalty method, respectively, the goodwill or intangible asset is considered impaired. The carrying value of the goodwill or indefinite-life intangible asset would then beimpaired and is reduced to fair value. For goodwill, the determination of a reporting unit’s fair value involves, among other things, the Company’s market capitalization and application of the income approach, which includes developing forecasts of future cash flows and determining an appropriate discount rate.
During the year ended December 31, 2019, the Company recorded impairment charges of $0.8 million and $2.0 million related to the full impairment of the goodwill and intangible asset balances, respectively, in its Insurance segment. This impairment was a result of changes in the future plans for the Insurance segment and certain other factors impacting recoverability. As a result, there were no goodwill or intangible asset balances remaining in the Company’s Insurance segment as of December 31, 2019.
Based on the Company’sTurning Point’s annual goodwill impairment testing, the estimated fair values of each of the Turning Pointits reporting units were substantially in excess of the respective carrying values at December 31, 2018. The Company2019. Turning Point had no such impairment of goodwill or other intangible assets during the year ended December 31, 2018. Refer2019. However, there could be an impairment of the goodwill of Turning Point’s NewGen reporting unit if future revenues do not achieve the expected future cash flows or if macroeconomic conditions result in a future increase in the weighted average cost of capital used to estimate fair value. See Note 10 of Notes to Consolidated Financial Statements11, “Goodwill and Other Intangible Assets” for further details regarding the Company’s goodwill and other intangible assets as of December 31, 2018.
The Company performed a qualitative assessment related to the goodwill at its insurance subsidiary, which was acquired on January 2, 2018. The Company recorded no impairment of goodwill or other intangible assets during the year ended December 31, 2018.2019.
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 derived principally from or corroborated by observable market data by correlation or other means.
Level 3 – Unobservable inputs which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
Derivative Instruments
Foreign Currency Forward Contracts: Turning Point enters into foreign currency forward contracts to hedge a portion of its exposure to changes in foreign currency exchange rates on inventory purchase commitments. The Company accounts for its forward contracts under the provisions of ASC 815, Derivatives and Hedging. Under Turning Point’s policy, the Turning Point may hedge up to 100% of its anticipated purchases of inventory in the denominated invoice currency over a forward period not to exceed twelve months. The Company may also, from time to time, hedge up to ninety percent of its non-inventory purchases in the denominated invoice currency. Forward contracts that qualify as hedges are adjusted to their fair value through other comprehensive (loss) 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 (loss) 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: Turning Point enters into interest rate swap contracts to manage interest rate risk and reduce the volatility of future cash flows. Turning Point accounts for its interest rate swap contracts under the provisions of ASC 815, Derivatives and Hedging. Swap contracts that qualify as hedges are adjusted to their fair value through other comprehensive (loss) 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 (loss) 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.
Retirement Plans
The Company follows the provisions of ASC 715, Compensation – Retirement Benefits in accounting for its retirement plans, which requires an employer to (i) recognize in its statement of financial position the funded status of a benefit plan, measured as the difference between the fair value of plan assets and benefit obligations; (ii) recognize, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost; and (iii) measure defined benefit plan assets and obligations as of the date of the employer’s statement of financial position.
Deferred Financing Costs
Deferred financing costs are amortized over the terms of the related debt obligations using the effective interest method. Unamortized amounts are expensed upon extinguishment of the related borrowings. Deferred financing costs are presented as a direct deduction from the carrying amount of that debt liability except for deferred financing costs relating to Turning Point’s revolving credit facility, which are presented as an asset.
Advertising and Promotion
Advertising and promotion costs, including point of sale materials, are expensed as incurred and amounted to $5.6 million, $3.4$12.0 million and $3.9$5.6 million for the years ending December 31, 2019 and 2018, 2017 and 2016, respectively.
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.
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.industry is likely to continue to be heavily regulated. There can be no assurance as to the ultimate content, timing, or effect of any regulation of tobacco products by any federal, state, or local legislative or regulatory body, nor can there be any assurance that any such legislation or regulation would not have a material adverse effect on the Company’s financial position, results of operations, or cash flows. Recently, several state governors have reacted to perceived issues around nicotine vapor products by unilaterally, without regard to the legislative process, proclaiming bans on vapor products, particularly those that are flavored. Many of these executive actions have been challenged and temporarily restrained, but no assurance can be given that such state or local flavor bans will not be enacted or ultimately upheld. Depending on the number and location of such bans, such executive actions and legislation could have a material adverse effect on Turning Point’s financial position, results of operations or cash flows. Food and Drug Administration (“FDA”) continues to consider various restrictive regulations around Turning Point’s products, including targeted flavor bans; however, the details, timing, and ultimate implementation of such measures remain unclear.
The tobacco industry has experienced, and is experiencing, significant product liability litigation. Most tobacco liability lawsuits have been brought against manufacturers and sellers of cigarettes for injuries allegedly caused by smoking or exposure to smoke. However, several lawsuits have been brought against manufacturers and sellers of smokeless products for injuries to health allegedly caused by use of smokeless products. Typically, such claims assert that use of smokeless products is addictive and causes oral cancer. Additionally, several lawsuits have been brought against manufacturers and distributors of NewGen products due to malfunctioning devices. There can be no assurance the CompanyTurning Point will not sustain losses in connection with such lawsuits and that such losses will not have a material adverse effect on the Company’sTurning Point’s financial position, results of operations, or cash flows.
Master Settlement Agreement (MSA): Forty-six states, certain U.S. territories, and the District of Columbia are parties to the Master Settlement Agreement (“MSA”) and the Smokeless Tobacco Master Settlement Agreement (“STMSA”). To the Company’sTurning Point’s knowledge, signatories to the MSA include 49 cigarette manufacturers and/or distributors. The only signatory to the STMSA is US Smokeless Tobacco Company. In the Company’sTurning Point’s opinion, the fundamental basis for each agreement is the states’ consents to withdraw all claims for monetary, equitable, and injunctive relief against certain tobacco products manufacturers and others and, in return, the signatories have agreed to certain marketing restrictions and regulations as well as certain payment obligations.
Pursuant to the MSA and subsequent states’ statutes, a “cigarette manufacturer” (which is defined to also include MYO cigarette tobacco) has the option of either becoming a signatory to the MSA or opening, funding, and maintaining an escrow account, with sub-accounts on behalf of each settling state. The STMSA has no similar provisions. The MSA escrow accounts are governed by states’ statutes that expressly give the manufacturers the option of opening, funding, and maintaining an escrow account in lieu of becoming a signatory to the MSA. The statutes require companies who are not signatories to the MSA to deposit, on an annual basis, into qualified banks, escrow funds based on the number of cigarettes or cigarette equivalents, i.e., the pounds of MYO tobacco, sold. The purpose of these statutes is expressly stated to be to eliminate the cost disadvantage the settling manufacturers have as a result of entering into the MSA. Such companies are entitled to direct the investment of the escrowed funds and withdraw any appreciation, but cannot withdraw the principal for twenty-five years from the year of each annual deposit, except to withdraw funds deposited pursuant to an individual state’s escrow statute to pay a final judgment to that state’s plaintiffs in the event of such a final judgment against the company.Turning Point. Either option – becoming an MSA signatory or establishing an escrow account – is permissible.
The CompanyTurning Point chose to open and fund an MSA escrow account as its means of compliance. It is management’s opinion, due to the possibility of future federal or state regulations, though none have to date been enacted, that entering into one or both of the settlement agreements or establishing and maintaining an escrow account would not necessarily prevent future regulations from having a material adverse effect on the results of operations, financial position, and cash flows of the Company.Turning Point.
Various states have enacted or proposed complementary legislation intended to curb the activity of certain manufacturers and importers of cigarettes that are selling into MSA states without signing the MSA or who have failed to properly establish and fund a qualifying escrow account. To the best of the Company’sTurning Point’s knowledge, no such statute has been enacted which could inadvertently and negatively impact the Company,Turning Point, which has been, and is currently, fully compliant with all applicable laws, regulations, and statutes. However, there can be no assurance that the enactment of any such complementary legislation in the future will not have a material adverse effect on the results of operations, financial position, or cash flows of the Company.Turning Point.
Pursuant to the MSA escrow account statutes, in order to be compliant with the MSA escrow requirements, companies selling products covered by the MSA are required to deposit such funds for each calendar year into a qualifying escrow account by April 15 of the following year. At December 31, 2018, the Company2019, Turning Point had on deposit approximately $32.1 million, the fair value of which was approximately $30.6$32.1 million. Inputs to the valuation methodology of the MSA escrow deposits when funds are invested include unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date. During 2018, less than $0.1 million relating to 2017 sales was2019 no monies were deposited into this qualifying escrow account. The investment vehicles available to the CompanyTurning Point are specified in the state escrow agreements and are limited to low-risk government securities.
Effective April 1, 2009, the federal excise tax on MYO products was increased from $1.0969 per pound to $24.78 per pound of tobacco. With this significant increase in the federal excise tax, the CompanyTurning Point discontinued its generic category of MYO. The Company’sTurning Point’s Zig-Zag branded MYO cigarette smoking tobacco line was discontinued in the third quarter of 2017. Thus, pending a change in MSA legislation, the CompanyTurning Point has no remaining product lines covered by the MSA and will not be required to make future escrow deposits.
The CompanyTurning Point has chosen to invest a portion of the MSA escrow, from time to time, 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; thus, 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 December 31, 2018:account:
| | December 31, | | December 31, | |
| | 2018 | | | 2017 | | 2019 | | 2018 | |
| | Cost | | | | | | | | | Estimated Fair Value | | | Cost | | | | | | Estimated Fair Value | | |
(In thousands) | | Cost and Estimated Fair Value | | Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Estimated Fair Value | |
Cash and cash equivalents | | $ | 2,361 | | | $ | - | | | $ | - | | | $ | 2,361 | | | $ | 3,602 | | | $ | - | | | $ | 3,602 | | | $ | 32,074 | | | $ | 2,361 | | | $ | - | | | $ | - | | | $ | 2,361 | |
Fair value level 2: U.S. Governmental agency obligations (unrealized gain position < 12 months) | | | 1,193 | | | | 9 | | | | - | | | | 1,202 | | | | - | | | | - | | | | - | | | - | | | 1,193 | | | 9 | | | - | | | 1,202 | |
Fair value level 2: U.S. Governmental agency obligations (unrealized loss position < 12 months) | | | 1,000 | | | | - | | | | (3 | ) | | | 997 | | | | 722 | | | | (17 | ) | | | 705 | | | - | | | 1,000 | | | - | | | (3 | ) | | 997 | |
Fair value level 2: U.S. Governmental agency obligations (unrealized loss position > 12 months) | | | 27,519 | | | | - | | | | (1,529 | ) | | | 25,990 | | | | 27,733 | | | | (1,214 | ) | | | 26,519 | | | | - | | | | 27,519 | | | | - | | | | (1,529 | ) | | | 25,990 | |
| | $ | 32,073 | | | $ | 9 | | | $ | (1,532 | ) | | $ | 30,550 | | | $ | 32,057 | | | $ | (1,231 | ) | | $ | 30,826 | | |
Total | | | $ | 32,074 | | | $ | 32,073 | | | $ | 9 | | | $ | (1,532 | ) | | $ | 30,550 | |
Fair value for the U.S. Governmental agency obligations are Level 2. The following schedule shows the maturities of the U.S. Governmental agency obligations:obligations as of:
| | December 31, | | |
| | 2018 | | | 2017 | | |
(In thousands) | | | December 31, 2018 | |
Less than one year | | $ | 1,499 | | | $ | - | | | $ | 1,499 | |
One to five years | | | 13,591 | | | | 7,114 | | | | 13,591 | |
five to ten years | | | 11,152 | | | | 17,662 | | | | 11,152 | |
Greater than ten years | | | 3,470 | | | | 3,679 | | | | 3,470 | |
Total U.S. Governmental agency obligations | | $ | 29,712 | | | $ | 28,455 | | |
Total | | | $ | 29,712 | |
The following shows the amount of deposits by sales year for the MSA escrow account:
| | Deposits as of | | |
Sales Year | | | | | | | |
(Dollar amounts in thousands) Sales Year | | | Deposits as of December 31, | |
| | 2019 | | | 2018 | |
1999 | | $ | 211 | | | $ | 211 | | | $ | 211 | | | $ | 211 | |
2000 | | | 1,017 | | | | 1,017 | | | 1,017 | | | 1,017 | |
2001 | | | 1,673 | | | | 1,673 | | | 1,673 | | | 1,673 | |
2002 | | | 2,271 | | | | 2,271 | | | 2,271 | | | 2,271 | |
2003 | | | 4,249 | | | | 4,249 | | | 4,249 | | | 4,249 | |
2004 | | | 3,714 | | | | 3,714 | | | 3,714 | | | 3,714 | |
2005 | | | 4,552 | | | | 4,552 | | | 4,553 | | | 4,552 | |
2006 | | | 3,847 | | | | 3,847 | | | 3,847 | | | 3,847 | |
2007 | | | 4,167 | | | | 4,167 | | | 4,167 | | | 4,167 | |
2008 | | | 3,364 | | | | 3,364 | | | 3,364 | | | 3,364 | |
2009 | | | 1,619 | | | | 1,626 | | | 1,619 | | | 1,619 | |
2010 | | | 406 | | | | 406 | | | 406 | | | 406 | |
2011 | | | 193 | | | | 193 | | | 193 | | | 193 | |
2012 | | | 199 | | | | 199 | | | 199 | | | 199 | |
2013 | | | 173 | | | | 173 | | | 173 | | | 173 | |
2014 | | | 143 | | | | 143 | | | 143 | | | 143 | |
2015 | | | 101 | | | | 101 | | | 101 | | | 101 | |
2016 | | | 91 | | | | 81 | | | 91 | | | 91 | |
2017 | | | 83 | | | | 70 | | | | 83 | | | | 83 | |
Total | | $ | 32,073 | | | $ | 32,057 | | | $ | 32,074 | | | $ | 32,073 | |
Federal Excise Taxes: Tobacco products, cigarette papers, and cigarette tubes are subject to federal excise taxes. The following table outlines the federal excise tax rate by product category effective as of April 1, 2009:
| | Cigarette and Tobacco Rates effective April 1, 2009 2019 |
Cigarettes | | $1.0066 per pack |
Large Cigars | | 52.75% of manufacturer’s price; cap of $0.4026 per cigar |
Little Cigars | | $1.0066 per pack |
PipePip Tobacco (including Shisha) | | $2.8311 per pound |
Chewing Tobacco | | $0.5033 per pound |
Snuff | | $1.51 per pound |
RYO/MYO and Cigar Wrappers | | $24.78 per pound |
Cigarette Papers | | $0.0315 per 50 papers |
Cigarette Tubes | | $0.063 per 50 tubes |
Any future enactment of increases in federal excise taxes on the Company’sTurning Point’s products could have a material adverse effect on the results of operations or financial condition of the Company. The Company is unable to predict the likelihood of passage of future increases in federal excise taxes. As of December 31, 2018,2019, federal excise taxes are not assessed on e-cigarettes and related products.
As of December 31, 2018, California, Delaware,2019, nearly half of the District of Columbia, Kansas, Louisiana, Minnesota, New Jersey, North Carolina, Pennsylvania,states and West Virginia have ancertain localities impose excise taxtaxes on e-cigarettes.electronic cigarettes and/or liquid vapor. In addition, there are several local taxing jurisdictions with an excise tax on e-cigarettes. Several states have also implemented additional measures on e-cigarettes, such as licensing requirements.
Food and Drug Administration (“FDA”): Administration:On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”) authorized the Food and Drug Administration (“FDA”)FDA to immediately regulate the manufacture, 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, 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.
PriorIn August 2016, the FDA’s regulatory authority under the Tobacco Control Act (the “TCA”) was extended to October 1, 2016, these FDA user fees applied only to thoseall tobacco products then regulatednot previously covered, including: (i) certain NewGen products (such as electronic cigarettes, vaporizers and e-liquids) and their components or parts (such as tanks, coils and batteries); (ii) cigars and their components or parts (such as cigar tobacco); (iii) pipe tobacco; (iv) hookah products; and (v) any other tobacco product “newly deemed” by the FDA. Effective October 1, 2016,These “deeming regulations” apply to all products made or derived from tobacco intended for human consumption, but excluding accessories of tobacco products (such as lighters). Accordingly, the FDA began additionally applying FDA user feeshas since regulated Turning Point’s pipe tobacco, cigar, and cigar wrap products as well as its vapor products containing tobacco-derived nicotine and products intended or reasonably expected to newly deemed tobacco products subjectbe used to FDA user fees as described above, i.e., cigars and pipe tobacco.consume such e-liquids.
On July 28,Under the deeming regulations, the FDA has responsibility for conducting premarket review of “new tobacco products”—defined as those products not commercially marketed in the United States as of February 15, 2007. There are three pathways for obtaining premarket authorization, including submission of a premarket tobacco product application (“PMTA”).
When the FDA initially issued the deeming regulations, it recognized that many products in the deemed categories that were already on the market qualified as “new tobacco products” and lacked a marketing order. In August 2017, the FDA announcedissued a compliance policy (the “August 2017 Guidance”) that allowed 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” productsremain on the market aswithout an FDA authorization until specified deadlines had passed. Under the August 2017 Guidance, compliance dates vary depending upon the type of August 8, 2016, have been postponed untilapplication submitted, but all newly-deemed products require an application no later than August 8, 2021, for “combustible” products (e.g., cigar and pipe), and August 8, 2022, for “non-combustible” products (e.g., vapor products) with the exception of “grandfathered” products (products in commerce as of February 15, 2007) which are already authorized.
On March 27, 2018, several public health organizations filed a lawsuit (the “Maryland Lawsuit”) challenging the August 2017 Guidance. The plaintiffs asserted, among other arguments, that the modification to the deeming regulations included in the August 2017 Guidance conflicts with the TCA and exceeds FDA’s statutory authority. The plaintiffs also expressed concern that the August 2017 Guidance allows vapor products to remain marketed for a significant period of time without required premarket review.
The court found in favor of the plaintiffs in May 2019 and vacated the August 2017 Guidance. On July 12, 2019, the court issued its remedy order (the “Remedy Order”). No other filing deadlines were altered. The FDA also acknowledged a “continuum of risk” amongSpecifically, the court ordered that: (1) for all deemed new tobacco products, (i.e., certainmarketers must file applications within 10 months of the Remedy Order to continue marketing such products; (2) such a product may remain on the market pending FDA review of a timely filed application for a period not to exceed one year from the date of the application’s submission; (3) in its discretion, the FDA may enforce the premarket review requirements against such products for which marketers do not file applications within 10 months; and (4) the FDA will have the ability to exempt deemed new tobacco products posefrom these application submission requirements for good cause, on a greater riskcase-by-case basis. On October 24, 2019, FDA filed a Notice of Appeal from the Remedy Order and other actions adverse to individualFDA. The court-ordered modification to the compliance policy remains subject to change as a result of potential appeals or litigation brought or pending in other venues.
Currently, the deadline to submit an application and public health than others), thatto continue marketing a deemed new product remains May 12, 2020. In January, the FDA indicated it intendsintended to seek public comment onmaintain this deadline irrespective of the role flavors playoutcome of the pending appeal in attracting youththe Maryland Lawsuit.
On September 11, 2019, President Donald Trump and the roleDepartment of Health and Human Services Secretary, Alex Azar, indicated FDA would adopt a regulatory policy restricting all flavors may play in helping some smokers switch to potentially less harmful forms of nicotine delivery, andvapor products. In January 2020, FDA issued a Guidance document (the “January 2020 Guidance”) that stated it would be increasingprioritizing enforcement of several categories of electronic nicotine delivery system (“ENDS”) products: (1) flavored, cartridge-based ENDS products (other than tobacco- or menthol-flavored ENDS products; (2) ENDS products for which the manufacturer has failed to take (or is failing to take) adequate measures to prevent minors’ access; (3) ENDS products targeted to minors or whose marketing is likely to promote the use of ENDS by minors; and (4) ENDS products offered for sale after May 12, 2020, for which the manufacturer has not submitted a premarket application. The policy outlined several factors the agency would consider in its focusenforcement of flavored cigars going forward but did not restrict those products as it had considered in the March 2019 Guidance proposal. The agency’s policy on these and other regulated products may change or expand over time in ways not yet known; however, such a policy could significantly impact Turning Point’s products and its plans for PMTA filings.
As a result of the Remedy Order and subsequent January 2020 Guidance, Turning Point would not be permitted to continue marketing its existing line of vapor products that the FDA regulates as tobacco products past May 12, 2020, unless Turning Point files an application for each such product by that date. Turning Point expects to be able to make appropriate PMTA applications by the deadlines and to supplement and complete the applications within FDA’s discretionary timeline. A successful PMTA must demonstrate that the subject product is “appropriate for the protection of public health,” taking into account the effect of the marketing of the product on all sub-populations. On September 25, 2019, FDA published a proposed rule outlining certain required elements of PMTA filings. This rule is not yet final, and its requirements may shift before being finalized. Turning Point believes it has products that meet the requisite standard and that Turning Point will be able to efficiently produce satisfactory PMTA filings. However, there is no assurance that the FDA’s guidance or ultimate regulation will not change, the Remedy Order will not be altered or that unforeseen circumstances will not arise that prevent Turning Point from filing applications or otherwise increase the amount of time and money Turning Point is required to spend to successfully file all necessary PMTAs. Even if Turning Point successfully files all of its PMTAs in a timely manner, no assurance can be given that the applications will ultimately be successful. Given the shorter time frame mandated by the Remedy Order, which if not amended or successfully appealed, may result in the prioritization of meeting requisite deadlines by selecting high priority SKUs in Turning Point’s inventory position, and future revenues may be adversely impacted.
In addition, Turning Point currently distributes many third-party manufactured vapor products for which Turning Point will be completely dependent on the regulationmanufacturer complying with the premarket filing requirements. There can be no assurances that some products that we currently distribute will be able to be sold to end consumers after May 2020. While Turning Point will take measures to pursue regulatory compliance for its own privately-branded or proprietary vape products that compete with these third-party products, there is no assurance that such proprietary products would be as successful in the marketplace or can fully displace third-party products that are currently being distributed by Turning Point, which could adversely affect the Company’s results of cigarette products. FDA has since initiated rule-making processes in a number of areas, including whetheroperations and how to regulate flavored tobacco products, such as cigars and e-cigarettes. Additionally, FDA has taken several enforcement actions against companies it alleges are utilizing inappropriate marketing or selling misbranded products.liquidity.
Consumer Product Safety Commission (“CPSC”): On July 26, 2016, the CPSC began requiring that e-liquid containers be packaged in child-resistant packaging, as outlined in the Poison Prevention Packaging Act. The Company isTurning Point may not able to predict whether additional packaging requirements will be necessary for ourits e-liquid products in the future.
Stock-Based Compensation
The Company measures stock-based compensation costs related to its stock options on the fair value based method under the provisions of ASC 718, Compensation – Stock Compensation. The fair value based method requires compensation cost for stock options to be recognized over the requisite service period based on the fair value of stock options granted. The Company determined the fair value of these awards using the Black-Scholes option pricing model.
Additionally, Turning Point grants performance-based restricted stock units (“PRSU”) subject to both performance-based and service-based vesting conditions. The fair value of each PRSU is Turning Point’s stock price on the date of grant. For purposes of recognizing compensation expense as services are rendered in accordance with ASC 718, Turning Point assumes all employees involved in the PRSU grant will provide service through the end of the performance period. Stock compensation expense is recorded based on the probability of achievement of the performance conditions specified in the PRSU grant.
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). income. Realized gains and losses from the sale of investments are calculated as of the trade date in the consolidated statements of operations(loss) income and comprehensive loss(loss) income 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 determinationdecide 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 (loss) 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
The Company’s equity investments are carried at fair value with changes in fair value recognized in income. Unrealized holding gains and losses on equity securities are recorded in the consolidated statements of (loss) income. The Company had net unrealized gains on equity securities of $0.1 million, which were included in net investment income on the Company’s consolidated statements of (loss) income for the year ended December 31, 2019. For the year ended December 31, 2018, the Company had net unrealized holding losses on equity securities of $0.1 million, which were included in net investment income on the Company’s consolidated statements of income for the year ended December 31, 2018.(loss) income.
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.The activity of the deferred policy acquisition costs (“DAC”) accounts was as follows:
DAC asset at January 2, 2018 | | $ | - | | |
(In thousands) | | | For the year ended December 31, 2019 | | | For the period ended December 31, 2018 | |
DAC asset at beginning of period | | | $ | 2,279 | | | $ | - | |
Deferred expenses | | | 5,097 | | | 3,068 | | | 5,097 | |
Amortized expenses | | | (2,818 | ) | | | (4,354 | ) | | | (2,818 | ) |
DAC asset at December 31, 2018 | | $ | 2,279 | | |
DAC asset at end of period | | | $ | 993 | | | $ | 2,279 | |
The Company, utilizing assumptions for future expected claims, premium rate increases and interest rates, reviews the recoverability of its DAC on a periodic basis. If the Company determines that the future gross profits of its in-force policies are not sufficient to recover its DAC, the Company recognizes a premium deficiency by charging any unamortized DACacquisition costs to expense to the extent required in order to eliminate the deficiency. If the premium deficiency exceeds the unamortized DAC,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.
PremiumPremiums 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$30,000 as of December 31, 2019 and 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 December 31, 2018,2019, 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 December 31, 20182019 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. During the year ended December 31, 2019, the Company recorded $0.3 million in premium based assessments from New York State, which are recorded in other operating expenses in the consolidated statements of (loss) income. There were no significant assessments incurred during the year ended December 31, 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 December 31, 2018,2019, 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 records the effects of income taxes under the liability method in which deferred income tax assets and liabilities are recognized based on the difference between the financial and tax basis of assets and liabilities using the enacted tax rates in effect for the years in which the differences are expected to reverse. The Company assesses its ability to realize future benefits of deferred tax assets by determining if they meet the “more likely than not” criteria in ASC 740, Income Taxes. If the Company determines that future benefits do not meet the “more likely than not” criteria, a valuation allowance is recorded.
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.
Concentrations of Credit Risk
At December 31, 20182019 and 2017,2018, the Company had bank deposits, including MSA escrow accounts, in excess of federally insured limits of approximately $134.3 million and $15.4 million, respectively. During 2019 and $20.4 million, respectively. During 2016,2018, Turning Point began to investinvested a portion of itsthe MSA escrow accounts intoin U.S. Government securities including TIPS, Treasury Notes, and Treasury Bonds.
The Company sells its products to distributors, retail establishments, and customersconsumers throughout the United States and also sells Zig-Zag® premium cigarette papers in Canada.Canada and some smaller quantities in other countries. The Company had no customers that accounted for more than 10% of gross, annualnet sales for 2018, 2017,2019 or 2016.2018. The Company performs periodic credit evaluations of its customers and generally does not require collateral on trade receivables. Historically, the Company has not experienced significant credit losses.
Accounts Receivable
Accounts receivable are recognized at their net realizable value. All accounts receivable are trade related, recorded at the invoiced amount, and do not bear interest. The Company maintains allowances for doubtful accounts receivable for estimated uncollectible invoices resulting from a customer’s inability to pay (bankruptcy, out of business, etc., i.e. “bad debt” which results in write-offs). The activity of allowance for doubtful accounts during 2018 and 2017 iswas as follows:
| | 2018 | | | 2017 | | | For the Year Ended December 31, | |
(In thousands) | | | 2019 | | | 2018 | |
Balance at beginning of period | | $ | 17 | | | $ | 35 | | | $ | 42 | | | $ | 17 | |
Additions to allowance account during period | | | 25 | | | | 46 | | | 238 | | | 25 | |
Deductions of allowance account during period | | | - | | | | (64 | ) | | | - | | | | - | |
Balance at end of period | | $ | 42 | | | $ | 17 | | | $ | 280 | | | $ | 42 | |
Recent Accounting Pronouncements Adopted
Effective January 1, 2019, the Company adopted ASU No. 2016-02, “Leases.” This ASU requires substantially all leases be recorded on the balance sheet as right of use assets and lease obligations. The Company adopted the ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP, in the first quarter of 2018 using thea modified retrospective method. This ASU requires the recognition of revenue to depict the transfer of goods to customersadoption method at an amount that the Company expects to be entitled to in exchange for those goods in accordance with the following five-step analysis: (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. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The adoption of this ASU had no effect on the timing or amount of revenue recognition, or on net income.
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 amendments2019, as outlined 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 accumulated deficit of less than $0.1 million during the first quarter of 2018.
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, in the first quarter of 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 ofNo. 2018-11, “Leases - Targeted Improvements.” Under this ASU resulted in a reclassification of $0.2 million and $0.3 million from cost of sales and selling, general, and administrative expenses to net periodic benefit (income) expense, excluding service cost, for the years ended December 31, 2017 and 2016, respectively.
The Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, in the first quarter of 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 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 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, soadoption, there wasis no impact to the comparative consolidated statement of (loss) income and consolidated balance sheet. The Company determined that there was no cumulative-effect adjustment to beginning retained earnings on the consolidated balance sheet. The Company will continue to report periods prior to January 1, 2019 in its financial statements upon adoption.under prior guidance as outlined in ASC Topic 840, “Leases”. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed carry forward of historical lease classifications. Adoption of this standard did not materially impact the Company’s income before income taxes or the statement of cash flows. See Note 17, “Lease Commitments” for further details.
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. The Company will apply the revised lease rules for its interim and annual reporting periods beginning January 1, 2019, using a modified retrospective approach, including adopting several optional practical expedients. Generally, the Company is the lessee under various agreements for real estate and vehicles that are currently accounted for as operating leases. As a result, existing and newly qualifying operating leases under these new rules will increase reported assets and liabilities. The expected amount of right of use assets and lease liabilities to be recorded upon adoption is less than 5% of total assets.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-CreditInstruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrumentsthat changes the impairment model for most. ASU 2016-13 is intended to improve financial assetsreporting by requiring timelier recording of credit losses on loans and certain other financial 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 instrumentsheld by financial institutions and other organizations. This ASU applies to financial assets measured at amortized cost, and require entities to record allowances for available-for-saleincluding loans, held-to-maturity debt securities, rather than reducenet investments in leases, and trade accounts receivable as well as certain off-balance sheet credit exposures, such as loan commitments. The ASU replaces the carrying amount, as they do today under the other-than-temporarycurrent incurred loss impairment model. It also simplifies the accounting model for purchased credit-impaired debt securitiesmethodology with a methodology to reflect current expected credit losses and loans. Entities will apply the standard’s provisions asrequires consideration of a cumulative effectbroader range of reasonable and supportable information to explain credit loss estimates. The guidance must be adopted using a modified retrospective transition method through a cumulative-effect adjustment to retained earnings asearnings/(deficit) in the period of the beginning of the first reporting period in which the guidance is effective.adoption. The guidanceASU is effective for the Company for interim and annual periods beginning after December 15, 2019. The Company is currently evaluatingin the effect the adoptionfirst quarter of this standard will have on its consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, 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.2020. The Company does not expect the adoption of ASU 2018-07 willto have a materialsignificant impact on its consolidatedto the Company’s financial statements.statements and related disclosures.
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 new standard will become effective for the Company beginning with the first quarter 2020 and will not have a material impact on the Company’s consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12 to simplify the accounting in ASC 740, Income Taxes. This guidance removes certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. This guidance also clarifies and simplifies other areas of ASC 740. This ASU will be effective beginning in the first quarter of the Company’s fiscal year 2021. Early adoption is permitted. Certain amendments in this update must be applied on a prospective basis, certain amendments must be applied on a retrospective basis, and certain amendments must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings/(deficit) in the period of adoption. The Company is currently evaluating the effect thatimpact this ASU 2018-13 will have on its consolidatedthe financial statement disclosures.statements and related disclosures, as well as the timing of adoption.
Note 3. Acquisitions and Investments
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 offersoffered personal automobile insurance, primarily in the state of New York.
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. During the fourth quarter of 2018, the Company finalized its purchase price allocation. The following table summarizes the fair values of the assets acquired and liabilities assumed atas of the date of acquisition:
| | At January 2,2018 as reported | | | Adjustments | | | At January 2,2018 as adjusted | | |
| | (preliminary) | | | | | | (final) | | |
(In thousands) | | | At January 2, 2018
(final) | |
Fixed maturities available for sale | | $ | 25,386 | | | $ | - | | | $ | 25,386 | | | $ | 25,386 | |
Cash and cash equivalents | | | 12,795 | | | | - | | | | 12,795 | | | 12,795 | |
Investment income due and accrued | | | 203 | | | | - | | | | 203 | | | 203 | |
Premiums receivable | | | 7,158 | | | | - | | | | 7,158 | | | 7,158 | |
Property, plant and equipment | | | 408 | | | | - | | | | 408 | | | 408 | |
Intangible assets | | | 2,100 | | | | - | | | | 2,100 | | | 2,100 | |
Other assets | | | 615 | | | | - | | | | 615 | | | 615 | |
Reserves for losses and loss adjustment expenses | | | (29,366 | ) | | | (1,306 | ) | | | (30,672 | ) | | (30,672 | ) |
Unearned premiums | | | (12,784 | ) | | | - | | | | (12,784 | ) | | (12,784 | ) |
Advance premium collected | | | (651 | ) | | | - | | | | (651 | ) | | (651 | ) |
Deferred tax liability | | | (420 | ) | | | - | | | | (420 | ) | | (420 | ) |
Other liabilities | | | (3,230 | ) | | | 835 | | | | (2,395 | ) | | | (2,395 | ) |
Total net assets acquired | | | 2,214 | | | | (471 | ) | | | 1,743 | | | 1,743 | |
Consideration exchanged | | | 2,500 | | | | - | | | | 2,500 | | | | 2,500 | |
Goodwill | | $ | 286 | | | $ | 471 | | | $ | 757 | | | $ | 757 | |
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 with a payment that was made on January 1, 2020 and ending January 1, 2022, with a $3.5 million final principal payment on January 1, 2023. The promissory note has a 5% fixed 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 an 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 millionPrincipal payments began 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 an 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, atMay 7, 2019, the consummationCompany, through Standard Outdoor, completed an asset acquisition consisting of six billboard structures located in Georgia, as well as the Contributionground leases and Exchange,advertising contracts relating to such billboard structures, for total consideration of $0.6 million, paid in cash. In conjunction with the SG Parties contributed to SDI 9,842,373 sharesasset acquisition, the Company established an asset retirement obligation 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 December 31, 2018, SDI had an ownership interest of 50.3 % 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.$0.1 million.
Acquisitions by Turning Point
Solace Technologies
In July 2019, Turning Point purchased the assets of E-Vape 12, Inc and Solace Technologies LLC (“Solace”) for $9.4 million in total consideration, comprised of $7.7 million in cash, $1.1 million earn-out fair value, and $0.5 million holdback for 18 months, which was adjusted by $0.2 million for a working capital deficiency. The earn-out consists of 44,295 shares of Turning Point’s common stock to be issued to the former owners upon the achievement of certain annual milestones. Immediately following the acquisition, 88,582 performance based restricted stock units with a fair value of $4.62 million were issued to former owners who became employees. Solace is an innovative product development company that has grown from the creator of one of the leading vape juice brands in the industry into a leader of alternative ingredients product development. Turning Point intends to incorporate Solace’s innovative products as well as the legacy vapor products into its Nu-X development engine. As of December 31, 2019, Turning Point had not completed the accounting for the acquisition. The following purchase price and goodwill and other intangibles are based on the excess of the acquisition price over the estimated fair value of the tangible assets acquired and are based on management’s preliminary estimates:
(In thousands) | | As of December 31, 2019 (preliminary) | |
Total consideration transferred | | $ | 9,405 | |
| | | | |
Adjustments to consideration transferred: | | | | |
Cash acquired | | | (45 | ) |
Working capital | | | (235 | ) |
Adjusted consideration transferred | | | 9,125 | |
| | | | |
Assets acquired: | | | | |
Working capital (primarily AR and inventory) | | | 1,132 | |
Fixed assets and other long term assets | | | 414 | |
Intangible assets | | | 1,352 | |
Other liabilities | | | (209 | ) |
Net assets acquired | | | 2,689 | |
| | | | |
Goodwill | | $ | 6,436 | |
The goodwill of $6.4 million consists of the synergies and scale expected from combining the operations and is currently deductible for tax purposes.
IVG
In September 2018, Turning Point acquired 100% of the equity interest of IVG for total consideration of $23.8 million satisfied through $14.5 million paid in cash, 153,079 shares of Turning Point’s common stock with a fair value of $5.3 million, and a $4.0 million note payable to IVG’s shareholders (“IVG Note”) which matures 18 months from the acquisition date.date, on March 5, 2020. 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. Turning Point has tracked liabilities subject to indemnification obligations and believes that such obligations exceed $4 million. The arrangement includesPurchase Agreement provides a mechanism under which the parties either agree on the indemnity amount or litigate disputed amounts. The Purchase Agreement provides that the amount of the indemnity is to initially be determined as of March 5, 2020. Some of the liabilities are identified but not yet fixed, such as product liability expenses. The Purchase Agreement and related agreements include 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. Such amounts will be considered compensation and are not a component of the IVG purchase price. 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 $0.9 million and $1.5 million, respectively, within selling, general, and administrative expenses in the consolidated statementstatements of (loss) income for the yearyears ended December 31, 2019 and 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 Turning Point’s NewGen portfolio. As of December 31, 2018, Turning Point had not completed the accounting for the acquisition.acquisition during the third quarter 2019. The estimatedfollowing purchase price and goodwill recorded isare based on the excess consideration transferredof the acquisition price over the estimated fair value of the tangible and intangible assets acquired and liabilities assumed and is based on management’s preliminary estimates.acquired:
| | As of December 31, 2018 (preliminary) | | | As of September 6, 2019 (final) | |
Total consideration transferred | | $ | 24,292 | | | $ | 24,292 | |
Adjustments to consideration: | | | | | | | |
Cash aquired, net of debt assumed | | | (221 | ) | |
Cash acquired, net of debt assumed | | | (221 | ) |
Working capital | | | (245 | ) | | | (245 | ) |
Adjusted consideration transferred | | | 23,826 | | | 23,826 | |
| | | | | | | |
Assets acquired: | | | | | | | |
Working capital (primarily inventory) | | | 3,331 | | | 3,218 | |
Fixed assets | | | 1,296 | | | 1,274 | |
Intangible assets | | | 7,880 | | | | 7,880 | |
Net assets acquired | | | 12,507 | | | 12,372 | |
| | | | | | | | |
Goodwill | | $ | 11,319 | | | $ | 11,454 | |
The goodwill of $11.3$11.5 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 December 31, 2018, Turning Point had not completed theThe accounting for the acquisition of these assets.assets was finalized during the second quarter 2019. The following purchase price and goodwill are based on the excess of the acquisition price over the estimated fair values for working capital (primarily inventory), fixedvalue of the tangible and intangible assets acquired:
(In thousands) | | As of April 30, 2018 (final) | |
Total consideration transferred | | $ | 4,800 | |
| | | | |
Assets acquired: | | | | |
Working capital (primarily inventory) | | | 2,500 | |
Fixed assets | | | 272 | |
Intangible assets | | | 256 | |
Net assets acquired | | | 3,028 | |
| | | | |
Goodwill | | $ | 1,772 | |
Upon finalization of the acquisition accounting during the second quarter 2019, $1.8 million was transferred between intangible assets and trade name are based upon management’s preliminary estimates:
| | Fair Value | |
Working capital | | $ | 2,500 | |
Fixed assets | | | 272 | |
Trade name | | | 2,028 | |
Total consideration transferred | | $ | 4,800 | |
Vapor Shark
In March 2017, Turning Point entered into a strategic partnership with Vapor Shark in which Turning Point committed to make a deposit up to $2.5goodwill. The goodwill of $1.8 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.
As a result of the management agreement, Vapor Shark became a VIE. Turning Point determined that it was the primary beneficiary and consolidated Vapor Shark as of April 1, 2017. Since Vapor Shark is a business, the Company accounted for the consolidation of the VIE as if it were an acquisition and recorded the assets and liabilities at fair value. 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. There was no goodwill assigned as a result of the transaction. Turning Point acquired $3.9 million in assets and assumed $3.9 million in liabilities, which included a liability of $0.6 million relatingrelated to the option provided to Vapor Shark’s former sole shareholder to purchase the Vapor Shark brandedexpected increased retail stores it owns.
In December 2017, Turning Point offered to pay Vapor Shark’s former sole shareholder $1.5 millionpresence in exchange for his option to purchase the company-owned stores. The agreement was finalized in January 2018, and Turning Point paid $1.0 million in February 2018 with the remaining $0.5 million to be paid in 24 monthly installments. As a result of the transaction a $0.9 million charge was recorded, and is included, in selling, general, and administrative expenses in 2017.
Pro Forma Information – Maidstone, IVG and Vapor Supply
The following table presents unaudited pro forma information as if the acquisitions of IVG, Vapor Supply and Maidstone, had occurred on January 1, 2017. The table below has been prepared for comparative purposes only and isgeographic regions 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 acquisition. Amortization of intangibles, 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 consolidated financial statements since their acquisition dates and include net sales of $23.9 million, loss before income taxes of $0.9 million and net loss of $0.7 million for the year ended December 31, 2018. The operating results of Maidstone have also been included in these consolidated financial statements since its acquisition date on January 2, 2018 and include net revenues of $30.7 million and net loss of $3.2 million for the year ended December 31, 2018.
The following shows pro forma amounts for the years ended December 31, 2018 and 2017. These amounts do not include adjustments for amounts attributable to noncontrolling interests.
| | Unaudited Pro Forma Consolidated For the year ended December 31, | |
| | 2018 | | | 2017 | |
Net sales | | $ | 409,072 | | | $ | 396,909 | |
Income before income taxes | | | 23,200 | | | | 21,221 | |
Net income | | | 16,497 | | | | 14,451 | |
Investments
In November 2018, Turning Point paid $2.0 million to acquire a minority ownership position (19.99%) in Canadian American Standard Hemp (“CASH”). CASH is headquartered in Warwick, Rhode Island, and manufactures cannabidiol isolate (“CBD”) developed through highly efficient and proprietary processes. The investment in CASH positions Turning Point to participate in the market for hemp-derived products.
In December 2018, Turning Point acquired a minority ownership position in General Wireless Operations, Inc. (d/b/a RadioShack; “RadioShack”) from an affiliate of Standard General LP for $0.4 million. Standard General LP has a controlling interest in Turning Point andpreviously served by the Company and qualifies as a related party. Turning Point will work together with RadioShack on product development and sourcing teams in China. Furthermore, Turning Point purchased $1.1 million of finished goods inventory from RadioShack during 2018, none of which was outstanding at December 31, 2018.
Both investments are presented as assets within the other assets line of the December 31, 2018, Consolidated Balance Sheet.is currently deductible for tax purposes.
Note 4. Derivative Instruments
Foreign Exchange ContractsCurrency
The Company’s policy is to manage the risks associated with foreign exchange rate movements. The policy allows hedging up to 100% of its anticipated purchases of inventory over a forward period that will not exceed 12 rolling and consecutive months. The Company may, from time to time, hedge currency for non-inventory purchases, e.g., production equipment, not to exceed 90% of the purchase price. The Company did not execute any forward contracts during 2019. During 2018 the Company executed various forward contracts, none of which met hedge accounting requirements, for the purchase of €14.5 million with maturity dates ranging from March 2018 to January 2019. During 2017, the Company executed no forward contracts. At December 31, 20182019 and 2017,2018, the Company had forward contracts for the purchase of €1.5€0.0 million and €0€1.5 million, respectively.
Interest Rate Swaps
The Company’s policy is to manage interest rate risk by reducing the volatility of future cash flows associated with debt instruments bearing interest at variable rates. In March 2018, the Company executed various interest rate swap agreements for a notional amount of $70 million with an expiration of December 2022. The swap agreements fix LIBOR at 2.755%. The swap agreements met the hedge accounting requirements; thus, any change in fair value is recorded to other comprehensive income. The Company uses the Shortcut Method to account for the swap agreements. The Shortcut Method assumes the hedge to be perfectly effective; thus, there is no ineffectiveness to be recorded in earnings.
Note 5. Investments
The Company currently classifies all of its investments in fixed maturity 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 December 31, 2018 are as follows:follows as of:
| | December 31, 2018 | | |
| | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Fair Value | | |
U.S. Treasury and U.S Government | | $ | 4,338 | | | $ | - | | | $ | (34 | ) | | $ | 4,304 | | |
(In thousands) | | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | Fair Value | |
December 31, 2019 | | | | | | | | | | |
U.S. Treasury and U.S. Government | | | $ | 11,253 | | | $ | 30 | | | $ | - | | | $ | 11,283 | |
U.S. Tax-exempt municipal | | | 4,645 | | | | 4 | | | | (25 | ) | | | 4,624 | | | | 2,508 | | | | 76 | | | | - | | | | 2,584 | |
Corporate | | | 14,858 | | | | 16 | | | | (193 | ) | | | 14,681 | | | | 3,907 | | | | 82 | | | | - | | | | 3,989 | |
Mortgage and asset-backed securities | | | 8,633 | | | | 10 | | | | (120 | ) | | | 8,523 | | | | 3,760 | | | | 64 | | | | - | | | | 3,824 | |
Total Fixed Maturity Securities | | $ | 32,474 | | | $ | 30 | | | $ | (372 | ) | | $ | 32,132 | | | $ | 21,428 | | | $ | 252 | | | $ | - | | | $ | 21,680 | |
| | | | | | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | |
U.S. Treasury and U.S. Government | | | $ | 4,338 | | | $ | - | | | $ | (34 | ) | | $ | 4,304 | |
U.S. Tax-exempt municipal | | | | 4,645 | | | | 4 | | | | (25 | ) | | | 4,624 | |
Corporate | | | | 14,858 | | | | 16 | | | | (193 | ) | | | 14,681 | |
Mortgage and asset-backed securities | | | | 8,633 | | | | 10 | | | | (120 | ) | | | 8,523 | |
Total Fixed Maturity Securities | | | $ | 32,474 | | | $ | 30 | | | $ | (372 | ) | | $ | 32,132 | |
Amortized cost and fair value of fixed maturity securities at December 31, 2019 and 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.
| | December 31, 2018 | | | December 31, 2019 | | | December 31, 2018 | |
| | Amortized Cost | | | Fair Value | | |
(In thousands) | | | Amortized Cost | | | Fair Value | | | Amortized Cost | | | Fair Value | |
Due in one year or less | | $ | 748 | | | $ | 745 | | | $ | 3,695 | | | $ | 3,698 | | | $ | 748 | | | $ | 745 | |
Due after one year through five years | | | 13,719 | | | | 13,600 | | | 12,600 | | | 12,720 | | | 13,719 | | | 13,600 | |
Due after five years through ten years | | | 9,027 | | | | 8,917 | | | 1,488 | | | 1,553 | | | 9,027 | | | 8,917 | |
Due after ten years | | | 347 | | | | 347 | | | - | | | - | | | 347 | | | 347 | |
Mortgage and asset-backed securities | | | 8,633 | | | | 8,523 | | | | 3,645 | | | | 3,709 | | | | 8,633 | | | | 8,523 | |
Total | | $ | 32,474 | | | $ | 32,132 | | | $ | 21,428 | | | $ | 21,680 | | | $ | 32,474 | | | $ | 32,132 | |
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 December 31, 2018, fixed90
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:follows as of:
| | December 31, 2018 | | | Less Than 12 Months | | | 12 Months or More | | | Total | |
(In thousands) | | | Fair Value | | | Gross Unrealized Losses | | | Fair Value | | | Gross Unrealized Losses | | | Fair Value | | | Gross Unrealized Losses | |
December 31, 2019 | | | | | | | | | | | | | | | | | | | |
Bonds: | | | | | | | | | | | | | | | | | | | |
U.S. Treasury and U.S. Government | | | $ | 3,698 | | | $ | (386 | ) | | $ | - | | | $ | - | | | $ | 3,698 | | | $ | (386 | ) |
Mortgage and asset-backed securities | | | | - | | | | - | | | | 59 | | | | (32 | ) | | | 59 | | | | (32 | ) |
Total fixed maturities available for sale | | | $ | 3,698 | | | $ | (386 | ) | | $ | 59 | | | $ | (32 | ) | | $ | 3,757 | | | $ | (418 | ) |
| | Less Than 12 Months | | | | | | | | | | | | | | | | | | | |
| | Fair Value | | | Gross Unrealized Losses | | |
December 31, 2018 | | | | | | | | | | | | | | | | | | | |
Bonds: | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury and U.S. Government | | $ | 4,304 | | | $ | (34 | ) | | $ | 4,304 | | | $ | (34 | ) | | $ | - | | | $ | - | | | $ | 4,304 | | | $ | (34 | ) |
U.S. Tax-exempt municipal | | | 4,285 | | | | (25 | ) | | 4,285 | | | (25 | ) | | - | | | - | | | 4,285 | | | (25 | ) |
Corporate bonds | | | 10,306 | | | | (193 | ) | | 10,306 | | | (193 | ) | | - | | | - | | | 10,306 | | | (193 | ) |
Mortgage and asset-backed securities | | | 6,717 | | | | (120 | ) | | | 6,717 | | | | (120 | ) | | | - | | | | - | | | | 6,717 | | | | (120 | ) |
Total Fixed maturities available for sale | | $ | 25,612 | | | $ | (372 | ) | |
Total fixed maturities available for sale | | | $ | 25,612 | | | $ | (372 | ) | | $ | - | | | $ | - | | | $ | 25,612 | | | $ | (372 | ) |
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 induring the year ended December 31, 2019 or for the period from January 2, 2018 to ended December 31,, 2018.
The Company’s equity investments are carried at fair value with changes in fair value recognized in income. For the period from January 2, 2018 to December 31, 2018, the Company recognized total holding losses of $0.1 million.
The components of net investment income for the period from January 2, 2018 to year ended December 31,, 2019 and for the period ended December 31, 2018 are as follows:
| | January 2, 2018 to December 31, 2018 | | |
| (In thousands) | | | For the Year Ended December 31, 2019 | | | For the period from January 2, 2018 to December 31, 2018 | |
Investment income: | | | | | | | | | |
Bonds | | $ | 699 | | | $ | 777 | | | $ | 699 | |
Common stocks | | | 16 | | | 51 | | | 16 | |
Preferred stocks | | | 18 |
| | 45 | | | 18 | |
Cash and cash equivalents | | | 138 | | | 100 | | | 138 | |
Other asset investments
| | | 72 | | | | 27 | | | | 72 | |
Total investment income | | | 943 | | | 1,000 | | | 943 | |
Less: Investment expenses | | | (92 | ) | | | (65 | ) | | | (92 | ) |
Net investment income | | $ | 851 | | | $ | 935 | | | $ | 851 | |
For the year ended December 31, 2019, Maidstone realized $0.4 million of capital gains and less than $20,000 of capital losses. For the period from January 2, 2018 to December 31, 2018, Maidstone recognized a de minimis amount of realized losses upon settlement or maturity of its fixed maturity debt securities.less than $10,000 in capital gains and capital losses.
The following tables show how Maidstone’s investments are categorized in the fair value hierarchy as of December 31, 2018:of:
| | December 31, 2018 | |
| | Level 1 | | | Level 2 | | | Level 3 | | | Total Fair Value | |
| | | | | | | | | | | | |
Common Stock | | $ | 227 | | | $ | - | | | $ | - | | | $ | 227 | |
Preferred Stocks | | | - | | | | 466 | | | | - | | | | 466 | |
Total Equities: | | $ | 227 | | | $ | 466 | | | $ | - | | | $ | 693 | |
Fixed Maturities: | | | | | | | | | | | | | | | | |
U.S. Treasury and U.S. Government | | $ | 4,304 | | | $ | - | | | $ | - | | | $ | 4,304 | |
U.S. Tax-exempt municipal | | | - | | | | 4,624 | | | | - | | | | 4,624 | |
Corporate | | | - | | | | 14,681 | | | | - | | | | 14,681 | |
Mortgage and asset-backed securities | | | - | | | | 8,523 | | | | - | | | | 8,523 | |
Total Fixed Maturities | | $ | 4,304 | | | $ | 27,828 | | | $ | - | | | $ | 32,132 | |
(In thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total Fair Value | |
December 31, 2019 | | | | | | | | | | | | |
Common stock | | $ | 255 | | | $ | - | | | $ | - | | | $ | 255 | |
Preferred stocks | | | - | | | | 820 | | | | - | | | | 820 | |
Total equities: | | $ | 255 | | | $ | 820 | | | $ | - | | | $ | 1,075 | |
Fixed maturities: | | | | | | | | | | | | | | | | |
U.S. treasury and U.S. government | | $ | 11,283 | | | $ | - | | | $ | - | | | $ | 11,283 | |
U.S. tax-exempt municipal | | | - | | | | 2,584 | | | | - | | | | 2,584 | |
Corporate | | | - | | | | 3,989 | | | | - | | | | 3,989 | |
Mortgage and asset-backed securities | | | - | | | | 3,824 | | | | - | | | | 3,824 | |
Total fixed maturities | | $ | 11,283 | | | $ | 10,397 | | | $ | - | | | $ | 21,680 | |
| | | | | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | | | | | | |
Common stock | | $ | 227 | | | $ | - | | | $ | - | | | $ | 227 | |
Preferred stocks | | | - | | | | 466 | | | | - | | | | 466 | |
Total equities: | | $ | 227 | | | $ | 466 | | | $ | - | | | $ | 693 | |
Fixed maturities: | | | | | | | | | | | | | | | | |
U.S. treasury and U.S. government | | $ | 4,304 | | | $ | - | | | $ | - | | | $ | 4,304 | |
U.S. tax-exempt municipal | | | - | | | | 4,624 | | | | - | | | | 4,624 | |
Corporate | | | - | | | | 14,681 | | | | - | | | | 14,681 | |
Mortgage and asset-backed securities | | | - | | | | 8,523 | | | | - | | | | 8,523 | |
Total fixed maturities | | $ | 4,304 | | | $ | 27,828 | | | $ | - | | | $ | 32,132 | |
There were no transfers between levels during the period from January 2, 2018 to year ended December 31,, 2019 or for the period ended December 31, 2018.
Summary of significant valuation techniques for assets and liabilities measured at fair value on a recurring basis.basis
Level 1 measurementsinputs-
Fixedfixed income securities and Equityequity securities: Valuationsvaluations based on unadjusted quoted prices in active markets for identical assets that the Company’s pricing sources have the ability to access. Since the valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these securities does not entail a significant amount or degree of judgment.
Level 2 measurementsinputs-
Fixedfixed income securities and Equityequity securities: Valuationsvaluations based upon quoted prices for similar assets in active markets, quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities) or can be corroborated by observable market data.
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 asAs of December 31, 2018:2019 and 2018, the carrying value of deposits the Company had on deposit with U.S. regulatory authorities was $2.8 million.
Assets used for collateral or guarantees: | | | |
Deposits with U.S. Regulatory Authorities | | $ | 2,733 | |
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.
Cash and Cash Equivalents
The Company has used Level 1 inputs to determine the fair value of its cash and cash equivalents. As of December 31, 2018,2019 and December 31, 2017,2018, 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.
Revolving Credit Facility
The fair value of Turning Point’s revolving credit facility approximates its carrying value as the interest rate fluctuates with changes in market rates.
Long-Term DebtNote Payable – IVG
With the exception of the IVG Note, theThe fair value of Turning Point’s long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to Turning Point for debt of the same remaining maturities. At December 31, 2018, the $4.0 million carrying value of the IVG Note approximates its faircarrying value of $4.2 million due to the proximityrecency of the note’s issuance, relative to the year ended December 31, 2018.2019.
Long-Term Debt
Turning Point’s 2018 Credit Facility bears interest at variable rates that fluctuate with market rates. The carrying values of the long-term debt instruments approximate their respective fair values. As of December 31, 2019, the fair value of the 2018 First Lien Term Loan approximated $146.0 million. As of December 31, 2018, the fair values of the 2018 First Lien Term Loan and the 2018 Second Lien Term Loan approximated $154.0 million and $40.0 million, respectively. As
In July 2019 Turning Point closed an offering of $172.5 million in aggregate principal amount of its 2.50% Convertible Senior Notes due July 15, 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes fair value approximated $140.1 million, with a carrying value of $172.5 million 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. See ‘Note 15: Notes Payable and Long-Term Debt’ for details regarding the credit facilities.2019.
The fair valuesvalue of Standard Outdoor’s promissory notes issued as partial consideration in the January and February 2018 asset acquisitions approximated $9.1 million.
$8.0 million as of December 31, 2019.The fair value of SDI’s term loan debt issued in January 2018 and the additional amount issued in August 2018September 2019 approximates its carrying value as the interest rate fluctuates with changes in market rates. See Note 16, “Notes Payable and Long-Term Debt” for further information regarding the Company’s long-term debt.
Foreign Exchange
AtAs of December 31, 20182019 and 2017,2018, Turning Point had forward contracts for the purchase of €1.5€0.0 million and €0€1.5 million, respectively. The fair value of the foreign exchange contracts was based upon the quoted market price that resulted in no gain or loss for the year ended December 31, 2019 and a loss of approximately $0.1 million for the year ended December 31, 2018. As there were no open contracts as of December 31, 2019, there is no resulting balance sheet position related to the fair value. The fair value of the foreign exchange contracts resulted in a liability of approximately $0.1 million as of December 31, 2018.
Turning Point had swap contracts for a total notional amount of $70 million at December 31, 2019 and 2018. Turning Point had no swap agreements outstanding at December 31, 2017. The fair values of the swap contracts are based upon quoted market prices for similar instruments, thus leading to a level 2 distinction within the fair value hierarchy, and resulted in a liability of $2.5 million and $0.9 million, respectively, as of December 31, 2019 and 2018.
Note 7. Inventories
The components of inventories at December 31 are as follows:follows as of:
| | December 31, 2018 | | | December 31, 2017 | | | December 31, | |
| (In thousands) | | | 2019 | | | 2018 | |
Raw materials and work in process | | $ | 2,722 | | | $ | 2,545 | | | $ | 7,050 | | | $ | 2,722 | |
Leaf tobacco | | | 34,977 | | | | 30,308 | | | 32,763 | | | 34,977 | |
Finished goods - Smokeless products | | | 6,321 | | | | 5,834 | | | 5,680 | | | 6,321 | |
Finished goods - Smoking products | | | 14,666 | | | | 14,110 | | | 13,138 | | | 14,666 | |
Finished goods - NewGen products | | | 37,194 | | | | 14,532 | | | 17,111 | | | 37,194 | |
Other | | | 738 | | | | 1,290 | | | | 989 | | | | 738 | |
| | | 96,618 | | | | 68,619 | | |
Gross inventory | | | 76,731 | | | 96,618 | |
LIFO reserve | | | (5,381 | ) | | | (5,323 | ) | | | (5,752 | ) | | | (5,381 | ) |
| | $ | 91,237 | | | $ | 63,296 | | |
Net inventory | | | $ | 70,979 | | | $ | 91,237 | |
The following represents the inventory valuation allowance roll-forward, for the years ended December 31:
| | 2018 | | | 2017 | | |
(In thousands) | | | 2019 | | | 2018 | |
Balance at beginning of period | | $ | (459 | ) | | $ | (600 | ) | | $ | (2,504 | ) | | $ | (459 | ) |
Charged to cost and expense | | | (2,132 | ) | | | (197 | ) | | (20,001 | ) | | (2,132 | ) |
Deductions for inventory disposed | | | 263 | | | | 533 | | | 1,003 | | | 263 | |
Other | | | (176 | ) | | | (195 | ) | | | - | | | | (176 | ) |
Balance at end of period | | $ | (2,504 | ) | | $ | (459 | ) | | $ | (21,502 | ) | | $ | (2,504 | ) |
Inventory reserves increased as a result of additional reserves necessary for products in Turning Point’s NewGen segment primarily from increased regulation.
Note 8. Other Current Assets
Other current assets consist of the following as of:
| | December 31, | |
(In thousands) | | 2019 | | | 2018 | |
Inventory deposits | | $ | 4,012 | | | $ | 9,739 | |
Prepaid taxes | | | 3,673 | | | | - | |
Other | | | 8,706 | | | | 5,306 | |
Total
| | $ | 16,391 | | | $ | 15,045 | |
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Note 8. Property, Plant and Equipment
Property, plant and equipment at December 31 consists of:
| | 2018 | | | 2017 | |
Land | | $ | 22 | | | $ | 22 | |
Building and improvements | | | 2,320 | | | | 2,072 | |
Leasehold improvements | | | 2,101 | | | | 1,873 | |
Machinery and equipment | | | 13,307 | | | | 12,635 | |
Advertising structures | | | 17,913 | | | | 329 | |
Furniture and fixtures | | | 5,453 | | | | 3,821 | |
| | | 41,116 | | | | 20,752 | |
Accumulated depreciation | | | (13,375 | ) | | | (11,580 | ) |
| | $ | 27,741 | | | $ | 9,172 | |
Note 9. Other Current Assets
Property, Plant and Equipment
Other current assetsProperty, plant and equipment consist of the following as of:
| | December 31, | |
(In thousands) | | 2019 | | | 2018 | |
Land | | $ | 22 | | | $ | 22 | |
Building and improvements | | | 2,655 | | | | 2,320 | |
Leasehold improvements | | | 2,567 | | | | 2,101 | |
Machinery and equipment | | | 14,532 | | | | 13,307 | |
Advertising structures | | | 18,650 | | | | 17,913 | |
Furniture and fixtures | | | 8,949 | | | | 5,453 | |
Gross property, plant and equipment | | | 47,375 | | | | 41,116 | |
Accumulated depreciation | | | (17,007 | ) | | | (13,375 | ) |
Net property, plant and equipment | | $ | 30,368 | | | $ | 27,741 | |
Note 10. Deferred Financing Costs
Deferred financing costs relating to Turning Point’s revolving credit facility consist of:
| | December 31, 2018 | | | December 31, 2017 | |
|
Inventory deposits | | $ | 9,739 | | | $ | 3,797 | |
Other | | | 5,306 | | | | 7,054 | |
| | $ | 15,045 | | | $ | 10,851 | |
| December 31, | |
(In thousands) | 2019 | | 2018 | |
Deferred financing costs, net of accumulated amortization of $410 and $174, respectively | | $ | 890 | | | $ | 870 | |
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. As a condition to the loan, the Supplier agreed to issue the Turning Point warrants to purchase 7.5% of the ownership interest of the supplier. In connection with the loan repayments Turning Point received $1.0 million, net of expenses, for compensation of the warrants which was recorded as a reduction to selling, general, and administrative expenses.
Note 10.11. Goodwill and Other Intangible Assets
The following table summarizes goodwill by segment:
| | Smokeless | | | Smoking | | | New Gen | | | Insurance | | | Total | | |
Balance as of January 1, 2017 | | $ | 32,590 | | | $ | 96,107 | | | $ | 5,693 | | | $ | - | | | $ | 134,390 | | |
(In thousands) | | | Smokeless | | Smoking | | New Gen | | Insurance | | Total | |
Balance as of December 31, 2017 | | | $ | 32,590 | | | $ | 96,107 | | | $ | 5,923 | | | $ | - | | | $ | 134,620 | |
Adjustments | | | - | | | | - | | | | 230 | | | | - | | | | 230 | | | | - | | | | - | | | | 11,319 | | | | 757 | | | | 12,076 | |
Balance as of December 31, 2017 | | | 32,590 | | | | 96,107 | | | | 5,923 | | | | - | | | | 134,620 | | |
Balance as of December 31, 2018 | | | | 32,590 | | | | 96,107 | | | | 17,242 | | | | 757 | | | | 146,696 | |
Adjustments | | | | - | | | | - | | | | 1,907 | | | | - | | | | 1,907 | |
Acquisitions | | | - | | | | - | | | | 11,319 | | | | 757 | | | | 12,076 | | | | - | | | | - | | | | 6,436 | | | | - | | | | 6,436 | |
Balance as of December 31, 2018 | | $ | 32,590 | | | $ | 96,107 | | | $ | 17,242 | | | $ | 757 | | | $ | 146,696 | | |
Impairment | | | | - | | | | - | | | | - | | | | (757 | ) | | | (757 | ) |
Balance as of December 31, 2019 | | | $ | 32,590 | | | $ | 96,107 | | | $ | 25,585 | | | $ | - | | | $ | 154,282 | |
The following tables summarize information about the Company’s allocation of other intangible assets. Gross carrying amounts of unamortized, indefinite life intangible assets are shown below:below as of:
| | As of December 31, | | December 31, | |
| | 2018 | | | 2017 | | 2019 | | 2018 | |
| | Smokeless | | | NewGen | | | Insurance | | | Total | | | Smokeless | | | NewGen | | | Total | | |
(In thousands) | | Smokeless | | NewGen | | Insurance | | Total | | Smokeless | | NewGen | | Insurance | | Total | |
Unamortized indefinite life intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Trade names | | $ | 10,871 | | | $ | 10,786 | | | $ | - | | | $ | 21,657 | | | $ | 10,871 | | | $ | 10,786 | | | $ | 21,657 | | | $ | 10,871 | | | $ | 10,786 | | | $ | - | | | $ | 21,657 | | | $ | 10,871 | | | $ | 10,786 | | | $ | - | | | $ | 21,657 | |
State insurance licenses | | | - | | | | - | | | | 2,000 | | | | 2,000 | | | | - | | | | - | | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | 2,000 | | | 2,000 | |
Formulas | | | 53 | | | | - | | | | - | | | | 53 | | | | 53 | | | | - | | | | 53 | | | | 53 | | | | - | | | | - | | | | 53 | | | | 53 | | | | - | | | | - | | | | 53 | |
Total | | $ | 10,924 | | | $ | 10,786 | | | $ | 2,000 | | | $ | 23,710 | | | $ | 10,924 | | | $ | 10,786 | | | $ | 21,710 | | | $ | 10,924 | | | $ | 10,786 | | | $ | - | | | $ | 21,710 | | | $ | 10,924 | | | $ | 10,786 | | | $ | 2,000 | | | $ | 23,710 | |
During the year ended December 31, 2019, the Company recorded impairment charges of $0.8 million and $2.0 million related to the full impairment of the goodwill and intangible asset balances, respectively, in its Insurance segment. This impairment was a result of changes in the future plans for the Insurance segment and certain other factors impacting recoverability. As a result, there were no goodwill or intangible asset balances remaining in the Company’s Insurance segment as of December 31, 2019.
Amortized intangible assets included within the NewGen segment, as well as customer contracts for Standard Outdoor and Trade names for Maidstone, consist of as of:
| | December 31, | |
| | 2019 | | | 2018 | |
(In thousands) | | Gross Carrying Amount | | | Accumulated Amortization | | | Gross Carrying Amount | | | Accumulated Amortization | |
Amortized intangible assets: | | | | | | | | | | | | |
Customer relationships (useful life of 8-10 years) | | $ | 8,106 | | | $ | 2,834 | | | $ | 8,107 | | | $ | 1,713 | |
Trade names (useful life 15 years) | | | 7,258 | | | | 814 | | | | 7,678 | | | | 233 | |
Franchise agreements (useful life of 8 years) | | | 780 | | | | 130 | | | | 780 | | | | 44 | |
Non-compete agreements (useful life of 3.5 years) | | | 100 | | | | 88 | | | | 100 | | | | 60 | |
Total | | $ | 16,244 | | | $ | 3,866 | | | $ | 16,665 | | | $ | 2,050 | |
| | As of December 31, | |
| | 2018 | | | 2017 | |
| | Gross Carrying Amount | | | Accumulated Amortization | | | Gross Carrying Amount | | | Accumulated Amortization | |
|
Amortized intangible assets: | | | | | | | | | | | | |
Customer relationships (useful life of 8-10 years) | | $ | 8,107 | | | $ | 1,713 | | | $ | 5,386 | | | $ | 729 | |
Trade names (useful life 4-15 years) | | | 7,678 | | | | 233 | | | | - | | | | - | |
Franchise agreements (useful life of 8 years) | | | 780 | | | | 44 | | | | - | | | | - | |
Non-compete agreements (useful life of 3.5 years) | | | 100 | | | | 60 | | | | 100 | | | | 31 | |
Total | | $ | 16,665 | | | $ | 2,050 | | | $ | 5,486 | | | $ | 760 | |
Annual amortization expense for each of the next five years is estimated to be approximately $1.7 million for years one and two and approximately $1.4 million for years three to five, assuming no additional transactions occur that require the amortization of intangible assets.
Note 12. Other Assets
Other assets consist of the following as of:
| | December 31, | |
(In thousands) | | 2019 | | | 2018 | |
Equity investments | | $ | 5,421 | | | $ | 2,421 | |
Pension assets | | | 1,686 | | | | 1,223 | |
Other | | | 4,496 | | | | 2,771 | |
Total | | $ | 11,603 | | | $ | 6,415 | |
Equity Investments
In July 2019, Turning Point obtained a 30% stake in Canadian distribution entity, ReCreation Marketing (“ReCreation”) for $1 million paid at closing. Turning Point may invest an additional $2 million, if certain performance metrics are achieved, with options to acquire up to a 50% ownership position. Turning Point received board seats aligned with its ownership position. Sales in 2019 to ReCreation of RipTide products was $0.2 million, which was included in accounts receivable in the consolidated balance sheet as of December 31, 2019.
In November 2018, Turning Point paid $2.0 million to acquire a minority ownership position (19.99%) in Canadian American Standard Hemp (“CASH”). CASH is headquartered in Warwick, Rhode Island, and manufactures cannabidiol isolate (“CBD”) developed through highly efficient and proprietary processes. The investment in CASH positions Turning Point to participate in the market for hemp-derived products. In the fourth quarter 2019, CASH completed a fundraising round, resulting in the fair value of Turning Point’s investment increasing to $4.0 million. This resulted in a gain of $2.0 million which is recorded in investment income in the consolidated statements of loss for the year ended December 31, 2019. Purchases of inventory in 2019 from CASH was $0.6 million. There were no amounts outstanding at December 31, 2019.
In December 2018, Turning Point acquired a minority ownership position in General Wireless Operations, Inc. (d/b/a RadioShack; “RadioShack”) from 5G gaming LLC, which is owned by Standard General LP, for $0.4 million. Standard General LP has a controlling interest in the Company and qualifies as a related party. The Company will work together with RadioShack on product development and sourcing teams in China. Furthermore, the Company paid $0.2 million in consulting fees in 2019 and purchased $1.1 million of finished goods inventory from Radio Shack during 2018. There were no amounts outstanding at December 31, 2019.
Note 11. Deferred Financing Costs:
Deferred financing costs relating to Turning Point’s revolving credit facility at December 31 consist of:
| | 2018 | | | 2017 | |
Deferred financing costs, net of accumulated amortization of $174 and $134, respectively | | $ | 870 | | | $ | 630 | |
Note 12.13. Accrued Liabilities
Accrued liabilities at December 31 consist of:of the following as of:
| | December 31, | | | December 31, | |
| | 2018 | | | 2017 | | |
(In thousands) | | | 2019 | | | 2018 | |
Accrued payroll and related items | | $ | 6,063 | | | $ | 5,683 | | | $ | 5,267 | | | $ | 6,063 | |
Customer returns and allowances | | | 2,895 | | | | 2,707 | | | 6,160 | | | 3,634 | |
Taxes payable | | | 705 | | | 2,138 | |
Lease liabilities | | | 2,487 | | | - | |
Accrued interest | | | 2,236 | | | 722 | |
Other | | | 14,925 | | | | 11,624 | | | | 10,817 | | | | 11,326 | |
| | $ | 23,883 | | | $ | 20,014 | | |
Total | | | $ | 27,672 | | | $ | 23,883 | |
Note 13.14. Liability for Losses and Loss Adjustment Expenses
Maidstone estimates reserves for both reported and unreported unpaid losses that have occurred on or before the balance sheet date that will need to be paid in the future. Reserves for unpaid losses fall into two categories: case reserves and reserves for claims incurred but not reported, or “IBNR”.
Case reserves are established within the claims department on an individual-case basis for all accidents reported. When a claim is reported, an automatic minimum case reserve is established for that claim type that represents our initial estimate of the losses that will ultimately be paid on the reported claim. The initial estimate for each claim is based upon averages of loss payments for prior closed claims made for that claim type. Claims personnel perform an evaluation of the type of claim involved, the circumstances surrounding each claim and the policy provisions relating to the loss and consequentially adjust the reserves as necessary. As claims mature, management increases or decreases the case reserve estimates as deemed necessary by the claims department based upon additional information received regarding the loss and any other information gathered while reviewing claims.
IBNR is applied as a bulk reserve, which cannot be allocated to particular claims, but are necessary to estimate ultimate losses on reported and unreported claims. Management estimates IBNR reserves by projecting ultimate losses using industry accepted actuarial methods, mentioned below, and then deducting actual loss payments and case reserves from the projected ultimate losses.
Management calculates estimates of ultimate losses by using the following actuarial methods. Management separately calculates the methods using paid loss data and incurred loss data. In the versions of these methods based on incurred loss data, the incurred losses are defined as paid losses plus case reserves. Management also evaluates ultimate losses based on claim type. In the auto industry, claim type is based on coverage; i.e. bodily injury, uninsured motorist, property damage, personal injury protection and physical damage.
| · | Incurred Development Method – The incurred development method is based upon the assumption that the relative change in a given year’s incurred loss estimates from one evaluation point to the next is similar to the relative change in prior years’ reported loss estimates at similar evaluation points. |
Incurred Development Method – The incurred development method is based upon the assumption that the relative change in a given year’s incurred loss estimates from one evaluation point to the next is similar to the relative change in prior years’ reported loss estimates at similar evaluation points.
| · | Paid Development Method - The paid development method is similar to the incurred development method, simply using paid triangles to calculate development factors. |
| · | Incurred Bornhuetter-Ferguson (“BF”) Method – The Incurred BF Method uses an estimated loss ratio for a particular year, and is weighted against the portion of the year’s claims that have been reported, based on historical incurred loss development patterns. The estimate of required reserves assumes that the remaining unreported portion of a particular year will pay out at a rate consistent with the estimated loss ratio for that year. |
| · | Paid Bornhuetter-Ferguson (“BF”) Method – The Paid BF Method uses an estimated loss ratio for a particular year, and is weighted against the portion of the year’s claims that have been paid, based on historical paid loss development patterns. The estimate of required reserves assumes that the remaining unpaid portion of a particular year will pay out at a rate consistent with the estimated loss ratio for that year. |
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Paid Development Method - The paid development method is similar to the incurred development method, simply using paid triangles to calculate development factors.
Incurred Bornhuetter-Ferguson (“BF”) Method – The Incurred BF Method uses an estimated loss ratio for a particular year, and is weighted against the portion of the year’s claims that have been reported, based on historical incurred loss development patterns. The estimate of required reserves assumes that the remaining unreported portion of a particular year will pay out at a rate consistent with the estimated loss ratio for that year.
Paid Bornhuetter-Ferguson (“BF”) Method – The Paid BF Method uses an estimated loss ratio for a particular year, and is weighted against the portion of the year’s claims that have been paid, based on historical paid loss development patterns. The estimate of required reserves assumes that the remaining unpaid portion of a particular year will pay out at a rate consistent with the estimated loss ratio for that year.
Maidstone’s best estimate of required reserves is generally based on an average of the methods above, with appropriate weighting of the various methods based on claim type and year. OnMaidstone engages an annualindependent external actuarial specialist (the “Actuary”) to calculate its recorded reserves on a quarterly basis since the consulting actuary issuessecond quarter 2019. The Actuary estimates a statementrange of ultimate losses, along with a range and recommended central estimate of IBNR reserve amounts. Maidstone’s carried IBNR reserves are based on an internal actuarial opinion that documents the actuary’s evaluationanalysis and reflect management’s best estimate of the adequacy of the unpaid loss obligations under the terms of policies in-force.and LAE liabilities.
The following tables are loss reserve development tables that illustrate the change over time of reserves established for claim and allocated claim adjustment expenses arising from short-duration insurance contracts. Insurance contracts are considered to be short-duration contracts when the contracts are not expected to remain in force for an extended period of time. The Incurred Claim and Allocated Claim Adjustment Expenses tables, reading across, show the cumulative net incurred claim and allocated claim adjustment expenses relating to each accident year at the end of the stated calendar year. Changes in the cumulative amount across time are the result of Maidstone’s expanded awareness of additional facts and circumstances that pertain to the unsettled claims. The Cumulative Paid Claim and Allocated Claim Adjustment Expenses tables, reading across, show the cumulative amount paid for claims in each accident year as of the end of the stated calendar year.
Auto Insurance
$ InTables in thousands (except number of reported claims)
Auto: Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | Auto: Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | Auto: Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | |
| | | | For the years ended December 31, | | | As of December 31, 2019 | |
| | For the years ended December 31, | | | As of December 31, 2018 | | | Unaudited | | | Audited | |
| | Unaudited | | | Audited | | |
Accident Year | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | Net IBNR Reserve | | | Reported Claims | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | Net IBNR Reserve | | | Reported Claims | |
2009 | | $ | 65,149 | | | $ | 73,497 | | | $ | 74,715 | | | $ | 75,881 | | | $ | 76,009 | | | $ | 75,604 | | | $ | 75,513 | | | $ | 75,222 | | | $ | 75,145 | | | $ | 75,184 | | | $ | 31 | | | | 16,072 | | |
2010 | | | | | | | 54,887 | | | | 57,194 | | | | 56,990 | | | | 57,281 | | | | 57,105 | | | | 56,872 | | | | 56,254 | | | | 56,084 | | | | 56,030 | | | | 43 | | | | 12,355 | | | $ | 54,887 | | | $ | 57,194 | | | $ | 56,990 | | | $ | 57,281 | | | $ | 57,105 | | | $ | 56,872 | | | $ | 56,254 | | | $ | 56,084 | | | $ | 56,030 | | | $ | 56,035 | | | $ | 53 | | | 12,355 | |
2011 | | | | | | | | | | | 47,570 | | | | 44,500 | | | | 44,184 | | | | 43,752 | | | | 43,548 | | | | 42,908 | | | | 42,817 | | | | 42,830 | | | | 87 | | | | 9,351 | | | | | | 47,570 | | | 44,500 | | | 44,184 | | | 43,752 | | | 43,548 | | | 42,908 | | | 42,817 | | | | 42,830 | | | 42,934 | | | | 62 | | | 9,351 | |
2012 | | | | | | | | | | | | | | | 26,106 | | | | 25,378 | | | | 25,572 | | | | 25,308 | | | | 25,066 | | | | 24,743 | | | | 24,718 | | | | 16 | | | | 5,251 | | | | | | | | | 26,106 | | | 25,378 | | | 25,572 | | | 25,308 | | | 25,066 | | | 24,743 | | | | 24,718 | | | 24,784 | | | | 60 | | | 5,252 | |
2013 | | | | | | | | | | | | | | | | | | | 15,997 | | | | 15,605 | | | | 15,951 | | | | 15,830 | | | | 15,727 | | | | 15,681 | | | | 68 | | | | 3,454 | | | | | | | | | | | | 15,997 | | | 15,605 | | | 15,951 | | | 15,830 | | | 15,727 | | | | 15,681 | | | 15,734 | | | | 36 | | | 3,455 | |
2014 | | | | | | | | | | | | | | | | | | | | | | | 12,270 | | | | 12,282 | | | | 11,973 | | | | 11,931 | | | | 11,929 | | | | 79 | | | | 3,409 | | | | | | | | | | | | | | | 12,270 | | | 12,282 | | | 11,973 | | | 11,931 | | | | 11,929 | | | 12,123 | | | | 45 | | | 3,409 | |
2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | 15,840 | | | | 15,562 | | | | 15,421 | | | | 15,149 | | | | 192 | | | | 4,754 | | | | | | | | | | | | | | | | | | 15,840 | | | 15,562 | | | 15,421 | | | | 15,149 | | | 15,405 | | | | 159 | | | 4,758 | |
2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 30,996 | | | | 32,128 | | | | 32,469 | | | | 760 | | | | 8,291 | | | | | | | | | | | | | | | | | | | | | 30,996 | | | 32,128 | | | | 32,469 | | | 34,060 | | | | 448 | | | 8,311 | |
2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 23,331 | | | | 25,096 | | | | 2,293 | | | | 7,009 | | | | | | | | | | | | | | | | | | | | | | | | 23,331 | | | | 25,096 | | | 26,697 | | | | 1,402 | | | 7,030 | |
2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 20,761 | | | | 4,960 | | | | 5,381 | | | | | | | | | | | | | | | | | | | | | | | | | | | | 16,956 | | | 20,744 | | | | 3,409 | | | 5,625 | |
2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 16,714 | | | | 4,847 | | | | 3,881 | |
Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 319,847 | | | $ | 8,529 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 240,858 | | | $ | 265,230 | | | $ | 10,521 | | | | |
Auto: Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
Auto: Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | |
For the years ended December 31, | |
| | Unaudited | | | Audited | |
Accident Year | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | |
2010 | | $ | 25,764 | | | $ | 45,769 | | | $ | 51,501 | | | $ | 53,932 | | | $ | 54,938 | | | $ | 55,481 | | | $ | 55,328 | | | $ | 55,619 | | | $ | 55,683 | | | | 55,717 | |
2011 | | | | | | | 20,259 | | | | 34,495 | | | | 39,391 | | | | 41,338 | | | | 42,166 | | | | 42,116 | | | | 42,443 | | | | 42,545 | | | | 42,772 | |
2012 | | | | | | | | | | | 12,411 | | | | 19,975 | | | | 22,590 | | | | 23,821 | | | | 23,784 | | | | 24,100 | | | | 24,431 | | | | 24,510 | |
2013 | | | | | | | | | | | | | | | 7,685 | | | | 12,103 | | | | 13,985 | | | | 14,674 | | | | 15,223 | | | | 15,417 | | | | 15,556 | |
2014 | | | | | | | | | | | | | | | | | | | 5,971 | | | | 9,101 | | | | 9,870 | | | | 10,576 | | | | 11,371 | | | | 11,807 | |
2015 | | | | | | | | | | | | | | | | | | | | | | | 8,002 | | | | 8,917 | | | | 10,862 | | | | 13,283 | | | | 14,391 | |
2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | 15,980 | | | | 23,545 | | | | 27,582 | | | | 31,034 | |
2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 14,477 | | | | 18,922 | | | | 22,733 | |
2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 11,237 | | | | 15,146 | |
2019 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 9,085 | |
Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 220,473 | | | $ | 242,751 | |
| | For the years ended December 31, | |
| | Unaudited | | | Audited | |
| | | | | | |
| | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | |
2009 | | $ | 33,059 | | | $ | 58,825 | | | $ | 67,177 | | | $ | 71,395 | | | $ | 73,275 | | | $ | 74,253 | | | $ | 74,886 | | | $ | 74,969 | | | $ | 75,055 | | | $ | 75,128 | |
2010 | | | | | | | 25,764 | | | | 45,769 | | | | 51,501 | | | | 53,932 | | | | 54,938 | | | | 55,481 | | | | 55,328 | | | | 55,619 | | | | 55,683 | |
2011 | | | | | | | | | | | 20,259 | | | | 34,495 | | | | 39,391 | | | | 41,338 | | | | 42,166 | | | | 42,116 | | | | 42,443 | | | | 42,545 | |
2012 | | | | | | | | | | | | | | | 12,411 | | | | 19,975 | | | | 22,590 | | | | 23,821 | | | | 23,784 | | | | 24,100 | | | | 24,431 | |
2013 | | | | | | | | | | | | | | | | | | | 7,685 | | | | 12,103 | | | | 13,985 | | | | 14,674 | | | | 15,223 | | | | 15,417 | |
2014 | | | | | | | | | | | | | | | | | | | | | | | 5,971 | | | | 9,101 | | | | 9,870 | | | | 10,576 | | | | 11,371 | |
2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | 8,002 | | | | 8,917 | | | | 10,862 | | | | 13,283 | |
2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 15,980 | | | | 23,545 | | | | 27,582 | |
2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 14,477 | | | | 18,922 | |
2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 11,237 | |
Total | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | $ | 295,599 | |
Auto: Reconciliation of Reserve Balances to Liability for Unpaid Loss and Loss Adjustment Expenses
as of:
| | As of December 31, 2018 | |
|
| | | |
Unpaid Loss and Allocated Loss Adjustment Expense, Net of Reinsurance, for years presented | | $ | 24,248 | |
Unpaid Loss and Loss Adjustment Expense, Net of Reinsurance, for years prior to 2009 | | | 97 | |
Unpaid Unallocated Loss Adjustment Expense | | | 2,955 | |
Unpaid Losses and Loss Adjustment Expenses | | $ | 27,300 | |
| December 31, | |
| 2019 | | 2018 | |
Unpaid Loss and Allocated Loss Adjustment Expense, Net of Reinsurance, for years presented | | $ | 22,266 | | | $ | 24,248 | |
Unpaid Loss and Loss Adjustment Expense, Net of Reinsurance, for years prior to 2010 | | | 393 | | | | 97 | |
Unpaid Unallocated Loss Adjustment Expense | | | 2,734 | | | | 2,955 | |
Unpaid Losses and Loss Adjustment Expenses | | $ | 25,393 | | | $ | 27,300 | |
The following is supplementary information about average historical claims durationduration:
Auto: Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance as of December 31, 2018.2019
Auto: Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance as of December 31, 2018 | | |
(Unaudited) | (Unaudited) | | (Unaudited) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Years | | | 1 | | | | 2 | | | | 3 | | | | 4 | | | | 5 | | | | 6 | | | | 7 | | | | 8 | | | | 9 | | | | 10 | | | 1 | | | 2 | | | 3 | | | 4 | | | 5 | | | 6 | | | 7 | | | 8 | | | 9 | | | 10 | |
| | | 50.0 | % | | | 26.1 | % | | | 10.9 | % | | | 6.5 | % | | | 2.7 | % | | | 0.9 | % | | | 0.7 | % | | | 0.3 | % | | | 0.1 | % | | | 0.1 | % | | 49.6 | % | | 22.6 | % | | 11.5 | % | | 8.7 | % | | 3.3 | % | | 1.0 | % | | 0.4 | % | | 0.3 | % | | 0.3 | % | | 0.1 | % |
Homeowners’ Insurance
$ InTables in thousands (except number of reported claims)
Homeowners’: Incurred claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
| | For the years ended December 31, | | | As of December 31, 2018 | | | For the years ended December 31, | | |
| |
| | Unaudited | | | Audited | | | Unaudited | | | Audited | | | As of December 31, 2019 | |
Accident Year | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | Net IBNR Reserves | | | Reported Claims | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | | | Net IBNR Reserves | | | Reported Claims | |
| 2014 | | $ | 2 | | | $ | 2 | | | $ | 2 | | | $ | 2 | | | $ | 2 | | | $ | - | | | | 3 | | | $ | 2 | | | $ | 2 | | | $ | 2 | | | $ | 2 | | | $ | 2 | | | $ | 2 | | | $ | - | | | 3 | |
2015 | | | | | | | 597 | | | | 580 | | | | 580 | | | | 580 | | | | - | | | | 41 | | | | | | 597 | | | 580 | | | 580 | | | | 580 | | | 580 | | | | - | | | 41 | |
2016 | | | | | | | | | | | 524 | | | | 523 | | | | 524 | | | | - | | | | 27 | | | | | | | | | 524 | | | 523 | | | | 524 | | | 524 | | | | - | | | 27 | |
2017 | | | | | | | | | | | | | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | - | | | | - | | | - | | | | - | | | - | |
2018 | | | | | | | | | | | | | | | | | | | 42 | | | | 24 | | | | 6 | | | | | | | | | | | | | | | | 42 | | | 45 | | | | 3 | | | 7 | |
2019 | | | | | | | | | | | | | | | | | | | | | | | | 286 | | | | 32 | | | | 15 | |
Total | | | | | | | | | | | | | | | | | | $ | 1,148 | | | $ | 24 | | | | | | | | | | | | | | | | | | | $ | 1,148 | | | $ | 1,437 | | | $ | 35 | | | | |
Homeowners’: Cumulative Paid Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
For the Years Ended December 31, | |
| | Unaudited | | | Audited | |
Accident Year | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | | | 2019 | |
2014 | | $ | - | | | $ | 1 | | | $ | 2 | | | $ | 2 | | | $ | 2 | | | $ | 2 | |
2015 | | | | | | | 304 | | | | 580 | | | | 580 | | | | 580 | | | | 580 | |
2016 | | | | | | | | | | | 524 | | | | 524 | | | | 524 | | | | 524 | |
2017 | | | | | | | | | | | | | | | - | | | | - | | | | - | |
2018 | | | | | | | | | | | | | | | | | | | 11 | | | | 42 | |
2019 | | | | | | | | | | | | | | | | | | | | | | | 185 | |
Total | | | | | | | | | | | | | | | | | | $ | 1,117 | | | $ | 1,333 | |
| | For the Years Ended December 31, | |
| | Unaudited | | | Audited | |
Accident Year | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | |
|
2014 | | $ | - | | | $ | 1 | | | $ | 2 | | | $ | 2 | | | $ | 2 | |
2015 | | | | | | | 304 | | | | 580 | | | | 580 | | | | 580 | |
2016 | | | | | | | | | | | 524 | | | | 524 | | | | 524 | |
2017 | | | | | | | | | | | | | | | | | | | - | |
2018 | | | | | | | | | | | | | | | | | | | 12 | |
Total | | | | | | | | | | | | | | | | | | $ | 1,118 | |
Homeowners’: Reconciliation of Reserve Balances to Liability for Unpaid Loss and Loss Adjustment Expenses
as of:
| | As of December 31, 2018 | |
| | | |
Unpaid Loss and Allocated Loss Adjustment Expense, Net of Reinsurance, for years presented | | $ | 30 | |
Unpaid Loss and Loss Adjustment Expense, Net of Reinsurance, for years prior to 2009 | | | - | |
Unpaid Unallocated Loss Adjustment Expense | | | - | |
Unpaid Losses and Loss Adjustment Expenses | | $ | 30 | |
| | December 31, | |
| | 2019 | | | 2018 | |
Unpaid Loss and Allocated Loss Adjustment Expense, Net of Reinsurance, for years presented | | $ | 104 | | | $ | 30 | |
Unpaid Loss and Loss Adjustment Expense, Net of Reinsurance, for years prior to 2010 | | | - | | | | - | |
Unpaid Unallocated Loss Adjustment Expense | | | - | | | | - | |
Unpaid Losses and Loss Adjustment Expenses | | $ | 104 | | | $ | 30 | |
The following is supplementary information about average historical claims duration as of December 31, 2018.duration:
Homeowners’ Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance as of December 31, 2018 | | |
Homeowners’ Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance as of December 31, 2019 | | Homeowners’ Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance as of December 31, 2019 | |
(Unaudited) | (Unaudited) | | (Unaudited) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Years | | | 1 | | | | 2 | | | | 3 | | | | 4 | | | | 5 | | | | 6 | | | | 7 | | | | 8 | | | | 9 | | | | 10 | | | | 1 | | | | 2 | | | | 3 | | | | 4 | | | | 5 | | | | 6 | | | | 7 | | | | 8 | | | | 9 | | | | 10 | |
| | | 45.3 | % | | | 34.0 | % | | | 0.8 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | | 0.0 | % | | 48.9 | % | | 34.0 | % | | 0.8 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % |
The following table summarizes the net outstanding liabilities based on the tables above:above as of:
| | As of December 31, 2018 | | | December 31, | |
Net Outstanding Liabilities | | | | |
(In thousands) | | | 2019 | | 2018 | |
Net Outstanding Liabilities: | | | | | | | |
Auto | | $ | 24,345 | | | $ | 22,555 | | | $ | 24,345 | |
Homeowners’ | | | 30 | | | | 104 | | | | 30 | |
Liabilities for unpaid claims and claims adjustment expenses, net of reinsurance | | | 24,375 | | |
Reinsurance recoverable on unpaid claims | | | | | |
Liability for unpaid claims and claims adjustment expenses, net of reinsurance | | | | 22,659 | | | | 24,375 | |
Reinsurance recoverable on unpaid claims: | | | | | | | | | |
Auto | | | - | | | | - | �� | | | - | |
Homeowners’ | | | - | | | | - | | | | - | |
Total reinsurance recoverable on unpaid claims | | | - | | | | - | | | | - | |
Unallocated claims adjustment expenses | | | 2,955 | | | | 2,734 | | | | 2,955 | |
Total gross liability for unpaid claims and claims expenses | | $ | 27,330 | | |
Total gross liability for unpaid claims and claims adjustment expenses | | | $ | 25,393 | | | $ | 27,330 | |
Activity in the liability for losses and LAE is summarized as follows:
| | January 2, 2018 to December 31, 2018 | | |
| Reserve for losses and LAE at January 2, 2018 | | $ | 30,672 | | |
(In thousands) | | | For the Year Ended December 31, 2019 | | | For the Period from January 2, 2018 to December 31, 2018 | |
Reserve for losses and LAE at beginning of period | | | $ | 27,330 | | | $ | 30,672 | |
Provision for claims, net of insurance: | | | | | | | | | | | | |
Incurred related to: | | | | | | | | | | |
Prior year | | | 3,918 | | | - | |
Current year | | | 25,223 | | | | 13,187 | | | | 25,223 | |
Total incurred | | | 25,223 | | | | 17,105 | | | | 25,223 | |
Deduct payment of claims, net of reinsurance: | | | | | | | | | | |
Paid related to: | | | | | | | | | | | | |
Prior year | | | 14,176 | | | 14,603 | | | 14,176 | |
Current year | | | 14,389 | | | | 4,439 | | | | 14,389 | |
Total paid | | | 28,565 | | | | 19,042 | | | | 28,565 | |
Reserve for losses and LAE at December 31, 2018 | | $ | 27,330 | | |
Reserve for losses and LAE at end of period | | | $ | 25,393 | | | $ | 27,330 | |
The components of the net liability for losses and LAE are as follows:follows as of:
| | As of December 31, 2018 | | | December 31, | |
(In thousands) | | | 2019 | | 2018 | |
Case basis reserves | | $ | 15,863 | | | $ | 12,078 | | | $ | 15,863 | |
Incurred but not reported reserves | | | 11,467 | | | | 13,315 | | | | 11,467 | |
Total | | $ | 27,330 | | | $ | 25,393 | | | $ | 27,330 | |
On February 1, 2018, Maidstone began to write homeowners insurance. As a result, Maidstone placed three reinsurance contracts: An Excess Multiple Line Reinsurance Contract, Excess Catastrophe Reinsurance Contractan excess multiple line reinsurance contract, excess catastrophe reinsurance contract and a Property Per Risk Automatic Facultative Reinsurance Contract.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 premium and losses related to this coverage are ceded via a 100% quota share reinsurance agreement with an unaffiliated insurance company.
Included in the Consolidated Statementsconsolidated statements of Operations(loss) income for the year ended December 31, 2019 and the period from January 2, 2018 toended December 31, 2018, are $0.1 million ofMaidstone earned premiums in connection with ceded reinsurance of $0.2 million and $0.1 million, respectively, all of which arewere with non-affiliated companies. 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.
On July 1, 2019, Maidstone stopped writing new homeowners insurance policies and put a moratorium on new homeowner insurance business. At December 31, 2018,2019, management did not believe there was a risk of loss as a result of a concentration of risk in its reinsurance program.
At December 31, 2018,2019, Maidstone had noan insignificant amount of net unsecured reinsurance recoverable from individual unaffiliated reinsurers, which were equal to or greater than 3% of surplus.reinsurers.
Note 15.16. Notes Payable and Long-Term Debt
Notes payable and long-term debt at December 31 consist of the following:following as of:
| | December 31, 2018 | | | December 31, 2017 | | | December 31, | |
| (In thousands) | | | 2019 | | 2018 | |
2018 First Lien Term Loan | | $ | 154,000 | | | $ | - | | | $ | 146,000 | | | $ | 154,000 | |
2018 Second Lien Term Loan | | | 40,000 | | | | - | | | | - | | | | 40,000 | |
SDI Term Loan | | | 15,000 | | | | - | | |
Convertible Senior Notes | | | | 172,500 | | | | - | |
SDI GACP Term Loan | | | | 25,000 | | | | - | |
SDI Crystal Term Loan | | | | - | | | | 15,000 | |
Standard Outdoor Promissory Notes | | | 9,950 | | | | - | | | | 8,447 | | | | 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 | | | | - | | | | 4,240 | | | | 4,000 | |
Note payable - VaporBeast | | | - | | | | 2,000 | | |
Total Notes Payable and Long-Term Debt | | | 222,950 | | | | 197,613 | | |
Gross notes payable and long-term debt | | | | 356,187 | | | | 222,950 | |
Less deferred finance charges and debt discount | | | (4,903 | ) | | | (3,573 | ) | | | (39,641 | ) | | | (4,903 | ) |
Less current maturities | | | (9,431 | ) | | | (7,850 | ) | | | (16,977 | ) | | | (9,431 | ) |
| | $ | 208,616 | | | $ | 186,190 | | |
Net notes payable and long-term debt | | | $ | 299,569 | | | $ | 208,616 | |
2018 Credit Facility
On March 7, 2018, Turning Point entered into a $250 million credit facility consisting of a $160 million 2018 First Lien Term Loan with Fifth Third Bank, as administrative agent, and other lenders, and a $50 million 2018 Revolving Credit Facility (collectively, the “2018 First Lien Credit Facility”) in addition to a $40 million 2018 Second Lien Term Loan (together with the 2018 First Lien Credit Facility, the “2018 Credit Facility”) with Prospect Capital Corporation, as administrative agent, and other lenders. The 2018 Credit Facility retained the $40 million accordion feature of the 2017 Credit Facility. Proceeds from the 2018 Credit Facility were used to repay, in full, the 2017 Credit Facility. Turning Point incurred a loss on extinguishment of debt of $2.4 million in the first quarter of 2018 as a result of the refinancing.
The 2018 Credit Facility contains customary events of default including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, and change in control defaults. The 2018 Credit Facility also contains certain negative covenants customary for facilities of these types including covenants that, subject to exceptions described in the 2018 Credit Facility, restrict the ability of Turning Point and its subsidiary guarantors: (i) to pledge assets, (ii) to incur additional indebtedness, (iii) to pay dividends, (iv) to make distributions, (v) to sell assets, and (vi) to make investments.
2018 First Lien Credit Facility: The 2018 First Lien Term Loan and the 2018 Revolving Credit Facility bear interest at LIBOR plus a spread of 2.75% to 3.50% based on Turning Point’s senior leverage ratio. The 2018 First Lien Term Loan has quarterly required payments of $2.0 million beginning June 30, 2018, increasing to $3.0 million on June 30, 2020, and increasing to $4.0 million on June 30, 2022. The 2018 First Lien Credit Facility has a maturity date of March 7, 2023. The 2018 First Lien Term Loan is secured by a first priority lien on substantially all of the assets of the borrowers and the guarantors thereunder, including a pledge of Turning Point’s capital stock, other than certain excluded assets (the “Collateral”). In connection with the Convertible Senior Notes offering, Turning Point entered into a First Amendment (“the Amendment”) to the First Lien Credit Agreement, with Fifth Third Bank, as administrative agent, and other lenders and certain other lender parties thereto. The Amendment was entered into primarily to permit Turning Point to issue up to $200 million of convertible senior notes, enter into certain capped call transactions in connection with the issuance of such notes and to use the proceeds from the issuance of the notes to repay amounts outstanding under Turning Point’s Second Lien Credit Agreement and use the remaining proceeds for acquisitions and investments. In connection with the Amendment, fees of $0.7 million were incurred. The 2018 First Lien Credit Facility contains certain financial covenants, includingwhich were amended in connection with the Convertible Senior Notes offering in the third quarter 2019. The covenants include maximum senior leverage ratio of 3.50x3.00x with step-downs to 3.00x,2.50x, a maximum total leverage ratio of 4.50x5.50x with step-downs to 4.00x,5.00x, and a minimum fixed charge coverage ratio of 1.20x. In the first quarter of 2020, the financial covenants were amended to permit certain add-backs related to PMTA in the definition of Consolidated EBITDA for the period of October 1, 2019 until September 30, 2020. Based on an excess cash covenant for the facility, a principal payment of $4.5 million was due in the second quarter 2019. All parties agreed to waive the payment, resulting in consent fees of $0.1 million. The weighted average interest rate of the 2018 First Lien Term Loan was 5.77%4.55% at December 31, 2019, 2018. The weighted average interest rate. As of the 2018 Revolving Credit Facility was 5.79% at December 31, 2019, 2018. At December 31, 2018, Turning Point had $26.0 million ofno borrowings outstanding under the 2018 Revolving Credit Facility. The $24.0$50.0 million unused portion of the 2018 Revolving Credit Facility is reduced by $1.3 million letters of credit withfrom Fifth Third Bank totaling $3.7 million, resulting in $22.7$46.3 million of availability under the 2018 Revolving Credit Facility atas of December 31, 2019, 2018..
2018 Second Lien Credit Facility: The 2018 Second Lien Credit Facility bearsbore interest at a rate of LIBOR plus 7.00% and hashad a maturity date of March 7, 2024. The 2018 Second Lien Term Loan iswas secured by a second priority interest in the Collateral and iswas guaranteed by the same entities as the 2018 First Lien Term Loan. The 2018 Second Lien Credit Facility containscontained certain financial covenants including a maximum senior leverage ratio of 3.75x with step-downs to 3.50x, a maximum total leverage ratio of 4.75x with step-downs to 4.50x, and a minimum fixed charge coverage ratio of 1.10x. The weighted average interest rateBased on an excess cash covenant for the facility, a $4.5 million principal payment was made in the second quarter 2019, resulting in a $0.2 million loss on extinguishment of debt. Turning Point used a portion of the proceeds from the issuance of the Convertible Senior Notes to prepay all outstanding amounts related to the 2018 Second Lien Term LoanCredit Facility in the third quarter 2019. The principal paid in the third quarter amounted to $35.5 million, and the transaction resulted in a $1.1 million loss on extinguishment of debt.
Convertible Senior Notes
In July 2019 Turning Point closed an offering of $172.5 million in aggregate principal amount of 2.50% Convertible Senior Notes due July 15, 2024 (the “Convertible Senior Notes”). The Convertible Senior Notes bear interest at a rate of 2.50% per year, payable semiannually in arrears on January 15 and July 15 of each year, beginning on January 15, 2020. The Convertible Senior Notes will mature on July 15, 2024, unless earlier repurchased, redeemed or converted. The Convertible Senior Notes are senior unsecured obligations of Turning Point.
The Convertible Senior Notes are convertible into approximately 3,202,808 shares of Turning Point voting common stock under certain circumstances prior to maturity at a conversion rate of 18.567 shares per $1,000 principal amount of the Convertible Senior Notes, which represents a conversion price of approximately $53.86 per share, subject to adjustment under certain conditions, but will not be adjusted for any accrued and unpaid interest. Upon conversion, Turning Point may pay cash, shares of common stock or a combination of cash and stock, as determined by Turning Point at its discretion. The conditions required to allow the holders to convert their Convertible Senior Notes were not met as of December 31, 2019.
Under GAAP, certain convertible debt instruments that may be settled in cash on conversion are required to be separately accounted for as liability and equity components of the instrument in a manner that reflects the issuer’s non-convertible debt borrowing rate. Accordingly, in accounting for the issuance of the Convertible Senior Notes, Turning Point separated the Convertible Senior Notes into liability and equity components. The carrying amount of the liability component was 9.46% at calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component, which is recognized as a debt discount, represents the difference between the proceeds from the issuance of the Convertible Senior Notes and the fair value of the liability component of the Convertible Senior Notes. The excess of the principal amount of the liability component over its carrying amount (“debt discount”), $35.0 million, will be amortized to interest expense using an effective interest rate of 7.5% over the expected life of the Convertible Senior Notes. The equity component is not remeasured as long as it continues to meet the criteria for equity classification. Interest expense includes $2.9 million of amortization for the year ended December 31,, 2018. 2019.
In accounting for the issuance costs related to the issuance of the Convertible Senior Notes, Turning Point allocated the total amount incurred to the liability and equity components based on their relative values. Debt issuance costs attributable to the liability component are amortized to interest expense using the effective interest method over the expected life of the Convertible Senior Notes, $4.7 million, and the debt issuance costs attributable to the equity component, $1.2 million, are netted with the equity component of stockholders’ equity.
In connection with the Convertible Senior Notes offering, Turning Point entered into privately negotiated capped call transactions with certain financial institutions. The capped call transactions have a strike price of $53.86 per and a cap price of $82.86 per, and are exercisable when and if the Convertible Senior Notes are converted. Turning Point paid $20.53 million for these capped calls and charged that amount to additional paid-in capital.
Note Payable – IVG
In September 2018, Turning Point issued a note payable to IVG’s former shareholders (“IVG Note”). The IVG Note is $4.0 million principal with 6.0% interest compounding annually and matures on March 5, 2020. The IVG Note is subject to customary defaults including defaults for nonpayment, nonperformance, any material breach under the purchase agreement, and bankruptcy or insolvency.
2017 Credit Facility
On February 17, 2017, Turning Point and NATC, entered into a new $250 million secured credit facility comprised of (i) a First Lien Credit Facility with Fifth Third Bank, as administrative agent, and other lenders (the “2017 First Lien Credit Facility”) and (ii) a Second Lien Credit Facility with Prospect Capital Corporation, as administrative agent, and other lenders (the “2017 Second Lien Credit Facility,” and together with the 2017 First Lien Credit Facility, the “2017 Credit Facility”). Turning Point used the proceeds of the 2017 Credit Facility to repay, in full, Turning Point’s First Lien Term Loan, Second Lien Term Loan, and Revolving Credit Facility and to pay related fees and expenses. As a result of this transaction, Turning Point incurred a loss on extinguishment of debt of $6.1 million during the first quarter of 2017.
The 2017 Credit Facility contained customary events of default including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts, and change in control defaults. The 2017 Credit Facility also contained certain negative covenants customary for facilities of these types including covenants that, subject to exceptions described in the 2017 Credit Facility, restricted the ability of Turning Point and its subsidiary guarantors: (i) to pledge assets, (ii) to incur additional indebtedness, (iii) to pay dividends, (iv) to make distributions, (v) to sell assets, and (vi) to make investments.
2017 First Lien Credit Facility
The 2017 First Lien Credit Facility consisted of: (i) a $50 million revolving credit facility (the “2017 Revolving Credit Facility”), (ii) a $110 million first out term loan facility (the “2017 First Out Term Loan”), and (iii) a $35 million second out term loan facility (the “2017 Second Out Term Loan”), which would have been repaid in full only after repayment in full of the 2017 First Out Term Loan. The 2017 First Lien Credit Facility also included an accordion feature allowing Turning Point to borrow up to an additional $40 million upon the satisfaction of certain conditions, including obtaining commitments from one or more lenders. Borrowings under the 2017 Revolving Credit Facility could have been used for general corporate purposes, including acquisitions.
The 2017 First Out Term Loan and the 2017 Revolving Credit Facility had a maturity date of February 17, 2022, and the 2017 Second Out Term Loan had a maturity date of May 17, 2022. The 2017 First Out Term Loan and the 2017 Revolving Credit Facility bore interest at LIBOR plus a spread of 2.5% to 3.5% based on Turning Point’s senior leverage ratio.
2017 Second Lien Credit Facility
The 2017 Second Lien Credit Facility consisted of a $55 million second lien term loan (the “2017 Second Lien Term Loan”) having a maturity date of August 17, 2022. The 2017 Second Lien Term Loan bore interest at a fixed rate of 11%.
Note Payable – VaporBeast
On November 30, 2016, Turning Point issued a note payable to VaporBeast’s former shareholders (“VaporBeast Note”). The VaporBeast Note was $2.0 million principal with 6% interest compounded monthly and matured on May 30, 2018, at which time it was paid in full.
SDI
On February 2, 2018, SDI and its Standard Outdoor advertising subsidiaries (the “Borrowers”)September 18, 2019, the Company entered into a Term Loan Agreement (the “Term Loan Agreement”) with GACP II, L.P., a Delaware limited partnership (the “Agent”), as administrative agent and collateral agent for the financial institutions (the “Lenders”). The Term Loan Agreement provides for a term loan agreement with Crystal Financial LLC (“Crystal Termof $25.0 million (the “Term Loan”). The Term Loan will be used to (a) repay, in full, all outstanding indebtedness under the Crystal Term Loan provides for an initial term loan(as defined below), (b) finance the purchase of $10.0 million and a commitment to provide additional term loanscommon stock of up to $15.0 million. Subject toTurning Point, (c) finance the satisfactionrepurchase of certain conditions,common stock of the Company, may request an additional increase in the commitment of up to $25.0 million. The proceeds were used to finance a portion of the acquisition of certain billboard structures,(d) fund certain fees and expenses, and (e) provide working capital for the Borrowers. Any incremental term loans will be used to finance permitted acquisitions. Company.
The Crystal Term Loan bears interest at a rate equal to the three-month “Libor Rate” as published in The Wall Street Journal plus 7.25%9.00%. Interest under the Crystal Term Loan Agreement is payable monthly and is also subject to an agency fee of $50,000, payable upon execution ofwith the Term Loan Agreement, and annually thereafter. In addition, the Crystalprincipal balance due on September 18, 2024. The Term Loan was subject to a one-time commitmentclosing fee of $350,000,$0.5 million, which was paid upon execution of the term loan agreement. The principal balance is payable at maturity, on February 2, 2023. In August 2018,Term Loan Agreement. Additionally, the Company borrowed an additional $5.0 million under the Crystal Term Loan. This borrowingLoan is subject to an agent monitoring fee of $25,000, payable quarterly. An early termination fee shall be due at any time if on or prior to the same terms asthird anniversary of the initial borrowing.
closing of the Term Loan, the Company prepays or repays (whether voluntarily or mandatorily), or is required to prepay or repay, the Term Loan in whole or in part. The obligations of the BorrowersCompany under the Term Loan Agreement are secured by all the assets of the Borrowers, subject to certain exceptions and exclusions as set forth inshares of Turning Point stock owned by the Term Loan Agreement and other loan documents.Company.
The Term Loan Agreement contains certain affirmative and negative covenants that are binding on the Borrowers,Company, including, but not limited to, restrictions (subject to specified exceptions and qualifications) on the ability of the BorrowersCompany to incur indebtedness, to create liens, to merge or consolidate, to make dispositions, to pay dividends or make distributions, to make investments, to pay any subordinated indebtedness, to enter into certain transactions with affiliates or to make capital expenditures.
In addition, the Term Loan Agreement requires the Borrowers to abide by certain financial covenants. Specifically, the Term Loan Agreement requires that the Borrowers:
| · | Maintain unrestricted cash and cash equivalents of at least $3,000,000 in accounts subject to account control agreements in favor of the Agent at all times (i) prior to March 31, 2019 and (ii) after March 31, 2019 unless the Fixed Charge Coverage Ratio (as defined in the Term Loan Agreement) is greater than or equal to 1.10 to 1.00. |
| · | Maintain a Turning Point Consolidated Total Leverage Ratio (as defined in the Term Loan Agreement) of less than 6.00 to 1.00 prior to December 30, 2018, 5.75 to 1.00 from December 31, 2018 to December 30, 2019, and 5.50 to 1.00 starting December 31, 2019 and thereafter. |
| · | Maintain a Turning Point Consolidated Senior Leverage Ratio (as defined in the Term Loan Agreement) of less than 5.00 to 1.00 prior to December 30, 2018, 4.75 to 1.00 from December 31, 2018 to December 30, 2019, and 4.50 to 1.00 starting December 31, 2019 and thereafter. |
Under the Term Loan Agreement, the Borrowers must also not permit amounts outstanding under the Term Loan Agreement to exceed the sum of (i) Billboard Cash Flow (as defined in the Term Loan Agreement) multiplied by the Applicable BCF Multiple (as defined in the Term Loan Agreement) and (ii) the aggregate value of the shares of common stock of Turning Point pledged by the Registrant to the Agent multiplied by 0.35.
The Term Loan Agreement contains customary events of default (which are in some cases subject to certain exceptions, thresholds, notice requirements and grace periods). The Term Loan Agreement also contains certain representations, warranties and conditions, in each case as set forth in the Term Loan Agreement.
With respect to the maintenance of at least $3.0$2.0 million in unrestricted cash and cash equivalents in accounts subject to control agreements in favor of the Agent, as of December 31, 2019, the Company hashad approximately $12.3$10.5 million in unrestricted cash and cash equivalents at December 31, 2018 in those accounts.
On September 18, 2019, in connection with entering into the Term Loan Agreement, the Company repaid in full all amounts outstanding under the Crystal Term Loan (as defined below). The Company recognized a loss on extinguishment of debt of $1.0 million, comprised of $0.7 million unamortized deferred financing costs and a $0.3 million early termination fee, which is recognized in the consolidated statements of (loss) income for the year ended December 31, 2019. The Company capitalized $0.6 million of deferred financing costs associated with closing on the Term Loan.
On February 2, 2018, SDI and its Standard Outdoor advertising subsidiaries (the “Borrowers”) entered into a term loan agreement with Crystal Financial LLC (“Crystal Term Loan”). The Crystal Term Loan provided for an initial term loan of $10.0 million and a commitment to provide additional term loans of up to $15.0 million. As of December 31, 2019, the Company had repaid all amounts outstanding under the Crystal Term Loan.
Interest expense related to the Term Loan and the Crystal loanTerm Loan of $2.1 million, including amortization of the discount, was recorded for the year ended December 31, 2019. Interest expense related to the Crystal Term Loan of $1.4 million, including amortization of the discount, was recorded for the year ended December 31, 2018.
Standard Outdoor
On January 18, 2018, as partial consideration for an asset purchase of 83 billboard structures located in Alabama, as well as the ground leases and advertising contracts relating to such billboard structures, the Company issued a promissory note with a face value of $6.5 million. The promissory note was recorded net of a discount of $0.9 million, representing the difference between the face value and fair value at issuance. This discount will be amortized into interest expense using the effective interest rate method over the term of the promissory note. A principal payment of $1.0 million on the promissory note is payable January 1 of each year, beginning with a payment that was made on January 1, 2020 and ending January 1, 2022, with a $3.5 million final principal payment on January 1, 2023. The promissory note has a 5% fixed coupon interest rate and interest is payable quarterly.
On February 20, 2018, as partial consideration for an asset purchase of 86 billboard structures located in Georgia and Florida, as well as the ground leases and advertising contracts relating to such billboard structures, the Company issued a promissory note with a face value of $3.5 million. The promissory note was recorded net of a discount of $0.3 million, representing the difference between the face value and fair value at issuance. This discount will be amortized into interest expense using the effective interest rate method over the term of the promissory note. A principal payment of $0.9 millionPrincipal payments began on the promissory note is payable March 1, 2019, with the remaining principal paid down monthly through March 1, 2022. The promissory note has a 5% fixed coupon interest rate and interest is payable monthly starting March 1, 2019.
monthly.Interest expense related to the Standard Outdoor loans of $0.8 million, including amortization of the discount, was recorded for the yearyears ended December 31, 2019 and 2018.
The following table summarizes the consolidated scheduled principal repayments subsequent to December 31, 2018:2019:
($ In thousands) | | Future Minimum Principal Payments | |
2020 | | $ | 17,078 | |
2021 | | | 13,882 | |
2022 | | | 16,227 | |
2023 | | | 111,500 | |
2024 | | | 197,500 | |
thereafter | | | - | |
Total | | $ | 356,187 | |
Note 17. Lease Commitments
As of January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). The main impact to the financial statements is the recognition of lease liabilities and right of use assets.
Turning Point
Turning Point’s leases consist primarily of leased property for its manufacturing warehouse, head offices and retail space as well as vehicle leases. In general, Turning Point does not recognize any renewal periods within the lease terms as there are not significant barriers to ending the lease at the initial term. Lease and non-lease components are accounted for as a single lease component.
Standard Outdoor
Standard Outdoor leases land and constructs a billboard that it owns, or leases an existing billboard owned by a third party. Standard Outdoor does recognize certain renewal periods to match the remaining useful life of its billboard structures. From a lessor perspective, Standard Outdoor has operating leases related to customers that use its billboards to advertise; however, these lessees are typically considered to be short-term (less than 12 months) and are not cyclical with the same lessee.
Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet. Lease expense for these leases is recognized on a straight-line basis over the lease term.
| | Future Minimum Principal Payments | |
2019 | | $ | 9,502 | |
2020 | | | 16,839 | |
2021 | | | 13,882 | |
2022 | | | 16,227 | |
2023 | | | 126,500 | |
thereafter | | | 40,000 | |
Total | | $ | 222,950 | |
The components of lease expense consist of the following:
(In thousands) | | For the Year Ended December 31, 2019 | |
Operating lease cost: | | | |
Cost of sales | | $ | 1,188 | |
Selling, general and administrative | | | 3,221 | |
Variable lease cost (1) | | | 698 | |
Short-term lease cost | | | 147 | |
Sublease income | | | (110 | ) |
Total | | $ | 5,144 | |
| (1) | Variable lease cost primarily includes elements of a contract that do not represent a good or service, but for which the lessee is responsible for paying. |
Supplemental balance sheet information related to leases consist of the following as of:
(In thousands) | | December 31, 2019 | |
Assets: | | | |
Right of use assets | | $ | 14,503 | |
Total leased assets | | $ | 14,503 | |
| | | | |
Liabilities: | | | | |
Current lease liabilities (1) | | $ | 2,487 | |
Long-term lease liabilities | | | 13,262 | |
Total lease liabilities | | $ | 15,749 | |
| (1) | Reported within accrued liabilities on the consolidated balance sheet. |
| | December 31, 2019 | |
Consolidated weighted average remaining lease term - operating leases | | 8.7 years | |
Consolidated weighted average discount rate - operating leases | | | 6.67 | % |
Nearly all the lease contracts for the Company do not provide a readily determinable implicit rate. For these contracts, the Company estimated the incremental borrowing rate based on information available upon the adoption of ASU 2016-02. The Company applied a consistent method in periods after the adoption of ASU 2016-02 to estimate the incremental borrowing rate.
As of December 31, 2019, future maturities of lease liabilities consist of the following:
Year | | Payments (in thousands) | |
2020 | | $ | 3,568 | |
2021 | | | 3,207 | |
2022 | | | 2,600 | |
2023 | | | 2,179 | |
2024 | | | 1,387 | |
Thereafter | | | 8,401 | |
Total lease payments | | | 21,342 | |
Less: Imputed interest | | | 5,593 | |
Present value of lease liabilities | | $ | 15,749 | |
As of December 31, 2019, Turning Point had operating leases with lease liabilities of $1.5 million which had not yet commenced. The leases are primarily related to vehicles for business use. Turning Point recognized a $0.3 million impairment of right of use assets in the fourth quarter 2019 related to planned store closures.
Note 16.18. Pension and Postretirement Benefit Plans
Turning Point has a defined benefit pension plan. Benefits for hourly employees were based on a stated benefit per year of service, reduced by amounts earned in a previous plan. Benefits for salaried employees were based on years of service and the employees’ final compensation. The defined benefit pension plan is frozen. Turning Point’s policy is to make the minimum amount of contributions that can be deducted for federal income taxes. Turning Point expects to make no contributions to the pension plan in 2019.2020. In the second quarter of 2018, Turning Point made mutually agreed upon lump-sum payments to certain individuals covered by the defined benefit pension plan which resulted in a curtailment loss of approximately $0.3 million during the second quarter of 2018, which is reported within “Net periodic benefit (income), excluding service cost” within the consolidated statements of (loss) income. In the fourth quarter 2019, Turning Point elected to terminate the defined benefit pension plan, effective December 31, 2019 with final distributions to be made in 2020.
Turning Point sponsored a defined benefit postretirement plan that covered hourly employees. This plan provides medical and dental benefits. This plan is contributory with retiree contributions adjusted annually. Turning Point’s policy is to make contributions equal to benefits paid during the year. In the fourth quarter 2019, Turning Point amended the plan to cease benefits effective June 30, 2020. The plan amendment eliminated a significant amount of the benefits under the plan, resulting in a curtailment of $3.1 million. The curtailment resulted in $1.8 million being reclassified from other comprehensive income to income. The total gain on the curtailment was $4.9 million and is recorded in net periodic (benefit) expense, excluding service cost in the consolidated statement of (loss) income for the year ended December 31, 2019. Turning Point expects to contribute approximately $0.2$0.1 million to its postretirement plan in 20192020 for the payment of benefits.
The following tables provide a reconciliation of the changes in the plans’ benefit obligations and fair value of assets for the years ended December 31, 20182019 and 2017,2018, and a statement of the funded status:
The following tables provides the components of net periodic pension and postretirement benefit costs and total costs for the plans:
| | Pension Benefits | | | Postretirement Benefits | |
(In thousands) | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Reconciliation of benefit obligations: | | | | | | | | | | | | |
Benefit obligation at January 1 | | $ | 13,700 | | | $ | 17,121 | | | $ | 3,305 | | | $ | 4,217 | |
Service cost | | | 104 | | | | 104 | | | | - | | | | - | |
Interest cost | | | 520 | | | | 553 | | | | 101 | | | | 117 | |
Actuarial loss (gain) | | | 916 | | | | (1,157 | ) | | | - |
| | | (527 | ) |
Assumptions | | | - | | | | - | | | | - | | | | (323 | ) |
Settlement/curtailment | | | - | | | | (1,866 | ) | | | (3,207 | ) | | | - | |
Benefits paid | | | (1,023 | ) | | | (1,055 | ) | | | (84 | ) | | | (179 | ) |
Benefit obligation at December 31 | | $ | 14,217 | | | $ | 13,700 | | | $ | 115 | | | $ | 3,305 | |
| | | | | | | | | | | | | | | | |
Reconciliation of fair value of plan assets: | | | | | | | | | | | | | | | | |
Fair value of plan assets at January 1 | | $ | 14,923 | | | $ | 17,517 | | | $ | - | | | $ | - | |
Actual return on plan assets | | | 2,003 | | | | 327 | | | | - | | | | - | |
Employer contribution | | | - | | | | - | | | | 84
| | | | 179 | |
Settlement/curtailment | | | - | | | | (1,866 | ) | | | - | | | | - | |
Benefits paid | | | (1,023 | ) | | | (1,055 | ) | | | (84 | ) | | | (179 | ) |
Fair value of plan assets at December 31 | | $ | 15,903 | | | $ | 14,923 | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | |
Funded status: | | | | | | | | | | | | | | | | |
Funded status at December 31 | | $ | 1,686 | | | $ | 1,223 | | | $ | (115 | ) | | $ | (3,305 | ) |
Unrecognized net actuarial loss (gain) | | | 1,827 | | | | 2,416 | | | | (54 | ) | | | (1,929 | ) |
Net amount recognized | | $ | 3,513 | | | $ | 3,639 | | | $ | (169 | ) | | $ | (5,234 | ) |
| | Pension Benefits | | | Postretirement Benefits | |
|
| | 2018 | | | 2017 | | | 2018 | | | 2017 | |
Reconciliation of benefit obligations: | | | | | | | | | | | | |
Benefit obligation at January 1 | | $ | 17,121 | | | $ | 16,780 | | | $ | 4,217 | | | $ | 4,745 | |
Service cost | | | 104 | | | | 104 | | | | | | | | - | |
Interest cost | | | 553 | | | | 649 | | | | 117 | | | | 144 | |
Actuarial loss (gain) | | | (1,157 | ) | | | 668 | | | | (527 | ) | | | (472 | ) |
Assumptions | | | - | | | | - | | | | (323 | ) | | | - | |
Settlement/curtailment | | | (1,866 | ) | | | - | | | | - | | | | - | |
Benefits paid | | | (1,055 | ) | | | (1,080 | ) | | | (179 | ) | | | (200 | ) |
Benefit obligation at December 31 | | $ | 13,700 | | | $ | 17,121 | | | $ | 3,305 | | | $ | 4,217 | |
| | | | | | | | | | | | | | | | |
Reconciliation of fair value of plan assets: | | | | | | | | | | | | | | | | |
Fair value of plan assets at January 1 | | $ | 17,517 | | | $ | 16,357 | | | $ | - | | | $ | - | |
Actual return on plan assets | | | 327 | | | | 2,240 | | | | - | | | | - | |
Employer contribution | | | - | | | | - | | | | 179 | | | | 200 | |
Settlement/curtailment | | | (1,866 | ) | | | - | | | | - | | | | - | |
Benefits paid | | | (1,055 | ) | | | (1,080 | ) | | | (179 | ) | | | (200 | ) |
Fair value of plan assets at December 31 | | $ | 14,923 | | | $ | 17,517 | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Funded status: | | | | | | | | | | | | | | | | |
Funded status at December 31 | | $ | 1,223 | | | $ | 396 | | | $ | (3,305 | ) | | $ | (4,217 | ) |
Unrecognized net actuarial loss (gain) | | | 2,416 | | | | 3,443 | | | | (1,929 | ) | | | (1,161 | ) |
Net amount recognized | | $ | 3,639 | | | $ | 3,839 | | | $ | (5,234 | ) | | $ | (5,378 | ) |
Accumulated benefit obligations did not exceed plan assets at December 31, 2019 or 2018 or 2017 for the Company’sTurning Point’s pension plan.
The asset allocation for Turning PointPoint’s defined benefit plan, by asset category, follows:
| | Target Allocation |
| | Percentage of Plan Assets at December 31, | | |
|
| Target Allocation | | | Percentage of Plan Assets at December 31, | |
| | 2019 | | | 2018 | | | 2017 | | | 2020 | | | 2019 | | | 2018 | |
Asset category: | | | | | | | | | | | | | | | | | | |
Equity securities (1) | | | 0.0 | % | | | 0.0 | % | | | 51.4 | % | |
Debt securities | | | 100.0 | % | | | 84.8 | % | | | 21.6 | % | | 100.0 | % | | 88.5 | % | | 84.8 | % |
Cash | | | 0.0 | % | | | 15.2 | % | | | 27.0 | % | | | 0.0 | % | | | 11.5 | % | | | 15.2 | % |
Total | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| | | | | | | | | | | | | |
(1) No shares of Turning Point’s common stock were included in equity securities at December 31, 2017 | | |
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.
Following is the description of the valuation methodologies used for assets measured at fair value subsequent to initial recognition. These methods may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while Turning Point believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. There have been no changes in the methodologies used at December 31, 20182019 and 2017.2018.
Pooled Separate Accounts: Valued at the net asset value (NAV) of shares held by the plan at year end.
Guaranteed Deposit Account: Valued at contract value, which approximates fair value.
Assets measured at fair value on a recurring basis: The table below presents the balances of the plan’s assets measured at fair value on a recurring basis by level within the fair value hierarchy:
| | Total | | | Level 1 | | | Level 2 | | | Level 3 | | |
(In thousands) | | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
December 31, 2019 | | | | | | | | | | | | | |
Pooled separate accounts | | $ | 12,658 | | | $ | - | | | $ | 12,658 | | | $ | - | | | $ | 14,079 | | | $ | - | | | $ | 14,079 | | | $ | - | |
Guaranteed deposit account | | | 2,265 | | | | - | | | | - | | | | 2,265 | | | | 1,824 | | | | - | | | | - | | | | 1,824 | |
Total assets at fair value as of December 31, 2018 | | $ | 14,923 | | | $ | - | | | $ | 12,658 | | | $ | 2,265 | | |
Total assets at fair value at end of period | | | $ | 15,903 | | | $ | - | | | $ | 14,079 | | | $ | 1,824 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2018 | | | | | | | | | | | | | |
Pooled separate accounts | | $ | 12,796 | | | $ | - | | | $ | 12,796 | | | $ | - | | | $ | 12,658 | | | $ | - | | | $ | 12,658 | | | $ | - | |
Guaranteed deposit account | | | 4,721 | | | | - | | | | - | | | | 4,721 | | | | 2,265 | | | | - | | | | - | | | | 2,265 | |
Total assets at fair value as of December 31, 2017 | | $ | 17,517 | | | $ | - | | | $ | 12,796 | | | $ | 4,721 | | |
Total assets at fair value at end of period | | | $ | 14,923 | | | $ | - | | | $ | 12,658 | | | $ | 2,265 | |
Level 3 Gains and Losses: The table below sets forth a summary of changes in the fair value of the Guaranteed Deposit Account:
| | Guaranteed Deposit Account | | |
| Balance at December 31, 2016 | | $ | 1,966 | | |
Total gains (losses), realized/unrealized | | | | | |
Return on plan assets | | | 64 | | |
Purchases, sales, and settlements, net | | | 2,691 | | |
(In thousands) | | | Guaranteed Deposit Account | |
Balance at December 31, 2017 | | | 4,721 | | | $ | 4,721 | |
Total gains (losses), realized/unrealized | | | | | | | |
Return on plan assets | | | 81 | | | 81 | |
Purchases, sales, and settlements, net | | | (2,537 | ) | | | (2,537 | ) |
Balance at December 31, 2018 | | $ | 2,265 | | | 2,265 | |
Total gains (losses), realized/unrealized | | | | |
Return on plan assets | | | 45 | |
Purchases, sales, and settlements, net | | | | (486 | ) |
Balance at December 31, 2019 | | | $ | 1,824 | |
Turning Point’s investment philosophy is to earn a reasonable return without subjecting plan assets to undue risk. Turning Point uses one management firm to manage plan assets, which are invested in equity and debt securities. Turning Point’s investment objective
is to match the duration of the debt securities with the expected payments.
The following table provides the amounts recognized in the consolidated balance sheets as of December 31:
| | Pension Benefits | | | Postretirement Benefits | | | Pension Benefits | | Postretirement Benefits | |
| | | 2018 | | | 2017 | | | 2018 | | | 2017 | | |
(In thousands) | | | 2019 | | 2018 | | 2019 | | 2018 | |
Prepaid asset | | $ | 1,223 | | | $ | 396 | | | $ | - | | | $ | - | | | $ | 1,686 | | | $ | 1,223 | | | $ | - | | | $ | - | |
Accrued benefit cost | | | - | | | | - | | | | (3,305 | ) | | | (4,217 | ) | | | - | | | �� | - | | | | (115 | ) | | | (3,305 | ) |
Accumulated other comprehensive loss, unrecognized net gain (loss) | | | 2,416 | | | | 3,443 | | | | (1,929 | ) | | | (1,161 | ) | | | 1,827 | | | | 2,416 | | | | (54 | ) | | | (1,929 | ) |
| | $ | 3,639 | | | $ | 3,839 | | | $ | (5,234 | ) | | $ | (5,378 | ) | |
Total | | | $ | 3,513 | | | $ | 3,639 | | | $ | (169 | ) | | $ | (5,234 | ) |
The amounts in accumulated other comprehensive (loss) income that are expected to be recognized in net periodic benefit costs in 2019 are losses2020 is a loss of $0.2$1.8 million for pension and gains of approximately $0.1 million for postretirement, respectively.
pension.
The following table provides the components of net periodic pension and postretirement benefit costs and total costs for the plans for the years ended December 31:
| | Pension Benefits | | | Post-Retirement Benefits | | | Pension Benefits | | | Postretirement Benefits | |
| | | 2018 | | | 2017 | | | 2016 | | | 2018 | | | 2017 | | | 2016 | | |
(In thousands) | | | 2019 | | | 2018 | | | 2019 | | | 2018 | |
Service cost | | $ | 104 | | | $ | 104 | | | $ | 104 | | | $ | - | | | $ | - | | | $ | - | | | $ | 104 | | | $ | 104 | | | $ | - | | | $ | - | |
Interest cost | | | 553 | | | | 649 | | | | 699 | | | | 117 | | | | 144 | | | | 173 | | | 520 | | | 553 | | | 101 | | | 117 | |
Expected return on plan assets | | | (949 | ) | | | (1,024 | ) | | | (1,034 | ) | | | - | | | | - | | | | - | | | (645 | ) | | (949 | ) | | - | | | - | |
Amortization of (gains) losses | | | 186 | | | | 463 | | | | 493 | | | | (81 | ) | | | (52 | ) | | | (24 | ) | | 147 | | | 186 | | | (169 | ) | | (81 | ) |
Curtailment loss | | | 306 | | | | - | | | | - | | | | - | | | | - | | | | - | | |
Curtailment loss (gain)
| | | | - | | | | 306 | | | | | )
| | | - | |
Net periodic benefit cost | | $ | 200 | | | $ | 192 | | | $ | 262 | | | $ | 36 | | | $ | 92 | | | $ | 149 | | | $ | 126 | | | $ | 200 | | | $ | (4,983 | ) | | $ | 36 | |
Turning Point is required to make assumptions regarding such variables as the expected long-term rate of return on plan assets and the discount rate applied to determine service cost and interest cost. The rate of return on assets used is determined based upon analysis of the plans’ historical performance relative to the overall markets and mix of assets. The assumptions listed below represent management’s review of relevant market conditions and have been adjusted, as appropriate. A discount rate was not used for postretirement benefits in 2019 as all benefits will be paid in less than one year. The weighted average assumptions used in the measurement of Turning Point’s benefit obligation are as follows:
| | Pension Benefits | | | Post-Retirement Benefits | |
|
| | 2018 | | | 2017 | | | 2018 | | | 2017 | |
Discount rate | | | 4.00 | % | | | 3.50 | % | | | 4.25 | % | | | 3.25 | % |
| | Pension Benefits | | | Postretirement Benefits | |
| | 2019 | | | 2018 | | | 2018 | |
Discount rate | | | 3.00 | % | | | 4.00 | % | | | 4.25 | % |
The weighted average assumptions used to determine net periodic pension and postretirement costs are as follows:
| | Pension Benefits | | | Post-Retirement Benefits | |
|
| | 2018 | | | 2017 | | | 2018 | | | 2017 | |
Discount rate | | | 3.8 | % | | | 4.0 | % | | | 3.3 | % | | | 3.5 | % |
Expected return on plan assets | | | 6.0 | % | | | 6.5 | % | | | - | | | | - | |
For postretirement benefits measurement purposes, the assumed health care cost trend rate for participants as of December 31, 2018, and going forward, was 5.5%. Assumed health care cost trend rates could have a significant effect on the amounts reported for the postretirement benefit plans. A 1% increase in assumed health care cost trend rates would have the following effects:
| | 2018 | | | 2017 | | | 2016 | |
Effect on total of service and interest cost components of net periodic postretirement cost | | $ | 3 | | | $ | 4 | | | $ | 3 | |
|
Effect on the health care component of the accumulated postretirement benefit obligation | | $ | (97 | ) | | $ | (109 | ) | | $ | (78 | ) |
| Pension Benefits | | Postretirement Benefits | |
| 2019 | | 2018 | | 2018 | |
Discount rate | | | 4.0 | % | | | 3.8 | % | | | 3.3 | % |
Expected return on plan assets | | | 4.5 | % | | | 6.0 | % | | | 0.0 | % |
The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
Period | | Pension Benefits | | | Postretirement Benefits | |
| Pension Benefits
(in thousands)
|
|
| 2019 | | $ | 1,071 | | | $ | 222 | | |
2020 | | | 1,051 | | | | 227 | |
| $ | 1,036 |
|
2021 | | | 1,041 | | | | 231 | |
| | 1,028
|
|
2022 | | | 1,016 | | | | 236 | |
| | 1,003
|
|
2023 | | | 1,005 | | | | 241 | |
| | 994
|
|
2024-2028 | | $ | 4,672 | | | $ | 1,233 | | |
2024
| |
| | 964
|
|
2025-2029
| |
| | 4,489
|
|
Turning Point also sponsors a voluntary 401(k) retirement savings plan. Eligible employees may elect to contribute up to 15% of their annual earnings subject to certain limitations. For the 20182019 and 20172018 Plan Years, Turning Point contributed 4% to those employees contributing 4% or greater. For those employees contributing less than 4%, Turning Point matched the contribution by 100%. Additionally, for all years presented, Turning Point made discretionary contributions of 1% to all employees, regardless of an employee’s contribution level. Turning Point’s contributions to this plan were approximately $1.5 million for 2019 and $1.2 million for 2018, $0.9 million for 2017, and $0.8 million for 2016.2018.
Note 17. Lease Commitments:
The Company leases certain office space and vehicles for varying periods. The following is a schedule of future minimum lease payments for operating leases that had initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2018:
Year | | Payments | |
2019 | | $ | 2,462 | |
2020 | | | 1,969 | |
2021 | | | 1,019 | |
2022 | | | 561 | |
2023 | | | 400 | |
Thereafter | | | 2,660 | |
Total | | $ | 9,071 | |
The total lease expense included in the consolidated statements of income for the years ended December 31, 2018, 2017, and 2016, was $4.9 million, $2.8 million, and $1.8 million, respectively.
Note 18.19. Stockholders’ Equity
Common Stock
As described in Note 1, just prior to the Contribution and Exchange, the Company’s issued and outstanding common stock was reclassified such that every 25 shares of common stock became one fully paid and nonassessable share of Class A Common Stock. Any fractional shares were rounded up and an additional share was issued. At the consummation of the Contribution and Exchange, the Company issued 7,335,018 shares of its Class A Common Stockcommon stock to Turning Point shareholders, in exchange for 9,842,373 shares of Turning Point stock, and 857,714 shares of its Class A Common Stock,common stock, in exchange for the Company’s outstanding common stock. The Company also issued 13,700 shares of Class A Common Stockcommon stock to holders of the Company’s restricted stock, which vested at the time of the Contribution and Exchange. Following the consummation of the Contribution and Exchange, the Company distributed a dividend of one share of Class B Common Stockcommon stock for each outstanding share of Class A Common Stock,common stock, for a total issuance of 8,190,166 shares of Class B Common Stock.
common stock.In addition, under the Fifth Amended and Restated Certificate of Incorporation, which became effective at the time of the Contribution and Exchange, the number of authorized shares of the Company’s Common Stock,common stock, $0.01 par value per share, was increased from 50,000,000 to 330,000,000, of which 300,000,000 are Class A Common Stockcommon stock and 30,000,000 are Class B Common Stock. Sharescommon stock.
The Company has two classes of common stock, Class A and Class B; shares of Class B common stock are convertible into shares of Class A Common Stockcommon stock at any time, on a one-for-one basis. Shares of Class A common stock and Class B Common Stockcommon stock have the same rights and powers, rank equally, (including as to dividends and distributions, and upon any liquidation, dissolution or winding up of the Company), share ratably and are identical in all respects and as to all matters. The holders of shares of Class A Common Stock and Class B Common Stock will vote together as a single class on all matters, (including the election of directors) submitted to a vote or for the written consent of the stockholders of the Company. Each holder of Class A Common Stock has the right to one vote per share of Class A Common Stock andexcept that (i) each holder of Class B Common Stock has the right to ten votes per share of Class B Common Stock. Thecommon stock shall have the right to 10 votes per share and (ii) the shares of Class B Common Stock arecommon stock shall be convertible into shares of Class A Common Stockcommon stock automatically upon the transfer of such shares of Class B Common Stock,common stock, with certain exceptions, or upon the affirmative vote of holders of two-thirds of the then-outstanding shares of Class B Common Stockcommon stock or voluntarily by the holder of such shares of Class B Common Stock.common stock.
The Sixth Amended and Restated Certificate of Incorporation was approved by the Company’s stockholders by partial written consent on July 14, 2017, and in accordance with the rules of the Securities and Exchange Commission and Delaware corporation law regarding approval by partial written consent, became effective when filed with the Secretary of State of the State of Delaware on August 18, 2017.
Preferred Stock
On May 30, 2017, under the Fifth Amended and Restated Certificate of Incorporation, the Company increased the number of authorized shares of the Company’s Preferred Stock, $0.01 par value per share, from 19,664,362 to 50,000,000, all of which is designated as blank check preferred stock. No changes with respect to Preferred Stockpreferred stock were made in the Sixth Amended and Restated Certificate of Incorporation.
Common Stock Repurchase Program
On June 29, 2017, the Company’s Board of Directors authorized a program, effective immediately, to repurchase over a period of twelve months shares of the Company’s Class A Common Stockcommon stock or Class B Common Stock,common stock, par value $0.01 per share, constituting, in the aggregate, up to 5% of the outstanding shares of Common Stock.common stock. Shares of the Common Stockcommon stock may be repurchased in the open market or through negotiated transactions. The program may be terminated or suspended at any time at the discretion of the Company.
The time of purchases and the exact number of shares to be purchased, if any, will depend on market conditions. The repurchase program does not include specific price targets or timetables. The Company intends to finance the purchases using available working capital. The Crystal Term Loan, as described in Note 15. Notes Payable and Long-Term Debt, generally prohibits such
Pursuant to this program, repurchases of 270,491 shares of common stock were made during the Company’s Common Stock.
Repurchasesyear ended December 31, 2019 for a cost of $3.5 million. During the year ended December 31, 2018, repurchases of 103,492 shares of common stock were made pursuant to this program during the year ended December 31, 2018 for a cost of $1.4 million. Approval for these repurchases was received from Crystal. As of December 31, 2018, $0.8 million was included in Accruedaccrued liabilities on the Consolidated Balance Sheetsconsolidated balance sheets for unsettled repurchases. No amounts were included in accrued liabilities on the consolidated balance sheets for unsettled repurchases were made during the year endedas of December 31, 2017.2019.
In January 2018, the Company issued 181,825 shares of its Class A common stock in a private placement for gross proceeds of $2.0 million.
In March 2018, the Company granted 18,834 shares of restricted stock with immediate vesting to individuals for services performed. These shares were granted outside of the Company’s 2017 Omnibus Equity Compensation Plan.
Dividends paid by Turning Point
On November 9, 2017, theTurning Point’s Board of Directors of Turning Point approved the initiation of a cash dividend to its shareholders. The initial quarterly dividend of $0.04 per common share was paid on December 15, 2017 to shareholders of record at the close of business on November 27, 2017, with $0.4 million paid to shareholders of Turning Point other than SDI as a result of this dividend.
During the year ended December 31, 2018, Turning Point paid or accrued dividends of $1.6 million to its shareholders other than SDI.2017. The most recent dividend wasof $0.05 per common share, an increase of approximately 11%, will be paid on January 11, 2019April 10, 2020, to shareholders of record at the close of business on December 21,2018March 20, 2020.
Dividends, among other disbursements assets, are classified as restricted payments within the 2018 Credit Facility. Turning Point is generally permitted to make restricted payments provided that, at the time of payment, or as a result of payment, Turning Point is not in default. Additional restrictions limit the aggregate amount of restricted, quarterly dividends during a fiscal year to the aggregate amount of mandatory and voluntary principal payments made on the priority term loans during the fiscal year.
Note 19.20. Share-Based Compensation