UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☑ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2016
or
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from_______________ to ________________
Commission file number: 001-37763
TURNING POINT BRANDS, INC.
(Exact name of registrant as specified in its charter)
Delaware
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20-0709285
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(State or other jurisdiction of Incorporation or organization)
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(I.R.S. Employer Identification No.)
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5201 Interchange Way, Louisville, KY
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40229
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(Address of principal executive offices)
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(Zip Code)
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(502) 778-4421
(Registrant’s telephone number, including area code)
Former name, former address and former fiscal year, if changed since last report: not applicable
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☑
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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☐
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Accelerated filer
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☐
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Non-accelerated filer
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☑ (Do not check if a smaller reporting company)
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Smaller reporting company
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☐
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
At June 14, 2016, there were 16,927,737 shares outstanding of the registrant’s voting common stock, par value $0.01 per share and 938,857 shares outstanding of the registrant’s non-voting common stock, par value $0.01 per share.
TURNING POINT BRANDS, INC.
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Page No.
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PART I FINANCIAL INFORMATION
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ITEM 1
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3 |
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3
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4
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5
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6
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7
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ITEM 2
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28
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ITEM 3
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40
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ITEM 4
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40
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PART II OTHER INFORMATION
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ITEM 1
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41
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ITEM 1A
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41
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ITEM 2
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41
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ITEM 3
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41
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ITEM 4
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41
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ITEM 5
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41
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ITEM 6
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41
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Signature
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42
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43
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PART I |
FINANCIAL INFORMATION |
Turning Point Brands, Inc.
Consolidated Balance Sheets
(dollars in thousands except share data) (unaudited)
ASSETS
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March 31,
2016
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December 31,
2015
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Current assets:
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Cash
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$
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2,940
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$
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4,835
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Accounts receivable, net of allowances of $137 in 2016 and 2015
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2,649
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3,940
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Inventories
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47,976
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44,339
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Other current assets
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9,383
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10,838
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Total current assets
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62,948
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63,952
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Property, plant and equipment, net
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5,764
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5,603
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Deferred financing costs, net
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191
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208
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Goodwill
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128,697
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128,697
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Other intangible assets, net
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8,553
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8,553
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Master Settlement Agreement - escrow deposits
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31,856
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31,842
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Other assets
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3,530
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3,608
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Total assets
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$
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241,539
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$
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242,463
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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Current liabilities:
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Accounts payable
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$
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4,895
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$
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4,087
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Accrued expenses
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9,743
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11,053
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Accrued interest expense
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866
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4,329
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First lien term loan
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1,650
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1,650
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Revolving credit facility
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1,018
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18
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Total current liabilities
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18,172
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21,137
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Notes payable and long-term debt
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290,480
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290,772
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Deferred income taxes
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7,054
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7,013
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Postretirement benefits
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4,638
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4,666
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Pension benefits
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428
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487
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Total liabilities
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320,772
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324,075
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Commitments and contingencies
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Stockholders' deficit:
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Preferred stock; $0.01 par value; authorized shares 40,000,000; issued and outstanding shares -0-
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Common stock, voting, $0.01 par value; authorized shares, 190,000,000; issued shares, 2016 and 2015 7,312,642; outstanding shares, 2016 and 2015 6,259,480, shares held in treasury, 2016 and 2015 1,053,162
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63
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63
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Common stock, nonvoting, $0.01 par value; authorized shares, 10,000,000; issued and outstanding shares, 2016 and 2015 938,857
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9
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9
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Additional paid-in capital
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12,650
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12,628
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Accumulated other comprehensive loss
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(3,389
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(3,512
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Accumulated deficit
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(88,566
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(90,800
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Total stockholders' deficit
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(79,233
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(81,612
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Total liabilities and stockholders' deficit
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$
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241,539
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$
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242,463
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The accompanying notes are an integral part of the consolidated financial statements.
Turning Point Brands, Inc.
Consolidated Statements of Income
(dollars in thousands except share data)
(unaudited)
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Three Months Ended
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March 31,
2016
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March 31,
2015
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Net sales
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$
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49,866
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$
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51,086
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Cost of sales
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25,219
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26,431
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Gross profit
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24,647
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24,655
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Selling, general and administrative expenses
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13,738
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12,671
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Operating income
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10,909
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11,984
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Interest expense and financing costs
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8,462
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8,482
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Income before income taxes
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2,447
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3,502
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Income tax expense
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213
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75
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Net income
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$
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2,234
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$
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3,427
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Basic earnings per common share:
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Net income
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$
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0.31
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$
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0.48
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Diluted earnings per common share:
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Net income
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$
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0.27
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$
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0.41
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Weighted average common shares outstanding:
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Basic - inclusive of voting and non-voting shares
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7,198,337
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7,197,523
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Diluted - inclusive of voting and non-voting shares
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8,354,659
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8,353,843
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The accompanying notes are an integral part of the consolidated financial statements.
Turning Point Brands, Inc.
Consolidated Statements of Comprehensive Income
(dollars in thousands except share data)
(unaudited)
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Three Months Ended
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March 31,
2016
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March 31,
2015
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Net income
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$
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2,234
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$
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3,427
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Other comprehensive income, net of tax -
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Pension and postretirement
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Amortization of unrealized losses recorded in cost of sales
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6
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6
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Amortization of unrealized losses recorded in selling, general and administrative expenses
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117
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126
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123
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132
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Comprehensive income
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$
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2,357
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$
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3,559
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The accompanying notes are an integral part of the consolidated financial statements
Turning Point Brands, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)
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Three Months Ended
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March 31,
2016
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March 31,
2015
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Cash flows from operating activities:
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Net income
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$
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2,234
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$
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3,427
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Adjustments to reconcile net income to net cash provided by operating activities:
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Depreciation expense
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293
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251
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Amortization of deferred financing costs
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362
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362
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Amortization of original issue discount
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259
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261
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Interest incurred but not paid on PIK toggle notes
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2,254
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1,945
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Deferred income taxes
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41
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(35
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)
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Stock compensation expense
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12
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46
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Member unit compensation expense
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10
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29
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Changes in operating assets and liabilities:
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Accounts receivable
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1,291
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(1,931
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)
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Inventories
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(3,637
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)
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(1,742
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Other current assets
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1,455
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1,749
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Other assets
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416
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(12
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Accounts payable
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724
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1,159
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Accrued pension liabilities
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64
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42
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Accrued postretirement liabilities
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(28
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)
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(31
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)
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Accrued expenses and other
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(4,773
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)
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1,322
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Net cash provided by operating activities
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977
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6,842
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Cash flows from investing activities:
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Capital expenditures
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(454
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)
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(327
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)
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Net cash used in investing activities
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(454
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)
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(327
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)
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Cash flows from financing activities:
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Proceeds from revolving credit facility
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1,000
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93
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Prepaid equity issuance costs
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(268
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)
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-
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Payment of first lien term loan
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(3,150
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)
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(412
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)
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Proceeds from issuance of stock
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-
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1
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Net cash used in financing activities
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(2,418
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)
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(318
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)
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Net increase (decrease) in cash
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(1,895
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)
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6,197
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Cash, beginning of period
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4,835
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8,467
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Cash, end of period
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$
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2,940
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$
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14,664
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Supplemental schedule of noncash financing activities:
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Accrued expenses incurred for prepaid equity costs
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$
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84
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$
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-
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The accompanying notes are an integral part of the consolidated financial statements.
Turning Point Brands, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except where designated and per share data)
Note 1. Basis of Presentation:
Turning Point Brands, Inc. (formerly known as North Atlantic Holding Company, Inc.), (the “Company”) is a holding company which owns NATC Holding Company, Inc. (“NATC Holding”) and its subsidiaries and Turning Point Brands, LLC (“TPLLC”) and its subsidiary, Intrepid Brands, LLC (“Intrepid”). Except where the context otherwise requires, references to the Company include the Company, NATC Holding and its subsidiary, North Atlantic Trading Company, Inc. (“NATC”) and its subsidiaries, National Tobacco Company, L.P. (“NTC”), North Atlantic Operating Company, Inc. (“NAOC”), North Atlantic Cigarette Company, Inc. (“NACC”), National Tobacco Finance Corporation (“NTFC”), Fred Stoker & Sons, Inc., RBJ Sales, Inc. and Stoker, Inc. (collectively, “Stoker”) and TPLLC and Intrepid.
The accompanying interim condensed consolidated financial statements have been prepared in accordance with our accounting practices described in our audited consolidated financial statements as of and for the year ended December 31, 2015, and are unaudited. In the opinion of management, the unaudited interim condensed consolidated financial statements included herein contain all adjustments necessary to present fairly our financial position, results of operations and cash flows for the periods indicated. Such adjustments, other than nonrecurring adjustments that have been separately disclosed, are of a normal, recurring nature. The operating results for interim periods are not necessarily indicative of results to be expected for a full year of future interim periods. The unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes as of and for the year ended December 31, 2015. The accompanying interim condensed consolidated financial statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission and, accordingly, do not include all the disclosures required by generally accepted accounting principles in the United States (“U.S. GAAP”) with respect to annual financial statements.
Note 2. Summary of Significant Accounting Policies:
Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned. All significant intercompany transactions have been eliminated.
Revenue Recognition: The Company recognizes revenues and the related costs upon delivery to the customer, at which time there is a transfer of title and risk of loss to the customer in accordance with the Financial Accounting Standards Board Accounting Standards Codification© (“ASC”) 605-10-S99. The Company classifies customer rebates as sales deductions in accordance with the requirements of ASC 605-50-25.
Shipping Costs: The Company records shipping costs incurred as a component of selling, general and administrative expenses. Shipping costs incurred were approximately $1.5 million and $1.8 million for the three months ended March 31, 2016 and 2015, respectively.
Master Settlement Agreement Escrow Account: Pursuant to the Master Settlement Agreement (the “MSA”) entered into in November 1998 by most states (represented by their attorneys general acting through the National Association of Attorneys General) and subsequent states’ statutes, a “cigarette manufacturer” (which is defined to include a manufacturer of make-your-own (“MYO”) cigarette tobacco) has the option of either becoming a signatory to the MSA or opening, funding, and maintaining an escrow account to have funds available for certain potential tobacco-related liabilities, with sub-accounts on behalf of each settling state. The Company has chosen to open and fund an escrow account as its method of compliance. It is the Company’s policy to record amounts on deposit in the escrow account for prior years as a non-current asset. Each year’s annual obligation is required to be deposited in the escrow account by April 15 of the following year. In addition to the annual deposit, many states have elected to require quarterly deposits for the previous quarter’s sales. As of March 31, 2016 and December 31, 2015, NATC had on deposit approximately $31.9 million and $31.8 million, respectively.
The following shows the amount of deposits by sales year for the MSA escrow account:
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Deposits At
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Sales
Year
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March 31,
2016
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December 31,
2015
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1999
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$
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211
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$
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211
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2000
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1,017
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1,017
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2001
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1,673
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1,673
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2002
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|
2,271
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2,271
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2003
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4,249
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4,249
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2004
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|
3,715
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3,715
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2005
|
|
|
4,552
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|
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|
4,552
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2006
|
|
|
3,847
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|
|
|
3,847
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2007
|
|
|
4,167
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|
|
|
4,167
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|
2008
|
|
|
3,364
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|
|
|
3,364
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|
2009
|
|
|
1,626
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|
|
|
1,626
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|
2010
|
|
|
406
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|
|
|
406
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|
2011
|
|
|
193
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|
|
|
193
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|
2012
|
|
|
198
|
|
|
|
198
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|
2013
|
|
|
173
|
|
|
|
173
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|
2014
|
|
|
142
|
|
|
|
142
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|
2015
|
|
|
52
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
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Total
|
|
$
|
31,856
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|
|
$
|
31,842
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|
Recent Accounting Pronouncements Adopted:
The Company adopted ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost in 2016. This ASU requires that debt issuance costs related to a recognized debt liability be presented as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Based on the requirements of this ASU, the Company has retrospectively applied ASU 2015-03 to the December 31, 2015 Consolidated Balance Sheet, which has resulted in $6.3 million being reclassified to direct deduction of the carrying amount of the debt.
The Company adopted ASU 2015-17, Income Taxes (Topic 740): Balance sheet classification of deferred taxes in 2016. This ASU requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. The Company has retrospectively applied ASU 2015-17 to the December 31, 2015 Consolidated Balance Sheet, which has resulted in $0.4 million of deferred tax liabilities being reclassified to a noncurrent deferred tax liability.
Subsequent Events:
The Company’s management has evaluated events and transactions that occurred from April 1, 2016 through June 14, 2016, the date these unaudited condensed consolidated financial statements were issued, for subsequent events requiring recognition or disclosure in the financial statements. See Note 16. Subsequent Events for a description of these events.
Note 3. Fair Value of Financial Instruments:
The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of ASC 825, Financial Instruments. The estimated fair value amounts have been determined by the Company using the methods and assumptions described below. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Cash and Cash Equivalents: Cash and cash equivalents are by definition short-term and the carrying amount is a reasonable estimate of fair value.
Accounts Receivable: The fair value of accounts receivable approximates their carrying value.
Revolving Credit Facility: The fair value of the revolving credit facility approximates its carrying value.
Long-Term Debt: The fair value of the Company’s long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. As of March 31, 2016, the fair value of the PIK Toggle Notes approximates their face amounts of $62.3 million. As of March 31, 2016, the fair value of the 7% Senior Notes approximates their face amounts of $12.6 million. At December 31, 2015, the fair value of the PIK Toggle Notes approximates their face amounts of $60.1 million. At December 31, 2015, the fair value of the 7% Senior Notes approximates their face amounts of $12.6 million.
As of March 31, 2016, the fair value of the First Lien Term Loan and the Second Lien Term Loan approximate their face amounts of $148.6 million and $80.0 million, respectively. At December 31, 2015, the fair value of the First Lien Term Loan and the Second Lien Term Loan approximate their face amounts of $151.7 million and $80.0 million, respectively.
Foreign Exchange: The fair value of the foreign exchange forward contracts was based upon the quoted market price that resulted in an insignificant asset at March 31, 2016. As of March 31, 2016, the Company had two outstanding foreign exchange forward contracts for the purchase of 1.1 million Euros. The fair value of the foreign exchange forward contracts was based upon the quoted market price that resulted in an insignificant asset as of December 31, 2015. As of December 31, 2015, the Company had seven outstanding foreign exchange forward contracts for the purchase of 5.1 million Euros.
Note 4. Inventories:
Inventories are stated at the lower of cost or market. Cost is determined on the last-in, first-out (“LIFO”) method for approximately 56% of the inventories. Leaf tobacco is presented in current assets in accordance with standard industry practice, notwithstanding the fact that such tobaccos are carried longer than one year for the purpose of curing.
The components of inventories are as follows:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Raw materials and work in process
|
|
$
|
1,932
|
|
|
$
|
1,940
|
|
Leaf tobacco
|
|
|
23,547
|
|
|
|
20,839
|
|
Finished goods - smokeless products
|
|
|
4,763
|
|
|
|
3,615
|
|
Finished goods - smoking products
|
|
|
12,498
|
|
|
|
14,077
|
|
Finished goods - electronic / vaporizer products
|
|
|
7,436
|
|
|
|
5,939
|
|
Other
|
|
|
1,417
|
|
|
|
1,237
|
|
|
|
|
51,593
|
|
|
|
47,647
|
|
LIFO reserve
|
|
|
(3,617
|
)
|
|
|
(3,308
|
)
|
|
|
$
|
47,976
|
|
|
$
|
44,339
|
|
The Company recorded an inventory valuation allowance of $0.3 million as of March 31, 2016 and December 31, 2015.
Note 5. Property, Plant and Equipment:
Property, plant and equipment at March 31, 2016 and December 31, 2015 consists of:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Leasehold improvements
|
|
$
|
2,196
|
|
|
$
|
2,196
|
|
Machinery and equipment
|
|
|
9,425
|
|
|
|
8,997
|
|
Furniture and fixtures
|
|
|
3,147
|
|
|
|
3,121
|
|
|
|
|
14,768
|
|
|
|
14,314
|
|
Accumulated depreciation
|
|
|
(9,004
|
)
|
|
|
(8,711
|
)
|
|
|
$
|
5,764
|
|
|
$
|
5,603
|
|
Note 6. Accrued Expenses:
Accrued expenses at March 31, 2016 and December 31, 2015 consist of:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
Accrued payroll and related items
|
|
$
|
4,053
|
|
|
$
|
3,659
|
|
Customer returns and allowances
|
|
|
1,533
|
|
|
|
2,015
|
|
Other
|
|
|
4,157
|
|
|
|
5,379
|
|
|
|
$
|
9,743
|
|
|
$
|
11,053
|
|
Note 7. Notes Payable and Long-Term Debt:
Notes payable and long-term debt consists of the following in order of preference:
|
|
March 31,
2016
|
|
|
December 31,
2015
|
|
First Lien Term Loan
|
|
$
|
147,475
|
|
|
$
|
150,555
|
|
Second Lien Term Loan
|
|
|
78,943
|
|
|
|
78,882
|
|
PIK Toggle Notes
|
|
|
61,195
|
|
|
|
58,882
|
|
7% Senior Notes
|
|
|
10,429
|
|
|
|
10,360
|
|
|
|
|
298,042
|
|
|
|
298,679
|
|
Less deferred finance charges
|
|
|
(5,912
|
)
|
|
|
(6,257
|
)
|
Less current maturities
|
|
|
(1,650
|
)
|
|
|
(1,650
|
)
|
Total Notes Payable and Long-Term Debt
|
|
$
|
290,480
|
|
|
$
|
290,772
|
|
Long-term Debt
On January 13, 2014, NATC entered into (i) a $170 million First Lien Term Loan Credit Agreement among NATC, the Company, NATC Holding, a wholly owned subsidiary of the Company to which the Company transferred its ownership of all outstanding capital stock of NATC, and Wells Fargo Bank, National Association, as administrative agent (the “First Lien Credit Agreement”), (ii) a $80 million Second Lien Term Loan Credit Agreement among NATC, the Company, NATC Holding and Wells Fargo Bank, National Association, as administrative agent (the “Second Lien Credit Agreement”), and (iii) a $40 million ABL Credit Agreement among NATC, NATC Holding and Wells Fargo Bank, National Association, as ABL Agent (the “ABL Credit Agreement”).
First Lien Credit Agreement
All of NATC’s subsidiaries, as well as the Company and NATC Holding, are guarantors under the First Lien Credit Agreement. The First Lien Credit Agreement is secured by a first priority lien on substantially all of the assets of the borrowers and the guarantors (other than TPLLC) thereunder, including a pledge of the capital stock of NATC and its subsidiaries held by NATC Holding, NATC or any guarantor (other than TPLLC), other than certain excluded assets (the “Collateral”). The loans designated as LIBOR rate loans bear interest at LIBOR Rate then in effect (but not less than 1.25%) plus 6.50% and the loans designated as base rate loans bear interest at the (i) highest of (A) the Prime Rate, (B) the Federal Funds Rate plus 0.50%, (C) LIBOR for an interest period of one month plus 1.00% and (D) 2.25% per year plus (ii) 5.50%. The weighted average interest rate at March 31, 2016 was 7.78%. The First Lien Credit Agreement matures in January 2020.
The First Lien Credit Agreement contains customary representations and warranties, events of default, affirmative covenants and negative covenants, which impose restrictions on, among other things, the ability of NATC and its subsidiaries to make investments, pay dividends, sell assets, and incur debt and additional liens. In addition, the First Lien Credit Agreement requires NATC to maintain a total leverage ratio as follows:
Period
|
Maximum Ratio
|
Closing Date through March 31, 2015
|
6.50 to 1.00
|
April 1, 2015 through September 30, 2016
|
6.25 to 1.00
|
October 1, 2016 through September 30, 2017
|
6.00 to 1.00
|
October 1, 2017 through September 30, 2018
|
5.75 to 1.00
|
October 1, 2018 and thereafter
|
5.50 to 1.00
|
NATC is required to make prepayments under the First Lien Credit Agreement upon the occurrence of certain events, including sales of certain assets, casualty events and the incurrence of additional indebtedness, subject to certain exceptions and reinvestment rights. NATC made a prepayment of approximately $2.7 million during the first quarter of 2016.
Second Lien Credit Agreement
The Second Lien Credit Agreement has the benefit of a second priority security interest in the Collateral and is guaranteed by the same entities as the First Lien Credit Agreement. The Second Lien Credit Agreement, contains substantially similar representations and warranties, events of default and covenants as the First Lien Credit Agreement; provided, however, that the total leverage ratio required to be maintained by NATC under the Second Lien Credit Agreement is as follows:
Period
|
Maximum Ratio
|
Closing Date through March 31, 2015
|
6.75 to 1.00
|
April 1, 2015 through September 30, 2016
|
6.50 to 1.00
|
October 1, 2016 through September 30, 2017
|
6.25 to 1.00
|
October 1, 2017 through September 30, 2018
|
6.00 to 1.00
|
October 1, 2018 and thereafter
|
5.75 to 1.00
|
Under the Second Lien Credit Agreement the loans designated as LIBOR rate loans bear interest at a rate of at LIBOR Rate then in effect (but not less than 1.25%) plus 10.25% and the loans designated as base rate loans bear interest at (i) highest of (A) the Prime Rate, (B) the Federal Funds Rate plus 0.50%, (C) LIBOR for an interest period of one month plus 1.00% and (D) 2.25% per year plus (ii) 9.25%. The weighted average interest rate at March 31, 2016 was 11.5%. The Second Lien Credit Agreement matures in July 2020. In connection with the Company’s initial public offering (“IPO) in May 2016, the Company prepaid $20 million of the borrowings under the Second Lien Credit Agreement. See Note 16. Subsequent Events.
ABL Credit Agreement
The ABL Credit Agreement provides for aggregate commitments of up to $40 million, subject to a borrowing base, which is calculated as the sum of (i) 85% of eligible accounts receivable, plus (ii) the lesser of (A) the product of 70% multiplied by the value of eligible inventory and (B) the product of 85% multiplied by the net recovery percentage identified in the most recent inventory appraisal multiplied by the value of eligible inventory, plus (iii) the lesser of (A) the product of 75% multiplied by the value of eligible inventory and (B) the product of 85% multiplied by the net recovery percentage identified in the most recent inventory appraisal multiplied by the value of the eligible finished goods inventory, minus (iv) the aggregate amount of reserves established by the administrative agent.
The interest rates per annum applicable to loans under the ABL Credit Agreement are, at the option of NATC, equal to the applicable Base Rate or LIBOR Rate plus the applicable Interest Margin, as defined below:
Pricing Level
|
|
Average Excess
Availability
|
|
Applicable Margin for
Base Rate Loans (the
“Base Rate Margin”)
|
|
|
Applicable Margin for
LIBOR Rate Loans
(the “LIBOR Rate
Margin”)
|
|
I
|
|
> $30,000,000
|
|
|
1.25%
|
|
|
|
2.25%
|
|
II
|
|
< $30,000,000 but > $15,000,000
|
|
|
1.50%
|
|
|
|
2.50%
|
|
III
|
|
< $15,000,000
|
|
|
1.75%
|
|
|
|
2.75%
|
|
The ABL Credit Agreement matures in January 2019 and the balance outstanding at March 31, 2016 was $1.0 million. The weighted average interest rate at March 31, 2016 was 5.00%.
PIK Toggle Notes
On January 13, 2014, the Company issued PIK Toggle Notes (“PIK Toggle Notes”) to Standard General Master Fund, L.P. (“Standard General”) with a principal amount of $45 million and warrants to purchase 42,424 of the Company’s common stock at $.01 per share, as adjusted for stock splits and other events specified in the agreement. After adjustment for the stock split effected in connection with our IPO of 10.43174381 to 1, the warrants have been adjusted to provide for the purchase of 442,558 of the Company’s common stock. Due to the issuance of the warrants, the PIK Toggle Notes had an original issue discount of $1.7 million and were initially valued at $43.3 million. The PIK Toggle Notes mature and the warrants expire on January 13, 2021.
The PIK Toggle Notes accrued interest based on the LIBOR Rate then in effect (but not less than 1.25%) plus 13.75%. Interest is payable on the last day of each quarter and upon maturity. The Company had the flexibility to pay interest in kind through an increase in the principal amount at the same interest rate as the PIK Toggle Notes. The Company chose to increase the PIK Toggle Notes for all interest for the first three months of 2016 and the face amount of the PIK Toggle Notes was $62.3 million at March 31, 2016.
The PIK Toggle Notes contains covenants which limit the ability of the Company to enter into transactions with affiliates and make dividends or other distributions or repurchase capital stock. The PIK Toggle Notes are unsecured and do not limit the Company’s ability to incur additional debt or liens.
In connection with the IPO, in May of 2016 the Company repurchased all of the outstanding PIK Toggle Notes in exchange for a combination of cash and shares of our common stock. See Note 16. Subsequent Events.
7% Senior Notes
In January of 2014, the Company issued 7% Senior Notes to various stockholders with a principal amount of $11 million and warrants to purchase 11,000,000 units of membership interests in Intrepid, which represented 40% of the Intrepid Common Units outstanding on a fully diluted basis, at a purchase price of $1.00 per unit. Due to the issuance of the Intrepid warrants, the 7% Senior Notes had an original issue discount of $2.8 million and was initially valued at $8.2 million. The 7% Senior Notes mature and the warrants expire on December 31, 2023.
The 7% Senior Notes accrued interest at a fixed rate of 7% per annum. Interest is payable on the last business day of June and December in each year and provided that the Company was permitted to elect to pay all or a portion of the interest in kind. The Company made such election for all of 2014 and 2015. The face amount of the 7% Senior Notes was $12.6 million at March 31, 2016.
The 7% Senior Notes are the general unsecured obligations of the Company and will rank equally with the Company’s other unsecured and unsubordinated debt from time to time outstanding. Redemptions of the 7% Senior Notes may be made by the Company at any time without penalty or premium.
In connection with the IPO, in May of 2016 we repurchased all of the outstanding 7% Senior Notes in exchange for shares of our common stock. See Note 16. Subsequent Events.
Restricted / Non-Restricted Condensed Consolidating Financial Statements
The payment of principal and interest on the First Lien Term Loan, Second Lien Term Loan and ABL are guaranteed by or obligations of NATC and its subsidiaries (“Issuer/Restricted”). TPLLC and its subsidiary (“Non-Restricted”) are not guarantors of the First Lien Term Loan, Second Lien Term Loan and ABL. The separate financial statements of the Issuer/Restricted are not included herein because the Issuer/Restricted are the Company’s wholly-owned consolidated subsidiaries and are jointly, severally, fully and unconditionally liable for the obligations represented by the First Lien Term Loan, Second Lien Term Loan and ABL. The Company believes that the consolidating financial information for the Issuer/Restricted and the Non-Restricted provide information that is more meaningful in understanding the financial position of the Issuer/Restricted than separate financial statements of the Issuer/Restricted.
The following consolidating financial information presents consolidating financial data for the Issuer/Restricted, Non-Restricted and an elimination column for adjustments to arrive at the information for the Company on a consolidated basis as of March 31, 2016 and December 31, 2015 and for the three months ended March 31, 2016 and 2015. The principal elimination entries set forth below eliminate investments in subsidiaries and intercompany balances and transactions.
Turning Point Brands, Inc.
Consolidating Balance Sheet
March 31, 2016
(in thousands)
|
|
Issuer/
Restricted
|
|
|
Non-Restricted
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
953
|
|
|
$
|
1,987
|
|
|
$
|
-
|
|
|
$
|
2,940
|
|
Accounts receivable
|
|
|
2,649
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,649
|
|
Inventories
|
|
|
40,252
|
|
|
|
7,724
|
|
|
|
-
|
|
|
|
47,976
|
|
Other current assets
|
|
|
6,025
|
|
|
|
3,358
|
|
|
|
-
|
|
|
|
9,383
|
|
Total current assets
|
|
|
49,879
|
|
|
|
13,069
|
|
|
|
-
|
|
|
|
62,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
5,639
|
|
|
|
125
|
|
|
|
-
|
|
|
|
5,764
|
|
Deferred financing costs, net
|
|
|
191
|
|
|
|
-
|
|
|
|
-
|
|
|
|
191
|
|
Goodwill
|
|
|
128,697
|
|
|
|
-
|
|
|
|
-
|
|
|
|
128,697
|
|
Investment in subsidiaries
|
|
|
35,159
|
|
|
|
-
|
|
|
|
(35,159
|
)
|
|
|
-
|
|
Other intangible assets, net
|
|
|
8,553
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,553
|
|
Master Settlement Agreement - escrow deposits
|
|
|
31,856
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,856
|
|
Other assets
|
|
|
3,100
|
|
|
|
430
|
|
|
|
-
|
|
|
|
3,530
|
|
Total assets
|
|
$
|
263,074
|
|
|
$
|
13,624
|
|
|
$
|
(35,159
|
)
|
|
$
|
241,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,831
|
|
|
$
|
64
|
|
|
$
|
-
|
|
|
$
|
4,895
|
|
Accrued expenses
|
|
|
8,802
|
|
|
|
941
|
|
|
|
-
|
|
|
|
9,743
|
|
Accrued interest expense
|
|
|
866
|
|
|
|
-
|
|
|
|
-
|
|
|
|
866
|
|
First lien term loan
|
|
|
1,650
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,650
|
|
Revolving credit facility
|
|
|
1,018
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,018
|
|
Total current liabilities
|
|
|
17,167
|
|
|
|
1,005
|
|
|
|
-
|
|
|
|
18,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and long-term debt
|
|
|
290,480
|
|
|
|
-
|
|
|
|
-
|
|
|
|
290,480
|
|
Deferred Income Taxes
|
|
|
7,054
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,054
|
|
Postretirement benefits
|
|
|
4,638
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,638
|
|
Pension benefits
|
|
|
428
|
|
|
|
-
|
|
|
|
-
|
|
|
|
428
|
|
Total Liabilities
|
|
|
319,767
|
|
|
|
1,005
|
|
|
|
-
|
|
|
|
320,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, voting
|
|
|
63
|
|
|
|
- |
|
|
|
- |
|
|
|
63
|
|
Common stock, non-voting
|
|
|
9
|
|
|
|
- |
|
|
|
- |
|
|
|
9
|
|
Additional paid-in capital
|
|
|
76,423
|
|
|
|
11,222
|
|
|
|
(74,995
|
)
|
|
|
12,650
|
|
Advance to TPB
|
|
|
757
|
|
|
|
(757
|
)
|
|
|
-
|
|
|
|
-
|
|
Accumulated other comprehensive loss
|
|
|
(3,389
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,389
|
)
|
Retained earnings (accumulated deficit)
|
|
|
(130,556
|
)
|
|
|
2,154
|
|
|
|
39,836
|
|
|
|
(88,566
|
)
|
Total stockholders' equity (deficit)
|
|
|
(56,693
|
)
|
|
|
12,619
|
|
|
|
(35,159
|
)
|
|
|
(79,233
|
)
|
Total liabilities and stockholders' equity (deficit)
|
|
$
|
263,074
|
|
|
$
|
13,624
|
|
|
$
|
(35,159
|
)
|
|
$
|
241,539
|
|
Turning Point Brands, Inc.
Consolidating Statement of Income
for the three months ended March 31, 2016
(in thousands)
|
|
Issuer/
Restricted
|
|
|
Non-Restricted
|
|
|
Consolidated
|
|
Net sales
|
|
$
|
46,224
|
|
|
$
|
3,642
|
|
|
$
|
49,866
|
|
Cost of sales
|
|
|
22,706
|
|
|
|
2,513
|
|
|
|
25,219
|
|
Gross profit
|
|
|
23,518
|
|
|
|
1,129
|
|
|
|
24,647
|
|
Selling, general and administrative expenses
|
|
|
12,725
|
|
|
|
1,013
|
|
|
|
13,738
|
|
Operating income
|
|
|
10,793
|
|
|
|
116
|
|
|
|
10,909
|
|
Interest expense and financing costs
|
|
|
8,469
|
|
|
|
(7
|
)
|
|
|
8,462
|
|
Income before income taxes
|
|
|
2,324
|
|
|
|
123
|
|
|
|
2,447
|
|
Income tax expense
|
|
|
213
|
|
|
|
-
|
|
|
|
213
|
|
Net income
|
|
$
|
2,111
|
|
|
$
|
123
|
|
|
$
|
2,234
|
|
Turning Point Brands, Inc.
Consolidating Statement of Cash Flows
for the three months ended March 31, 2016
(in thousands)
|
|
Issuer/
Restricted
|
|
|
Non-Restricted
|
|
|
Consolidated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,111
|
|
|
$
|
123
|
|
|
$
|
2,234
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
293
|
|
|
|
-
|
|
|
|
293
|
|
Amortization of deferred financing costs
|
|
|
362
|
|
|
|
-
|
|
|
|
362
|
|
Amortization of original issue discount
|
|
|
259
|
|
|
|
-
|
|
|
|
259
|
|
Interest incurred but not paid on PIK toggle notes
|
|
|
2,254
|
|
|
|
-
|
|
|
|
2,254
|
|
Deferred income taxes
|
|
|
41
|
|
|
|
-
|
|
|
|
41
|
|
Stock compensation expense
|
|
|
12
|
|
|
|
-
|
|
|
|
12
|
|
Member unit compensation expense
|
|
|
-
|
|
|
|
10
|
|
|
|
10
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,179
|
|
|
|
112
|
|
|
|
1,291
|
|
Inventories
|
|
|
(2,187
|
)
|
|
|
(1,450
|
)
|
|
|
(3,637
|
)
|
Other current assets
|
|
|
(435
|
)
|
|
|
1,890
|
|
|
|
1,455
|
|
Other assets
|
|
|
416
|
|
|
|
-
|
|
|
|
416
|
|
Accounts payable
|
|
|
709
|
|
|
|
15
|
|
|
|
724
|
|
Accrued pension liabilities
|
|
|
64
|
|
|
|
-
|
|
|
|
64
|
|
Accrued postretirement liabilities
|
|
|
(28
|
)
|
|
|
-
|
|
|
|
(28
|
)
|
Accrued expenses and other
|
|
|
(4,617
|
)
|
|
|
(156
|
)
|
|
|
(4,773
|
)
|
Net cash provided by operating activities
|
|
|
433
|
|
|
|
544
|
|
|
|
977
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(329
|
)
|
|
|
(125
|
)
|
|
|
(454
|
)
|
Net cash used in investing activities
|
|
|
(329
|
)
|
|
|
(125
|
)
|
|
|
(454
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from revolving credit facility, net
|
|
|
1,000
|
|
|
|
-
|
|
|
|
1,000
|
|
Prepaid equity issuance costs
|
|
|
(268
|
)
|
|
|
-
|
|
|
|
(268
|
)
|
Payments for first lien term loan
|
|
|
(3,150
|
)
|
|
|
-
|
|
|
|
(3,150
|
)
|
Net cash used in financing activities
|
|
|
(2,418
|
)
|
|
|
-
|
|
|
|
(2,418
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash
|
|
|
(2,314
|
)
|
|
|
419
|
|
|
|
(1,895
|
)
|
Cash, beginning of period
|
|
|
3,267
|
|
|
|
1,568
|
|
|
|
4,835
|
|
Cash, end of period
|
|
$
|
953
|
|
|
$
|
1,987
|
|
|
$
|
2,940
|
|
Turning Point Brands, Inc.
Consolidating Balance Sheet
December 31, 2015
(in thousands)
|
|
Issuer/
Restricted
|
|
|
Non-Restricted
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,267
|
|
|
$
|
1,568
|
|
|
$
|
-
|
|
|
$
|
4,835
|
|
Accounts receivable
|
|
|
3,828
|
|
|
|
112
|
|
|
|
-
|
|
|
|
3,940
|
|
Inventories
|
|
|
38,065
|
|
|
|
6,274
|
|
|
|
-
|
|
|
|
44,339
|
|
Other current assets
|
|
|
5,590
|
|
|
|
5,248
|
|
|
|
-
|
|
|
|
10,838
|
|
Total current assets
|
|
|
50,750
|
|
|
|
13,202
|
|
|
|
-
|
|
|
|
63,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
5,603
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,603
|
|
Deferred financing costs, net
|
|
|
208
|
|
|
|
-
|
|
|
|
-
|
|
|
|
208
|
|
Goodwill
|
|
|
128,697
|
|
|
|
-
|
|
|
|
-
|
|
|
|
128,697
|
|
Investment in subsidiaries
|
|
|
31,489
|
|
|
|
-
|
|
|
|
(31,489
|
)
|
|
|
-
|
|
Other intangible assets, net
|
|
|
8,553
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,553
|
|
Master Settlement Agreement - escrow deposits
|
|
|
31,842
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,842
|
|
Other assets
|
|
|
3,178
|
|
|
|
430
|
|
|
|
-
|
|
|
|
3,608
|
|
Total assets
|
|
$
|
260,320
|
|
|
$
|
13,632
|
|
|
$
|
(31,489
|
)
|
|
$
|
242,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,038
|
|
|
$
|
49
|
|
|
$
|
-
|
|
|
$
|
4,087
|
|
Accrued expenses
|
|
|
9,956
|
|
|
|
1,097
|
|
|
|
-
|
|
|
|
11,053
|
|
Accrued interest expense
|
|
|
4,329
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,329
|
|
First lien term loan
|
|
|
1,650
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,650
|
|
Revolving credit facility
|
|
|
18
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18
|
|
Total current liabilities
|
|
|
19,991
|
|
|
|
1,146
|
|
|
|
-
|
|
|
|
21,137
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable and long-term debt
|
|
|
290,772
|
|
|
|
-
|
|
|
|
-
|
|
|
|
290,772
|
|
Deferred Income Taxes
|
|
|
7,013
|
|
|
|
-
|
|
|
|
-
|
|
|
|
7,013
|
|
Postretirement benefits
|
|
|
4,666
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,666
|
|
Pension benefits
|
|
|
487
|
|
|
|
-
|
|
|
|
-
|
|
|
|
487
|
|
Total Liabilities
|
|
|
322,929
|
|
|
|
1,146
|
|
|
|
-
|
|
|
|
324,075
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity (deficit):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, voting
|
|
|
63
|
|
|
|
- |
|
|
|
- |
|
|
|
63
|
|
Common stock, non-voting
|
|
|
9
|
|
|
|
- |
|
|
|
- |
|
|
|
9
|
|
Additional paid-in capital
|
|
|
76,410
|
|
|
|
11,213
|
|
|
|
(74,995
|
)
|
|
|
12,628
|
|
Advance to TPB
|
|
|
793
|
|
|
|
(793
|
)
|
|
|
-
|
|
|
|
-
|
|
Accumulated other comprehensive loss
|
|
|
(3,512
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,512
|
)
|
Retained earnings (accumulated deficit)
|
|
|
(136,372
|
)
|
|
|
2,066
|
|
|
|
43,506
|
|
|
|
(90,800
|
)
|
Total stockholders' equity (deficit)
|
|
|
(62,609
|
)
|
|
|
12,486
|
|
|
|
(31,489
|
)
|
|
|
(81,612
|
)
|
Total liabilities and stockholders' equity (deficit)
|
|
$
|
260,320
|
|
|
$
|
13,632
|
|
|
$
|
(31,489
|
)
|
|
$
|
242,463
|
|
Turning Point Brands, Inc.
Consolidating Statement of Income
for the three months ended March 31, 2015
(in thousands)
|
|
Issuer/
Restricted
|
|
|
Non-Restricted
|
|
|
Consolidated
|
|
Net sales
|
|
$
|
45,603
|
|
|
$
|
5,483
|
|
|
$
|
51,086
|
|
Cost of sales
|
|
|
22,999
|
|
|
|
3,432
|
|
|
|
26,431
|
|
Gross profit
|
|
|
22,604
|
|
|
|
2,051
|
|
|
|
24,655
|
|
Selling, general and administrative expenses
|
|
|
11,396
|
|
|
|
1,275
|
|
|
|
12,671
|
|
Operating income
|
|
|
11,208
|
|
|
|
776
|
|
|
|
11,984
|
|
Interest expense and financing costs
|
|
|
8,450
|
|
|
|
32
|
|
|
|
8,482
|
|
Income before income taxes
|
|
|
2,758
|
|
|
|
744
|
|
|
|
3,502
|
|
Income tax expense
|
|
|
75
|
|
|
|
-
|
|
|
|
75
|
|
Net income
|
|
$
|
2,683
|
|
|
$
|
744
|
|
|
$
|
3,427
|
|
Turning Point Brands, Inc.
Consolidating Statement of Cash Flows
for the three months ended March 31, 2015
(in thousands)
|
|
Issuer/
Restricted
|
|
|
Non-Restricted
|
|
|
Consolidated
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,683
|
|
|
$
|
744
|
|
|
$
|
3,427
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
251
|
|
|
|
-
|
|
|
|
251
|
|
Amortization of deferred financing costs
|
|
|
362
|
|
|
|
-
|
|
|
|
362
|
|
Amortization of original issue discount
|
|
|
261
|
|
|
|
-
|
|
|
|
261
|
|
Interest incurred but not paid on PIK toggle notes
|
|
|
1,945
|
|
|
|
-
|
|
|
|
1,945
|
|
Deferred income taxes
|
|
|
(35
|
)
|
|
|
-
|
|
|
|
(35
|
)
|
Stock compensation expense
|
|
|
46
|
|
|
|
-
|
|
|
|
46
|
|
Member unit compensation expense
|
|
|
-
|
|
|
|
29
|
|
|
|
29
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(972
|
)
|
|
|
(959
|
)
|
|
|
(1,931
|
)
|
Inventories
|
|
|
(721
|
)
|
|
|
(1,021
|
)
|
|
|
(1,742
|
)
|
Other current assets
|
|
|
(836
|
)
|
|
|
2,585
|
|
|
|
1,749
|
|
Other assets
|
|
|
(12
|
)
|
|
|
-
|
|
|
|
(12
|
)
|
Accounts payable
|
|
|
2,153
|
|
|
|
(994
|
)
|
|
|
1,159
|
|
Accrued pension liabilities
|
|
|
42
|
|
|
|
-
|
|
|
|
42
|
|
Accrued postretirement liabilities
|
|
|
(31
|
)
|
|
|
-
|
|
|
|
(31
|
)
|
Accrued expenses and other
|
|
|
2,088
|
|
|
|
(766
|
)
|
|
|
1,322
|
|
Net cash provided by operating activities
|
|
|
7,224
|
|
|
|
(382
|
)
|
|
|
6,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
(327
|
)
|
|
|
-
|
|
|
|
(327
|
)
|
Issuance of note receivable
|
|
|
(800
|
)
|
|
|
800
|
|
|
|
-
|
|
Net cash provided by (used in) investing activities
|
|
|
(1,127
|
)
|
|
|
800
|
|
|
|
(327
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from (payments of) revolving credit facility, net
|
|
|
93
|
|
|
|
-
|
|
|
|
93
|
|
Prepaid equity issuance costs
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Payments for first lien term loan
|
|
|
(412
|
)
|
|
|
-
|
|
|
|
(412
|
)
|
Issuance of stock
|
|
|
1
|
|
|
|
-
|
|
|
|
1
|
|
Net cash used in financing activities
|
|
|
(318
|
)
|
|
|
-
|
|
|
|
(318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
5,779
|
|
|
|
418
|
|
|
|
6,197
|
|
Cash, beginning of period
|
|
|
8,014
|
|
|
|
453
|
|
|
|
8,467
|
|
Cash, end of period
|
|
$
|
13,793
|
|
|
$
|
871
|
|
|
$
|
14,664
|
|
Note 8. Income Taxes:
The Company has determined, that at March 31, 2016, its ability to realize future benefits of certain net deferred tax assets does not meet the “more likely than not” criteria in ASC 740, Income Taxes; therefore, a valuation allowance has been recorded. The Company’s income tax expense for the three months ended March 31, 2016 does not bear the normal relationship to income before income taxes because of net operating loss carryforwards that were utilized and were partially offset by certain minimum state income taxes. The Company’s income tax expense for the three months ended March 31, 2015 does not bear the normal relationship to income before income taxes because of net operating loss carryforwards which were utilized.
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. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company has determined that they 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 files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. In general, the Company is no longer subject to U.S. federal and state tax examinations for years prior to 2012.
Note 9. Pension and Postretirement Benefit Plans:
The components of Net Periodic Benefit Cost for the three months ended March 31, 2016 and 2015 are as follows:
|
|
Pension Benefits
|
|
|
Postretirement Benefits
|
|
For the three months ended March 31
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
26
|
|
|
$
|
31
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest cost
|
|
|
175
|
|
|
|
174
|
|
|
|
52
|
|
|
|
52
|
|
Expected return on plan assets
|
|
|
(259
|
)
|
|
|
(295
|
)
|
|
|
-
|
|
|
|
-
|
|
Amortization of gains and losses
|
|
|
123
|
|
|
|
132
|
|
|
|
-
|
|
|
|
-
|
|
Net periodic benefit cost
|
|
$
|
65
|
|
|
$
|
42
|
|
|
$
|
52
|
|
|
$
|
52
|
|
NATC has a defined benefit pension plan covering its employees. Benefits for the hourly employees are based on a stated benefit per year of service, reduced by amounts earned in a previous plan. Benefits for salaried employees are based on years of service and the employees’ final compensation. This defined benefit plan is frozen.
NATC sponsored a defined benefit postretirement plan that covered hourly employees. This plan provides medical and dental benefits. This plan is contributory, with retiree contributions adjusted annually.
NATC expects to contribute approximately $0.3 million to its postretirement plan in 2016 for the payment of benefits. Plan contributions and benefits have amounted to $80 and $83 for the three months ended March 31, 2016 and 2015, respectively. NATC expects to make no contributions to the pension plan in the year ending December 31, 2016.
Note 10. Share Incentive Plans:
On February 8, 2006, the Board of Directors of the Company adopted the North Atlantic Holding Company, Inc. 2006 Equity Incentive Plan (the “2006 Plan”) and approved a form of Restricted Stock Award Agreement (the “Form Award Agreement”) pursuant to which awards under the 2006 Plan may be granted to employees. The Form Award Agreement requires, as a condition of the award, that any and all stock options (vested or otherwise) previously granted to these individuals will be immediately cancelled as of the date of the award. On March 15, 2006, the Board of Directors of the Company approved a form of Restricted Stock Award Agreement pursuant to which awards under the 2006 Plan may be granted to non-employee directors (the “Director Form Award Agreement”). The 2006 Plan provides for the granting of nonqualified stock options and restricted stock awards. Pursuant to the 2006 Plan, 2,654,910 shares of common stock of the Company are reserved for issuance as awards to employees, consultants and directors as compensation for past or future services or the attainment of certain performance goals. On August 7, 2014, the Board of Directors of the Company amended the 2006 Plan. The 2006 Plan shares were increased to a maximum of 3,651,110 shares that may be issued pursuant to awards under the 2006 Plan. In addition, the term of the 2006 Plan was extended an additional 10 years. The 2006 Plan was initially scheduled to terminate on August 6, 2026. Upon the adoption of the Company’s 2015 Equity Incentive Plan in connection with the IPO (see Note 16. Subsequent Events) the Company determined that no additional grants would be made under the 2006 Plan, however all awards issued under the plan that have not been previously terminated or forfeited remain outstanding and continue unaffected. The Board of Directors of the Company may provide that awards under the 2006 Plan shall become vested in installments over a period of time or may specify that the attainment of certain performance measures will determine the degree of vesting, or a combination of both, as set forth in the applicable award agreements. Upon the occurrence of a change in control, the grantee shall be entitled to such consideration in respect of the outstanding shares subject to the 2006 Plan on the same terms and conditions as that provided to all other stockholders of the Company. As of March 31, 2016, 1,069,129 shares of restricted stock and 1,061,097 options have been granted to employees of NATC and 41,727 shares of restricted stock and 607,229 options have been granted to current and former non-employee directors of the Company under the 2006 Plan.
The total number of shares available for grant under the 2006 Plan is 871,928. Stock option activity is summarized below:
|
|
Incentive
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Outstanding, December 31, 2014
|
|
|
1,692,051
|
|
|
$
|
2.17
|
|
|
$
|
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,043
|
)
|
|
|
1.06
|
|
|
|
0.54
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(23,337
|
)
|
|
|
1.06
|
|
|
|
0.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
1,667,671
|
|
|
|
2.19
|
|
|
|
1.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(388
|
)
|
|
|
3.83
|
|
|
|
2.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2016
|
|
|
1,667,283
|
|
|
$
|
2.19
|
|
|
$
|
1.21
|
|
The total intrinsic value of options exercised and vested during the three months ended March 31, 2016 and 2015 was $0 and $7, respectively.
At March 31, 2016, the outstanding stock options’ exercise price for 986,356 options is $1.06 per share all of which are exercisable. The outstanding stock options’ exercise price for 680,927 options is $3.83 per share of which 628,984 options are exercisable. The weighted average of the remaining lives of the outstanding stock options is approximately 1.6 years for the options with the $1.06 exercise price, and 6.5 years for the options with the $3.83 exercise price. NATC estimates that the expected life of all stock options is ten years from the date of grant. For the $1.06 per share options, the weighted average fair value of options was determined using the Black-Scholes model assuming a ten-year life from grant date; a current share price and exercise price of $1.06; risk free interest rate of 4.366%; a volatility of 30%; and no assumed dividend yield. Based on these assumptions, the fair value of these options is approximately $0.54 per share option granted. For the $3.83 per share options, the weighted average fair value of options was determined using the Black-Scholes model assuming a ten-year life from grant date; a current share price and exercise price of $3.83; risk-free interest rate of 3.57%; a volatility of 40%; and no assumed dividend yield. Based on these assumptions, the fair value of these options is approximately $2.17 per share option granted.
The Company has recorded compensation expense related to the options based on the provisions of ASC 718 under which the fixed portion of such expense is determined as the fair value of the options on the date of grant and amortized over the vesting period. The Company recorded compensation expense of approximately $12 and $46 in the consolidated statements of income for the three months ended March 31, 2016 and 2015, respectively.
Note 11. Unit Incentive Plans and Warrants for Intrepid Brands, LLC:
Effective August 7, 2014, the Company adopted the Intrepid Brands, LLC 2014 Option Plan (“2014 Plan”) for units of ownership in Intrepid. The purpose of the 2014 Plan is to promote the success and enhance the value of the Company by linking the personal interests of the service providers (including employees, consultants and managers) to those of Company equity holders and by providing such individuals with an incentive for outstanding performance to generate superior returns to Company equity holders. The 2014 Plan is further intended to provide flexibility to the Company in its ability to motivate, attract, and retain the services of employees, consultants and managers whose judgment, interest, and special effort the successful conduct of the Company's operation is largely dependent.
The Administration Committee shall determine the treatment to be afforded to a participant in the event of termination of employment for any reason including death, disability, or retirement. The 2014 Plan contains provisions for equitable adjustment of benefits in the event of a merger, consolidation, reorganization, recapitalization, stock dividend, stock split, reverse stock split, split up, spin-off, combination of shares, exchange of shares, dividend in kind or other like change in capital structure or distribution (other than normal cash dividends) to stockholders of the Company.
Pursuant to the 2014 Plan, the maximum number of Common Units of Intrepid that may be issued pursuant to an exercise of Options awarded under the 2014 Plan is 1,375,000 Common Units, reduced by one such Unit for every Incentive Unit (if any) that the Company issues in accordance with the terms of its LLC Agreement. The 2014 Plan shall terminate automatically on the day preceding the tenth anniversary of its adoption unless earlier terminated pursuant to Section 11 (b) of the plan. The 2014 Plan is scheduled to terminate on August 6, 2024. As of March 31, 2016, 1,322,852 unit options have been granted to employees of NTC.
The total number of units available for grant under the 2014 Plan is 52,148. Unit option activity is summarized below:
|
|
Unit
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Outstanding, December 31, 2014
|
|
|
1,358,889
|
|
|
$
|
1.00
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(32,047
|
)
|
|
|
1.00
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
1,326,842
|
|
|
|
1.00
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(3,990
|
)
|
|
|
1.00
|
|
|
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2016
|
|
|
1,322,852
|
|
|
$
|
1.00
|
|
|
$
|
0.25
|
|
At March 31, 2016, under the 2014 Plan, the outstanding unit options’ exercise price for 1,322,852 options is $1.00 per option of which 997,648 are exercisable. The weighted average of the remaining lives of the outstanding unit options is approximately 18.3 years. The weighted average fair value of options was determined using the Black-Scholes model assuming a 20-year life from grant date; a current unit price and exercise price of $1.00; risk-free interest rate of 2.65% and a volatility of 20% and no assumed dividend yield. Based on these assumptions, the fair value of the options is approximately $0.25 per unit option granted. The Company recorded approximately $10 in the statements of income for the three months ended March 31, 2016. The Company recorded approximately $29 in the statements of income for the three months ended March 31, 2015.
In connection with the IPO, in May of 2016 all options outstanding under the 2014 Plan were repurchased for aggregate cash consideration of $683 which included $22 of payroll taxes. See Note 16. Subsequent Events.
In January of 2014, the Company issued warrants to purchase 11,000,000 units of membership interests in Intrepid (the “Intrepid Warrants”) concurrent with the 7% Senior Notes (see Note 7). This represented 40% of the Intrepid Common Units outstanding on a fully diluted basis, at a purchase price of $1.00 per unit. The warrants were exercisable beginning January 21, 2014 and they expire on December 31, 2023.
In connection with the IPO, in May of 2016 all outstanding Intrepid Warrants were repurchased for aggregate cash consideration of approximately $5.5 million. See Note 16. Subsequent Events.
Note 12. Contingencies:
The Company is involved in various claims and actions that arise in the normal course of business. While the outcome of these legal proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of the proceedings should not have a material adverse effect on the financial position, results of operations or cash flows of the Company.
Note 13. Earnings Per Share:
The following is a reconciliation of the numerators and denominators of the basic and diluted EPS computations of net income:
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Income
|
|
|
Shares
|
|
|
Per
Share
|
|
|
Income
|
|
|
Shares
|
|
|
Per
Share
|
|
Net income
|
|
$
|
2,234
|
|
|
|
|
|
|
|
|
$
|
3,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
|
|
|
|
|
|
|
7,198,337
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
7,197,523
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and warrants
|
|
|
|
|
|
|
1,156,322
|
|
|
|
|
|
|
|
|
|
|
|
1,156,320
|
|
|
|
|
|
|
|
|
|
|
|
|
8,354,659
|
|
|
$
|
0.27
|
|
|
|
|
|
|
|
8,353,843
|
|
|
$
|
0.41
|
|
For the three months ended March 31, 2016, weighted average options to purchase 680,927 shares of common stock were outstanding but were not included in the computation of diluted earnings per share because the options were anti-dilutive. For the three months ended March 31, 2015, weighted average options to purchase 715,618 shares of common stock were outstanding but were not included in the computation of diluted earnings per share because they were anti-dilutive. Due to the IPO in May 2016, the Company’s weighted average shares and basic and diluted earnings per share are expected to change significantly for the remainder of 2016. See Note 16. Subsequent Events, for a description of the IPO and shares issued in connection herewith.
Note 14. Parent-Only Financial Information:
The Company is a holding company with independent operations including cash and its investments in its subsidiaries.
All of NATC’s subsidiaries are wholly-owned and guarantee the First Lien Term Loan and the Second Lien Term Loan of NATC on a full, unconditional, and joint and several basis. Within the First Lien Term Loan and the Second Lien Term Loan there are no significant restrictions on the ability of NATC to obtain funds from its subsidiaries by dividend or loan, but NATC is subject to significant restrictions on its ability to pay dividends or make other payments to the Company. NATC and its subsidiaries are generally unable to pay dividends and make other restricted payments to the Company, except in limited circumstances, including (i) to pay certain costs in the ordinary course of business, (ii) to redeem, retire or otherwise acquire certain of our outstanding equity interest and (iii) to pay certain tax obligations. As a result of such restrictions on the Company’s subsidiaries’ ability to make distributions to the Company, $227,915 of its consolidated total assets are currently restricted assets of its consolidated subsidiaries, which may not be transferred to the Company in the form of loans, advances or cash dividends without the consent of a third party. The Company has disclosed the amount of restricted total assets rather than restricted net assets due to the negative net assets of the Company and its restricted subsidiaries.
TPLLC and Intrepid are wholly-owned by the Company. TPLLC and its subsidiary are not guarantors of the First Lien Term Loan and Second Lien Term Loan.
Note 15. Segment Information:
In accordance with ASC 280, Segment Reporting, the Company has three reportable segments, (1) the Smokeless Products; (2) the Smoking Products; and (3) the NewGen Products. The Smokeless Products segment: (a) manufactures and markets moist snuff; and (b) contracts for and markets chewing tobacco products. The Smoking Products segment: (a) imports and markets cigarette papers, tubes and related products; (b) processes, packages and markets MYO cigarette tobaccos; (c) imports and markets finished cigars and MYO cigar tobaccos and cigar wraps; and (d) processes, packages and markets pipe tobaccos. The NewGen Products segment markets e-cigarettes, e-liquids, vaporizers and other related products. The Company’s products are distributed primarily through wholesale distributors in the United States. The Other segment includes the assets of the Company not assigned to the three reportable segments and Elimination includes the elimination of intercompany accounts between segments.
The accounting policies of these segments are the same as those of the Company. Segment data includes a charge allocating corporate costs to the three reportable segments based on their respective Net sales. The Company evaluates the performance of its segments and allocates resources to them based on Operating income.
The table below presents financial information about reported segments for the three months ended March 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
|
|
|
|
Smokeless Products
|
|
$
|
18,339
|
|
|
$
|
17,516
|
|
Smoking Products
|
|
|
27,885
|
|
|
|
28,087
|
|
NewGen Products
|
|
|
3,642
|
|
|
|
5,483
|
|
|
|
$
|
49,866
|
|
|
$
|
51,086
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
|
|
|
|
|
|
Smokeless Products
|
|
$
|
3,559
|
|
|
$
|
4,523
|
|
Smoking Products
|
|
|
7,540
|
|
|
|
6,985
|
|
NewGen Products
|
|
|
116
|
|
|
|
776
|
|
Other (1)
|
|
|
(156
|
)
|
|
|
(130
|
)
|
|
|
$
|
11,059
|
|
|
$
|
12,154
|
|
Less Eliminations (2)
|
|
|
(150
|
)
|
|
|
(170
|
)
|
|
|
$
|
10,909
|
|
|
$
|
11,984
|
|
|
|
|
|
|
|
|
|
|
Interest expense and financing costs
|
|
|
(8,462
|
)
|
|
|
(8,482
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
2,447
|
|
|
$
|
3,502
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Smokeless Products
|
|
$
|
77,010
|
|
|
$
|
88,045
|
|
Smoking Products
|
|
|
525,233
|
|
|
|
495,211
|
|
NewGen Products
|
|
|
13,624
|
|
|
|
15,647
|
|
Other (1)
|
|
|
32,422
|
|
|
|
32,455
|
|
|
|
|
648,289
|
|
|
|
631,358
|
|
Less Eliminations (2)
|
|
|
(406,750
|
)
|
|
|
(380,598
|
)
|
|
|
$
|
241,539
|
|
|
$
|
250,760
|
|
(1) |
“Other” includes our assets that are not assigned to our three reportable segments, such as intercompany transfers and investments in subsidiaries. All goodwill has been allocated to our reportable segments. |
(2) |
“Elimination” includes the elimination of intercompany accounts between segments and investments in subsidiaries. |
Net Sales - Domestic and Foreign
(in thousands)
The table below presents financial information about our domestic and foreign net sales for the three months ended March 31, 2016 and 2015:
|
|
Three Months Ended
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
46,974
|
|
|
$
|
48,773
|
|
Foreign
|
|
|
2,892
|
|
|
|
2,313
|
|
Net Sales
|
|
$
|
49,866
|
|
|
$
|
51,086
|
|
Note 16. Subsequent Events
In April of 2016, the Company increased the total authorized shares of preferred and voting and non-voting common stock and effected a 10.43174381 for 1 stock split of the voting and nonvoting common stock. As a result of the stock split, all previously reported share amounts, including options and warrants in the accompanying financial statements and related notes have been retrospectively restated to reflect the stock split.
In May of 2016, the Company sold 6,210,000 shares of voting common stock in its IPO(including shares sold pursuant to the underwriters’ option to purchase 810,000 shares to cover over-allotments) at a price of $10.00 per share. The gross proceeds totaled $62,100. The IPO proceeds were used as follows: 1) $3,884 for the payment of expenses in connection with the Initial Public Offering; 2) $3,250 to purchase and retire Intrepid Warrants (See Note 11); 3) $34,000 to redeem and retire PIK Toggle Notes (See Note 7); 4) $20,200 to redeem and retire $20,000 face amount of Second Lien Term Notes and pay $200 as a 1% prepayment penalty (See Note 7); 5) $683 to purchase and retire all outstanding options to buy Intrepid Common Units which include $22 of payroll taxes (See Note 11); and 6) increased cash of $83.
In addition, in connection with the IPO the Company also: 1) exchanged 1,289,819 shares of voting common stock to repurchase all of the outstanding 7% Senior Notes (See Note 7); 2) exchanged 3,168,438 shares of voting common stock to redeem all of the remaining outstanding PIK Toggle Notes not repurchased for cash as described above (See Note 7); and 3) paid $2,250 to retire all the remaining Intrepid Warrants (for a total expenditure of $5,500 to retire all the Intrepid Warrants).
As a result of the transactions summarized above, the Company has fully repurchased and retired the PIK Toggle Notes and 7% Senior Notes (See Note 7) and fully repurchased and retired all outstanding Intrepid Warrants and options to buy Intrepid Common Units.
The Company has the following voting and non-voting shares of common stock outstanding after the transactions summarized above:
Voting shares outstanding before transactions
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6,259,480
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Shares issued by the Initial Public Offering
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6,210,000
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Shares issued for 7% Senior Notes
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1,289,819
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Shares issued for PIK Toggle Notes
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3,168,438
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Voting shares outstanding after transactions
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16,927,737
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Non-Voting shares outstanding before and after transactions
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938,857
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Cautionary Note Regarding Forward-Looking Statements
This document includes and other information we make public from time to time may include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about our estimates, expectations, projections, beliefs, intentions or strategies for the future, and the assumptions underlying such statements. We use the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “forecasts,” “may,” “will,” “should,” and similar expressions to identify our forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our present expectations. Factors that could cause these differences include, but are not limited to, the factors set forth in “Risk Factors” included in our Prospectus dated May 10, 2016, as well as:
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declining sales of tobacco products, and expected continuing decline of sales, in the tobacco industry overall;
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our dependence on a small number of third-party suppliers and producers;
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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;
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the possibility that our licenses to use certain brands or trademarks will be terminated, challenged or restricted;
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failure to maintain consumer brand recognition and loyalty of our customers;
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substantial and increasing U.S. regulation;
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regulation of our products by the FDA;
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uncertainty related to the regulation and taxation of our NewGen products;
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possible significant increases in federal, state and local municipal tobacco-related taxes;
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possible significant increases in tobacco-related taxes;
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possible taxation of our NewGen products;
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possible increasing international control and regulation;
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our reliance on relationships with several large retailers and national chains for distribution of our products;
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intense competition and our ability to compete effectively;
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significant potential product liability litigation;
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the scientific community’s lack of information regarding the long-term health effects of electronic cigarettes, vaporizer and e-liquid use;
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failure to maintain and contribute significant cash amounts to an escrow account as part of a settlement agreement between us and certain U.S. states;
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our substantial amount of indebtedness;
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the terms of our credit facilities may restrict our current and future operations;
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competition from illicit sources;
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our reliance on information technology;
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security and privacy breaches;
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contamination of our tobacco supply or products;
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infringement on our intellectual property;
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third-party claims that we infringe on their intellectual property;
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concentration of business with large customers;
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failure to manage our growth;
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fluctuations in our month-to-month results;
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exchange rate fluctuations;
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adverse U.S. and global economic conditions;
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failure to comply with certain regulations; and
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departure of key management personnel or our inability to attract and retain talent.
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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 and with our annual consolidated financial statements and accompanying notes, which are included in our prospectus dated May 10, 2016, filed with the SEC in accordance with Rule 424(b) of the Securities Act on May 12, 2016 (the “Prospectus”) and with the Risk Factors included in the Prospectus. In addition, this discussion includes forward-looking statements that are subject to risks and uncertainties that 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 that are discussed in “Risk Factors” in our Prospectus.
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 Turning Point Brands, Inc. and our consolidated subsidiaries. References to “TPB” refer to Turning Point Brands, Inc. without any of its subsidiaries. We were incorporated in 2004 under the name North Atlantic Holding Company, Inc. On November 4, 2015, we changed our name to Turning Point Brands, Inc. Many of the amounts and percentages in this discussion have been rounded for convenience of presentation.
Overview
We are a leading independent provider of Other Tobacco Products (“OTP”) in the U.S. We sell a wide range of products across the OTP spectrum, including moist snuff, loose leaf chewing tobacco, premium cigarette papers, make-your-own (“MYO”) cigar wraps and cigar smoking tobacco, cigars, liquid vapor products and tobacco vaporizer products. We do not sell cigarettes. We estimate that the OTP industry generated approximately $10.0 billion in manufacturer revenue in 2014. In contrast to manufactured cigarettes, which have been experiencing declining sales for decades based on data published by the Alcohol and Tobacco Tax and Trade Bureau (“TTB”), the OTP industry is demonstrating increased consumer appeal. For instance, according to Management Science Incorporated (“MSAi”), OTP consumer units shipped to retail increased by approximately 2% from 2013 to 2014 and approximately 3% from 2014 to 2015.
Our portfolio of brands includes some of the most widely recognized names in the OTP industry, such as Zig-Zag®, Beech-Nut®, Stoker’s®, Trophy®, Havana Blossom®, Durango®, Our Pride® and Red Cap™.
We generate revenues from the sale of our products primarily to wholesale distributors who in turn resell them to retail operations, as well as from the sale of our products directly to retail operations. Our net sales, which include federal excise taxes, consist of gross sales, net of cash discounts, returns, and selling and marketing allowances.
Our principal operating expenses include the cost of raw materials used to manufacture the limited number of our products which we manufacture; the cost of finished products, which are purchased goods; federal excise taxes; restructuring and impairment expenses; legal expenses and compensation expenses, including benefits and costs of salaried personnel. Our other principal expenses include interest expense and amortization of deferred financing costs and other expenses.
Recent Developments
On May 10, 2016, we priced the initial public offering (the “IPO”) of our voting common stock. In the IPO, we sold 6,210,000 shares of our voting common stock (including 810,000 shares pursuant to the underwriters option to purchase additional shares to cover over-allotments (the “Over-allotment Option”)) at a price per share of $10.00. The IPO closed on May 13, 2016 and