Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - Turning Point Brands, Inc.ex32_1.htm
EX-31.2 - EXHIBIT 31.2 - Turning Point Brands, Inc.ex31_2.htm
EX-31.1 - EXHIBIT 31.1 - Turning Point Brands, Inc.ex31_1.htm
EX-10.4 - EXHIBIT 10.4 - Turning Point Brands, Inc.ex10_4.htm
EX-10.2 - EXHIBIT 10.2 - Turning Point Brands, Inc.ex10_2.htm
EX-10.1 - EXHIBIT 10.1 - Turning Point Brands, Inc.ex10_1.htm
EX-3.1 - EXHIBIT 3.1 - Turning Point Brands, Inc.ex3_1.htm

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
 
20-0709285
(State or other jurisdiction of Incorporation or organization)
 
(I.R.S. Employer Identification No.)

5201 Interchange Way, Louisville, KY
 
40229
(Address of principal executive offices)
 
 (Zip Code)

(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
Accelerated filer
Non-accelerated filer
☑     (Do not check if a smaller reporting company)
Smaller reporting company

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.
TABLE OF CONTENTS
 
     
Page No.
PART I        FINANCIAL INFORMATION
 
       
 
ITEM 1
3
       
   
3
       
   
4
       
   
5
       
   
6
       
   
7
       
 
ITEM 2
28
       
 
ITEM 3
40
       
 
ITEM 4
40
       
PART II       OTHER INFORMATION
 
       
 
ITEM 1
41
       
 
ITEM 1A
41
       
 
ITEM 2
41
       
 
ITEM 3
41
       
 
ITEM 4
41
       
 
ITEM 5
41
       
 
ITEM 6
41
       
 
Signature
42
       
 
43
 
PART I FINANCIAL INFORMATION

Item 1.
Financial Statements

Turning Point Brands, Inc.
Consolidated Balance Sheets
(dollars in thousands except share data)  (unaudited)

ASSETS
 
March 31,
2016
   
December 31,
2015
 
Current assets:
           
Cash
 
$
2,940
   
$
4,835
 
Accounts receivable, net of allowances of $137 in 2016 and 2015
   
2,649
     
3,940
 
Inventories
   
47,976
     
44,339
 
Other current assets
   
9,383
     
10,838
 
Total current assets
   
62,948
     
63,952
 
Property, plant and equipment, net
   
5,764
     
5,603
 
Deferred financing costs, net
   
191
     
208
 
Goodwill
   
128,697
     
128,697
 
Other intangible assets, net
   
8,553
     
8,553
 
Master Settlement Agreement - escrow deposits
   
31,856
     
31,842
 
Other assets
   
3,530
     
3,608
 
Total assets
 
$
241,539
   
$
242,463
 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Current liabilities:
               
Accounts payable
 
$
4,895
   
$
4,087
 
Accrued expenses
   
9,743
     
11,053
 
Accrued interest expense
   
866
     
4,329
 
First lien term loan
   
1,650
     
1,650
 
Revolving credit facility
   
1,018
     
18
 
Total current liabilities
   
18,172
     
21,137
 
Notes payable and long-term debt
   
290,480
     
290,772
 
Deferred income taxes
   
7,054
     
7,013
 
Postretirement benefits
   
4,638
     
4,666
 
Pension benefits
   
428
     
487
 
Total liabilities
   
320,772
     
324,075
 
                 
Commitments and contingencies
               
                 
Stockholders' deficit:
               
Preferred stock; $0.01 par value; authorized shares 40,000,000; issued and outstanding shares -0-
         
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
   
63
     
63
 
Common stock, nonvoting, $0.01 par value; authorized shares, 10,000,000; issued and outstanding shares, 2016 and 2015 938,857
   
9
     
9
 
Additional paid-in capital
   
12,650
     
12,628
 
Accumulated other comprehensive loss
   
(3,389
)
   
(3,512
)
Accumulated deficit
   
(88,566
)
   
(90,800
)
Total stockholders' deficit
   
(79,233
)
   
(81,612
)
Total liabilities and stockholders' deficit
 
$
241,539
   
$
242,463
 

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)

   
Three Months Ended
 
   
March 31,
2016
   
March 31,
2015
 
Net sales
 
$
49,866
   
$
51,086
 
Cost of sales
   
25,219
     
26,431
 
Gross profit
   
24,647
     
24,655
 
Selling, general and administrative expenses
   
13,738
     
12,671
 
Operating income
   
10,909
     
11,984
 
Interest expense and financing costs
   
8,462
     
8,482
 
Income before income taxes
   
2,447
     
3,502
 
Income tax expense
   
213
     
75
 
Net income
 
$
2,234
   
$
3,427
 
                 
Basic earnings per common share:
               
Net income
 
$
0.31
   
$
0.48
 
Diluted earnings per common share:
               
Net income
 
$
0.27
   
$
0.41
 
Weighted average common shares outstanding:
               
Basic - inclusive of voting and non-voting shares
   
7,198,337
     
7,197,523
 
Diluted - inclusive of voting and non-voting shares
   
8,354,659
     
8,353,843
 

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)

   
Three Months Ended
 
   
March 31,
2016
   
March 31,
2015
 
Net income
 
$
2,234
   
$
3,427
 
                 
Other comprehensive income, net of tax -
               
Pension and postretirement
               
Amortization of unrealized losses recorded in cost of sales
   
6
     
6
 
Amortization of unrealized losses recorded in selling, general and administrative expenses
   
117
     
126
 
     
123
     
132
 
Comprehensive income
 
$
2,357
   
$
3,559
 

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)

   
Three Months Ended
 
   
March 31,
2016
   
March 31,
2015
 
Cash flows from operating activities:
           
Net income
 
$
2,234
   
$
3,427
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation expense
   
293
     
251
 
Amortization of deferred financing costs
   
362
     
362
 
Amortization of original issue discount
   
259
     
261
 
Interest incurred but not paid on PIK toggle notes
   
2,254
     
1,945
 
Deferred income taxes
   
41
     
(35
)
Stock compensation expense
   
12
     
46
 
Member unit compensation expense
   
10
     
29
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
1,291
     
(1,931
)
Inventories
   
(3,637
)
   
(1,742
)
Other current assets
   
1,455
     
1,749
 
Other assets
   
416
     
(12
)
Accounts payable
   
724
     
1,159
 
Accrued pension liabilities
   
64
     
42
 
Accrued postretirement liabilities
   
(28
)
   
(31
)
Accrued expenses and other
   
(4,773
)
   
1,322
 
Net cash provided by operating activities
   
977
     
6,842
 
                 
Cash flows from investing activities:
               
Capital expenditures
   
(454
)
   
(327
)
Net cash used in investing activities
   
(454
)
   
(327
)
                 
Cash flows from financing activities:
               
Proceeds from revolving credit facility
   
1,000
     
93
 
Prepaid equity issuance costs
   
(268
)
   
-
 
Payment of first lien term loan
   
(3,150
)
   
(412
)
Proceeds from issuance of stock
   
-
     
1
 
Net cash used in financing activities
   
(2,418
)
   
(318
)
                 
Net increase (decrease) in cash
   
(1,895
)
   
6,197
 
Cash, beginning of period
   
4,835
     
8,467
 
Cash, end of period
 
$
2,940
   
$
14,664
 
                 
Supplemental schedule of noncash financing activities:
               
Accrued expenses incurred for prepaid equity costs
 
$
84
   
$
-
 

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:

   
Deposits At
 
Sales
Year
 
March 31,
2016
   
December 31,
2015
 
             
1999
 
$
211
   
$
211
 
2000
   
1,017
     
1,017
 
2001
   
1,673
     
1,673
 
2002
   
2,271
     
2,271
 
2003
   
4,249
     
4,249
 
2004
   
3,715
     
3,715
 
2005
   
4,552
     
4,552
 
2006
   
3,847
     
3,847
 
2007
   
4,167
     
4,167
 
2008
   
3,364
     
3,364
 
2009
   
1,626
     
1,626
 
2010
   
406
     
406
 
2011
   
193
     
193
 
2012
   
198
     
198
 
2013
   
173
     
173
 
2014
   
142
     
142
 
2015
   
52
     
38
 
                 
Total
 
$
31,856
   
$
31,842
 

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:
 
   
March 31,
2016
   
March 31,
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
 
   
March 31,
2016
   
March 31,
2015
 
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
   
6,259,480
 
Shares issued by the Initial Public Offering
   
6,210,000
 
Shares issued for 7% Senior Notes
   
1,289,819
 
Shares issued for PIK Toggle Notes
   
3,168,438
 
Voting shares outstanding after transactions
   
16,927,737