SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

☑☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

~~PART I~~

~~FINANCIAL INFORMATION~~

Item 1.

Financial Statements

(dollars in thousands except share and per share data)

Class A common stock, $0.01 par value; authorized shares, 300,000,000; 8,711,972 and 8,348,373 issued and outstanding shares at June 30, 2018 and December 31, 2017, respectively

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

(dollars in thousands except share and per share data)

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

(dollars in thousands)

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

(dollars in thousands, except share data)

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

(dollars in thousands)

Standard Diversified Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Continued)

(dollars in thousands)

(unaudited)

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

(dollars in thousands, except where otherwise designated, and per share data)

Note 1. Organization and Description of Business

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

Noncontrolling Interests

Cash and Cash Equivalents

Derivative Instruments

Risks and Uncertainties

Master Settlement Agreement Escrow Account

Estimated

Fair

Value

Food and Drug Administration (“FDA”)

~~Food and Drug Administration (“FDA”)~~

Stock-Based Compensation

Fixed Maturity Securities

Deferred Policy Acquisition Costs (“DAC”)

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

Premiums and agents’ balances in the course of collection are reported at the amount management expects to collect from outstanding balances. Past due amounts are determined based on contractual terms. Maidstone provides an allowance for doubtful accounts based upon review of outstanding receivables and historical collection information. Maidstone recorded an allowance for doubtful accounts of less than $0.1 million as of ~~March 31,~~June 30, 2018.

Investment Income Due and Accrued

Investment income consists of interest, which is recognized on an accrual basis. Due and accrued income is not recorded on fixed maturity securities in default and on delinquent fixed maturities where collection of interest is improbable. As of ~~March 31,~~June 30, 2018, no investment income amounts were excluded from the Company balances.

Incurred Losses and Loss Adjustment Expenses

Incurred losses and loss adjustment expenses (“LAE”) are charged to operations as incurred. The liability for losses and LAE is based upon individual case estimates for reported claims and a factor for incurred but not reported (“IBNR”) claims. Losses, LAE and related liabilities are reported net of estimated salvage and subrogation. Inherent in the estimate of ultimate losses and LAE are expected trends in claim severity and frequency and other factors which may vary significantly as claims are settled; however, management believes that its aggregate provision for losses and LAE at ~~March 31,~~June 30, 2018 is reasonable and adequate to meet the ultimate net cost of covered losses, but such provision is necessarily based on estimates and the ultimate net cost may vary significantly from such estimates. As adjustments to these estimates become necessary, such adjustments are reflected in current operations.

Insurance Company Assessments

Assessments from various state insurance departments are incurred by the insurance company in the normal course of business. Assessments based upon premium volumes are accrued during the year while non-premium assessments are expensed in the period they are reported to the insurance company. There were no significant assessments incurred induring the ~~period from January 2, 2018 to March 31,~~three and six months ended June 30, 2018.

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 ~~March 31,~~June 30, 2018, no amounts were deemed to be uncollectible from reinsurers.

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

Asset Retirement Obligations

The Company records obligations associated with the retirement of tangible long-lived assets, such as advertising structures, in the period in which the assets are ~~acquired~~.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~~.basis.

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

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

Recent Accounting Pronouncements Adopted

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

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

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

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

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

Recent Accounting Pronouncements Not Yet Adopted

Note 3. Acquisitions

Maidstone acquisition

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

The transaction was accounted for as a business combination under the acquisition method of accounting. Accordingly, the tangible and identifiable intangible assets acquired and liabilities assumed were recorded at fair value as of the date of acquisition. The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed at the date of acquisition:

	At January 2, 2018 as reported			Q2'18 Adjustment			At January 2, 2018 as adjusted
	(preliminary) (in thousands)			(in thousands)			(preliminary) (in thousands)
Fixed maturities available for sale	$	25,386		$	-		$	25,386
Cash and cash equivalents		12,795			-			12,795
Investment income due and accrued		203			-			203
Premiums receivable		7,158			-			7,158
Property, plant and equipment		408			-			408
Intangible assets		2,100			-			2,100
Other assets		615			-			615
Reserves for losses and loss adjustment expenses		(29,366	)		(435	)		(29,801	)
Unearned premiums		(12,784	)		-			(12,784	)
Advance premium collected		(651	)		-			(651	)
Deferred tax liability		(420	)		-			(420	)
Other liabilities		(3,230	)		-			(3,230	)
Total net assets acquired		2,214			(435	)		1,779
Consideration exchanged		2,500			-			2,500
Goodwill	$	286		$	435		$	721

~~Table of Contents~~

At January 2, 2018
(preliminary)

Fixed maturities available for sale $ 25,386
Cash and cash equivalents 12,795
Investment income due and accrued 203
Premiums receivable 7,158
Property, plant and equipment 408
Intangible assets 2,100
Other assets 615
Reserves for losses and loss adjustment expenses (29,366 )
Unearned premiums (12,784 )
Advance premium collected (651 )
Deferred tax liability (420 )
Other liabilities (3,230 )
Total net assets acquired 2,214
Consideration exchanged 2,500
Goodwill $ 286

The purchase price allocation has been prepared on a preliminary basis and is subject to change as additional information becomes available concerning the fair value of the assets acquired and liabilities assumed. These changes could be material and could result in the recognition of a bargain purchase gain or goodwill. ~~Due to the timing of the acquisition on January 2, 2018, the~~The Company is still finalizing the valuation of assets acquired and liabilities assumed and as such, the fair value amounts noted in the table above are preliminary and subject to change. Primary amounts subject to adjustment include, but are not limited to, intangible assets, reserves for losses and loss adjustment expenses and the potential for the recognition of a gain on bargain purchase or a change in the goodwill balance as management has not yet finalized its analysis of the valuation of assets acquired and liabilities assumed. Such changes in the fair values from those listed above could be significant.

Any adjustments to the purchase price allocation will be made as soon as practicable but no later than one year from the January 2, 2018 acquisition date.

The operating results of Maidstone have been included in these condensed consolidated statements ~~for the entire first quarter of~~since its acquisition date on January 2, 2018 ~~including~~and include net revenues of ~~$7.7~~$7.5 million and $15.2 million and net income of $0.6 ~~million.~~million and $1.2 million for the three and six months ended June 30, 2018, respectively.

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The following supplemental unaudited pro forma information presents the Company’s financial results as if the acquisition of Maidstone had occurred on January 1, 2017:

	Three months ended June 30, 2017
	As reported		Maidstone			Proforma
Total revenue, net	$	72,086	$	8,936		$	81,022
Net income (loss) attributable to SDI	$	4,903	$	(597	)	$	4,306

	Three months ended March 31, 2017										Six months ended June 30, 2017
	As reported			Maidstone				Proforma			As reported		Maidstone			Proforma
Total revenue, net		$	66,788		$	10,087			$	76,875	$	138,874	$	19,023		$	157,897
Net income		$	1,877		$	(178	)		$	1,699
Net income (loss) attributable to SDI											$	6,780	$	(775	)	$	6,005

Standard Outdoor

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

~~Table of Contents~~

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

Reverse acquisition of Turning Point

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

On June 1, 2017, at the consummation of the Contribution and Exchange, the SG Parties contributed to SDI 9,842,373 shares of Turning Point Common Stock, representing a 52.1% ownership interest of Turning Point in exchange for 7,335,018 shares of Class A Common Stock of SDI, based on the exchange ratio described above. Immediately after the consummation of the Contribution and Exchange, SDI distributed a dividend of 7,335,018 shares of Class B Common Stock to the SG Parties. As of ~~March 31,~~June 30, 2018, SDI ~~has~~had an ownership interest of ~~51.2%~~51.0% in Turning Point.

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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 ~~the~~ SDI are accounted for at fair value. In this case, since the assets of SDI at the acquisition date consist principally of cash and cash equivalents, there was no significant difference between book value and fair value.

Acquisitions by Turning Point

Vapor Supply

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

	Fair Value

Working capital	$	3,163
Fixed assets		498
Trade name		1,139
Total purchase price	$	4,800

Vapor Shark

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

~~Table of Contents~~

Note 4. Investments

The Company currently classifies all of its investments in debt securities held by Maidstone as available-for-sale and, accordingly, they are carried at estimated fair value. The amortized cost, gross unrealized gains and losses, and fair value of investments in fixed maturity securities at ~~March 31,~~June 30, 2018 are as follows:

March 31, 2018
Amortized Cost
Gross Unrealized
Gains

Gross
Unrealized
Losses
Fair Value
U.S Treasury and U.S Government $ 5,343 $ - $ (41 ) $ 5,302
U.S. Tax-exempt Municipal 4,386 - (78 ) 4,308
Corporate 6,988 - (141 ) 6,847
Mortgage and Asset-backed Securities 6,454 - (139 ) 6,315
Total Fixed Maturity Securities $ 23,171 $ - $ (399 ) $ 22,772

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	June 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S. Treasury and U.S. Government	$	5,336	$	21	$	(64	)	$	5,293
U.S. Tax-exempt Municipal		4,361		-		(68	)		4,293
Corporate		9,737		1		(168	)		9,570
Mortgage and Asset-backed Securities		7,489		-		(151	)		7,338
Total Fixed Maturity Securities	$	26,923	$	22	$	(451	)	$	26,494

Amortized cost and fair value of fixed maturity securities at ~~March 31,~~June 30, 2018 by contractual maturity are shown below. The actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without call or prepayment penalties.

	March 31, 2018				June 30, 2018
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	2,820	$	2,816	$	2,570	$	2,568
Due after one year through five years		7,612		7,505		10,741		10,595
Due after five years through ten years		6,304		6,136		6,123		5,993
Mortgage and Asset-backed Securities		6,435		6,315		7,489		7,338
Total	$	23,171	$	22,772	$	26,923	$	26,494

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

At ~~March 31,~~June 30, 2018, fixed maturity securities that were in an unrealized loss position and the length of time that such securities have been in an unrealized loss position, as measured by their prior ~~12 month~~12-month fair values, are as follows:

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

~~Table of Contents~~

March 31, 2018
Less Than 12 Months
Fair Value
Gross
Unrealized
Losses

Bonds:
U.S. Treasury and U.S. Government $ 5,302 $ (41 )
U.S. Tax-exempt Municipal 4,308 (78 )
Corporate Bonds 6,847 (141 )
Mortgage and Asset-backed Securities 6,315 (139 )
Total Investments $ 22,772 $ (399 )

The Company has evaluated the unrealized losses on the fixed maturity securities and determined that they are not attributable to credit risk factors. For fixed maturity securities, losses in fair value are viewed as temporary if the fixed maturity security can be held to maturity and it is reasonable to assume that the issuer will be able to service the debt, both as to principal and interest. The Company did not recognize OTTI losses in the period from January 2, 2018 to ~~March 31, 2018~~June 30, 2018.

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

The components of net investment income for the period from January 2, 2018 to ~~March 31,~~June 30, 2018 are as follows:

For the three months ended June 30, 2018 and for the period from January 2, 2018 to ~~March 31,~~June 30, 2018, Maidstone ~~realized no~~recognized capital ~~gains or losses.~~losses related to changes in fair value of $9 on its equity securities.

The following ~~table shows~~tables show how Maidstone’s investments are categorized in the fair value hierarchy as of ~~March 31,~~June 30, 2018:

There were no transfers between levels during the ~~period from January 2, 2018 to March 31, 2018~~three and six months ended June 30, 2018.

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

The following table details the fair value of the Company’s restricted assets as of ~~March 31,~~June 30, 2018:

Note 5. Derivative Instruments

The Company’s policy is to manage the risks associated with foreign exchange rate movements. The policy allows hedging up to 100% of its anticipated purchases of inventory over a forward period that will not exceed 12 rolling and consecutive months. The Company may, from time to time, hedge currency for non-inventory purchases, e.g., production equipment, not to exceed 90% of the purchase price. The Company executed various forward contracts during the three months ended ~~March 31,~~June 30, 2018, none of which met hedge accounting requirements, for the purchase of ~~€6.0~~€6.3 million. The Company executed various forward contracts during the six months ended June 30, 2018, none of which met hedge accounting requirements, for the purchase of €12.3 million. The Company executed no forward contracts during ~~the three months ended March 31,~~ 2017. At ~~March 31,~~June 30, 2018, and December 31, 2017, the Company had forward contracts for the purchase of ~~€3.8~~€6.3 million and €0 million, respectively.

The Company’s policy is to manage interest rate risk by reducing the volatility of future cash flows associated with debt instruments bearing interest at variable rates. In March 2018, the Company executed various interest rate swap agreements for a notional amount of $70 million with an expiration of December 2022. The swap agreements fix LIBOR at 2.755%. The swap agreements met the hedge accounting requirements; thus, any change in fair value is recorded to other comprehensive income. The Company uses the Shortcut Method to account for the swap agreements. The Shortcut Method assumes the hedge to be perfectly effective; thus, there is no ineffectiveness to be recorded in earnings. The swap agreements’ fair values at ~~March 31,~~June 30, 2018, resulted in a liability of ~~$0.7~~$0.1 million included in other long-term liabilities.

Note 6. Fair Value of Financial Instruments

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of ASC 825, Financial Instruments. The estimated fair value amounts have been determined by the Company using the methods and assumptions described below. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Refer to Note 2. Summary of Significant Accounting Policies for details on the fair value of investments in Turning Point’s MSA and Note 4. Investments for details on the fair value of investments held by Maidstone.

Cash and Cash Equivalents

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

2018 Revolving Credit Facility

As all of Turning Point’s long-term debt bears interest at variable rates that fluctuate with market rates, the carrying values of its long-term debt instruments approximate their respective fair values. As of ~~March 31,~~June 30, 2018, the fair values of the 2018 First Lien Term Loan and the 2018 Second Lien Term Loan approximated ~~$160.0~~$158.0 million and $40.0 million, respectively. As of December 31, 2017, the fair values of the 2017 First Lien Term Loans and the 2017 Second Lien Term Loan approximated $140.6 million and $56.1 million, respectively.

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

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

Interest Rate ~~Swap~~Swaps

The Company had swap contracts for a total notional amount of $70 million at ~~March 31,~~June 30, 2018. The Company had no swap agreements outstanding at December 31, 2017. The fair values of the swap contracts are based upon quoted market prices and resulted in a liability of ~~$0.7~~$0.1 million as of ~~March 31,~~June 30, 2018.

Note 8. Property, Plant and Equipment

Property, plant and equipment ~~consist~~consists of:

March 31,
2018

December 31,
2017

Land $ 22 $ 22
Building and improvements 2,072 2,072
Leasehold improvements 1,873 1,873
Machinery and equipment 12,960 12,635
Advertising structures 17,715 329
Furniture, fixtures and other 4,285 3,821
38,927 20,752
Accumulated depreciation (12,347 ) (11,580 )
$ 26,580 $ 9,172

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

Note 9. Accrued Liabilities

Accrued liabilities consist of:

	March 31, 2018		December 31, 2017		June 30, 2018		December 31, 2017
Accrued payroll and related items	$	2,277	$	5,683	$	3,489	$	5,683
Customer returns and allowances		2,175		2,707		2,296		2,707
Other		9,818		11,624		9,132		11,624
	$	14,270	$	20,014	$	14,917	$	20,014

Other liabilities include ~~$0.7~~$0.8 million of SDI and Standard Outdoor related accruals at ~~March 31,~~June 30, 2018. There were $1.3 million of other liabilities related to SDI at December 31, 2017.

Note 10. Liability for Losses and Loss Adjustment Expenses

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

~~Table of Contents~~

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

	Period from January 2, 2018 to March 31, 2018
Reserve for losses and LAE at January 2, 2018	$	29,366	$	29,801
Provision for claims, net of insurance:
Provisions for claims, net of insurance:
Incurred related to:
Current year		5,812		11,217
Total incurred		5,812		11,217
Deduct payment of claims, net of reinsurance:
Paid related to:
Prior year		5,478		9,220
Current year		2,704		6,277
Total paid		8,182		15,497
Reserve for losses and LAE at March 31, 2018	$	26,996
Reserve for losses and LAE at June 30, 2018			$	25,521

Table of Contents

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

	As of March 31, 2018		As of June 30, 2018
Case basis reserves	$	18,024	$	16,896
Incurred but not reported reserves		8,972		8,625
Total	$	26,996	$	25,521

Note 11. Reinsurance

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

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

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

	Period from January 2, 2018 to March 31, 2018			Period from January 2, 2018 to June 30, 2018
Written premiums		$	4	$	25
Premiums earned		$	2	$	18

Maidstone remains obligated for amounts ceded in the event the reinsurer cannot meet its obligation when they become due. ~~The amount of ceding commissions, which was subtracted from commission expense for the period from January 2, 2018 to March 31, 2018 was $1 thousand.~~

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. AsAt June 30, 2018, management did not believe there is a risk of ~~March 31,~~loss as a result of a concentration of risk in its reinsurance program.

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

Note 12. Notes Payable and Long-Term Debt

	June 30, 2018			December 31, 2017
2018 First Lien Term Loan	$	158,000		$	-
2018 Second Lien Term Loan		40,000			-
SDI Crystal Term Loan		10,000			-
Standard Outdoor Promissory Notes		9,950			-
2017 First Lien First Out Term Loan		-			105,875
2017 First Lien Second Out Term Loan		-			34,738
2017 Second Lien Term Loan		-			55,000
Note payable - VaporBeast		-			2,000
Total Notes Payable and Long-Term Debt		217,950			197,613
Less deferred finance charges		(5,463	)		(3,573	)
Less current maturities		(9,098	)		(7,850	)
	$	203,389		$	186,190

Turning Point

2018 Credit Facility

On March 7, 2018, Turning Point entered into a ~~$250~~$250 million credit facility consisting of a $160 million 2018 First Lien Term Loan with Fifth Third Bank, as administrative agent, and other lenders, and a $50 million 2018 Revolving Credit Facility (collectively, the “2018 First Lien Credit Facility”) in addition to a $40 million 2018 Second Lien Term Loan (together with the 2018 First Lien Credit Facility, the “2018 Credit Facility”) with Prospect Capital Corporation, as administrative agent, and other lenders. The 2018 Credit Facility retained the $40 million accordion feature of the 2017 Credit Facility. Proceeds from the 2018 Credit Facility were used to repay, in full, the 2017 Credit Facility. Turning Point incurred a loss on extinguishment of debt of $2.4 million in the first quarter of 2018 as a result of the refinancing.

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

2018 First Lien Credit ~~Facility:~~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 ~~Term Loan~~Credit Facility has a maturity date of March 7, 2023. The 2018 First Lien Term Loan is secured by a first priority lien on substantially all of the assets of the borrowers and the guarantors thereunder, including a pledge of Turning Point’s capital stock, other than certain excluded assets (the “Collateral”). The 2018 First Lien Credit Facility contains certain financial covenants including maximum senior leverage ratio of 3.50x with step-downs to 3.00x, a maximum total leverage ratio of 4.50x with step-downs to 4.00x, and a minimum fixed charge coverage ratio of 1.20x. The weighted average interest rate of the 2018 First Lien Term Loan was ~~5.13%~~5.34% at ~~March 31,~~June 30, 2018. The weighted average interest rate of the 2018 Revolving Credit Facility was 6.05% at June 30, 2018. At June 30, 2018, Turning Point had no$16.0 million of borrowings outstanding under the 2018 Revolving Credit Facility. The $34.0 million unused portion of the 2018 Revolving Credit Facility is reduced by a $0.7 million letter of credit with Fifth Third Bank, resulting in $33.3 million of availability under the 2018 Revolving Credit Facility at ~~March 31,~~June 30, 2018.

2018 Second Lien Credit ~~Facility:~~Facility

The 2018 Second Lien Credit Facility bears interest at a rate of LIBOR plus 7.00% and has a maturity date of March 7, 2024. The 2018 Second Lien Term Loan is secured by a second priority interest in the Collateral and is guaranteed by the same entities as the 2018 First Lien Term Loan. The 2018 Second Lien Credit Facility contains certain financial covenants including a maximum senior leverage ratio of 3.75x with step-downs to 3.50x, a maximum total leverage ratio of 4.75x with step-downs to 4.50x, and a minimum fixed charge coverage ratio of 1.10x. The weighted average interest rate of the 2018 Second Lien Term Loan was ~~8.70%~~9.05% at ~~March 31,~~June 30, 2018.

2017 Credit Facility

Note Payable – VaporBeast

~~First Lien Term Loan~~

~~Second Lien Term Loan~~

~~Revolving Credit Facility~~

SDI and Standard Outdoor

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

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

~~Table of Contents~~

The Term Loan Agreement contains certain affirmative and negative covenants that are binding on the Borrowers, including, but not limited to, restrictions (subject to specified exceptions and qualifications) on the ability of the Borrowers to incur indebtedness, to create liens, to merge or consolidate, to make dispositions, to pay dividends or make distributions, to make investments, to pay any subordinated indebtedness, to enter into certain transactions with affiliates or to make capital expenditures.

In addition, the Term Loan Agreement requires the Borrowers to abide by certain financial covenants. Specifically, the Term Loan Agreement requires that the Borrowers:

Maintain unrestricted cash and cash equivalents of at least $3,000,000 in accounts subject to account control agreements in favor of the Agent at all times (i) prior to March 31, 2019 and (ii) after March 31, 2019 unless the Fixed Charge Coverage Ratio (as defined in the Term Loan Agreement) is greater than or equal to 1.10 to 1.00.

Maintain a Turning Point Consolidated Total Leverage Ratio (as defined in the Term Loan Agreement) of less than 6.00 to 1.00 prior to December 30, 2018, 5.75 to 1.00 from December 31, 2018 to December 30, 2019, and 5.50 to 1.00 starting December 31, 2019 and thereafter.

Maintain a Turning Point Consolidated Senior Leverage Ratio (as defined in the Term Loan Agreement) of less than 5.00 to 1.00 prior to December 30, 2018, 4.75 to 1.00 from December 31, 2018 to December 30, 2019, and 4.50 to 1.00 starting December 31, 2019 and thereafter.

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

The Term Loan Agreement contains customary events of default (which are in some cases subject to certain exceptions, thresholds, notice requirements and grace periods). The Term Loan Agreement also contains certain representations, warranties and conditions, in each case as set forth in the Term Loan Agreement.

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

On January 18, 2018, as partial consideration for an asset purchase of 83 billboard structures located in Alabama, as well as the ground leases and advertising contracts relating to such billboard structures, the Company issued a promissory note with a face value of $6.5 million. The promissory note was recorded net of a discount of $0.9 million, representing the difference between the face value and fair value at issuance. This discount will be amortized into interest expense using the effective interest rate method over the term of the promissory note. A principal payment of $1.0 million on the promissory note is payable January 1 of each year, beginning January 1, 2020 and ending January 1, 2022, with a $3.5 million final principal payment on January 1, 2023. The promissory note has a 5% fixed coupon interest rate and interest is payable quarterly. ~~Interest expense of $0.1 million, including amortization of the discount, was recorded for the three months ended March 31, 2018.~~

On February 20, 2018, as partial consideration for an asset purchase of 86 billboard structures located in Georgia and Florida, as well as the ground leases and advertising contracts relating to such billboard structures, the Company issued a promissory note with a face value of $3.5 million. The promissory note was recorded net of a discount of $0.3 million, representing the difference between the face value and fair value at issuance. This discount will be amortized into interest expense using the effective interest rate method over the term of the promissory note. A principal payment of $0.9 million on the promissory note is payable March 1, 2019, with the remaining principal paid down monthly through March 1, 2022. The promissory note has a 5% fixed coupon interest rate and interest is payable ~~monthly.~~ monthly starting March 1, 2019.

Interest expense related to the Standard Outdoor loans of ~~less than $0.1~~$0.2 million and $0.4 million, including amortization of the discount, was recorded for the three months and six months ended ~~March 31,~~June 30, 2018.

Note 13. Pension and Postretirement Benefit Plans

The following ~~table~~tables provides the components of net periodic pension and postretirement benefit costs and total costs for the plans:

Note 14. Stockholders’ Equity

As described in Note 1. Organization and Description of Business, just prior to the Contribution and Exchange, the Company’s issued and outstanding common stock was reclassified such that every 25 shares of common stock became one fully paid and nonassessable share of Class A Common Stock. Any fractional shares were rounded up and an additional share was issued. At the consummation of the Contribution and Exchange, the Company issued 7,335,018 shares of its Class A Common Stock to Turning Point shareholders, in exchange for 9,842,373 shares of Turning Point stock, and 857,714 shares of its Class A Common Stock, in exchange for the Company’s outstanding common stock. The Company also issued 13,700 shares of Class A Common Stock to holders of the Company’s restricted stock, which vested at the time of the Contribution and Exchange. Following the consummation of the Contribution and Exchange, the Company distributed a dividend of one share of Class B Common Stock for each outstanding share of Class A Common Stock, for a total issuance of 8,190,166 shares of Class B Common Stock. In the third quarter of 2017, the Company adjusted the Class A and Class B Common Stock balances as of January 1, 2017 (adjusted for the reverse stock split and reclassification) to appropriately reflect the correct beginning share balance for the Class A and Class B Common Stock.

In addition, under the Fifth Amended and Restated Certificate of Incorporation, which became effective at the time of the Contribution and Exchange, the number of authorized shares of the Company’s Common Stock, $0.01 par value per share, was increased from 50,000,000 to 330,000,000, of which 300,000,000 are Class A Common Stock and 30,000,000 are Class B Common Stock. Shares of Class A Common Stock and Class B Common Stock have the same rights and powers, rank equally (including as to dividends and distributions, and upon any liquidation, dissolution or winding up of the Company), share ratably and are identical in all respects and as to all matters. The holders of shares of Class A Common Stock and Class B Common Stock will vote together as a single class on all matters (including the election of directors) submitted to a vote or for the written consent of the stockholders of the Company. Each holder of Class A Common Stock has the right to one vote per share of Class A Common Stock and each holder of Class B Common Stock has the right to ten votes per share of Class B Common Stock. The shares of Class B Common Stock are convertible into shares of Class A Common Stock automatically upon the transfer of such shares of Class B Common Stock, with certain exceptions, or upon the affirmative vote of holders of two-thirds of the then-outstanding shares of Class B Common Stock or voluntarily by the holder of such shares of Class B Common Stock. During the ~~three~~six months ended ~~March 31,~~June 30, 2018, ~~11,001~~118,235 shares of Class B Common Stock were converted to Class A Common Stock.

The Sixth Amended and Restated Certificate of Incorporation was approved by the Company’s stockholders by partial written consent on July 14, 2017, and in accordance with the rules of the Securities and Exchange Commission and Delaware corporation law regarding approval by partial written consent, became effective when filed with the Secretary of State of the State of Delaware on August 18, 2017.

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 ~~500,000,000,~~50,000,000, all of which is designated as blank check preferred stock. No changes with respect to Preferred Stock were made in the Sixth Amended and Restated Certificate of Incorporation. No shares of Preferred Stock have been issued.

Common Stock Repurchase Program

On June 29, 2017, the Company’s Board of Directors authorized a program, effective immediately, to repurchase over a period of twelve months shares of the Company’s Class A Common Stock or Class B Common Stock, par value $0.01 per share, constituting, in the aggregate, up to 5% of the outstanding shares of Common Stock. Shares of the Common Stock may be repurchased in the open market or through negotiated transactions. The program may be terminated or suspended at any time at the discretion of the Company. No repurchases of Common Stock were made pursuant to this program since its authorization. The Crystal Term Loan, as described in Note ~~12,~~12. Notes Payable and Long-Term Debt, generally prohibits such repurchases of the Company’s Common Stock.

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

OnIn March 9, 2018, the Company granted 18,834 shares of restricted stock with immediate vesting to individuals for services performed. These shares were granted outside of the Company’s 2017 Omnibus Equity Compensation Plan. In June 2018, 37,816 shares of restricted stock vested, with 15,838 shares withheld by the Company as treasury stock to cover the employees’ taxes on the restricted stock vesting. This treasury stock was immediately retired.

Turning Point Dividends

On November 9, 2017, the Board of Directors of Turning Point approved the initiation of a cash dividend to its shareholders. The initial quarterly dividend of $0.04 per common share was paid on December 15, 2017 to shareholders of record at the close of business on November 27, 2017 and $0.4 million was paid to noncontrolling interest holders as a result of this dividend. The most recent dividend of $0.04 per common share was paid on ~~April~~July 13, 2018, to shareholders of record at the close of business on ~~March 26,~~June 25, 2018 and $0.4 million was paid to noncontrolling interest holders as a result of this dividend.

Note 15. Share-Based Compensation

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

On June 9, 2017, the Company’s Board of Directors adopted the 2017 Omnibus Equity Compensation Plan (the “2017 Plan”) in order to provide employees of the Company and its subsidiaries, certain consultants and advisors who perform services for the Company or its subsidiaries, and non-employee members of the Board of Directors of the Company with the opportunity to receive grants of incentive stock options, nonqualified stock options, stock appreciation rights, stock awards, stock units, and other stock-based awards. The Board authorized 1,000,000 shares of the Class A Common Stock of the Company to be issued under the Plan. The Plan was approved by the Company’s stockholders by partial written consent on July 14, 2017, and in accordance with the rules of the Securities and Exchange Commission and Delaware corporation law regarding approval by partial written consent, became effective on August 17, 2017. No awards have been made to date under the 2017 Plan.

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

Options Outstanding Options Exercisable
Weighted Average Wtd. Average
Range of
Exercise Prices

Number of
Shares

Remaining
Contractual Life

Exercise
Price
Number of
Shares

Exercise
Price

$ 31.00 - $31.25 2,800 1.6 Years $ 31.18 2,800 $ 31.18
$ 45.25 - $46.25 1,463 1.2 Years $ 45.80 1,463 $ 45.80
$ 50.00 - $56.25 800 0.1 Years $ 56.25 800 $ 56.25
$ 31.00 - $56.25 5,063 1.3 Years $ 39.36 5,063 $ 39.36

As of ~~March 31,~~June 30, 2018, there was ~~$1.9~~$1.4 million of total unrecognized stock-based compensation expense, related to restricted stock awards, which will be recognized over the weighted-average remaining vesting period of ~~2.2~~2.1 years.

Note 16. Income Taxes

The Company follows the provisions of ASC 740-10-25, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. A tax position must be more-likely-than-not to be sustained upon examination by taxing authorities for those benefits to be recognized. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. As of ~~March 31,~~June 30, 2018, SDI had approximately $523 ~~thousand~~ of unrecognized tax benefits under the provisions of ASC 740-10-25, $517 ~~thousand~~ of which were recorded as a reduction to existing net operating loss and tax credit carry forwards, and therefore require no accrual for interest or penalty. The remaining $6 ~~thousand~~ includes de minimis interest and penalties where required. SDI does not expect that the total amount of unrecognized tax benefits related to positions taken in prior periods will change significantly during the next twelve months. Turning Point has determined that it did not have any uncertain tax positions requiring recognition under the provisions of ASC 740-10-25. The Company’s policy is to recognize interest and penalties accrued on uncertain tax positions, if any, as part of interest expense. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions. For federal purposes, SDI’s post-2001 tax years remain open to examination as a result of net operating losses generated during those years that are carried forward to be potentially utilized in future years. For state purposes, the statute of limitations for SDI remains open in a similar manner for states that have generated NOLs. In general, Turning Point is no longer subject to U.S. federal and state tax examinations for years prior to 2014.

On December 22, 2017, H.R. 1, commonly known as the Tax Cuts and Jobs Act (“TCJA”) was signed into law. As a result, the federal corporate income tax rate was reduced from 35% to 21%, effective January 1, 2018. The Company’s 2017 financial results included an SDI-related charge of $3.2 million to income tax expense, offset by a reduction in the valuation allowance of $3.2 million, primarily resulting from re-measuring SDI’s net deferred tax assets to reflect the recently enacted lower tax rate effective January 1, 2018. The rate change also resulted in a re-measurement of the full valuation allowance already established against the deferred tax asset. Turning Point was also required to re-measure its deferred tax assets and liabilities at the newly enacted rate, resulting in $0.2 million of income tax expense for the year ended December 31, 2017.

Note 17. Contingencies

Other major tobacco companies are defendants in product liability claims. In a number of these cases, the amounts of punitive and compensatory damages sought are significant and could have a material adverse effect on Turning Point’s business and results of operations. Turning Point is a defendant in certain cases which have been dormant for many ~~years. Plaintiffs’ counsel is in the process of voluntarily dismissing those claims.~~years, which cases have now been dismissed with prejudice.

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

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

Table of Contents

Concentrations

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

~~Table of Contents~~

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

The Company’s fixed income investment portfolio is managed in accordance with guidelines that have been tailored to meet specific investment strategies, including standard of diversification, which limit the allowable holdings to any single issue. The Company reported no investment in excess of 10% of the Company’s surplus at ~~March 31,~~June 30, 2018, other than investments issued or guaranteed by the United States government or its agencies.

Note 18. Earnings Per Share

The Company has two classes of common stock, Class A and Class B; shares of Class B Common Stock are convertible into shares of Class A Common Stock at any time, on a one-for-one basis. S~~hares~~Shares of Class A Common Stock and Class B Common Stock have the same rights and powers, rank equally, share ratably and are identical in all respects and as to all matters, except that (i) each share of Class B Common Stock shall have the right to 10 votes per share and (ii) the shares of Class B Common Stock shall be convertible into shares of Class A Common Stock automatically upon the transfer of such shares of Class B Common Stock, with certain exceptions, or upon the affirmative vote of holders of two-thirds of the then-outstanding shares of Class B Common Stock or voluntarily by the holder of such shares of Class B Common Stock.

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

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

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

					Three Months Ended June 30,				Six Months Ended June 30,
	Three Months Ended March 31,				2018		2017		2018		2017
	2018		2017
Basic net income per common share calculation:
Net income attributable to SDI	$	521	$	1,877	$	3,528	$	4,903	$	4,049	$	6,780

Weighted average Class A common shares outstanding – basic		8,521,404		13,961,806		8,632,350		12,160,721		8,788,230		13,069,930
Weighted average Class B common shares outstanding – basic		8,038,028		13,961,806		7,977,478		12,154,174		8,007,585		13,066,638
Weighted average common shares outstanding – basic		16,559,432		27,923,612
Net income attributable to SDI per share of common stock – basic	$	0.03	$	0.07
Weighted average common shares outstanding – basic (1)						16,609,828		24,314,895		16,795,815		26,136,568
Net income per share of common stock – basic					$	0.21	$	0.20	$	0.24	$	0.26

Table of Contents

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017

Diluted net income per common share calculation:
Net income attributable to SDI	$	3,528		$	4,903		$	4,049		$	6,780
Impact of subsidiary dilutive securities (1)		(125	)		(73	)		(170	)		(73	)
Net income attributable to SDI - diluted	$	3,403		$	4,830		$	3,879		$	6,707

Weighted average Class A common shares outstanding – basic		8,632,350			12,160,721			8,788,230			13,069,930
Weighted average Class B common shares outstanding – basic		7,977,478			12,154,174			8,007,585			13,066,638
Dilutive impact of stock options and restricted stock awards		826			14,305			33,511			7,192
Weighted average common shares outstanding – diluted		16,610,654			24,329,200			16,829,326			26,143,760
Net income per share of common stock – diluted	$	0.20		$	0.20		$	0.23		$	0.26

Three Months Ended March 31,
2018 2017
Diluted net income attributable to SDI per common share calculation:
Net income attributable to SDI $ 521 $ 1,877
Impact of subsidiary dilutive securities ⁽¹⁾
(43 ) -
Net income attributable to SDI - diluted $ 478 $ 1,877

Weighted average Class A common shares outstanding – basic 8,521,404 13,961,806
Weighted average Class B common shares outstanding – basic 8,038,028 13,961,806
Dilutive impact of stock options and restricted stock awards 43,796 669,950
Weighted average common shares outstanding – diluted 16,603,228 28,593,562
Net income attributable to SDI per share of common stock – diluted $ 0.03 $ 0.07

(1)

The Company records anand adjustment to net income in the relevant period for the dilutive impact of subsidiary stock-based awards on the Company’s reported net income for purposes of calculating income per share. ~~There is no adjustment to the three months ended March 31, 2017 because the reverse acquisition of Turning Point by SDI did not occur until June 1, 2017.~~

The following outstanding securities at ~~March 31,~~June 30, 2018 have been excluded from the computation of diluted weighted average shares outstanding, as they are anti-dilutive:

		~~March 31,~~June 30, 2018
Stock options			~~5,063~~2,463

Note 19. Segment Information

In accordance with ASC 280, Segment Reporting, the Company has five reportable segments. Three of the Company’s segments are also those of Turning Point: (1) Smokeless products; (2) Smoking products; and (3) NewGen products. The smokeless products segment (i) manufactures and markets moist snuff and (ii) contracts for and markets chewing tobacco products. The smoking products segment (i) imports and markets cigarette papers, tubes, and related products; (ii) imports and markets finished cigars, MYO cigar tobaccos, and cigar wraps; and (iii) processes, packages, markets, and distributes traditional pipe tobaccos. The NewGen products segment (i) markets e-cigarettes, e-liquids, vaporizers, and other related products; (ii) distributes a wide assortment of vaping products to non-traditional retail outlets via VaporBeast and Vapor Shark, and (iii) distributes a wide assortment of vaping related products to individual consumers via Vapor Shark branded retail outlets. The Company’s smoking and smokeless products are distributed primarily through wholesale distributors in the United States while the NewGen products are distributed primarily through e-commerce to non-traditional retail outlets in the United States.

Beginning in the first quarter of 2018, as a result of the recently completed acquisition of an insurance company, the Company has an additional segment, Insurance. The Insurance segment represents the Company’s property and casualty insurance business, operated through Maidstone Insurance, a New York domiciled seller of auto and personal lines.

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

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

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The tables below present financial information about reported segments:

For the three months ended	June 30, 2018			June 30, 2017

Revenues
Smokeless Products	$	24,410		$	22,021
Smoking Products		29,328			27,019
NewGen Products		27,363			23,046
Insurance		7,497			-
Other ⁽⁴⁾		672			-
		89,270			72,086

Operating Income
Smokeless Products ⁽¹⁾	$	6,440		$	5,302
Smoking Products ⁽²⁾		8,781			8,965
NewGen Products ⁽³⁾		(312	)		(734	)
Insurance		551			-
Other ⁽⁴⁾		(1,361	)		(393	)
	$	14,099		$	13,140

Interest expense		(4,110	)		(4,050	)
Interest and investment income		270			102
Loss on extinguishment of debt		-			-
Net periodic benefit expense, excluding service cost		(264	)		(24	)
Income before income taxes	$	9,995		$	9,168

Capital Expenditures
Smokeless Products	$	540		$	154
NewGen Products		100			45
Insurance		23			-
	$	663		$	199

Depreciation and amortization
Smokeless products	$	333		$	352
NewGen Products		400			241
Insurance		55			-
Other ⁽⁴⁾		368			-
	$	1,156		$	593

Three Months Ended
March 31,
2018 2017
Revenues
Smokeless Products $ 20,747 $ 20,248
Smoking Products 26,996 27,177
NewGen Products 26,199 19,363
Insurance 7,718 -
Other⁽¹⁾
406 -
$ 82,066 $ 66,788

Operating Income
Smokeless Products $ 4,486 $ 3,611
Smoking Products 6,894 8,048
NewGen Products (1,496 ) (664 )
Insurance 617 -
Other⁽¹⁾
(1,462 ) (146 )
$ 9,039 $ 10,849

Interest expense (3,992 ) (4,933 )
Interest and investment income 103 114
Loss on extinguishment of debt (2,384 ) (6,116 )
Net periodic benefit income (expense), excluding service cost 43 (92 )
Income (loss) before income taxes $ 2,809 $ (178 )

Capital Expenditures
Smokeless Products $ 349 $ 366
NewGen Products 14 2
Insurance 20 -
$ 383 $ 368

Depreciation and amortization
Smokeless products $ 339 $ 352
NewGen Products 396 177
Insurance 57 -
Other⁽¹⁾
195 -
$ 987 $ 529

(1)

Includes Turning Point allocated corporate charges of $2,215 and $1,759 for the three months ended June 30, 2018 and 2017, respectively.

(2)

Includes Turning Point allocated corporate charges of $2,707 and $2,158 for the three months ended June 30, 2018 and 2017, respectively.

(3)

Includes Turning Point allocate corporate charges of $2,259 and $1,841 for the three months ended June 30, 2018 and 2017, respectively.

(4)

“Other” includes sales, operating income or assets that are not assigned to the four other reportable segments, such as sales, operating income or assets of SDI and Standard Outdoor, and Turning Point deferred taxes. All goodwill has been allocated to reportable segments.

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For the six months ended	June 30, 2018			June 30, 2017

Revenues
Smokeless Products	$	45,157		$	42,269
Smoking Products		56,324			54,196
NewGen Products		53,562			42,409
Insurance		15,215			-
Other ⁽¹⁾		1,078			-
	$	171,336		$	138,874

Operating Income
Smokeless Products ⁽¹⁾	$	10,926		$	9,221
Smoking Products ⁽²⁾		15,675			16,705
NewGen Products ⁽³⁾		(1,808	)		(1,398	)
Insurance		1,168			-
Other ⁽⁴⁾		(2,823	)		(539	)
	$	23,138		$	23,989

Interest expense		(8,106	)		(8,983	)
Interest and investment income		377			216
Loss on extinguishment of debt		(2,384	)		(6,116	)
Net period benefit expense, excluding service cost		(221	)		(116	)
Income before income taxes	$	12,804		$	8,990

Capital Expenditures
Smokeless Products	$	889		$	520
NewGen Products		114			47
Insurance		43			-
	$	1,046		$	567

Depreciation and amortization
Smokeless products	$	672		$	704
NewGen Products		796			418
Insurance		112			-
Other ⁽⁴⁾		563			-
	$	2,143		$	1,122

					June 30, 2018		December 31, 2017
	March 31, 2018		December 31, 2017
Assets
Smokeless Products	$	97,279	$	94,559	$	104,460		94,559
Smoking Products		139,872		141,869		138,825		141,869
NewGen Products		43,922		44,914		63,763		44,914
Insurance		56,282		-		55,885		-
Other ⁽¹⁾		21,961		17,372
Other ⁽⁴⁾						24,969		17,372
	$	359,316	$	298,714	$	387,902	$	298,714

~~(1) “Other”~~

(1)

Includes Turning Point allocated corporate charges of $4,262 and $3,590 for the six months ended June 30, 2018 and 2017, respectively.

(2)

Includes Turning Point allocated corporate charges of $5,319 and $4,602 for the six months ended June 30, 2018 and 2017, respectively.

(3)

Includes Turning Point allocated charges of $4,780 and $3,601 for the six months ended June 30, 2018 and 2017, respectively.

(4)

Table of ~~SDI and Standard Outdoor, and Turning Point deferred taxes. All goodwill has been allocated to reportable segments.~~Contents

Revenue Disaggregation

Revenues of the Smokeless and Smoking segments are 100% comprised of sales made to wholesalers while NewGen sales are made to wholesalers, retailers, and ultimate end-customers. NewGen net sales are broken out by sales channel below.

	Three Months Ended June 30,
	2018		2017
Wholesalers	$	2,350	$	2,686
Retail outlets		19,904		18,007
End-customers		5,069		2,341
Other		40		12
	$	27,363	$	23,046

	Three Months Ended March 31,
	2018		2017			Six Months Ended June 30,
						2018		2017
Wholesalers	$	2,330		$	2,474	$	4,680	$	5,153
Retail outlets		20,884			15,777		40,624		33,764
End-customers		2,935			1,112		8,168		3,480
Other		50			-		90		12
	$	26,199		$	19,363	$	53,562	$	42,409

Net Sales - Domestic and Foreign

The table below presents a breakdown of domestic and foreign net sales, excluding revenues from the Insurance segment, which are all domestic, for the three and six months ended ~~March 31,~~June 30, 2018 and 2017:

	Three Months Ended
		June 30, 2018		June 30, 2017
Domestic	$	78,111	$	69,355
Foreign		3,662		2,731
Net Sales	$	81,773	$	72,086

	Three Months Ended March 31,					Six Months Ended
	2018		2017				June 30, 2018		June 30, 2017
Domestic	$	71,264		$	64,371	$	149,375	$	133,726
Foreign		3,084			2,417		6,746		5,148
Net Sales	$	74,348		$	66,788	$	156,121	$	138,874

Note 20. Related Party Transactions

SDI engaged the services of Pine Hill Group, LLC (“Pine Hill Group”) and Edward J. Sweeney to serve as interim Chief Financial Officer effective May 31, 2017. Mr. Sweeney carries out his role as interim Chief Financial Officer of the Company pursuant to an agreement between the Company and Pine Hill Group. Mr. Sweeney is one of the managing members of Pine Hill Group. The agreement outlines the scope of responsibilities of Pine Hill Group, as well as Mr. Sweeney’s role. These include, but are not limited to, services provided to the Company as interim Chief Financial Officer, controllership services, technical accounting and financial reporting services, and risk, valuation and transaction advisory services. Pine Hill Group is compensated at an hourly rate for performing services pursuant to the agreement. Pine Hill Group is responsible for all payments to Mr. Sweeney. As a result, Mr. Sweeney has received no direct compensation from the Company and the amount of aggregate payments made to Pine Hill Group is based on the amount of work performed on the Company’s behalf by all Pine Hill Group employees. During the three and six months ended ~~March 31,~~June 30, 2018, the Company incurred expenses of ~~$0.5~~$0.3 million and $0.8 million, respectively, related to services provided by Pine Hill Group.

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Note 21. Statutory Information

Maidstone is subject to insurance laws and regulations in the jurisdictions in which it operates. These regulations include certain restrictions on the amount of dividends or other distributions available.

Under the insurance laws of New York State, insurance companies are restricted (on basis of lower of 10% of the company’s statutory surplus at the end of the preceding twelve-month period or 100% of the company’s adjusted net investment income for the prior twelve-month period) as to the amount of dividends they may declare or pay in any twelve-month period without prior approval of the New York Department of Financial Services (the “NYDFS”). As of ~~March 31,~~June 30, 2018, the maximum amount of dividends that may be paid without approval of the NYDFS is $0. Further, under New York State law, companies may pay cash dividends only from earned surplus on a statutory basis. No dividends were declared or paid by Maidstone during the ~~three~~six months ended ~~March 31,~~June 30, 2018.

Maidstone is subject to certain risk-based capital (“RBC”) requirements as specified by the National Association of Insurance Commissioners (“NAIC”) to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks, such as asset quality, asset and liability matching, loss reserve adequacy and other business factors. Regulatory compliance is determined by a ratio (“Ratio”) of the enterprise’s regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Generally, a Ratio in excess of 200% of authorized control level RBC requires no corrective actions by Maidstone or regulators. As of December 31, 2017, Maidstone’s Ratio was over 314%.

Statutory combined capital and surplus and net loss of Maidstone at ~~March 31,~~June 30, 2018 was as follows (in thousands):

	June 30, 2018
Statutory capital and surplus	$	9,864
Statutory loss	$	(2,580	)

March 31,
2018

Statutory capital and surplus $ 13,580
Statutory loss $ (1,095 )

Maidstone files financial statements prepared in accordance with statutory accounting practices prescribed or permitted by insurance regulators. Statutory net income and statutory surplus, as reported to the insurance regulatory authorities, differ in certain respects from the amounts prepared in accordance with GAAP. The main differences between statutory net income and GAAP net income relate to deferred acquisition costs, deferred income taxes, unrealized appreciation or decline in value of investments and non-admitted assets.

Note 22. Subsequent ~~Event~~Events

~~On April 30,~~In July 2018, ~~Turning Point acquired~~ the ~~related assets of Vapor Supply, Vapor Supply.com,~~Company filed a Form S-3 Registration Statement with the Securities and ~~some of its affiliates~~Exchange Commission to provide for ~~total consideration of $4.8 million paid in cash. Turning Point is~~the potential to offer up to $6,651,094 in the ~~process~~aggregate of ~~assigning fair value~~our Class A common stock, warrants and units.

In August 2018, the Company borrowed an additional $5.0 million under the Crystal Term loan. This borrowing is subject to the ~~assets acquired which primarily consist of inventory, fixed assets, and intangible assets.~~same terms as the initial borrowing.

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Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements reflecting the current expectations of Standard Diversified Inc. and its subsidiaries (the “Company” or “SDI”). In addition, when used in this quarterly report, the words “anticipate,” “enable,” “estimate,” “intend,” “expect,” “believe,” “potential,” “may,” “will,” “should,” “project” and similar expressions as they relate to the Company are intended to identify said forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties, which may cause actual results to differ from those anticipated at this time. Such risks and uncertainties include the factors described below under Item 1A of Part II of this Form 10-Q and other reports filed with the Securities and Exchange Commission from time to time, as well as:

declining sales of tobacco products, and expected continuing decline of sales, in the tobacco industry overall;

our dependence on a small number of third-party suppliers and producers;

the possibility that we will be unable to identify or contract with new suppliers or producers in the event of a supply or product disruption;

the possibility that our licenses to use certain brands or trademarks will be terminated, challenged or restricted;

failure to maintain consumer brand recognition and loyalty of our customers;

substantial and increasing U.S. regulation;

regulation of our products by FDA, which has broad regulatory powers;

uncertainty related to the regulation and taxation of our NewGen products;

possible significant increases in federal, state and local municipal tobacco-related taxes;

possible increasing international control and regulation;

our reliance on relationships with several large retailers and national chains for distribution of our products;

intense competition and our ability to compete effectively;

~~uncertainty and continued evolution of markets containing our NewGen products;~~

significant potential product liability litigation;

the scientific community’s lack of information regarding the long-term health effects of electronic ~~cigarette,~~cigarettes, vaporizer and e-liquid use;

requirement to maintain compliance with Master Settlement Agreement escrow account requirements;

our amount of indebtedness;

the terms of our credit facilities, which may restrict our current and future operations;

competition from illicit sources;

our reliance on information technology;

security and privacy breaches;

contamination of our tobacco supply or products;

infringement on our intellectual property;

third-party claims that we infringe on their intellectual property;

concentration of business with large customers;

failure to manage our growth;

failure to successfully integrate our acquisitions or otherwise ~~being~~be unable to benefit from pursuing acquisitions;

fluctuations in our results;

exchange rate fluctuations;

adverse U.S. and global economic conditions;

sensitivity of end-customers to increased sales taxes and economic conditions;

failure to comply with certain regulations;

departure of key management personnel or our inability to attract and retain talent;

imposition of significant tariffs on imports into the U.S.;

reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors, potentially decreasing our stock price;

failure to maintain our status as an emerging growth company before the five-year maximum time period a company may retain such status;

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our principal stockholders will be able to exert significant influence over matters submitted to our stockholders and may take certain actions to prevent takeovers;

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our certificate of incorporation and bylaws, as well as Delaware law and certain regulations, could discourage or prohibit acquisition bids or merger proposals, which may adversely affect the market price of our common stock;

our certificate of incorporation limits the ownership of our common stock by individuals and entities that are Restricted Investors. These restrictions may affect the liquidity of our common stock and may result in Restricted Investors being required to sell or redeem their shares at a loss or relinquish their voting, dividend and distribution rights;

future sales of our common stock in the public market could reduce our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us;

we may issue preferred stock whose terms could adversely affect the voting power or value of our common stock;

failure to estimate adequate loss reserves and trends in loss and loss adjustment expense;

our inability to obtain regulatory approval of, or to implement, premium rate increases; and

adverse changes in applicable laws, regulations or rules governing insurance companies, and tax or accounting matters including limitations on premium levels, increases in minimum capital and reserves, and other financial viability requirements, and changes that affect the cost of, or demand for our ~~products~~.

products.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of the historical financial condition and results of operations in conjunction with our interim condensed consolidated financial statements and accompanying notes, which are included elsewhere in this Quarterly Report on Form 10-Q. In addition, this discussion includes forward-looking statements subject to risks and uncertainties which may result in actual results differing from statements we make. See “Cautionary Note Regarding Forward-Looking Statements.” Factors that could cause actual results to differ include those risks and uncertainties discussed in “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission (“SEC”) on March 12, 2018.

The following discussion relates to the interim unaudited financial statements of the Company included elsewhere in this Quarterly Report on Form 10-Q. In this discussion, unless the context requires otherwise, references to “our Company” “we,” “our,” or “us” refer to Standard Diversified Inc. and our consolidated subsidiaries. References to “SDI” refer to Standard Diversified Inc. without any of its subsidiaries. Dollars are in thousands, except where designated and in per share data. Many of the amounts and percentages in this discussion have been rounded for convenience of presentation.

Overview

We are a holding company. Our subsidiaries are engaged in the following lines of business:

Other tobacco products (Turning Point Brands, Inc. (“Turning Point”), a ~~51.2%~~51.0% owned subsidiary);

Outdoor advertising (Standard Outdoor LLC (“Standard Outdoor”), a wholly owned subsidiary), beginning in July 2017; and

Insurance (Pillar General Inc. (“Pillar General”), a wholly owned subsidiary), beginning in January 2018.

We expect to become a diversified holding company with interests in a variety of industries and market sectors. We will rely upon our existing cash balances and potential distributions from our subsidiaries to generate the funds necessary to meet our operating obligations and for future acquisitions. In addition, we may be required to raise additional capital through equity and/or debt financings in order to fund our future operations and/or acquisitions.

Recent Developments

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.

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On July 13, 2018, we filed a Form S-3 Registration Statement with the Securities and Exchange Commission to provide for the potential to offer up to $6.7 million in the aggregate of our Class A common stock, warrants and units.

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 Turning Point’s subsidiary Vapor Acquisitions Company, LLC, for total consideration of $4.8 million paid in cash to strengthen its presence within the NewGen segment. Vapor Supply is a business-to-business e-commerce distribution platform servicing independent retail vape shops. Additionally, Vapor Supply manufactures and markets proprietary e-liquids under the DripCo brand and operates company-owned stores in Oklahoma. Refer to Note 3 of Notes to Consolidated Financial Statements for more details regarding the Vapor Supply acquisition.

On April 25, 2018, our Class A common stock began trading on the NYSE American Exchange under the ticker “SDI.”

On April 20, 2018, we filed with the Secretary of State of the State of Delaware an amendment to our Sixth Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), effective immediately, to change our name from Standard Diversified Opportunities Inc. to Standard Diversified Inc.

On April 18, 2018, Arnold Zimmerman was elected to our Board of Directors, effective immediately, to fill a newly created vacancy on the board. Mr. Zimmerman’s term is scheduled to expire at our meeting of stockholders to be held in 2018. Mr. Zimmerman was also elected as a member of our Audit Committee.

Other Developments

Term Loan Borrowing and Credit Facility Refinancing

On February 2, 2018, SDI entered into a term loan agreement with Crystal Financial LLC (“Crystal Term Loan”). The Crystal Term Loan provides for an initial term loan of $10.0 million and a commitment to provide additional term loans of up to $15.0 million. The initial proceeds were used to finance a portion of the acquisition of certain billboard structures, fund certain fees and expenses, and provide working capital for SDI.

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On March 7, 2018, Turning Point entered into a $250.0 million credit facility consisting of a $160.0 million 2018 First Lien Term Loan with Fifth Third Bank, as administrative agent, and other lenders, and a $50.0 million 2018 Revolving Credit Facility (collectively, the “2018 First Lien Credit Facility”) in addition to a $40.0 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 $40.0 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. Refer to the Long-Term Debt section for a more complete description of Turning Point’s credit facilities.

~~Other Developments~~

On ~~April 30,~~February 2, 2018, ~~Turning Point acquired the related assets~~SDI entered into a term loan agreement with Crystal Financial LLC (“Crystal Term Loan”). The Crystal Term Loan provides for an initial term loan of ~~Vapor Supply, Vapor Supply.com,~~$10.0 million and ~~some~~a commitment to provide additional term loans of ~~its affiliates for total consideration of $4.8 million paid in cash. Turning Point is in the process of assigning fair value~~up to ~~the assets acquired which primarily consist of inventory, fixed assets, and intangible assets.~~

~~On April 25, 2018, our Class A common stock began trading on the NYSE American Exchange under the ticker “SDI.”~~

~~On April 18, 2018, Arnold Zimmerman was elected~~$15.0 million. The initial proceeds were used to ~~our Board of Directors, effective immediately, to fill~~finance a ~~newly created vacancy on the board. Mr. Zimmerman’s term is scheduled to expire at our meeting of stockholders to be held in 2018. Mr. Zimmerman was also elected as member of our Audit Committee.~~

On April 18, 2018, our Board approved an amendment, effective immediately, to the Company’s Second Amended and Restated Bylaws (the “Bylaws”) to conform language in the Bylaws and the Company’s Sixth Amended and Restated Certificate of Incorporation, which provides that all membersportion of the ~~Board serve in a single class.~~acquisition of certain billboard structures, fund certain fees and expenses, and provide working capital for SDI.

On February 20, 2018, the Company 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 discount of $0.3 million.

On January 18, 2018, the Company 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 $6.5 million, net of a discount of $0.9 million.

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

On January 2, 2018, SDI acquired all of the outstanding capital stock of Interboro Holdings, Inc. (“Interboro”) for a cash purchase price of $2.5 million. Under the name Maidstone Insurance Company (“Maidstone”), Maidstone offers personal automobile insurance, primarily in the State of New York.

On November 9, 2017, the Board of Directors of Turning Point approved the initiation of a cash dividend to its shareholders. The initial quarterly dividend of $0.04 per common share was paid on December 15, 2017 to shareholders of record at the close of business on November 27, 2017. Approximately $0.4 million was distributed to noncontrolling interest holders outside of SDI as a result of this dividend. The most recent dividend of $0.04 per common share was paid on April 13, 2018 to shareholders of record at the close of business on March 26, 2018 and $0.4 million was paid to noncontrolling interest holders as a result of this dividend.

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On July 28, 2017, the U.S. Food and Drug Administration (“FDA”) announced a new direction in regulating tobacco products, including the newly “deemed” markets such as cigars and vapor products. 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. See ~~Note 2. Summary of Significant Accounting Policies of our condensed consolidated financial statements for further details regarding this new direction and other applicable FDA announcements.~~

On June 30, 2017, Turning Point filed a Form S-3 Registration Statement with the Securities and Exchange Commission providing for the potential to offer up to $200 million in the aggregate of Turning Point common stock, preferred stock, depository shares, warrants, and units, as well as a secondary offering and sale of up to approximately 12.8 million shares of TPB common stock by selling shareholders. Turning Point currently has no plans to utilize the offering; however, Turning Point believes it provides future flexibility as Turning Point continues to drive its strategic organic growth and acquisition initiatives.

In March 2017, Turning Point entered into a strategic partnership with Hand Media, Inc., dba Vapor Shark (“Vapor Shark”), a leading distributor and manufacturer of premium vaping e-liquids with nationwide distribution through independent retail vape shops as well as Vapor Shark branded retail locations. See ~~Note 3. Acquisitions in our condensed consolidated financial statements for additional details regarding the Vapor Shark acquisition.~~

Overview of Turning Point

Turning Point is a leading independent provider of Other Tobacco Products (“OTP”) in the U.S. Turning Point sells a wide range of products across the OTP spectrum, including moist snuff tobacco (“MST”), loose leaf chewing tobacco, premium cigarette papers, make-your-own (“MYO”) cigar wraps, cigars, liquid vapor products and tobacco vaporizer products. Turning Point does not sell cigarettes. Turning Point estimates that the OTP industry generated approximately $11.0 billion in manufacturer revenue in 2017. In contrast to manufactured cigarettes, which have been experiencing declining volumes for decades based on data published by the Alcohol and Tobacco Tax and Trade Bureau (“TTB”), the OTP industry is demonstrating increased consumer appeal with low to mid-single digit consumer unit growth as reported by Management Science Associates, Inc. (“MSAi”), a third-party analytics and informatics company. Under the leadership of a senior management team with an average of 22 years of experience in the tobacco industry, Turning Point has grown and diversified its business through new product launches, category expansions, and acquisitions while concurrently improving operational efficiency.

Turning ~~Point’s reportable segments are: (i) smokeless~~Point operates in three segments: Smokeless products, ~~(ii) smoking~~Smoking products and ~~(iii)~~ NewGen products. In its ~~smokeless~~Smokeless products segment, Turning Point (i) manufactures and markets moist snuff and (ii) contracts for and markets loose leaf chewing tobacco products. In its ~~smoking~~Smoking products segment, Turning Point (i) markets and distributes cigarette papers, tubes, and related products; (ii) markets and distributes finished cigars and MYO cigar ~~wraps,~~wraps; and ~~cigars; and~~ (iii) processes, packages, markets, and distributes traditional pipe tobaccos. In its NewGen products segment, Turning Point (i) markets and distributes ~~liquid vapor products, tobacco vaporizer products,~~e-cigarettes, e-liquids, vaporizers, and certain other products without tobacco and/or nicotine; (ii) distributes a wide assortment of vaping related products to non-traditional retail via VaporBeast, Vapor Shark, and Vapor ~~Shark;~~Supply; and (iii) distributes a wide assortment of vaping related products to individual consumers via Vapor Shark and Vapor World branded retail outlets. Refer to the ‘Recent Developments’ section below for details regarding the Vapor Supply acquisition.

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®~~Stoker’s^®in the Smokeless segment, Zig-Zag^® in the Smoking segment, and ~~VaporBeast™.~~VaporBeast^® in the NewGen segment.

Turning Point’s core tobacco business (smokeless and smoking segments) primarily generates revenues from the sale of its products to wholesale distributors who, in turn, resell them to retail operations. The acquisition of VaporBeast in ~~November~~the fourth quarter 2016 expanded its revenue streams as they began selling directly to non-traditional retail outlets and to ultimate consumers via non-traditional retail outlets as well. Turning Point’s acquisition of Vapor Shark in the second quarter of 2017 and Vapor Supply in the second quarter 2018 have further expanded its selling network by allowing them to directly reach ultimate consumers through Vapor Shark and Vapor World branded retail outlets. Turning Point’s net sales, which include federal excise taxes, consist of gross sales net of cash discounts, returns, and selling and marketing allowances.

Turning Point relies on long-standing relationships with high-quality, established manufacturers to provide the majority of its produced products. Approximately ~~86%~~85% of Turning Point production, as measured by gross sales, is outsourced to suppliers. The remaining ~~14%~~15% represents Turning Point’s moist snuff tobacco operations located in Dresden, TN and Louisville, KY, the packaging of its pipe tobacco in Louisville, KY, and ~~its Vapor Shark~~the proprietary e-liquids operations located in ~~Miami, FL.~~Oklahoma City, OK and Louisville, KY. Turning Point’s principal operating expenses include the cost of raw materials, used to manufacture the limited number of its products which it produces in-house; the cost of finished products, which are generally purchased goods; federal excise taxes; legal expenses; and compensation expenses, including benefits and costs of salaried personnel. Turning Point’s other principal expenses include interest expense among other expenses.

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Overview of Standard Outdoor

Standard Outdoor is an out-of-home advertising business. Revenues include outdoor advertising revenues, while operating expenses primarily include compensation costs, depreciation and rent expense.

Overview of Pillar General

As described above under Recent Developments, on January 2, 2018, Pillar General acquired all of the outstanding capital stock of Interboro Holdings, Inc. (“Interboro”) for a cash purchase price of $2.5 million. Under the name Maidstone Insurance Company (“Maidstone”), Maidstone offers personal automobile and ~~home~~homeowners insurance, primarily in the state of New York. The results of Maidstone are included in our consolidated results as of January 2, 2018, the date of acquisition.

Segment Information

We operate in five reportable segments; (1) smokeless products, (2) smoking products, (3) NewGen products, (4) Insurance and (5) Other, which includes our out-of-home advertising business and SDI holding company, as well as certain unallocated Turning Point amounts. The smokeless products segment: (a) manufactures and markets moist snuff tobacco and (b) contracts for and markets chewing tobacco products. The smoking products segment: (a) imports and markets cigarette papers, tubes and related products and (b) imports and markets finished cigars and make-your-own (“MYO”) cigar wraps. The NewGen products segment (a) markets e-cigarettes, e-liquids, vaporizers and other related products and (b) distributes a wide assortment of vaping products to non-traditional retail outlets. The insurance segment products include auto and homeowners property and casualty insurance. The results of operations of the SDI holding company, Standard Outdoor, which owns billboard structures and operates an out-of-home advertising business, and of Turning Point not allocated to the other three Turning Point reportable segments are included in Other.

Key Factors Affecting Turning Point’s Results of Operations

Turning Point considers the following factors to be the key factors affecting its results of operations:

Its ability to further penetrate markets with its existing products;

Its ability to introduce new products and product lines that complement its core business;

Decreasing interest in tobacco products among consumers;

Price sensitivity in its end-markets;

Marketing and promotional initiatives, which cause variability in its results;

General economic conditions, including consumer access to disposable income;

Cost and increasing regulation of promotional and advertising activities;

Cost of complying with regulation, including newly passed “deeming regulations”;

Counterfeit and other illegal products in its end-markets;

Currency fluctuations;

Its ability to identify attractive acquisition opportunities in OTP; and

Its ability to integrate acquisitions.

Key Factors Affecting Pillar General’s Results of Operations

Pillar General considers the following to be the key factors affecting its results of operations:

~~Its ability to further penetrate markets with its existing products; and~~

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~~Its ability to mitigate credit risks due to writing business through brokers.~~

~~Key Factors Affecting Standard Outdoor’s Results of Operations~~

~~Standard Outdoor considers the following to be the key factors affecting its results of operations:~~

Its ability to further penetrate markets with its existing services; and

Price sensitivity in its geographic markets.

Critical Accounting Policies and Uses of Estimates

There have been no material changes to our critical accounting policies and estimates from the information provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in the Company’s Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on March 12, 2018, except for the use of estimates related to insurance reserves as described below and accounting policies related to our Insurance business, and accounting for interest rate swaps as disclosed in Note 2. Summary of Significant Accounting Policies of our condensed consolidated financial statements.

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Reserves for losses and loss adjustment expenses

Reserve estimates are developed at a very detailed level, and the results of these numerous micro-level best estimates are aggregated to form a consolidated reserve estimate. For example, actuarial estimates are prepared each quarter to estimate losses for each line of insurance, major components of losses (such as coverages and perils) and for reported losses and IBNR. The actuarial methods described above are used to analyze the settlement patterns of claims by determining the development factors for specific data elements that are necessary components of a reserve estimation process. Development factors are calculated quarterly and periodically throughout the year for data elements such as claim counts reported and settled, paid losses, and paid losses combined with case reserves. The historical development patterns for these data elements are used as the assumptions to calculate reserve estimates.

Reserves are re-estimated periodically throughout the year, by combining historical results with current actual results to calculate new development factors. This process incorporates the historic and latest actual trends, and other underlying changes in the data elements used to calculate reserve estimates. New development factors are likely to differ from previous development factors used in prior reserve estimates because actual results (claims reported or settled, losses paid, or changes to case reserves) may develop differently than the implied assumptions contained in the previous development factor calculations. If claims reported, paid losses, or case reserve changes are greater or less than the levels estimated by previous development factors, ultimate loss and allocated loss adjustment expense total may increase or decrease. When actual development of these data elements is different than the historical development pattern used in a prior period reserve estimate, a new reserve is determined. The difference between indicated reserves based on new reserve estimates and recorded reserves (the previous estimate) is the amount of reserve re-estimate and is recognized as an increase or decrease in Incurred losses and loss adjustment expenses in the Condensed Consolidated Statements of Income.

Recent Accounting ~~Pronouncements Adopted~~Pronouncements:

~~We 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 using the modified retrospective method. This ASU requires the recognition~~Refer to Note 2 of ~~revenue~~Notes to depict the transfer of goods to customers at an amount that we expect 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.

~~We adopted ASU 2016-18,~~ ~~Statement of Cash Flows (Topic 230): Restricted Cash, on January 1, 2018. The amendments~~Consolidated Financial Statements included in this ~~ASU require that~~Quarterly Report for a ~~statement~~description 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 our statements of cash flows include changes in restricted cash, such as changes in the portion of the MSA escrow deposits held in cash.recently issued accounting pronouncements, including those recently adopted.

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

~~We 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. This ASU allows entities to make a one-time reclassification from accumulated other comprehensive income (“AOCI”) to retained earnings for the effects of remeasuring deferred tax liabilities and assets originally recorded in other comprehensive income as a result of the change in the federal tax rate by the Tax Cuts and Jobs Act (“TCJA”). The adoption of this ASU resulted in a reclassification of stranded tax effects related to the TCJA from AOCI to retained earnings of less than $0.1 million.

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~~Recent Accounting Pronouncements~~

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

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

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Consolidated Results of Operations

~~Comparison of the Three Months Ended March 31, 2018 to the Three Months Ended March 31, 2017~~

The table and discussion set forth below relate to our consolidated results of ~~operations.~~operations:

Three Months Ended March 31,
2018 2017 % Change
Revenues
Smokeless Products $ 20,747 $ 20,248 2.5 %
Smoking Products 26,996 27,177 -0.7 %
NewGen Products 26,199 19,363 35.3 %
Insurance 7,718 - 100.0 %
Other 406 - 100.0 %
Total revenues $ 82,066 $ 66,788 22.9 %

Operating Income
Smokeless Products $ 4,486 $ 3,611 24.2 %
Smoking Products 6,894 8,048 -14.3 %
NewGen Products (1,496 ) (664 ) 125.3 %
Insurance 617 - 100.0 %
Other (1,462 ) (146 ) 901.4 %
Total operating income $ 9,039 $ 10,849 -16.7 %

Interest expense (3,992 ) (4,933 ) -19.1 %
Interest and investment income 103 114 -9.6 %
Loss on extinguishment of debt (2,384 ) (6,116 ) -61.0 %
Net periodic benefit income (expense), excluding service cost 43 (92 ) -146.7 %
Income (loss) before income taxes 2,809 (178 ) -1678.1 %
Income tax expense (benefit) 809 (2,055 ) -139.4 %
Net income 2,000 1,877 6.6 %
Amounts attributable to noncontrolling interests (1,479 ) - 100.0 %
Net income attributable to SDI $ 521 $ 1,877 -72.2 %

	Three Months Ended June 30,
	2018			2017			% Change
Revenues
Smokeless products	$	24,410		$	22,021			10.8	%
Smoking products		29,328			27,019			8.5	%
NewGen products		27,363			23,046			18.7	%
Insurance		7,497			-			100.0	%
Other		672			-			100.0	%
Total revenues	$	89,270		$	72,086			23.8	%

Operating Income (Loss)
Smokeless products	$	6,440		$	5,302			21.5	%
Smoking products		8,781			8,965			-2.1	%
NewGen products		(312	)		(734	)		-57.5	%
Insurance		551			-			100.0	%
Other		(1,361	)		(393	)		246.3	%
Total Operating Income	$	14,099		$	13,140			7.3	%

Interest expense		(4,110	)		(4,050	)		1.5	%
Interest and investment income		270			102			164.7	%
Net periodic benefit expense, excluding service cost		(264	)		(24	)		1000.0	%
Income before income taxes		9,995			9,168			9.0	%
Income tax expense		1,908			2,795			-31.7	%
Net income		8,087			6,373			26.9	%
Amounts attributable to noncontrolling interests		(4,559	)		(1,470	)		210.1	%
Net income attributable to SDI	$	3,528		$	4,903			-28.0	%

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	Six Months Ended June 30,
	2018			2017			% Change
Revenues
Smokeless products	$	45,157		$	42,269			6.8	%
Smoking products		56,324			54,196			3.9	%
NewGen products		53,562			42,409			26.3	%
Insurance		15,215			-			100.0	%
Other		1,078			-			100.0	%
Total revenues	$	171,336		$	138,874			23.4	%

Operating Income (Loss)
Smokeless products	$	10,926		$	9,221			18.5	%
Smoking products		15,675			16,705			-6.2	%
NewGen products		(1,808	)		(1,398	)		29.3	%
Insurance		1,168			-			100.0	%
Other		(2,823	)		(539	)		423.7	%
Total operating income	$	23,138		$	23,989			-3.5	%

Interest expense		(8,106	)		(8,983	)		-9.8	%
Interest and investment income		377			216			74.5	%
Loss on extinguishment of debt		(2,384	)		(6,116	)		-61.0	%
Net periodic benefit expense, excluding service cost		(221	)		(116	)		90.5	%
Income before income taxes		12,804			8,990			42.4	%
Income tax expense		2,717			740			267.2	%
Net income	$	10,087		$	8,250			22.3	%
Amounts attributable to noncontrolling interests		(6,038	)		(1,470	)		310.7	%
Net income attributable to SDI	$	4,049		$	6,780			-40.3	%

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Comparison of the Three Months Ended June 30, 2018 to the Three Months Ended June 30, 2017

Revenues.For the three months ended ~~March 31,~~June 30, 2018, revenues were ~~$82.1~~$89.3 million, an increase of ~~$15.3~~$17.2 million or ~~22.9%~~23.8%, from ~~$66.8~~$72.1 million for the three months ended ~~March 31,~~June 30, 2017. This increase iswas primarily due to the acquisition of Maidstone on January 2, 2018, which contributed ~~$7.8~~$7.5 million of revenues from earned insurance premiums and other fees, and an increase of ~~$6.8~~$9.0 million which was primarily driven by volume growth across all of the tobacco product segments in addition to Turning Point’s acquisition of Vapor Supply in the NewGen segment ~~primarily driven by progress against the goal to grow sales in the existing store base and the acquisition of Vapor Shark in~~during the second quarter of ~~2017.~~2018.

Operating income.For the three months ended ~~March 31,~~June 30, 2018, operating income was ~~$9.0~~$14.1 million, ~~a decrease~~an increase of ~~$1.8~~$1.0 million or ~~16.7%~~7.3%, from ~~$10.8~~$13.1 million for the three months ended ~~March 31,~~June 30, 2017. This ~~decrease is~~increase was primarily due to growth in the smokeless products, segment the inclusion of Vapor Supply and the insurance business in 2018 and was partially offset by corporate general and administrative expenses incurred by SDI, which were not included for a full quarter in the prior period because the reverse acquisition of Turning Point by SDI did not occur until June 1, 2017.

Income ~~(loss)~~ before income taxes. For the three months ended ~~March 31,~~June 30, 2018, income before income taxes was ~~$2.8~~$10.0 million compared to ~~a loss~~income before income taxes of ~~$0.2~~$9.2 million for the three months ended ~~March 31,~~June 30, 2017. This increase iswas primarily due to ~~a $3.7 million lower loss on extinguishment of~~an increase in Turning Point ~~debt, partially offset by~~operating income and the ~~decrease~~inclusion of ~~$1.8 million~~the insurance business operating income which was not included in ~~operating income.~~the prior period because the acquisition did not occur until January 2, 2018.

Net income attributable to SDI. For the three months ended ~~March 31,~~June 30, 2018, net income attributable to SDI was ~~$0.5~~$3.5 million compared to ~~$1.9~~$4.9 million for the three months ended ~~March 31,~~June 30, 2017, a decrease of $1.4 million or ~~72.2%~~28.0%. This decrease iswas a result of the items discussed above, ~~as well as~~offset by the deduction of net income attributable to noncontrolling interests, which relates to the allocation of Turning Point net income to shareholders of Turning Point ~~who are not~~other than SDI. ~~There~~

Comparison of the Six Months Ended June 30, 2018 to the Six Months Ended June 30, 2017

Revenues. For the six months ended June 30, 2018, revenues were ~~no noncontrolling interests~~$171.3 million, an increase of $32.4 million or 23.3%, from $138.9 million for the ~~three~~six months ended ~~March 31, 2017,~~June 30, 2017. This increase was primarily due to the acquisition of Maidstone on January 2, 2018, which contributed $15.2 million of revenues from earned insurance premiums and other fees, and an increase of $16.2 million driven by volume growth across all of Turning Point’s segments in addition to Turning Point’s acquisition of Vapor Supply in the NewGen segment during the second quarter of 2018 and the inclusion of an additional quarter of Vapor Shark in 2018.

Operating income. For the six months ended June 30, 2018, operating income was $23.1 million, a decrease of $0.8 million or 3.5%, from $23.9 million for the six months ended June 30, 2018. This decrease was primarily due to corporate general and administrative expenses incurred by SDI, which were not included for the entire prior period because the reverse acquisition of Turning Point by SDI did not occur until June 1, 2017.

Income before income taxes. For the six months ended June 30, 2018, income before income taxes was $12.8 million compared to income before income taxes of $9.0 million for the six months ended June 30, 2017. This increase was primarily due to a $3.7 million lower loss on extinguishment of Turning Point debt and a $0.9 million lower interest expense, partially offset by the decrease of $0.8 million in operating income.

Net income attributable to SDI. For the six months ended June 30, 2018, net income attributable to SDI was $4.0 million compared to $6.8 million for the six months ended June 30, 2017, a decrease of $2.8 million or 40.3%. This decrease is a result of the items discussed above, offset by the deduction of net income attributable to noncontrolling interests, which relates to the allocation of Turning Point net income to shareholders of Turning Point other than SDI.

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Segment Results of Operations

Comparison of the Three Months Ended ~~March 31,~~June 30, 2018 to the Three Months Ended ~~March 31,~~June 30, 2017

Turning Point and Other segments

The table and discussion set forth below relate to the results of operations of the three Turning Point segments, as well as our Other reportable segment, which includes non-allocated amounts of Turning Point, SDI ~~(for 2018 only)~~ and Standard Outdoor (for 2018 only):

	Three Months Ended March 31,									Three Months Ended June 30,
	2018			2017			% Change			2018			2017			% Change

Net sales
Net Sales
Smokeless products	$	20,747		$	20,248			2.5	%	$	24,410		$	22,021			10.8	%
Smoking products		26,996			27,177			-0.7	%		29,328			27,019			8.5	%
NewGen products		26,199			19,363			35.3	%		27,363			23,046			18.7	%
Other		406			-			100.0	%		672			-			100.0	%
Total net sales		74,348			66,788			11.3	%		81,773			72,086			13.4	%
Cost of sales		42,456			39,116			8.5	%		45,950			40,076			14.7	%
Gross profit
Gross Profit
Smokeless products		10,993			9,260			18.7	%		12,533			11,553			8.5	%
Smoking products		13,164			13,700			-3.9	%		15,180			14,117			7.5	%
NewGen products		7,652			4,712			62.4	%		8,082			6,340			27.5	%
Other		83			-			100.0	%		28			-			100.0	%
Total gross profit		31,892			27,672			15.3	%		35,823			32,010			11.9	%
Selling, general and administrative expenses		23,470			16,823			39.5	%		22,275			18,870			18.0	%
Operating income		8,422			10,849			-22.4	%
Operating Income											13,548			13,140			3.1	%
Interest expense		3,992			4,933			-19.1	%		4,110			4,050			1.5	%
Interest and investment income		(103	)		(114	)		-9.6	%		(270	)		(102	)		164.7	%
Loss on extinguishment of debt		2,384			6,116			-61.0	%
Net periodic benefit (income) expense, excluding service cost		(43	)		92			-146.7	%
Income (loss) before income taxes		2,192			(178	)		-1331.5	%
Income tax expense (benefit)		809			(2,055	)		-139.4	%
Net periodic benefit expense, excluding service cost											264			24			1000.0	%
Income before income taxes											9,444			9,168			3.0	%
Income tax expense											1,908			2,795			-31.7	%
Net income		1,383			1,877			-26.3	%	$	7,536		$	6,373			18.2	%
Amounts attributable to noncontrolling interests		(1,479	)		-			0.0	%		(4,559	)		(1,470	)		210.1	%
Net (loss) income attributable to SDI	$	(96	)	$	1,877			-105.1	%
Net income attributable to SDI										$	2,977		$	4,903			-39.3	%

Net ~~Sales.~~Sales. For the three months ended ~~March 31,~~June 30, 2018, overall net sales increased to ~~$74.3~~$81.8 million from ~~$66.8~~$72.1 million for the three months ended ~~March 31,~~June 30, 2017, an increase of ~~$7.5~~$9.7 million or ~~11.3%~~13.4%. The increase in net sales was primarily driven by volume growth across all segments in addition to Turning Point’s acquisition of Vapor Supply in the NewGen segment ~~which includes the acquisition of Vapor Shark in~~during the second quarter of ~~2017.~~2018 and the acquisitions of out-of-home advertising businesses in the first quarter of 2018.

For the three months ended ~~March 31,~~June 30, 2018, net sales in the Smokeless products segment increased to ~~$20.7~~$24.4 million from ~~$20.2~~$22.0 million for the three months ended ~~March 31,~~June 30, 2017, an increase of ~~$0.5~~$2.4 million or ~~2.5%~~10.8%. For the three months ended ~~March 31,~~June 30, 2018, volume increased ~~0.4%~~6.5% and price/mix increased ~~2.1%~~4.3%. Net sales growth was primarily driven by the continuing growth of Stoker’s^® MST.

For the three months ended March 31, 2018, net sales in the Smoking products segment decreased to $27.0 million from $27.2 million for the three months ended March 31, 2017, a decrease of $0.2 million or 0.7%. For the three months ended March 31, 2018, Smoking products volumes decreased 0.3% while price/mix decreased 0.4%. The decrease in net sales is due to an increase in cigarette papers sales of $1.0 million offset by a $1.2 million decrease related to the decision to deemphasize the low margin cigar products business and the discontinuation of the MYO tobacco line.

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For the three months ended ~~March 31,~~June 30, 2018, net sales in the Smoking products segment increased to $29.3 million from $27.0 million for the three months ended June 30, 2017, an increase of $2.3 million or 8.5%. For the three months ended June 30, 2018, volume increased 3.4% and price/mix increased 5.1%. Net sales for Zig-Zag^® branded papers and cigar wraps were up $3.8 million, offset by $1.2 million of decreases related to Turning Point’s strategic decision to de-emphasize the low margin cigar products business and line rationalization of the MYO tobacco line.

For the three months ended June 30, 2018, net sales in the NewGen products segment increased to ~~$26.2~~$27.4 million from ~~$19.4~~$23.0 million for the three months ended ~~March 31,~~June 30, 2017, an increase of ~~$6.8~~$4.3 million or ~~35.3%~~18.7%. The increase in net sales was primarily driven by ~~progress against the goal to grow sales in the existing store base~~continued VaporBeast momentum and the acquisition of Vapor ~~Shark~~Supply in the second quarter of ~~2017.~~2018.

For the three months ended ~~March 31,~~June 30, 2018, net sales in the Other segment ~~was $0.4~~were $0.7 million. The net sales in Other relate to Standard Outdoor’s out-of-home advertising business, driven by two asset acquisitions comprised of 169 billboard structures during the three months ended March 31, 2018.

Gross Profit. For the three months ended ~~March 31,~~June 30, 2018, overall gross profit increased to ~~$31.9~~$35.8 million from ~~$27.7~~$32.0 million for the three months ended ~~March 31,~~June 30, 2017, an increase of ~~$4.2~~$3.8 million or ~~15.3%~~11.9%, primarily due to the increased net ~~sales and a favorable LIFO impact when compared to the prior year period.~~sales. Turning Point’s gross margin ~~increased~~decreased to ~~43.0%~~44.1% for the three months ended ~~March 31,~~June 30, 2018, from ~~41.4%~~44.4% for the three months ended ~~March 31,~~June 30, 2017, primarily due to a ~~favorable impact~~change in product mix associated with the growth of ~~LIFO when compared to~~ the ~~prior year period.~~NewGen segment.

For the three months ended ~~March 31,~~June 30, 2018, gross profit in the Smokeless products segment increased to ~~$11.0~~$12.5 million from ~~$9.3~~$11.5 million for the three months ended ~~March 31,~~June 30, 2017, an increase of $1.0 million or 8.5%. Gross profit as a percentage of net sales decreased to 51.3% of net sales for the three months ended June 30, 2018, from 52.5% of net sales for the three months ended June 30, 2017. The decrease in gross profit as a percentage of revenue was primarily driven by an unfavorable LIFO impact when compared to the prior year.

For the three months ended June 30, 2018, gross profit in the Smoking products segment increased to $15.2 million from $14.1 million for the three months ended June 30, 2017, an increase of $1.1 million or 7.5%. Gross profit as a percentage of net sales decreased to 51.8% of net sales for the three months ended June 30, 2018, from 52.2% of net sales for the three months ended June 30, 2017, primarily due to an adverse year-over-year Euro exchange rate impact.

For the three months ended June 30, 2018, gross profit in the NewGen products segment increased to $8.1 million from $6.3 million for the three months ended June 30, 2017, an increase of $1.7 million or ~~18.7%~~27.5%. Gross profit as a percentage of net sales increased to ~~53.0%~~29.5% of net sales for the three months ended ~~March 31,~~June 30, 2018, from ~~45.7%~~27.5% of net sales for the three months ended June 30, 2017, primarily as a result of the inclusion of Vapor Supply in 2018, which generally has higher margins due to retail store operations.

For the three months ended June 30, 2018, gross profit for the Other segment was $28, all of which relates to the Standard Outdoor business, primarily from two asset acquisitions during the first quarter of 2018.

Selling, General and Administrative Expenses. For the three months ended June 30, 2018, selling, general and administrative expenses increased to $22.3 million from $18.9 million for the three months ended June 30, 2017, an increase of $3.4 million or 18.0%, due primarily to the inclusion of Vapor Supply’s expenses in 2018, transaction costs associated with the Vapor Supply acquisition, higher legal and litigation expenses associated with Turning Point’s anti-counterfeiting initiative, and the variable costs associated with increased sales at VaporBeast offset by a $0.5 million supplier receivable reserve reversal related to the $6.5 million loan. Selling, general and administrative expenses for the three months ended June 30, 2018 also included $1.1 of SDI expenses, which are primarily legal, accounting and other professional fees. These expenses have only been incurred since the June 1, 2017 acquisition date.

Interest Expense. For the three months ended June 30, 2018, interest expense was flat at $4.1 million with the three months ended June 30, 2017, as a result of lower interest rates from Turning Point’s February 2017 and March ~~31,~~2018 refinancings of its credit facilities, offset by $0.5 million of interest expense for SDI and Standard Outdoor from their new borrowings during 2018.

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Interest and Investment Income. Interest and investment income relating to investment of the MSA escrow deposits as well as SDI’s cash and cash equivalents increased to $0.3 million for the three months ended June 30, 2018 and from $0.1 million for the three months ended June 30, 2017.

Income Tax Expense. Our income tax expense of $1.9 million was 20.2% of income before income taxes for the three months ended June 30, 2018. SDI and Standard Outdoor contributed no income tax expense or benefit to the consolidated results for the three months ended June 30, 2018 because they had a net loss and a full valuation allowance. Our income tax expense was $2.8 million for the three months ended June 30, 2017. The decrease was primarily a result of the change in the federal tax rate from 35% to 21% and the change in the Kentucky tax rate from 6% to 5%.

Amounts Attributable to Noncontrolling Interests. Income attributable to noncontrolling interests of $4.6 million for the three months ended June 30, 2018 was related to the shareholders of Turning Point other than SDI.

Net Income Attributable to SDI. Due to the factors described above, net income for the three months ended June 30, 2018 was $3.0 million compared to net income for the three months ended June 30, 2017 of $4.9 million.

	Six Months Ended June 30,
	2018			2017			% Change

Net Sales
Smokeless products	$	45,157		$	42,269			6.8	%
Smoking products		56,324			54,196			3.9	%
NewGen products		53,562			42,409			26.3	%
Other		1,078			-			100.0	%
Total net sales		156,121			138,874			12.4	%
Cost of sales		88,406			79,136			11.7	%
Gross Profit
Smokeless products		23,526			20,869			12.7	%
Smoking products		28,344			27,817			1.9	%
NewGen products		15,734			11,052			42.4	%
Other		111			-			100.0	%
Total gross profit		67,715			59,738			13.4	%
Selling, general and administrative expenses		45,745			35,749			28.0	%
Operating Income		21,970			23,989			-8.4	%
Interest expense		8,106			8,983			-9.8	%
Interest and investment income		(377	)		(216	)		74.5	%
Loss on extinguishment of debt		2,384			6,116			-61.0	%
Net periodic benefit expense, excluding service cost		221			116			90.5	%
Income before income taxes		11,636			8,990			29.4	%
Income tax expense		2,717			740			267.2	%
Net income	$	8,919		$	8,250			8.1	%
Amounts attributable to noncontrolling interests		(6,038	)		(1,470	)		310.7	%
Net income attributable to SDI	$	2,881		$	6,780			-57.5	%

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Comparison of the Six Months Ended June 30, 2018 to the Six Months Ended June 30, 2017

Net Sales. For the six months ended June 30, 2018, overall net sales increased to $156.1 million from $138.9 million for the six months ended June 30, 2017, an increase of $17.2 million or 12.4%. The increase in net sales was primarily driven by volume growth in the NewGen segment which includes an additional quarter of Vapor Shark results in 2018, the acquisition of Vapor Supply in the second quarter of 2018 and the acquisitions of out-of-home advertising businesses in the first quarter of 2018.

For the six months ended June 30, 2018, net sales in the Smokeless products segment increased to $45.2 million from $42.3 million for the six months ended June 30, 2017, an increase of $2.9 million or 6.8%, primarily due to the continuing growth of Stoker’s^® MST.

For the six months ended June 30, 2018, net sales in the Smoking products segment increased to $56.3 million from $54.2 million for the six months ended June 30, 2017, an increase of $2.1 million or 3.9%. Net sales for Zig-Zag^® branded papers and cigar wraps were up $4.6 million offset by $2.5 million of decreases related to Turning Point’s strategic decision to de-emphasize the low margin cigar products business and line rationalization of the MYO tobacco line.

For the six months ended June 30, 2018, net sales in the NewGen products segment increased to $53.6 million from $42.4 million for the six months ended June 30, 2017, an increase of $11.2 million or 26.3%. The increase in net sales was primarily driven by continued VaporBeast momentum, inclusion of an additional quarter of Vapor Shark results in 2018 and Turning Point’s acquisition of Vapor Supply in the second quarter of 2018.

For the six months ended June 30, 2018, net sales in the Other segment were $1.1 million. The net sales in Other relate to Standard Outdoor’s out-of-home advertising business, driven by two asset acquisitions comprised of 169 billboard structures during the first quarter of 2018.

Gross Profit. For the six months ended June 30, 2018, overall gross profit increased to $67.7 million from $59.7 million for the six months ended June 30, 2017, an increase of $8.0 million or 13.4%, primarily due to the increased net sales. Turning Point’s gross margin increased to 43.6% for the six months ended June 30, 2018, from 43.0% for the six months ended June 30, 2017, primarily due to higher margins in the NewGen segment resulting from the inclusion of an additional quarter of Vapor Shark results, the inclusion of Vapor Supply, and efficiencies realized within the growing Stoker’s^® MST line along with a favorable LIFO impact when compared to the prior year.

For the six months ended June 30, 2018, gross profit in the Smokeless products segment increased to $23.5 million from $20.8 million for the six months ended June 30, 2017, an increase of $2.7 million or 12.7%. Gross profit as a percentage of net sales increased to 52.1% of net sales for the six months ended June 30, 2018, from 49.4% of net sales for the six months ended June 30, 2017. The increase in gross ~~margin~~profit as a percentage of revenue is primarily due to a favorable LIFO impact when compared to the prior year ~~period.~~in addition to efficiencies realized in the growing Stoker’s^® MST line.

For the ~~three~~six months ended ~~March 31,~~June 30, 2018, gross profit in the Smoking products segment ~~decreased~~increased to ~~$13.2~~$28.3 million from ~~$13.7~~$27.8 million for the ~~three~~six months ended ~~March 31,~~June 30, 2017, ~~a decrease~~an increase of $0.5 million or ~~3.9%~~1.9%. Gross profit as a percentage of net sales decreased to ~~48.8%~~50.3% of net sales for the ~~three~~six months ended ~~March 31,~~June 30, 2018, from ~~50.4%~~51.3% of net sales for the ~~three~~six months ended ~~March 31,~~June 30, 2017, primarily due to an adverse year-over-year Euro exchange rate impact.

For the ~~three~~six months ended ~~March 31,~~June 30, 2018, gross profit in the NewGen products segment increased to ~~$7.7~~$15.7 million from ~~$4.7~~$11.1 million for the ~~three~~six months ended ~~March 31,~~June 30, 2017, an increase of ~~$3.0~~$4.7 million or ~~62.4%~~42.4%. Gross profit as a percentage of net sales increased to ~~29.2%~~29.4% of net sales for the ~~three~~six months ended ~~March 31,~~June 30, 2018, from ~~24.3%~~26.1% of net sales for the ~~three~~six months ended ~~March 31,~~June 30, 2017, primarily as a result of the inclusion of an additional quarter of Vapor Shark results and Vapor Supply in 2018, both of which generally ~~has~~have higher ~~margins.~~margins due to retail store operations.

For the ~~three~~six months ended ~~March 31,~~June 30, 2018, gross profit for the Other segment was $0.1 million, all of which relates to the Standard Outdoor business, primarily from two asset acquisitions during the ~~three months ended March 31,~~first quarter of 2018.

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Selling, General and Administrative Expenses. For the ~~three~~six months ended ~~March 31,~~June 30, 2018, selling, general and administrative expenses increased to ~~$23.5~~$45.7 million from ~~$16.8~~$35.7 million for the ~~three~~six months ended ~~March 31,~~June 30, 2017, an increase of ~~$6.7~~$10.0 million or ~~39.5%~~28.0%, due primarily to the inclusion of an additional quarter of Vapor Shark’s expenses, ~~in 2018,~~ higher legal and litigation expenses associated with the anti-counterfeiting initiatives, non-recurring departmental reorganization expenses, and variable costs associated with increased sales at ~~VaporBeast.~~ VaporBeast, offset by a $0.5 million supplier receivable reserve reversal related to the $6.5 million loan. Selling, general and administrative expenses for the ~~three~~six months ended ~~March 31,~~June 30, 2018 also include ~~$1.3~~$2.4 million of SDI expenses, which are primarily legal, accounting and other professional ~~fees.~~ fees along with $0.3 million of Standard Outdoor expenses. These expenses have only been incurred since the June 1, 2017 acquisition date.

Interest Expense. For the ~~three~~six months ended ~~March 31,~~June 30, 2018, interest expense decreased to ~~$4.0~~$8.1 million from ~~$4.9~~$9.0 million for the ~~three~~six months ended ~~March 31,~~June 30, 2017, as a result of lower interest rates from Turning Point’s February 2017 and March 2018 refinancings of its credit facilities, offset by ~~$0.3~~$0.9 million of interest expense for SDI and Standard Outdoor from their new borrowings during the ~~three~~six months ended ~~March 31,~~June 30, 2018.

Interest and Investment Income. Interest and investment income relating to investment of the MSA escrow deposits as well as SDI’s cash and cash equivalents was approximately ~~$0.1~~$0.4 million for the ~~three~~six months ended ~~March 31,~~June 30, 2018 and ~~2017, respectively.~~$0.2 million for the six months ended June 30, 2017.

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Loss on Extinguishment of ~~Debt.~~Debt. For the ~~three~~six months ended ~~March 31,~~June 30, 2018, loss on extinguishment of debt was $2.4 million as the result of refinancing Turning Point’s credit facility in the first quarter of 2018. For the ~~three~~six months ended ~~March 31,~~June 30, 2017, loss on extinguishment of debt was $6.1 million as the result of Turning Point refinancing ~~Turning Point’s~~its credit facility in the first quarter of 2017.

Income Tax Expense ~~(Benefit)~~. Our income tax expense of ~~$0.8~~$2.7 million was ~~36.9%~~23.3% of income before income taxes for the ~~three~~six months ended ~~March 31,~~June 30, 2018. SDI and Standard Outdoor contributed no income tax expense or benefit to the consolidated results for the ~~three~~six months ended ~~March 31,~~June 30, 2018 because they had a net loss and a full valuation allowance. Our income tax ~~benefit of $2.1 million~~expense for the ~~three~~six months ended ~~March 31,~~June 30, 2017 was ~~primarily~~lower than expected based on our estimated annual effective tax rate as a result of discrete tax ~~benefits~~deductions of $8.6 million from the exercise of stock options during the ~~quarter.~~six-month period.

Amounts Attributable to Noncontrolling Interests. Income attributable to noncontrolling interests of ~~$1.5~~$6.0 million for the ~~three~~six months ended ~~March 31,~~June 30, 2018 iswas related to the shareholders of Turning Point ~~who are not~~other than SDI.

Net ~~(Loss)~~ Income Attributable to ~~SDI.~~SDI. Due to the factors described above, net ~~loss~~income for the ~~three~~six months ended ~~March 31,~~June 30, 2018 was ~~$0.1~~$2.9 million compared to net income for the ~~three~~six months ended ~~March 31,~~June 30, 2017 of ~~$1.9~~$6.8 million.

Insurance segment

The table and discussion set forth below relate to the results of operations of our Insurance segment:

			Three Months Ended		For the period from January 2, 2018 to
	For the period January 2, 2018 to March 31, 2018		June 30, 2018		June 30, 2018

Insurance premiums earned	$	7,317	$	7,134	$	14,451
Net investment income		194		176		370
Other income		207		187		394
Total revenues		7,718		7,497		15,215

Incurred losses and loss adjustment expenses		5,812		5,405		11,217
Acquisition and underwriting expenses		53
Other operating expenses		1,236		1,541		2,830
Total operating costs and expenses		7,101		6,946		14,047
Income before income taxes		617		551		1,168
Income tax expense		-		-		-
Net income	$	617	$	551	$	1,168

On January 2, 2018, we completed the acquisition of Interboro Holdings Inc., which operates as Maidstone Insurance. As a result, the following discussion relates to the insurance operations during the ~~period from January 2,~~three months ended June 30, 2018 ~~to March 31, 2018.~~

~~Insurance Premiums Earned. For~~and the period from January 2, 2018 to ~~March 31,~~June 30, 2018.

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Insurance Premiums Earned. For the three months ended June 30, 2018 ~~$7.3~~and the period from January 2, 2018 to June 30, 2018, $7.1 million and $14.5 million of insurance premiums, respectively, were earned related to auto insurance policies ~~previously~~ written.

Net Investment Income. For the three months ended June 30, 2018 and the period from January 2, 2018 to ~~March 31,~~June 30, 2018, we earned net investment income of $0.2 million and $0.4 million, respectively, comprised primarily of interest, net of investment expenses.

Other Income. We recognized $0.2 million and $0.4 million of other income for the three months ended June 30, 2018 and the period from January 2, 2018 to ~~March 31,~~June 30, 2018, respectively, which included service and takeout fees, installment and late fees collected by Maidstone, and broker fees collected from non-affiliated insurance companies when acting as an agent. Service and takeout fees are in the form of credits for writing business from the state assigned pool. These credits can be used to reduce the amount of business written in the future or sold to third-party insurance companies for them to reduce their exposure to the assigned risk pool.

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Incurred losses and loss adjustment expenses. For the three months ended June 30, 2018 and the period from January 2, 2018 to ~~March 31,~~June 30, 2018, we incurred losses and loss adjustment expenses of ~~$5.8 million.~~$5.4 million and $11.2 million, respectively. These amounts are based on individual case estimates for reported claims and a factor for incurred but not reported (“IBNR”) claims.

~~Acquisition and underwriting expenses~~. For the period from January 2, 2018 to March 31, 2018, we recorded amortization of deferred policy acquisition costs of less than $0.1 million related to commissions, premium tax and policy issuance costs deferred at issuance.

Other operating expenses. We incurred other expenses of ~~$1.2~~$1.5 million and $2.8 million for the three months ended June 30, 2018 and the period from January 2, 2018 to ~~March 31,~~June 30, 2018, respectively, which consisted of salaries and benefits, depreciation, amortization and other general and administrative expenses. We also recorded amortization of deferred policy acquisition costs of $0.1 million and $0.3 million, respectively, related to commissions, premium tax and policy issuance costs deferred at issuance.

Income tax expense ~~(benefit)~~. For the three months ended June 30, 2018 and the period from January 2, 2018 to ~~March 31,~~June 30, 2018, there was no income tax benefit or expense recognized. The insurance operations are subject to state and federal corporate income taxes.

Net ~~Income.~~income. Due to the factors described above, net income for the three months ended June 30, 2018 and the period from January 2, 2018 to ~~March 31,~~June 30, 2018 was $0.6 million and $1.2 million, respectively, for the insurance business.

Liquidity and Capital Reserves

SDI and Standard Outdoor

SDI and Standard Outdoor had cash and cash equivalents totaling ~~$5.6~~$4.6 million at ~~March 31,~~June 30, 2018. For the ~~three~~six months ended ~~March 31,~~June 30, 2018, we had cash outflows from operating activities of ~~$1.2~~$2.4 million primarily relating to payments of accrued liabilities and an increase in receivables. We had a net cash ~~inflow~~outflow from investing activities of ~~$2.9~~$19.9 million relating to our acquisitions of Maidstone and two billboard sign ~~businesses, primarily due to cash acquired in the Maidstone acquisition.~~businesses. We had cash inflows from financing activities of ~~$11.1~~$11.3 million primarily from borrowings under the Crystal Term Loan and proceeds from a private placement stock issuance in January 2018. Future uses of our cash may include investing in our subsidiaries and new acquisitions.

Common Stock Repurchase Program

On June 29, 2017, our Board of Directors authorized a program to repurchase over a period of twelve months shares of our Class A Common Stock or Class B Common Stock, par value $0.01 per share, constituting, in the aggregate, up to 5% of the outstanding shares of Common Stock. The program was effective immediately. Shares of the Common Stock may be repurchased in the open market or through negotiated transactions. The program may be terminated or suspended at any time at the discretion of the Company. No repurchases of Common Stock were made pursuant to this program since its authorization. The Crystal Term Loan, as described in Note ~~12,~~12. Notes Payable and Long-Term Debt, generally prohibits such repurchases of the Company’s Common Stock.

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Turning Point Brands

Turning Point’s principal uses for cash are working capital, debt service, and capital expenditures. Turning Point believes its cash flows from operations and borrowing availability under ~~the~~its 2018 Revolving Credit Facility (as defined herein) are adequate to satisfy its operating cash requirements for the foreseeable future.

~~Turning~~Turing Point’s working capital, which is defined as current assets less current liabilities, increased ~~$5.0~~$12.0 million to ~~$46.3~~$53.3 million at ~~March 31,~~June 30, 2018, compared with $41.3 million at December 31, 2017. The increase in working capital is primarily due to ~~paying down~~ the ~~balance~~issuance of ~~its 2018 Revolving Credit Facility~~the note receivable, the acquisition of Vapor Supply, and ~~a reduction~~investment in ~~accrued liabilities partially offset by a decrease in inventory, an increase in accounts payable, and an increase in the portion of its debt possessing current maturities due to its 2018 refinancing.~~inventory.

	June 30, 2018		December 31, 2017
Current Assets	$	105,164	$	79,493
Current Liabilities		51,837		38,230
Working Capital	$	53,327	$	41,263

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March 31,
2018

December 31,
2017

Current Assets $ 76,521 $ 79,493
Current Liabilities 30,227 38,230
Working Capital $ 46,294 $ 41,263

Cash Flows from Operating Activities

For the ~~three~~six months ended ~~March 31,~~June 30, 2018, net cash provided by operating activities was ~~$8.4~~$6.0 million compared to net cash ~~used in~~provided by operating activities of ~~$2.3~~$6.4 million for the ~~three~~six months ended ~~March 31,~~June 30, 2017, ~~an increase~~a decrease of ~~$10.8~~$0.4 million ~~or 460%~~, ~~principally~~primarily due to higher working capital ~~changes.~~investments in 2018.

Cash Flows from Investing Activities

For the ~~three~~six months ended ~~March 31,~~June 30, 2018, net cash used inby investing activities was ~~$0.9~~$14.0 million compared to net cash provided by investing activities of ~~$0.8~~$0.7 million for the ~~three~~six months ended ~~March 31,~~June 30, 2017, a decrease of ~~$1.7~~$14.7 million, ~~or 208%,~~ primarily due to ~~changes~~issuance of the note receivable and the acquisition of Vapor Supply in ~~restricted cash relating to Turning Point’s MSA escrow account.~~2018.

Cash Flows from Financing Activities

For the ~~three~~six months ended ~~March 31,~~June 30, 2018, net cash provided by financing activities was $6.1 million compared to net cash used in financing activities ~~was $6.9 million compared to net cash provided by financing activities~~ of ~~$2.1~~$7.2 million for the ~~three~~six months ended ~~March 31,~~June 30, 2017, ~~a decrease~~an increase of ~~$9.0~~$13.3 million, ~~or 429%,~~ primarily due to ~~payments on Turning~~borrowings against Turing Point’s ~~2017~~2018 Revolving Credit Facility ~~in the first quarter of 2018.~~to fund its investing activities.

Insurance

The insurance segment had cash and cash equivalents of ~~$22.1~~$14.8 million and fixed maturity investments of ~~$22.8~~$26.5 million as of ~~March 31,~~June 30, 2018. The cash used in operating activities for the period from January 2, 2018 to ~~March 31,~~June 30, 2018 was ~~$2.9~~$4.8 million. The primary uses for the cash are payments of claims from policy holders, ~~and~~offset by the timing of collection of premiums receivable.

The cash ~~provided by~~used in investing activities, excluding the $12.8 million acquired by SDI in the acquisition and a capital contribution from SDI, was ~~$2.2~~$3.2 million for the period from January 2, 2018 to ~~March 31,~~June 30, 2018, which was primarily driven by ~~proceeds from~~payments for the ~~sale~~purchase of available-for-sale fixed maturity securities and equity securities.

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Long-Term Debt

As of ~~March 31,~~June 30, 2018, the Company was in compliance with the financial and restrictive covenants in its existing debt instruments. The following table provides outstanding balances under our debt instruments.

	June 30, 2018			December 31, 2017
2018 First Lien Term Loan	$	158,000		$	-
2018 Second Lien Term Loan		40,000			-
SDI Crystal Term Loan		10,000			-
Standard Outdoor Promissory Notes		9,950			-
2017 Revolving Credit Facility		-			8,000
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
Notes payable - VaporBeast		-			2,000
Total Notes Payable and Long-Term Debt		217,950			205,613
Less deferred financing charges		(5,463	)		(3,573	)
Less revolving credit facility		-			(8,000	)
Less current maturities		(9,098	)		(7,850	)
	$	203,389		$	186,190

March 31,
2018

December 31,
2017

2018 First Lien Term Loan $ 160,000 $ -
2018 Second Lien Term Loan 40,000 -
SDI Crystal Term Loan 10,000 -
Standard Outdoor Promissory Notes 8,866 -
2017 Revolving Credit Facility - 8,000
2017 First Lien First Out Term Loan - 105,875
2017 First Lien Second Out Term Loan - 34,738
2017 Second Lien Term Loan - 55,000
Note payable - VaporBeast 2,000 2,000
Total Notes Payable and Long-Term Debt 220,866 205,613
Less deferred finance charges (4,693 ) (3,573 )
Less revolving credit facility - (8,000 )
Less current maturities (10,900 ) (7,850 )
$ 205,273 $ 186,190

2018 Credit Facility

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 our ability: (i) to pledge assets, (ii) to incur additional indebtedness, (iii) to pay dividends, (iv) to make distributions, (v) to sell assets, and (vi) to make investments. Refer to Note 12. Notes Payable and Long-Term Debt in our condensed consolidated financial statements for further information regarding dividend restrictions.

2018 First Lien Credit Facility: The 2018 First Lien Term Loan and the 2018 Revolving Credit Facility bear interest at LIBOR plus a spread of 2.75% to 3.50% based on our 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 ~~Term Loan~~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 our capital stock, other than certain excluded assets (the “Collateral”). The 2018 First Lien Credit Facility contains certain financial covenants including maximum senior leverage ratio of 3.50x with step-downs to 3.00x, a maximum total leverage ratio of 4.50x with step-downs to 4.00x, and a minimum fixed charge coverage ratio of 1.20x. The weighted average interest rate of the 2018 First Lien Term Loan was ~~5.13%~~5.34% at ~~March 31,~~June 30, 2018. ~~Turning Point~~The weighted average interest rate of the 2018 Revolving Credit Facility was 6.05% at June 30, 2018. At June 30, 2018, we had no$16.0 million of borrowings outstanding under ~~its~~the 2018 Revolving Credit Facility. The $34.0 million unused portion of the 2018 Revolving Credit Facility is reduced by a $0.7 million letter of credit with Fifth Third Bank, resulting in $33.3 million of availability under the 2018 Revolving Credit Facility at ~~March 31,~~June 30, 2018.

~~2017 Credit Facility~~

Note Payable – VaporBeast

On November 30, 2016, Turning Point issued a note payable to VaporBeast’s former shareholders (“VaporBeast Note”). The VaporBeast Note iswas $2.0 million principal with 6% interest compounded monthly and ~~matures~~matured on May 30, ~~2018. The VaporBeast Note may be prepaid~~2018, at ~~any~~which time without penalty and is subject to a late-payment penalty of 5% and a default rate of 13% per annum. The VaporBeast Note is subject to customary defaults, including defaults for nonpayment, nonperformance, any material breach under the purchase agreement, and bankruptcy or insolvency.

~~First Lien Term Loan~~

~~Second Lien Term Loan~~

~~Revolving Credit Facility~~

SDI Crystal Term Loan

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 provides for an initial term loan of $10.0 million and a commitment to provide additional term loans of up to $15.0 million. Subject to the satisfaction of certain conditions, 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 bears interest at a rate equal to the three-month “Libor Rate” as published in The Wall Street Journal plus 7.25%. Interest under the Crystal Term Loan agreement is payable monthly and is also subject to an agency fee of $50,000, payable upon execution of the 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 is payable at maturity, on February 2, 2023.

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

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.

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 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.

Off-balance Sheet Arrangements

During the ~~three months ended March 31,~~second quarter of 2018 we executed various forward contracts, none of which met hedge accounting requirements, for the purchase of ~~€6.0~~€6.3 million with ~~maturity~~settlement dates ranging from ~~March~~August 2018 to ~~July 2018.~~January 2019. During 2017, we executed no forward contracts. At ~~March 31,~~June 30, 2018, and December 31, 2017, we had forward contracts for the purchase of ~~€3.8~~€6.3 million and €0 million, respectively.

Contractual Obligations

As of ~~March 31,~~June 30, 2018, there had been no material changes outside the ordinary course of business to our contractual obligations as of December 31, 2017, as reported in our Annual Report on Form 10-K, with the exception of changes to our long-term debt obligations due to the refinancing discussed in the “Long-Term Debt” section and those related to the acquisition of our insurance company. Our insurance reserves are $27.0 million as of March 31, 2018. These insurance reserves are more fully described in Note 10. Liability for Losses and Loss Adjustment Expenses.‘Long-Term Debt’ section.

The following tables summarize our contractual obligations (in thousands):

Long-Term Debt Obligations

Payments due by period as of December 31, 2017
Long-Term Debt Obligations

Total

Less than
1 year

1-3 years

4-5 years

More than
5 years

Long-term debt obligations, including interest $ 266,052 $ 29,803 $ 42,444 $ 193,805 $ -

We believe that any effect of inflation at current levels will be minimal. Historically, we have been able to increase prices at a rate equal to, or greater than, the rate of inflation and believe we will continue to be able to do so for the foreseeable future. In addition, we have been able to maintain a relatively stable, variable cost structure for our products due, in part, to our successful procurement with regard to our tobacco products and, in part, to our existing contractual agreement for the purchase of our premium cigarette papers.

Foreign Currency Sensitivity

Although we engaged in hedging inventory purchases during the ~~three~~six months ended ~~March 31,~~June 30, 2018, there have been no material changes in our exposure to exchange rate fluctuation risk, as reported within our 2017 Annual Report on Form 10-K, during the period. Please refer to our “Quantitative and Qualitative Disclosures about Market Risk” included in our 2017 Annual Report on Form 10-K filed with the ~~SEC on March 12, 2018.~~SEC.

Interest Rate Sensitivity

Turning Point’s March 2018 refinancing resulted in all of ~~its~~our long-term debt instruments ~~with the exception of the VaporBeast Note Payable,~~ having variable interest rates that fluctuate with market rates. To reduce the volatility of future cash flows, Turning Point entered into interest rate swap agreements with lenders under ~~its~~the 2018 Credit ~~Facility.~~Facility in March 2018. At ~~March 31,~~June 30, 2018, ~~$70.0~~$70 million of ~~Turning Point’s $188.2 million~~its outstanding long-term debt carrying variable rates is covered by the interest rate swap agreements and, thus, effectively bears interest at a fixed rate. WeTurning Point believe the effect, if any, of reasonably possible near-term changes in interest rates on our consolidated financial position, results of operations, ofor cash flows would not be significant. A 1% increase in the interest rate would change pre-tax income by approximately ~~$0.6~~$1.4 million per year. Refer to Note ~~5. Derivative Instruments~~5 for additional information regarding the interest rate ~~swap.~~swaps.

Item 4.

Controls and Procedures

We have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Interim Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act of 1934, as amended (the “Act”)) as of ~~March 31,~~June 30, 2018. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Act is: (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms; and (ii) accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures.

Changes in Internal Control Over Financial Reporting

On January 2, 2018, we acquired all of the outstanding capital stock of Interboro Holdings, Inc. and in January and February 2018, we acquired assets primarily consisting of billboard structures. See Note 3. Acquisitions, in the accompanying notes to the condensed consolidated financial statements for additional information regarding the acquisitions. We are in the process of integrating policies, processes, people, technology and operations into the control structure of the consolidated company, and we will continue to evaluate the impact of any related changes to our internal control over financial reporting.

~~Table of Contents~~

On March 13, 2018, Turning Point’s former Chief Financial Officer, Mark Stegeman resigned, Robert Lavan was named Chief Financial Officer, and Brian Wigginton was appointed Chief Accounting Officer. Outside of these actions, there were no changes in Turning Point’s internal controls over financial reporting during the most recent fiscal quarter. Due to the consistency of other personnel surrounding the financial reporting process and the lack of change in control activities surrounding financial reporting process, the change in Turning Point’s principal financial officer has not materially affected, and is not reasonably likely to materially affect, its internal controls over financial reporting or the internal controls over financial reporting of our consolidated company.

Table of Contents

PART II

OTHER INFORMATION

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

We are a party from time to time to various proceedings in the ordinary course of business. For a description of the Master Settlement Agreement, to which we are a party, see “Financial Statements and Supplementary Data - Note 2 Summary of Significant Accounting Policies: Risk and Uncertainties.” Other than the proceedings mentioned below, there is no material litigation, arbitration or governmental proceeding currently pending against us or any of our officers or directors in their capacity as such, and we and our officers and directors have not been subject to any such proceeding.

Other major tobacco companies are defendants in a number of product liability claims. In a number of these cases, the amounts of punitive and compensatory damages sought are significant, and could have a material adverse effect on our business and results of operations. We are a defendant in certain cases which have been dormant for many ~~years. Plaintiffs’ counsel are in the process of voluntarily dismissing those claims.~~years, which cases have now been dismissed with prejudice.

We are subject to several lawsuits alleging personal injuries resulting from malfunctioning vaporizer devices and may be subject to claims in the future relating to our other NewGen products. We are still evaluating these claims and the potential defenses to them. For example, we did not design or manufacture the products at issue; rather, we were merely the distributor. Nonetheless, there can be no assurance that we will prevail in these cases, and they could have a material adverse effect on our business and results of operations. As a result of their relative novelty, electronic cigarette and vaporizer product manufacturers and sellers have only recently become subject to litigation.

Item 1A.

Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on March 12, 2018, which could materially affect our business, financial condition or future results. Our risk factors as of the date of this Quarterly Report on Form 10-Q have not changed materially from those described in our Annual Report on Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

As set forth in our Current Report on Form 8-K filed with the Securities and Exchange Commission on January 18, 2018, on January 12, 2018, we entered into a Common Stock Purchase Agreement, pursuant to which we sold an aggregate of 181,825 shares of our Class A common stock to three investment funds, all of which are “accredited investors” as such term is defined in Regulation D under the Securities Act of 1933, as amended. The aggregate purchase price for such shares was $2.0 million. There were no discounts or commissions in connection with the sale, which was effected in accordance with Rule 506 under said Regulation D.

On March 9, 2018, our Board of Directors approved the issuance to various persons and entities, including employees of and consultants to the Company and its subsidiaries, of an aggregate of 162,994 shares of our Class A Common Stock, all of which recipients are “accredited investors” as such term is defined in Regulation D under the Securities Act of 1933, as amended. The shares were issued in return for services rendered or to be rendered. There were no discounts or commissions in connection with the issuances, which was effected in accordance Section 4(2) of the Securities Act of 1933, as amended.

60Not applicable.

~~Table of Contents~~

Item 3.

Defaults Upon Senior Securities

Not applicable.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

On May 10, 2018, our Board of Directors approved the amendment and restatement of the Amended and Restated Bylaws of the Company. The material changes implemented by such amendment and restatement were (1) to make clear, in Article IV, Section 2, that shares of the Company’s Class B Common Stock may not be transferred by any holder of such shares without the prior written consent of the Company; and (2) in Article V, to modify the indemnification rights held by officers, directors and employees of the Company to provide that such rights are consistent with the maximum scope provided under Delaware law.Not applicable.

Item 6.

Exhibits

See the Exhibit Index immediately following the signature page of this Quarterly Report on Form 10-Q.

Table of Contents

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	STANDARD DIVERSIFIED INC.

		By: /s/ Ian Estus
		Name: Ian Estus
		Title: Chief Executive Officer

		/s/ Edward J. Sweeney
		Name: Edward J. Sweeney
		Title: Interim Chief Financial Officer

Dated: August 10, 2018

Table of Contents

EXHIBIT INDEX

3.1	Sixth Amended and Restated Certificate of Incorporation of the Company, as amended through April 20, 2018.*

3.2	Third Amended and Restated Bylaws of the Company.*

~~10.1~~	Asset Purchase Agreement, dated as of January 18, 2018, by and between Standard Outdoor Southeast I LLC and Quality I/N Signs and Outdoor Advertising, LLC.*

~~10.2+~~	Promissory Note and Security Agreement, dated as of January 18, 2018, by and between Standard Outdoor Southeast I LLC and Quality I/N Signs and Outdoor Advertising, LLC.*

~~10.3~~	Asset Purchase Agreement, dated as of February 20, 2018, by and between Standard Outdoor Southeast II LLC and Vista Outdoor Corporation.*

~~10.4+~~	Promissory Note and Security Agreement, dated as of February 20, 2018, by and between Standard Outdoor Southeast I LLC and Vista Outdoor Corporation.*

~~10.5~~	Term Loan Agreement, dated as of February 2, 2018, by and among Standard Diversified Inc., Standard Outdoor LLC, Standard Outdoor Southwest LLC, Standard Outdoor Southeast I LLC, Standard Outdoor Southeast II LLC, Crystal Financial LLC, as administrative agent and collateral agent, and the financial institutions from time to time party thereto. (Incorporated ( Incorporated by reference to Exhibit ~~5.1~~3.1 to the ~~Current~~Quarterly Report on Form ~~8-K~~10-Q of ~~Standard Diversified Inc.~~the Company for the quarter ended March 31, 2018, filed with the Securities and Exchange Commission on ~~February 5,~~May 14, 2018.)

~~10.6~~	Amended and Restated First Lien Credit Agreement, dated as of March 7, 2018, by and among Turning Point Brands, Inc. and its subsidiaries, as the obligors, Fifth Third Bank, as administrative agent, and the lenders party thereto.***

~~10.7~~	Amended and Restated Second Lien Credit Agreement, dated as of March 7, 2018, by and among Turning Point Brands, Inc. and its subsidiaries, as obligors, Prospect Capital Corporation, as administrative agent, and the lenders party thereto.***

~~Table of Contents~~

~~10.8~~	Omnibus Amendment, Reaffirmation Agreement and Joinder dated as of March 7, 2018, by and among Turning Point Brands, Inc. and its subsidiaries, as the Grantors, Fifth Third Bank, as administrative agent, and the lenders party thereto. ***

~~10.9~~	Second Lien Omnibus Amendment, Reaffirmation Agreement and Joinder dated as of March 7, 2018, by and among Turning Point Brands, Inc. and its subsidiaries, as the Grantors, Fifth Third Bank, as administrative agent, and the lenders party thereto.***

~~10.10~~	First Amendment to Second Lien Intercreditor Agreement, dated as of March 7, 2018, by and among Turning Point Brands, Inc., and the other grantors party thereto, Fifth Third Bank, as first lien collateral agent, and Prospect Capital Corporation, as second lien collateral agent.***

31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

32.2	Certifications of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

99.1	Press release of the Company*

101	~~XBRL (eXtensible~~XBRL(eXtensible Business Reporting language). The following materials from SDI’s Quarterly Report on Form 10-Q for the quarter ended ~~March 31,~~June 30, 2018, filed on ~~May 14,~~August 10, 2018, formatted in XBRL: (i) consolidated balance sheets, (ii) consolidated statements of income, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of cash flows, and (v) the notes to consolidated financial statements.*

*	~~Filed herewith.~~

* Filed herewith

**	~~Furnished herewith.~~

~~***~~

~~Filed as an exhibit to the Quarterly Report on Form 10-Q of Turning Point Brands, Inc. filed on May 9, 2018 and incorporated by reference herein.~~

+	~~Confidential treatment has been requested as to certain portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended.~~

~~Table of Contents~~

~~Signatures~~

~~Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.~~

	~~STANDARD DIVERSIFIED INC.~~

		~~By: /s/ Ian Estus~~
		~~Name: Ian Estus~~
		~~Title: Chief Executive Officer~~

		~~/s/ Edward J. Sweeney~~
		~~Name: Edward J. Sweeney~~
		~~Title: Interim Chief Financial Officer~~

~~Dated: May 14, 2018~~** Furnished herewith

6364

Delaware		56-1581761
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification no.)

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

	Large accelerated filer ☐		Accelerated filer ☐
	Non-accelerated filer ☒		Smaller reporting company ☐
	Emerging growth company ☐ (Do not check if a smaller reporting company)

		Page No.
PART I FINANCIAL INFORMATION

ITEM 1	Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets as of ~~March 31,~~June 30, 2018 and December 31, 2017	3

	Condensed Consolidated Statements of Income for the three and six months ended ~~March 31,~~June 30, 2018 and 2017	4

	Condensed Consolidated Statements of Comprehensive ~~(Loss)~~ Income for the three and six months ended ~~March 31,~~June 30, 2018 and 2017	5

	Condensed Consolidated Statement of Stockholders’ Equity for the ~~three~~six months ended ~~March 31,~~June 30, 2018	6

	Condensed Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~March 31,~~June 30, 2018 and 2017	7

	Notes to Condensed Consolidated Financial Statements	9

ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	4344

ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	5960

ITEM 4	Controls and Procedures	5961

PART II OTHER INFORMATION

ITEM 1	Legal Proceedings	6062

ITEM 1A	Risk Factors	6062

ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	6062

ITEM 3	Defaults Upon Senior Securities	6162

ITEM 4	Mine Safety Disclosures	6162

ITEM 5	Other Information	6162

ITEM 6	Exhibits	6162

Signatures		63

	March 31, 2018			December 31, 2017			June 30, 2018			December 31, 2017
ASSETS
Cash and cash equivalents	$	31,535		$	18,219		$	22,882		$	18,219
Fixed maturities available for sale, at fair value; amortized cost $23,171 in 2018		22,772			-
Trade accounts receivable, net of allowances of $46 in 2018 and $17 in 2017		2,418			3,249
Fixed maturities available for sale, at fair value; amortized cost $26,923 in 2018								26,494			-
Equity securities, at fair value; cost: $753 in 2018								744			-
Trade accounts receivable, net of allowances of $47 in 2018 and $17 in 2017								5,862			3,249
Premiums receivable		6,417			-			6,258			-
Investment income due and accrued		138			-
Inventories		58,059			63,296			76,870			63,296
Other current assets		12,733			10,851			19,691			10,851
Property, plant and equipment, net		26,580			9,172			26,838			9,172
Deferred income taxes		-			450			-			450
Deferred financing costs, net		1,025			630			974			630
Intangible assets, net		29,486			26,436			30,371			26,436
Deferred policy acquisition costs		1,172			-			2,392			-
Goodwill		134,906			134,620			135,341			134,620
Master Settlement Agreement (MSA) escrow deposits		30,316			30,826			30,229			30,826
Pension asset		-			396			-			396
Other assets		1,759			569			2,956			569
Total assets	$	359,316		$	298,714		$	387,902		$	298,714

LIABILITIES AND EQUITY
Reserves for losses and loss adjustment expenses	$	26,996		$	-		$	25,521		$	-
Unearned premiums		13,014			-			13,350			-
Advance premiums collected		803			-			647			-
Accounts payable		7,445			3,686			13,402			3,686
Accrued liabilities		14,270			20,014			14,917			20,014
Current portion of long-term debt		10,900			7,850			9,098			7,850
Revolving credit facility		-			8,000			16,000			8,000
Notes payable and long-term debt		205,273			186,190			203,389			186,190
Deferred income taxes		455			-			1,371			-
Postretirement benefits		3,968			3,962			3,932			3,962
Asset retirement obligations		2,028			-			2,028			-
Other long-term liabilities		2,617			571			3,429			571
Total liabilities		287,769			230,273			307,084			230,273

Commitments and contingencies

Equity:
Preferred stock, $0.01 par value; authorized shares 500,000,000; -0- issued and outstanding shares		-			-
Class A common stock, $0.01 par value; authorized shares, 300,000,000; 8,581,510 and 8,347,123 issued and outstanding shares at March 31, 2018 and December 31, 2017, respectively		86			83
Class B common stock, $0.01 par value; authorized shares, 30,000,000; 8,029,274 and 8,040,275 issued and outstanding shares at March 31, 2018 and December 31, 2017, respectively; convertible into Class A shares on a one-for-one basis		80			81
Preferred stock, $0.01 par value; authorized shares 50,000,000; -0- issued and outstanding shares								-			-
Class A common stock, $0.01 par value; authorized shares, 300,000,000; 8,711,972 and 8,348,373 issued and outstanding shares at June 30, 2018 and December 31, 2017, respectively								87			83
Class B common stock, $0.01 par value; authorized shares, 30,000,000; 7,923,290 and 8,041,525 issued and outstanding shares at June 30, 2018 and December 31, 2017, respectively; convertible into Class A shares on a one-for-one basis								79			81
Additional paid-in capital		73,464			70,813			73,794			70,813
Accumulated other comprehensive loss		(2,396	)		(1,558	)		(2,119	)		(1,558	)
Accumulated deficit		(26,473	)		(26,982	)		(22,945	)		(26,982	)
Total stockholders’ equity		44,761			42,437
Total stockholders' equity								48,896			42,437
Noncontrolling interests		26,786			26,004			31,922			26,004
Total equity		71,547			68,441			80,818			68,441
Total liabilities and equity	$	359,316		$	298,714		$	387,902		$	298,714

	Three Months Ended March 31,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2018			2017
Revenues:
Net sales	$	74,348		$	66,788		$	81,773		$	72,086		$	156,121		$	138,874
Insurance premiums earned		7,317			-			7,134			-			14,451			-
Net investment income		194			-
Net investment income from insurance investments								176			-			370			-
Other income		207			-			187			-			394			-
Total revenues		82,066			66,788			89,270			72,086			171,336			138,874

Operating costs and expenses:
Cost of sales		42,456			39,116			45,950			40,076			88,406			79,136
Selling, general and administrative expenses		23,470			16,823			22,275			18,870			45,745			35,749
Incurred losses and loss adjustment expenses		5,812			-			5,405			-			11,217			-
Acquisition and underwriting expenses		53			-
Other operating expenses		1,236			-			1,541			-			2,830			-
Total operating costs and expenses		73,027			55,939			75,171			58,946			148,198			114,885
Operating income		9,039			10,849			14,099			13,140			23,138			23,989

Interest expense		3,992			4,933			4,110			4,050			8,106			8,983
Interest and investment income		(103	)		(114	)		(270	)		(102	)		(377	)		(216	)
Loss on extinguishment of debt		2,384			6,116			-			-			2,384			6,116
Net periodic benefit (income) expense, excluding service cost		(43	)		92
Income (loss) before income taxes		2,809			(178	)
Income tax expense (benefit)		809			(2,055	)
Net periodic benefit expense, excluding service cost								264			24			221			116
Income before income taxes								9,995			9,168			12,804			8,990
Income tax expense								1,908			2,795			2,717			740
Net income		2,000			1,877			8,087			6,373			10,087			8,250
Net income attributable to noncontrolling interests		1,479			-			4,559			1,470			6,038			1,470
Net income attributable to Standard Diversified Inc.	$	521		$	1,877		$	3,528		$	4,903		$	4,049		$	6,780


Net income attributable to SDI per Class A and Class B Common Share – Basic	$	0.03		$	0.07		$	0.21		$	0.20		$	0.24		$	0.26
Net income attributable to SDI per Class A and Class B Common Share – Diluted	$	0.03		$	0.07		$	0.20		$	0.20		$	0.23		$	0.26
Weighted Average Class A and Class B Common Shares Outstanding – Basic		16,559,432			27,923,612			16,609,828			24,314,895			16,795,815			26,136,568
Weighted Average Class A and Class B Common Shares Outstanding – Diluted		16,603,228			28,593,562			16,610,654			24,329,200			16,829,326			26,143,760

	Standard Diversified Inc. Shareholders																								Standard Diversified Inc. Shareholders
	Class A Common Shares				Class B Common Shares						Additional Paid-In Capital		Accumulated Other Comprehensive Loss			Accumulated Deficit			Noncontrolling Interests			Total			Class A Common Shares				Class B Common Shares						Additional Paid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Noncontrolling Interests			Total

	Shares		Amount		Shares			Amount																	Shares		Amount		Shares			Amount
Balance December 31, 2017		8,347,123	$	83		8,040,275		$	81		$	70,813	$	(1,558	)	$	(26,982	)	$	26,004		$	68,441			8,348,373	$	83		8,041,525		$	81		$	70,813		$	(1,558	)	$	(26,982	)	$	26,004		$	68,441
Conversion of Class B common stock into Class A common stock		11,001		1		(11,001	)		(1	)		-		-			-			-			-			118,235		2		(118,235	)		(2	)		-			-			-			-			-
Issuance of Class A common stock in private placement, net of issuance costs		181,825		2		-			-			1,978		-			-			-			1,980			181,825		2		-			-			1,978			-			-			-			1,980
Issuance of Class A common stock in asset purchase		22,727		-		-			-			250		-			-			-			250			22,727		-		-			-			250			-			-			-			250
SDI restricted stock vesting		18,834		-		-			-			-		-			-			-			-			40,812		-		-			-			(216	)		-			-			-			(216	)
Unrecognized pension and postretirement cost adjustment		-		-		-			-			-		15			-			15			30			-		-		-			-			-			155			-			149			304
Unrealized loss on investments		-		-		-			-			-		(596	)		-			(187	)		(783	)
Unrealized loss on interest rate swaps		-		-		-			-			-		(269	)		-			(257	)		(526	)
Unrealized loss on investments, net of tax of $104																										-		-		-			-			-			(689	)		-			(248	)		(937	)
Unrealized loss on interest rate swaps, net of tax of $22																										-		-		-			-			-			(39	)		-			(36	)		(75	)
SDI stock-based compensation		-		-		-			-			341		-			-			-			341			-		-		-			-			501			-			-						501
Impact of Turning Point equity transactions on APIC and NCI		-		-		-			-			82		-			-			111			193			-		-		-			-			468			-			-			785			1,253
Turning Point dividend payable to nontrolling interests		-		-		-			-			-		-			-			(379	)		(379	)
Turning Point dividend payable to noncontrolling interests																										-		-		-			-			-			-			-			(770	)		(770	)
Impact of adoption of ASU 2018-02		-		-		-			-			-		12			(12	)		-			-			-		-		-			-			-			12			(12	)		-			-
Net income		-		-		-			-			-		-			521			1,479			2,000			-		-		-			-			-			-			4,049			6,038			10,087
Balance March 31, 2018		8,581,510	$	86		8,029,274		$	80		$	73,464	$	(2,396	)	$	(26,473	)	$	26,786		$	71,547
Balance June 30, 2018																										8,711,972	$	87		7,923,290		$	79		$	73,794		$	(2,119	)	$	(22,945	)	$	31,922		$	80,818

	As of March 31, 2018							As of December 31, 2017							As of June 30, 2018							As of December 31, 2017
	Cost		Gross Unrealized Losses			Estimated Fair Value		Cost		Gross Unrealized Losses			Estimated Fair Value		Cost		Gross Unrealized Losses			Estimated Fair Value		Cost		Gross Unrealized Losses			Estimated Fair Value
Cash and cash equivalents	$	3,072	$	-		$	3,072	$	3,602	$	-		$	3,602	$	1,867	$	-		$	1,867	$	3,602	$	-		$	3,602
U.S. Governmental agency obligations (unrealized loss position < 12 months)		27,739		(1,706	)		26,033		722		(17	)		705		2,443		(46	)		2,397		722		(17	)		705
U.S. Governmental agency obligations (unrealized loss position > 12 months)		1,247		(36	)		1,211		27,733		(1,214	)		26,519		27,757		(1,792	)		25,965		27,733		(1,214	)		26,519
	$	32,058	$	(1,742	)	$	30,316	$	32,057	$	(1,231	)	$	30,826	$	32,067	$	(1,838	)	$	30,229	$	32,057	$	(1,231	)	$	30,826

	As of				As of
	March 31, 2018		December 31, 2017		June 30, 2018		December 31, 2017
Less than five years	$	7,114	$	7,114	$	7,114	$	7,114
Six to ten years		18,913		17,662		19,621		17,662
Greater than ten years		2,959		3,679		3,465		3,679
Total U.S. Governmental agency obligations	$	28,986	$	28,455	$	30,200	$	28,455

	Deposits as of				Deposits as of
Sales Year	March 31, 2018		December 31, 2017		June 30, 2018		December 31, 2017
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		4,552		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		1,626		1,626		1,626		1,626
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		81		81		81		81
2017		71		70		80		70
Total	$	32,058	$	32,057	$	32,067	$	32,057

	Period from January 2, 2018 to March 31, 2018
DAC asset at January 2, 2018	$	-		$	-
Deferred expenses		1,354			2,691
Amortized expenses		(182	)		(299	)
DAC asset at March 31, 2018	$	1,172
DAC asset at June 30, 2018				$	2,392

	At January 2, 2018
	(preliminary)

Fixed maturities available for sale	$	25,386
Cash and cash equivalents		12,795
Investment income due and accrued		203
Premiums receivable		7,158
Property, plant and equipment		408
Intangible assets		2,100
Other assets		615
Reserves for losses and loss adjustment expenses		(29,366	)
Unearned premiums		(12,784	)
Advance premium collected		(651	)
Deferred tax liability		(420	)
Other liabilities		(3,230	)
Total net assets acquired		2,214
Consideration exchanged		2,500
Goodwill	$	286

	March 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
U.S Treasury and U.S Government	$	5,343	$	-	$	(41	)	$	5,302
U.S. Tax-exempt Municipal		4,386		-		(78	)		4,308
Corporate		6,988		-		(141	)		6,847
Mortgage and Asset-backed Securities		6,454		-		(139	)		6,315
Total Fixed Maturity Securities	$	23,171	$	-	$	(399	)	$	22,772

	June 30, 2018
	Cost or Amortized Cost		Gross Unrealized Losses			Fair Value
Industrial and other		253		(5	)		248
Total Common stock	$	253	$	(5	)	$	248

Industrial and other		500		(4	)		496
Total Preferred stock	$	500	$	(4	)	$	496

Total Equities	$	753	$	(9	)	$	744

	Period from January 2, 2018 to March 31, 2018
Investment income:
Investment Income:
Bonds	$	153		$	303
Preferred stocks					6
Cash and cash equivalents		60			98
Other					11
Total investment income		213			418
Less: Investment expenses		(19	)		(48	)
Net investment income	$	194		$	370

	March 31, 2018			December 31, 2017			June 30, 2018			December 31, 2017
Raw materials and work in process	$	2,403		$	2,545		$	2,869		$	2,545
Leaf tobacco		29,300			30,308			36,504			30,308
Finished goods - smokeless products		6,503			5,834			6,814			5,834
Finished goods - smoking products		11,510			14,110			11,810			14,110
Finished goods - electronic / vaporizer products		12,910			14,532			23,384			14,532
Other		699			1,290			755			1,290
		63,325			68,619			82,136			68,619
LIFO reserve		(5,266	)		(5,323	)		(5,266	)		(5,323	)
	$	58,059		$	63,296		$	76,870		$	63,296

	June 30, 2018
	Level 1		Level 2		Level 3		Total Fair Value

Common Stock	$	248	$	-	$	-	$	248
Preferred Stocks		-		496		-		496
Total Equities		248		496		-		744
Fixed Maturities:
U.S. Treasury and U.S. Government	$	-	$	5,293	$	-	$	5,293
U.S. Tax-exempt Municipal		-		4,293		-		4,293
Corporate		-		9,570		-		9,570
Mortgage and Asset-backed Securities		-		7,338		-		7,338
Total Fixed Maturities	$	-	$	26,494	$	-	$	26,494

Assets used for collateral or guarantees:
Deposits with U.S. Regulatory Authorities		$	2,614			$	2,613

	Three months ended March 31,														Pension Benefits						Postretirement Benefits
	Pension Benefits							Post-Retirement Benefits
For the three months ended June 30,															2018			2017			2018			2017
	2018			2017				2018				2017
Service cost	$	26			$	26			$	-			$	-	$	26		$	26		$	-		$	-
Interest cost		142				170				29				58		142			150			29			14
Expected return on plan assets		(254	)			(256	)			-				-		(253	)		(256	)		-			-
Amortization of (gains) losses		60				120				(20	)			-
Net periodic benefit cost (income)	$	(26	)		$	60			$	9			$	58
Amortization of gains and losses																60			116			(20	)		-
Curtailment loss																306			-			-			-
Net periodic benefit cost															$	281		$	36		$	9		$	14

	Pension Benefits						Postretirement Benefits
For the six months ended June 30,	2018			2017			2018			2017

Service cost	$	52		$	52		$	-		$	-
Interest cost		284			320			58			72
Expected return on plan assets		(507	)		(512	)		-			-
Amortization of gains and losses		120			236			(40	)		-
Curtailment loss		306			-			-			-
Net periodic benefit cost	$	255		$	96		$	18		$	72

												Number of Shares			Price Range					Weighted Average Remaining Contractual term	Aggregate Intrinsic Value
	Number of Shares			Price Range					Weighted Average Remaining Contractual term	Aggregate Intrinsic Value
Balance, January 1, 2018		7,463		$	31.00	-	$	56.25	2.96 years				7,463		$	31.00	-	$	56.25	2.96 years
Granted													-			-			-
Cancelled		(2,400	)		50.00	-		50.00					(5,000	)	$	31.00	-	$	56.25
Balance, March 31, 2018		5,063			31.00	-		56.25	1.28 years	$	-
Vested and exercisable at March 31, 2018		5,063		$	31.00	-	$	56.25	1.28 years	$	-
Forfeited													-			-			-
Balance, June 30, 2018													2,463		$	31.00	-	$	50.00	2.2 years	$	-
Vested and exercisable at June 30, 2018													2,463		$	31.00	-	$	50.00	2.2 years	$	-

		Options Outstanding						Options Exercisable
				Weighted Average						Weighted Average
Range of Exercise Prices		Number of Shares		Remaining Contractual Life		Exercise Price		Number of Shares		Exercise Price

$	31.00 - $31.25		1,400	2.9	Years	$	31.18		1,400	$	31.18
$	45.25 - $46.25		1,063	1.4	Years	$	45.63		1,063	$	45.63
$	31.00 - $56.25		2,463	2.2	Years	$	37.41		2,463	$	37.41

	Shares			Weighted Average Grant Date Fair Value
						Shares			Weighted Average Grant Date Fair Value
Non-vested RSAs at January 1, 2018		119,102		$	10.62		119,102		$	10.62
Granted		116,491			10.70		116,491			10.70
Vested		(18,834	)		10.70		(56,650	)		10.62
Cancelled/Forfeited		-					(37,203	)		10.70
Non-vested RSAs at March 31, 2018		216,759		$	10.66
Non-vested RSAs at June 30, 2018							141,740		$	10.67

	Three Months Ended
	March 31,
	2018			2017
Revenues
Smokeless Products	$	20,747		$	20,248
Smoking Products		26,996			27,177
NewGen Products		26,199			19,363
Insurance		7,718			-
Other⁽¹⁾		406			-
	$	82,066		$	66,788

Operating Income
Smokeless Products	$	4,486		$	3,611
Smoking Products		6,894			8,048
NewGen Products		(1,496	)		(664	)
Insurance		617			-
Other⁽¹⁾		(1,462	)		(146	)
	$	9,039		$	10,849

Interest expense		(3,992	)		(4,933	)
Interest and investment income		103			114
Loss on extinguishment of debt		(2,384	)		(6,116	)
Net periodic benefit income (expense), excluding service cost		43			(92	)
Income (loss) before income taxes	$	2,809		$	(178	)

Capital Expenditures
Smokeless Products	$	349		$	366
NewGen Products		14			2
Insurance		20			-
	$	383		$	368

Depreciation and amortization
Smokeless products	$	339		$	352
NewGen Products		396			177
Insurance		57			-
Other⁽¹⁾		195			-
	$	987		$	529

	March 31, 2018
Statutory capital and surplus	$	13,580
Statutory loss	$	(1,095	)

	Payments due by period as of June 30, 2018
Long-Term Debt Obligations	Total		Less than 1 year		1-3 years		4-5 years		More than 5 years
Long-term debt obligations, including interest	$	295,787	$	39,423	$	49,753	$	164,122	$	42,489

	Payments due by period as of March 31, 2018										Payments due by period as of December 31, 2017
Long-Term Debt Obligations	Total		Less than 1 year		1-3 years		4-5 years		More than 5 years		Total		Less than 1 year		1-3 years		4-5 years		More than 5 years
Long-term debt obligations, including interest	$	286,946	$	22,097	$	47,390	$	173,340	$	44,119	$	266,052	$	29,803	$	42,444	$	193,805	$	-