STANDARD DIVERSIFIED INC 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 endedDecember 31, 2019 , filed with theSecurities and Exchange Commission ("SEC") onMarch 16, 2020 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 toStandard Diversified Inc. and our consolidated subsidiaries. References to "SDI" refer toStandard 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 through
"TPB"), a 50.2% owned subsidiary; and
• Until its transfer on
2017.
46-------------------------------------------------------------------------------- Table of Contents We are continually evaluating our portfolio of subsidiaries and lines of business and may make investment and divestiture decisions that could materially impact us and any of our existing or future lines of business. This may include investment and divestiture decisions to maintain our ownership percentage inTurning Point . Recent Developments
Merger and Reorganization Agreement with Turning Point
OnApril 7, 2020 , we entered into an Agreement and Plan of Merger and Reorganization (the "Merger Agreement"), by and among SDI, Turning Point andStandard Merger Sub, LLC , a wholly-owned subsidiary of the TPB ("Merger Sub"). The Merger Agreement provides for, among other things, (i) the merger of SDI with and into Merger Sub (the "Merger"), with Merger Sub surviving the Merger as a wholly-owned subsidiary of Turning Point. Under the terms of the Merger Agreement, the holders of SDI's Class A Common Stock and SDI's ClassB Common Stock (collectively, the "SDI Common Stock") will receive in the aggregate, in return for their SDI Common Stock, Turning Point Voting Common Stock ("TPB Common Stock") at a ratio of 0.97 of a share of TPB Common Stock for each share of TPB Common Stock held by SDI. SDI has divested, or will prior to the merger divest, its assets of SDI other than its TPB Common Stock and has agreed that its net liabilities at closing will not exceed$25,000 . The Merger is subject to customary closing conditions, including approval by holders of a majority of the aggregate voting power of the SDI Common Stock and the receipt of any applicable regulatory approvals. We expect the transaction to close in the summer of 2020. It is a condition to the consummation of the Merger that, as of the effective time of the time of the Merger, we have no liabilities other than liabilities included in an estimate of net liabilities delivered to Turning Point, and that the net liabilities included in such estimate not exceed$25,000 . Thus, we must discharge substantially all of our liabilities prior to the consummation of the merger, including the indebtedness of approximately$25.0 million under our$25.0 million loan (the "Term Loan") obtained pursuant to that certain Term Loan Agreement, dated as ofSeptember 18, 2019 (the "Term Loan Agreement"), betweenSDI and GACP II, L.P. , aDelaware limited partnership (the "Agent"), as administrative agent and collateral agent for the financial institutions (the "Lenders"). In order to raise the capital needed, along with its existing cash on hand, to retire such liabilities, including this indebtedness, we may consider a variety of transactions, including a sale of a portion of our shares of TPB Common Stock that we own. If the closing of the Merger were to occur on or aroundJune 30, 2020 , we would incur an early termination fee of approximately$0.6 million and this amount would reduce, over time, to its floor of$0.5 million , if prepayment occurs on or beforeSeptember 18, 2020 . We have classified the Term Loan as a non-current liability as ofMarch 31, 2020 as the Merger is still subject to customary closing conditions, including approval by holders of a majority of the aggregate voting power of the SDI Common Stock and the receipt of any applicable regulatory approvals.
Sale of Standard Outdoor
OnApril 7, 2020 , SDI transferred all of its equity interests in Standard Outdoor, which constituted 100% of the outstanding equity interests, toBillboards LLC , a commonly controlled affiliate of Standard General, SDI's controlling shareholder. The purchase consideration of$9.8 million consisted of the assumption byBillboards LLC of$7.2 million of the outstanding indebtedness of Standard Outdoor (equaling amounts payable under promissory notes issued by Standard Outdoor in past acquisitions), less cash transferred of$0.2 million , and shares of Turning Point common stock of$2.8 million . The Company expects to record this disposition other than by sale as a common control transaction in the second quarter of 2020 and as a result, no gain or loss is expected to be recognized. Any shortfall, preliminarily estimated to be approximately$2.8 million , between consideration received and the book value of net assets transferred, will be recorded as an equity distribution to its controlling shareholder, Standard General. In accordance with ASC 360, no impairment loss was recognized, as ofMarch 31, 2020 , as a result of this shortfall since the asset group being disposed of was tested for recoverability as held and used utilizing an estimate of undiscounted future cash flows based on the use of the asset for its remaining useful life, assuming that the disposal transaction would not occur. 47 -------------------------------------------------------------------------------- Table of ContentsMaidstone Insurance OnJanuary 14, 2020 , the NYSDFS filed a petition forMaidstone Insurance ("Maidstone") to enter an order of liquidation pursuant to Article 74 of the New York Consolidated Insurance Law ("Order of Liquidation") in theSupreme Court of the State of New York , County ofNassau (the "Court") with respect to Maidstone. OnJanuary 21, 2020 , the Court issued an order to show cause establishingFebruary 13, 2020 as the date of a hearing before the Court with respect to the Order of Liquidation. OnFebruary 13, 2020 , the Court conducted a hearing with respect to the Order of Liquidation and, thereafter, approved the Order of Liquidation. As ofFebruary 13, 2020 , the control and net assets of Maidstone vested with theNew York State Liquidation Bureau ("NYS Liquidation Bureau "). We determined that the disposal of Maidstone and our Insurance segment operations represents a strategic shift that had a major effect on our results of operations and, as a result, have reported the disposal as discontinued operations. See Note 3, "Discontinued Operations" to our unaudited condensed consolidated financial statement for further information.
Turning Point
COVID-19 Impact
As a result of the extraordinary situation we are facing, our focus is on the safety and well-being of our colleagues and the communities and customers we serve. As an organization, we have implemented several changes to enhance safety and mitigate health risk in our work environment. For Turning Point's warehouse and manufacturing operations, these include split shifts, temperature scans, additional contactless hand sanitizing stations, protective equipment, social distancing guidelines, and increased cleaning and sanitization. We canceled all unnecessary travel and facilitated telecommuting where possible. Like many companies, we have changed the way we communicate through increased use of videoconferencing and have implemented tele-selling initiatives through our sales force. Some of these changes that are proving to be efficient are likely to remain in-place even after this crisis and lead to on-going cost savings. Turning Point has deferred annual compensation increases for corporate employees other than those contractually required. We have also put a hold on new spending commitments as we cautiously manage through this environment. The dedication of our workforce to serve this demand has been remarkable. Turning Point hired additional employees in itsLouisville facility and implemented wage increases for its hourly employees to meet increased demand. Turning Point shifted production capacity to manufacture hand sanitizers and have donated bottles to hospitals, nursing homes and first responders in its local communities. We do expect COVID-19 to impact results in the future. Turning Point's third-party cigar wrap manufacture in theDominican Republic temporarily closed for three weeks and is slowly ramping back up. In person selling has been dramatically dampened, which will slow new product launches. Select budgeted annual price increases will be delayed. Turning Point expects these issues will be offset by its growing B2C platforms. We continue to monitor this challenging environment closely and will make necessary adjustments as needed to make sure we are serving our employees and customers, while also protecting the safety of employees and communities.
Premarket Tobacco Application Deadline Extension
OnApril 3, 2020 , theUnited States District Court for the District of Maryland agreed to an FDA request filed onMarch 30, 2020 , for a 120-day extension of the premarket tobacco application ("PMTA") deadline for many e-cigarettes, cigars and other tobacco products. FDA stated that the extension was needed because of the coronavirus outbreak.The U.S. Circuit Court of Appeals for the Fourth Circuit must still issue an order allowing the modification of the original order. An extension would move the deadline fromMay 12, 2020 toSeptember 9, 2020 . Turning Point will work during this additional time period to bolster its premarket filings.
Share Repurchase Authorization
OnFebruary 25, 2020 , the TPB Board of Directors approved a$50 million share repurchase authorization, which is intended for opportunistic execution based upon a variety of factors including marketing dynamics. The program will be subject to the ongoing discretion of the TPB Board of Directors. 48 -------------------------------------------------------------------------------- Table of Contents Organizational Structure and Overview of Turning Point Turning Point is a holding company which ownsNorth Atlantic Trading Company, Inc. ("NATC"), and its subsidiaries,Turning Point Brands, LLC ("TPLLC"), and its subsidiaries, andTurning Point Brands (Canada) Inc. ("TPBC"). NATC includes subsidiariesNational Tobacco Company, L.P. ("NTC"),National Tobacco Finance, LLC ("NTFLLC"),North Atlantic Operating Company, Inc. ("NAOC"),North Atlantic Cigarette Company, Inc. ("NACC"), andRBJ Sales, Inc. ("RBJ"). TPLLC includes subsidiariesIntrepid Brands, LLC ("Intrepid"),TPB Beast, LLC ("VaporBeast"),TPB Shark, LLC , and its subsidiaries (collectively, "Vapor Shark"),TPB International, LLC and its subsidiaries (collectively, "IVG"),Nu-X Ventures, LLC ("Nu-X"),Nu-Tech Holdings LLC ("Nu-Tech"), andSouth Beach Holdings, LLC ("South Beach"). Turning Point is a leading, independent provider of Other Tobacco Products ("OTP") and adult consumer alternatives. Turning Point estimates the OTP industry generated approximately$11.5 billion of manufacturer revenue in 2019. In contrast to manufactured cigarettes, which have been experiencing declining volumes for decades based on data published by theAlcohol 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 byManagement Science Associates, Inc. ("MSAi"), a third-party analytics and information company. Turning Point was the 6th largest competitor in terms of total OTP consumer units sold during 2019. Turning Point sells a wide range of products across the OTP spectrum; however, it does not sell cigarettes. Turning Point's portfolio of brands includes some of the most widely recognized names in the OTP industry, such as Zig-Zag®, Beech-Nut®, Stoker's®, Trophy®, VaporBeast® and VaporFi®. Turning Point currently ships to approximately 900 distributors with an additional 100 secondary, indirect wholesalers in theU.S. that carry and sell its products. Turning Point operates in three segments: (i) Smokeless products, (ii) Smoking products, and (iii) NewGen products. Under the leadership of a senior management team with an average of 24 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 has identified additional growth opportunities in the emerging alternatives market. InJanuary 2019 , it established its subsidiary, Nu-X, a new company and wholly-owned subsidiary dedicated to the development, production and sale of alternative products and acquisitions in related spaces. The creation of Nu-X allows Turning Point to leverage its expertise in traditional OTP management to alternative products.The Turning Point management team has over 100 years of experience navigating federal, state and local regulations that are directly applicable to the growing alternatives market. InJuly 2019 , Turning Point acquired the assets of Solace Technology ("Solace"). Solace is an innovative product development company which established one of the top e-liquid brands and has since grown into a leader in alternative products. Solace's legacy and innovation will enhance Nu-X's strong and nimble development engine. InJuly 2019 , Turning Point acquired a 30% stake in ReCreation Marketing ("ReCreation). ReCreation is a specialty marketing and distribution firm focused on building brands in the Canadian smoking, vaping and alternative products categories. The investment will leverage ReCreation's significant expertise in marketing and distributing tobacco and cannabis products throughoutCanada . The investment is part of Nu-X and Turning Point plans to make additional investments, partnerships and acquisitions to drive the business of Nu-X. These endeavors will enable Turning Point to continue to identify unmet customer needs and provide quality products that Turning Point believes will result in genuine customer satisfaction and foster the growth of revenue. Turning Point believes there are meaningful opportunities to grow through acquisitions and joint ventures across all product categories. As ofDecember 31, 2019 , Turning Point's products are available in approximately 185,000U.S. retail locations which, with the addition of retail stores inCanada , brings Turning Point's total North American retail presence to an estimated 210,000 points of distribution. Turning Point's sales team targets widespread distribution to all traditional retail channels, including convenience stores. 49 -------------------------------------------------------------------------------- Table of Contents Products Turning Point operates in three segments: Smokeless products, Smoking products and NewGen products. In its Smokeless products segment, Turning Point (i) manufacture and market moist snuff and (ii) contract for and market loose leaf chewing tobacco products. In its Smoking products segment, Turning Point principally (i) market and distribute cigarette papers, tubes, and related products; and (ii) market and distribute finished cigars and MYO cigar wraps. In its NewGen products segment, Turning Point (i) market and distribute CBD, liquid vapor products and certain other products without tobacco and/or nicotine; (ii) distribute a wide assortment of products to non-traditional retail via VaporBeast; and (iii) market and distribute a wide assortment of products to individual consumers via VaporFi B2C online platforms. Turning Point's portfolio of brands includes some of the most widely recognized names in the OTP industry such as Stoker's® in the Smokeless segment, Zig-Zag® in the Smoking segment, and VaporBeast®, VaporFi® and Solace© in the NewGen segment.
Operations
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 the products to retail operations. Turning Point's acquisition of VaporBeast in 2016 expanded its revenue streams as it began selling directly to non-traditional retail outlets. Turning Point's acquisition of IVG in 2018 enhanced its business-to-consumer revenue stream with the addition of the Vapor-Fi online platform. 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. More than 80% of Turning Point's production, as measured by net sales, is outsourced to suppliers. The remaining production consists of its moist snuff tobacco operations located inDresden, Tennessee , andLouisville, Kentucky and the proprietary e-liquids operations located inLouisville, Kentucky . 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 and other expenses.
Turning Point considers the following to be the key factors affecting its results of operations:
• Turning Point's ability to further penetrate markets with its existing
products;
• Turning Point's ability to introduce new products and product lines that
complement its core business;
• Decreasing interest in some tobacco products among consumers;
• Price sensitivity in its end-markets;
• Marketing and promotional initiatives, which cause variability in Turning
Point's 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 the "deeming regulations";
• Counterfeit and other illegal products in our end-markets;
• Currency fluctuations;
• Turning Point's ability to identify attractive acquisition opportunities in
OTP; and
• Turning Point's ability to integrate acquisitions.
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.
50
--------------------------------------------------------------------------------
Table of Contents
On April 7, 2020 , we transferred our equity interests in Standard Outdoor to
Billboards LLC , an affiliate of our parent company, Standard General. See Note
22, "Subsequent Events" to our condensed consolidated financial statements for
further information.
Segment Information
We operate in four reportable segments; (1) Smokeless products, (2) Smoking
products, (3) NewGen products, and (4) Other, which includes our out-of-home
advertising business and SDI holding company, as well as certain unallocated
Turning Point amounts. Turning Point's Smokeless products segment, Smoking
products segment and NewGen products segment are described above within Overview
of Turning Point - Products.
As a result of the approval of the Order of Liquidation on
Critical Accounting Policies and Uses of Estimates
Other than the update below, 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 endedDecember 31, 2019 , filed with theSecurities and Exchange Commission onMarch 16, 2020 .
Discontinued Operations
A business is classified as discontinued operations if the disposal represents a
strategic shift that will have a major effect on operations or financial results
and meets the criteria to be classified as held for sale or is disposed of by
sale or otherwise. Significant judgments are involved in determining whether a
business meets the criteria for discontinued operations reporting and the period
in which these criteria are met. In the period a component of an entity has been
disposed of or classified as held for sale, the results of operations for the
periods presented are reclassified into separate line items in the statements of
operations. Assets and liabilities are also reclassified into separate line
items on the related balance sheets for the periods presented. The statements of
cash flows for the periods presented are also reclassified to reflect the
results of discontinued operations as separate line items. Accounting Standards
Update ("ASU") 2014-08 requires that only a disposal of a component of an
entity, or a group of components of an entity, that represents a strategic shift
that has, or will have, a major effect on the reporting entity's operations and
financial results be reported in the financial statements as discontinued
operations. ASU 2014-08 also provides guidance on the financial statement
presentations and disclosures of discontinued operations.
Recent Accounting Pronouncements
Refer to Note 2, "Summary of Significant Accounting Policies" to our condensed consolidated financial statements included in this Quarterly Report for a description of recently issued accounting pronouncements, including those recently adopted.
51
--------------------------------------------------------------------------------
Table of Contents
Results of Operations
The table and discussion set forth below relate to our condensed consolidated
results of operations. The results of the Insurance segment were reclassified to
discontinued operations as of February 13, 2020 as a result of the approval of
the Order of Liquidation. As such, the Insurance segment is included in our net
loss from discontinued operations, in the table below.
Comparison of the Three Months Ended March 31, 2020 to the Three Months Ended
March 31, 2019
Three Months Ended March 31,
(In thousands, except percentage change) 2020 2019 % Change
Net Sales:
Smokeless Products $ 26,495 $ 22,544 17.5 %
Smoking Products 28,914 25,519 13.3 %
NewGen Products 35,280 43,565 -19.0 %
Other 679 681 -0.3 %
Total net sales 91,368 92,309 -1.0 %
Cost of sales 49,928 51,784 -3.6 %
Gross Profit:
Smokeless products 13,874 12,073 14.9 %
Smoking products 16,132 13,484 19.6 %
NewGen products 11,425 14,907 -23.4 %
Other 9 61 -85.2 %
Total gross profit 41,440 40,525 2.3 %
Selling, general and administrative expenses 34,777 30,733 13.2 %
Total operating income 6,663 9,792 -32.0 %
Interest expense, net 5,863 4,473 31.1 %
Investment income (91 ) (144 ) -36.8 %
Net periodic benefit income, excluding service
cost (87 ) (11 ) 690.9 %
Income before income taxes 978 5,474 -82.1 %
Income tax expense 946 1,774 -46.7 %
Net income from continuing operations 32 3,700 -99.1 %
Net income attributable to noncontrolling
interests (1,637 ) (3,260 ) -49.8 %
Net (loss) income from continuing operations
attributable to SDI (1,605 ) 440 -464.8 %
Net loss from discontinued operations, net of tax (1,712 ) (3,983 ) -57.0 %
Net loss attributable to SDI $ (3,317 ) $ (3,543 ) -6.4 %
Net sales. For the three months ended March 31, 2020 , consolidated net sales
decreased to $91.4 million from $92.3 million for the three months ended March
31, 2019 , a decrease of $0.9 million or 1.0%. The decrease in net sales was
primarily driven by lower volume in Turning Point's NewGen segment in 2020.
For the three months ended March 31, 2020 , net sales in the Smokeless products
segment increased to $26.5 million from $22.5 million for the three months ended
March 31, 2019 , an increase of $4.0 million or 17.5%. For the three months ended
March 31, 2020 , volume increased 16.7% and price/mix increased 0.8%. The
increase in net sales was primarily driven by the continuing double-digit volume
growth of Stoker's® MST partially offset by declining sales in chewing tobacco,
largely attributable to long-term segment erosion, and a continuing shift to
lower price products.
52
--------------------------------------------------------------------------------
Table of Contents
For the three months ended March 31, 2020 , net sales in the Smoking products
segment increased to $28.9 million from $25.5 million for the three months ended
March 31, 2019 , an increase of $3.4 million or 13.3%. For the three months ended
March 31, 2020 , volume increased 10.9% and price/mix increased 2.4%. The
increase in net sales is primarily related to double digit growth in US rolling
papers, partially offset by a $0.5 million decline in non-focus cigars and MYO
pipe.
For the three months ended March 31, 2020 , net sales in the NewGen products
segment decreased to $35.3 million from $43.6 million for the three months ended
March 31, 2019 , a decrease of $8.3 million or 19.0%. The decrease in net sales
is the result of the continued impact of vapor market disruption and wind-down
of the V2 business, partially offset by positive contributions from CBD, Solace
and other Nu-X products.
For the three months ended
Gross profit. For the three months endedMarch 31, 2020 , consolidated gross profit increased to$41.4 million from$40.5 million for the three months endedMarch 31, 2019 , an increase of$0.9 million or 2.3%. Gross profit as a percentage of revenue increased to 45.4% for the three months endedMarch 31, 2020 , compared to 43.9% for the three months endedMarch 31, 2019 . For the three months endedMarch 31, 2020 , gross profit in the Smokeless products segment increased to$13.9 million from$12.1 million for the three months endedMarch 31, 2019 , an increase of$1.8 million or 14.9%. Gross profit as a percentage of net sales decreased to 52.4% of net sales for the three months endedMarch 31, 2020 , from 53.6% of net sales for the three months endedMarch 31, 2019 , primarily as a as a result of mix. For the three months endedMarch 31, 2020 , gross profit in the Smoking products segment increased to$16.1 million from$13.5 million for the three months endedMarch 31, 2019 , an increase of$2.6 million or 19.6%. Gross profit as a percentage of net sales increased to 55.8% of net sales for the three months endedMarch 31, 2020 , from 52.8% of net sales for the three months endedMarch 31, 2019 , as a result of increased US rolling paper sales and a continued decline in the low margin cigar business. For the three months endedMarch 31, 2020 cigar sales were$0.7 million compared to$1.1 million for the three months endedMarch 31, 2019 . For the three months endedMarch 31, 2020 , gross profit in the NewGen products segment decreased to$11.4 million from$14.9 million for the three months endedMarch 31, 2019 , a decrease of$3.5 million or 23.4%. Gross profit as a percentage of net sales decreased to 32.4% of net sales for the three months endedMarch 31, 2020 , from 34.2% of net sales for the three months endedMarch 31, 2019 as a result of the decline in net sales. For the three months endedMarch 31, 2020 , gross profit included$2.8 million of tariff expenses compared to$2.0 million for the three months endedMarch 31, 2019 . For the three months endedMarch 31, 2020 and 2019, gross profit in the Other segment was approximately$9,000 and$61,000 , respectively, all of which relates to the Standard Outdoor business. Selling, general, and administrative expenses. For the three months endedMarch 31, 2020 , selling, general, and administrative expenses increased to$34.8 million from$30.7 million for the three months endedMarch 31, 2019 , an increase of$4.0 million or 13.2%. Selling, general and administrative expenses in the three months endedMarch 31, 2020 included$0.5 million of Turning Point stock options, restricted stock and incentives expense,$1.0 million of Turning Point transaction expenses and$5.9 million of expense related to PMTA. Selling, general and administrative expenses in the three months endedMarch 31, 2019 included$0.7 million of stock option, restricted stock and incentives expense,$0.9 million of transaction costs,$1.0 million in corporate and vapor restructuring and$0.4 million of new product launch costs for Nu-X products. The Other segment, which includes the corporate expenses of SDI and Standard Outdoor included$2.4 million and$2.3 million of selling, general and administrative expenses for three months endedMarch 31, 2020 and 2019, respectively. Total operating income. For the three months endedMarch 31, 2020 , total operating income was$6.7 million , a decrease of$3.1 million , or 32.0%, from$9.8 million for the three months endedMarch 31, 2019 . This decrease was primarily due to increases inTurning Point's selling, general and administrative expenses for the three months endedMarch 31, 2020 , as described above. 53 -------------------------------------------------------------------------------- Table of Contents Interest expense, net. For the three months endedMarch 31, 2020 , interest expense, net was$5.9 million compared to$4.5 million for the three months endedMarch 31, 2019 . This increase of$1.4 million was primarily as a result of the amortization of the debt discount on the Convertible Senior Notes of$1.8 million , from$3.9 million for the three months endedMarch 31, 2019 . Increased interest expense also resulted from the higher overall average outstanding debt balance of SDI. Investment income. Investment income relating to investment of the MSA deposits was approximately$0.1 million for the three months endedMarch 31, 2020 and 2019, respectively.
Net periodic benefit income, excluding service cost. For the three months ended
Income before income taxes. For the three months endedMarch 31, 2020 , income before income taxes was$1.0 million compared to$5.5 million for the three months endedMarch 31, 2019 . This decrease of$4.5 million was primarily due to the factors noted above. Income tax expense. Our income tax expense of$0.9 million and$1.8 million for the three months endedMarch 31, 2020 and 2019, respectively and was solely related to Turning Point and the income before income taxes of Turning Point. Turning Point's income tax expense was 22.4% of income before income taxes for the three months endedMarch 31, 2020 , compared to and 21.3% for the three months endedMarch 31, 2019 .
Net income from continuing operations. Due to the factors described above, net
income for the three months ended
Net income attributable to noncontrolling interests. Income attributable to noncontrolling interests of$1.6 million and$3.3 million for the three months endedMarch 31, 2020 and 2019, respectively, was related to the shareholders of Turning Point other than the Company. The decrease was directly attributable to the decrease inTurning Point's net income. Net (loss) income from continuing operations attributable to SDI. For the three months endedMarch 31, 2020 , net loss from continuing operations attributable to SDI was$1.6 million compared to net income of$0.4 million for the three months endedMarch 31, 2019 , a decrease of$2.0 million or 463.9%. This decrease was a result of the items discussed above. Net loss from discontinued operations, net of tax. Due to the approval of the Order of Liquidation onFebruary 13, 2020 , we reclassified the results of our Insurance segment to discontinued operations. The current and prior period amounts relate entirely to the net loss of our Insurance segment. For the three months endedMarch 31, 2020 , the net loss from discontinued operations, net of tax of$1.7 million consisted of the loss on disposal of the Insurance segment of$1.0 million and the net loss on operations of$0.7 million for the period fromJanuary 1, 2020 toFebruary 13, 2020 . For the three months endedMarch 31, 2019 , the net loss from discontinued operations, net of tax of$4.0 million included an impairment loss on goodwill and other intangible assets of$2.8 million and a loss from operations of$1.6 million . These losses were offset by an income tax benefit of$0.4 million for the three months endedMarch 31, 2019 . Net loss attributable to SDI. For the three months endedMarch 31, 2020 , net loss attributable to SDI was$3.3 million compared to$3.5 million for the three months endedMarch 31, 2019 , an increase of$0.2 million or 6.5%. This increase was a result of the items discussed above. 54 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources As mentioned previously, in connection with the closing of the proposed Merger with Turning Point, we expect to prepay the Term Loan and its$25.0 million outstanding principal balance plus an early termination fee at the time of the Merger. If the closing of the Merger were to occur on or aroundJune 30, 2020 , we would incur an early termination fee of approximately$0.6 million and this amount would reduce, over time, to its floor of$0.5 million , if prepayment of the Term Loan occurs on or beforeSeptember 18, 2020 . We have classified the Term Loan as a non-current liability as ofMarch 31, 2020 as the Merger is still subject to customary closing conditions, including approval by holders of a majority of the aggregate voting power of the SDI Common Stock and the receipt of any applicable regulatory approvals. In order to raise the capital needed, along with our existing cash on hand, to retire such liabilities, including this indebtedness, we may consider a variety of transactions, including a sale of a portion of our shares of TPB Common Stock. 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 their 2018 Revolving Credit Facility are adequate to satisfy its operating cash requirements for the foreseeable future. Our working capital, which we define as current assets less current liabilities, decreased by$5.3 million to$137.3 million atMarch 31, 2020 , compared with$142.6 million atDecember 31, 2019 . (In thousands) March 31, 2020 December 31, 2019 Current Assets$ 199,812 $ 234,372 Current Liabilities 62,522 91,771 Working Capital$ 137,290 $ 142,601
The following table summarizes our condensed consolidated statements of cash
flows for the three months ended
© Edgar Online, source
