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EX-32.1 - EXHIBIT 32.1 - Turning Point Brands, Inc.ex32_1.htm
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EX-31.1 - EXHIBIT 31.1 - Turning Point Brands, Inc.ex31_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 September 30, 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 November 9, 2016, there were 18,341,889 shares outstanding of the registrant’s voting common stock, par value $0.01 per share.
 


TURNING POINT BRANDS, INC.
TABLE OF CONTENTS
 
Page No.
PART I    FINANCIAL INFORMATION
 
       
 
ITEM 1
Financial Statements (Unaudited)
 
       
   
3
       
   
4
       
   
5
       
   
6
       
   
7
       
   
8
       
   
10
       
 
ITEM 2
35
       
 
ITEM 3
51
       
 
ITEM 4
51
       
PART II     OTHER INFORMATION
 
       
 
ITEM 1
52
       
 
ITEM 1A
52
       
 
ITEM 2
52
       
 
ITEM 3
52
       
 
ITEM 4
52
       
 
ITEM 5
52
       
 
ITEM 6
52
       
 
Signatures
53
       
 
54
 
PART I
FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
Turning Point Brands, Inc.
Consolidated Balance Sheets
(dollars in thousands except share data) (unaudited)

ASSETS
 
September 30,
2016
   
December 31,
2015
 
Current assets:
           
Cash
 
$
4,410
   
$
4,835
 
Accounts receivable, net of allowances of $29 in 2016 and $137 in 2015
   
3,394
     
3,940
 
Inventories
   
51,744
     
44,339
 
Other current assets
   
9,276
     
10,838
 
Total current assets
   
68,824
     
63,952
 
Property, plant and equipment, net
   
5,952
     
5,603
 
Deferred financing costs, net
   
157
     
208
 
Goodwill
   
128,697
     
128,697
 
Other intangible assets, net
   
8,553
     
8,553
 
Master Settlement Agreement - escrow deposits
   
31,924
     
31,842
 
Other assets
   
627
     
3,608
 
Total assets
 
$
244,734
   
$
242,463
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
               
Current liabilities:
               
Accounts payable
 
$
3,556
   
$
4,087
 
Accrued expenses
   
9,927
     
11,053
 
Accrued interest expense
   
359
     
4,329
 
First lien term loan
   
1,650
     
1,650
 
Revolving credit facility
   
-
     
18
 
Total current liabilities
   
15,492
     
21,137
 
Notes payable and long-term debt
   
199,488
     
290,772
 
Deferred income taxes
   
7,060
     
7,013
 
Postretirement benefits
   
4,577
     
4,666
 
Pension benefits
   
314
     
487
 
Total liabilities
   
226,931
     
324,075
 
                 
Commitments and contingencies
               
                 
Stockholders' equity (deficit):
               
Preferred stock; $0.01 par value; authorized shares 40,000,000; issued shares -0-
               
Common stock, voting, $0.01 par value; authorized shares, 190,000,000; issued shares, 2016 18,342,312 and 2015 6,259,480
   
183
     
63
 
Common stock, nonvoting, $0.01 par value; authorized shares, 10,000,000; issued shares, 2016 0 and 2015 938,857
   
-
     
9
 
Additional paid-in capital
   
104,822
     
12,628
 
Accumulated other comprehensive loss
   
(3,143
)
   
(3,512
)
Accumulated deficit
   
(84,059
)
   
(90,800
)
Total stockholders' equity (deficit)
   
17,803
     
(81,612
)
Total liabilities and stockholders' equity (deficit)
 
$
244,734
   
$
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
 
   
September 30,
2016
   
September 30,
2015
 
Net sales
 
$
50,959
   
$
51,431
 
Cost of sales
   
26,341
     
26,070
 
Gross profit
   
24,618
     
25,361
 
Selling, general and administrative expenses
   
12,727
     
11,839
 
Operating income
   
11,891
     
13,522
 
Interest expense and financing costs
   
5,557
     
8,676
 
Investment income
   
(279
)
   
-
 
Income before income taxes
   
6,613
     
4,846
 
Income tax expense (benefit)
   
(180
)
   
76
 
Net income
 
$
6,793
   
$
4,770
 
                 
Basic earnings per common share:
               
Net income
 
$
0.38
   
$
0.66
 
Diluted earnings per common share:
               
Net income
 
$
0.34
   
$
0.57
 
Weighted average common shares outstanding:
               
Basic - inclusive of voting and non-voting shares
   
18,094,592
     
7,197,928
 
Diluted - inclusive of voting and non-voting shares
   
19,729,219
     
8,335,308
 

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)

   
Nine Months Ended
 
   
September 30,
2016
   
September 30,
2015
 
Net sales
 
$
152,406
   
$
150,516
 
Cost of sales
   
78,267
     
77,889
 
Gross profit
   
74,139
     
72,627
 
Selling, general and administrative expenses
   
40,563
     
39,385
 
Operating income
   
33,576
     
33,242
 
Interest expense and financing costs
   
20,895
     
25,732
 
Investment income
   
(611
)
   
-
 
Loss on extinguishment of debt
   
2,824
     
-
 
Income before income taxes
   
10,468
     
7,510
 
Income tax expense
   
642
     
734
 
Net income
 
$
9,826
   
$
6,776
 
                 
Basic earnings per common share:
               
Net income
 
$
0.64
   
$
0.94
 
Diluted earnings per common share:
               
Net income
 
$
0.58
   
$
0.81
 
Weighted average common shares outstanding:
               
Basic - inclusive of voting and non-voting shares
   
15,396,155
     
7,197,928
 
Diluted - inclusive of voting and non-voting shares
   
16,968,613
     
8,354,314
 

The accompanying notes are an integral part of the consolidated financial statements.
 
Turning Point Brands, Inc.
Consolidated Statements of Comprehensive Income
(dollars in thousands)
(unaudited)
 
   
Three Months Ended
 
   
September 30,
2016
   
September 30,
2015
 
Net income
 
$
6,793
   
$
4,770
 
                 
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
     
125
 
     
123
     
131
 
Comprehensive income
 
$
6,916
   
$
4,901
 

The accompanying notes are an integral part of the consolidated financial statements
 
Turning Point Brands, Inc.
Consolidated Statements of Comprehensive Income
(dollars in thousands)
(unaudited)

   
Nine Months Ended
 
   
September 30,
2016
   
September 30,
2015
 
Net income
 
$
9,826
   
$
6,776
 
                 
Other comprehensive income, net of tax -
               
Pension and postretirement
               
Amortization of unrealized losses recorded in cost of sales
   
18
     
18
 
Amortization of unrealized losses recorded in selling, general and administrative expenses
   
351
     
376
 
     
369
     
394
 
Comprehensive income
 
$
10,195
   
$
7,170
 

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)

   
Nine Months Ended
 
   
September 30,
2016
   
September 30,
2015
 
Cash flows from operating activities:
           
Net income
 
$
9,826
   
$
6,776
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Loss on extinguishment of debt
   
2,824
     
-
 
Gain on sale of fixed assets
   
-
     
(1
)
Depreciation expense
   
896
     
784
 
Amortization of deferred financing costs
   
1,070
     
1,086
 
Amortization of original issue discount
   
591
     
785
 
Interest incurred but not paid on PIK Toggle Notes
   
3,422
     
6,057
 
Interest incurred but not paid on 7% Senior Notes
   
329
     
426
 
Interest paid on PIK Toggle Notes
   
(9,893
)
   
-
 
Deferred income taxes
   
47
     
(7
)
Stock compensation expense
   
103
     
129
 
Restricted stock compensation expense
   
29
     
-
 
Member unit compensation expense
   
13
     
82
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
546
     
(2,568
)
Inventories
   
(7,405
)
   
(241
)
Other current assets
   
1,562
     
(2,052
)
Other assets
   
(45
)
   
(106
)
Accounts payable
   
(531
)
   
1,509
 
Accrued pension liabilities
   
196
     
123
 
Accrued postretirement liabilities
   
(89
)
   
(94
)
Accrued expenses and other
   
(3,967
)
   
(63
)
Net cash provided by (used in) operating activities
   
(476
)
   
12,625
 
                 
Cash flows from investing activities:
               
Capital expenditures
   
(1,245
)
   
(1,100
)
Proceeds from sale of fixed assets
   
-
     
2
 
Note receivable
   
-
     
(430
)
Net cash used in investing activities
   
(1,245
)
   
(1,528
)
 
Turning Point Brands, Inc.
Consolidated Statements of Cash Flows (Cont.)
(dollars in thousands)
(unaudited)

   
Nine Months Ended
 
   
September 30,
2016
   
September 30,
2015
 
             
Cash flows from financing activities:
           
Payments for revolving credit facility, net
   
(18
)
   
(3,184
)
Payment of financing costs
   
(200
)
   
-
 
Payment of first lien term loan
   
(3,976
)
   
(6,237
)
Payment of second lien term loan
   
(20,000
)
   
-
 
Payment of PIK Toggle Notes
   
(24,107
)
   
-
 
Prepaid equity issuance costs
   
-
     
(305
)
Redemption of Intrepid options
   
(661
)
   
-
 
Redemption of Intrepid warrants
   
(5,500
)
   
-
 
Warrants exercised
   
4
         
Stock option exercised
   
8
     
-
 
Proceeds from issuance of stock
   
55,746
     
1
 
Net cash provided by (used in) financing activities
   
1,296
     
(9,725
)
                 
Net increase (decrease) in cash
   
(425
)
   
1,372
 
Cash, beginning of period
   
4,835
     
8,467
 
Cash, end of period
 
$
4,410
   
$
9,839
 
                 
Supplemental schedule of noncash financing activities:
               
Issuance of restricted stock
 
$
279
   
$
-
 
Conversion of PIK Toggle Notes to equity
 
$
29,014
   
$
-
 
Conversion of 7% Senior Notes to equity
 
$
10,074
   
$
-
 

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 $1.7 million and $1.5 million for the three months ended September 30, 2016 and 2015, respectively. Shipping costs incurred were approximately $4.8 million and $5.2 million for the nine months ended September 30, 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 September 30, 2016 and December 31, 2015, NATC had on deposit approximately $31.9 million and $31.8 million, respectively, in escrow.
 
Effective April 1, 2009, the federal excise tax on MYO products was increased from $1.0969 per pound to $24.78 per pound of tobacco. With this significant increase in the federal excise tax, the Company discontinued its generic category of MYO but continues to sell the Zig-Zag branded MYO. For further discussion of the MSA see our Form S-1/A filed on April 28, 2016 with the SEC, pages F-11 and F-12.
 
The following table represents the amount of deposits by sales year for the MSA escrow account and reflects the decline in annual deposits beginning in 2009, due to the significant increase in federal excise taxes, as described above:

   
Deposits  
 
Sales
Year
 
September 30,
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
   
199
     
198
 
2013
   
173
     
173
 
2014
   
142
     
142
 
2015
   
97
     
38
 
2016
   
22
     
-
 
                 
Total
 
$
31,924
   
$
31,842
 

Food and Drug Administration (“FDA”):
 
On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”) authorized the Food and Drug Administration (“FDA”) to immediately regulate the manufacture, sale and marketing of four categories of tobacco products – cigarettes, cigarette tobacco, roll-your-own tobacco and smokeless tobacco. On August 8, 2016, the FDA deeming regulation became effective. The deeming regulation gave the FDA the authority to additionally regulate cigars, pipe tobacco, e-cigarettes, vaporizers and e-liquids.

The FDA assesses tobacco product user fees on six classes of regulated tobacco products and computes user fees using a methodology similar to the methodology used by the U.S Department of Agriculture to compute the Tobacco Transition Payment Program (“TTPP”, also known as the “Tobacco Buyout”) assessment. First, the total annual congressionally established user fee assessment is allocated among the six classes of tobacco products using the federal excise tax weighted market share of tobacco products subject to regulation. Then, the assessment for each class of tobacco products is divided among individual manufacturers and importers.

Prior to October 1, 2016, these FDA user fees applied only to those products then regulated by the FDA.  Effective October 1, 2016, the FDA began additionally applying FDA user fees to newly deemed tobacco products subject to FDA user fees as described above, i.e., cigars and pipe tobacco. The Company estimates the fee assessed to it for cigars and pipe tobacco will be approximately $0.3 million for the fourth quarter of 2016.

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.
 
The Company adopted ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting in 2016. This ASU simplifies several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes, statutory tax withholding requirements and classifications on the statement of cash flows. This ASU results in excess tax benefits and deficiencies from share-based payment awards to be recognized as income tax expense or benefit in the statement of income. The adoption of this ASU had no effect on the Company’s balance sheet or statements of income for 2016.
 
Recent Accounting Pronouncements:
 
In May 2014, the FASB issued Accounting Standards Update (“ASU”), ASU 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606), which delayed the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting year. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the consolidated financial statements.
 
In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in this ASU require entities that measure inventory using the first-in, first-out or average cost methods to measure inventory at the lower of cost and net realizable value. Net realizable value is defined as estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. The Company is currently evaluating the effects adoption of this guidance will have on its consolidated financial statements.
 
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases. ASU 2016-02 requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less for which there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities and should recognize lease expense for such leases generally on a straight-line basis over the lease term. Certain qualitative disclosures along with specific quantitative disclosures will be required, so that users are able to understand more about the nature of an entity’s leasing activities. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. At transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients related to the identification and classification of leases that commenced before the effective date of ASU 2016-02. An entity that elects to use the practical expedients will, in effect, continue to account for leases that commenced before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. The Company is currently evaluating the effect the adoption of this standard will have on its financial statements.
 
Subsequent Events:
 
The Company’s management has evaluated events and transactions that occurred from October 1, 2016 through November 10, 2016, the date these unaudited condensed consolidated financial statements were issued, for subsequent events requiring recognition or disclosure in the financial statements.
 
Note 3. Initial Public Offering (“IPO”):
 
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 non-voting 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 IPO; 2) $3,250 to purchase and retire Intrepid Warrants (See Note 12, for definition and information); 3) $34,000 to redeem and retire PIK Toggle Notes (See Note 8, for definition and information); 4) $20,200 to redeem and retire $20,000 in principal amount of Second Lien Term Notes and pay $200 as a 1% prepayment penalty (See Note 8, for definition and information); 5) $683 to purchase and retire all outstanding options to buy Intrepid Common Units which include $22 of payroll taxes (See Note 12, for definition and information); and 6) increased cash of $83.
 
In addition, in connection with the IPO the Company also: 1) issued 1,289,819 shares of voting common stock in exchange for all of the outstanding 7% Senior Notes (See Note 8); 2) issued 3,168,438 shares of voting common stock in exchange for all of the remaining outstanding PIK Toggle Notes not repurchased for cash as described above (See Note 8); 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 8) and fully repurchased and retired all outstanding Intrepid Warrants and options to buy Intrepid Common Units.
 
The Company had 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
 
         
Non-Voting shares outstanding before and after transactions
   
938,857
 

In June 2016, the Board of Directors of the Company approved the conversion of 938,857 shares of non-voting common stock to shares of voting common stock. The Company had the following voting shares of common stock at September 30, 2016:

Voting shares outstanding after transactions above
   
16,927,737
 
Non-voting shares converted to voting shares
   
938,857
 
Voting shares issued as restricted stock, net of forfeitures
   
26,508
 
Voting shares issued from exercise of stock options
   
6,652
 
Voting shares issued from exercise of warrants
   
442,558
 
Voting shares outstanding at September 30, 2016
   
18,342,312
 
 
 
 
 
 
 

 
Note 4. 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. 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 September 30, 2016, the fair value of NATC’s First Lien Term Loan and NATC’s Second Lien Term Loan approximate their face amounts of $147.7 million and $60.0 million, respectively. At December 31, 2015, the fair value of NATC’s First Lien Term Loan and NATC’s Second Lien Term Loan approximate their face amounts of $151.7 million and $80.0 million, respectively.
 
Foreign Exchange: As of September 30, 2016, the Company had no open foreign exchange forward contracts.  As of December 31, 2015, the Company had seven outstanding foreign exchange forward contracts for the purchase of 5.1 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.
 
Note 5. Inventories:
 
Inventories are stated at the lower of cost or market.  Cost is determined on the last-in, first-out (“LIFO”) method for approximately 55% 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:

   
September 30,
2016
   
December 31,
2015
 
Raw materials and work in process
 
$
2,604
   
$
1,940
 
Leaf tobacco
   
24,821
     
20,839
 
Finished goods - smokeless products
   
4,456
     
3,615
 
Finished goods - smoking products
   
15,278
     
14,077
 
Finished goods - electronic / vaporizer products
   
7,046
     
5,939
 
Other
   
1,343
     
1,237
 
     
55,548
     
47,647
 
LIFO reserve
   
(3,804
)
   
(3,308
)
   
$
51,744
   
$
44,339
 

The Company recorded inventory valuation allowances of $0.7 million as of September 30, 2016 and $0.3 million as of December 31, 2015.
 

Note 6. Property, Plant and Equipment:
 
Property, plant and equipment at September 30, 2016 and December 31, 2015 consists of:

   
September 30,
2016
   
December 31,
2015
 
Leasehold improvements
 
$
2,215
   
$
2,196
 
Machinery and equipment
   
10,128
     
8,997
 
Furniture and fixtures
   
3,215
     
3,121
 
     
15,558
     
14,314
 
Accumulated depreciation
   
(9,606
)
   
(8,711
)
   
$
5,952
   
$
5,603
 

 
 
 
 
 
 
 
 
 
Note 7. Accrued Expenses:
 
Accrued expenses at September 30, 2016 and December 31, 2015 consist of:

   
September 30,
2016
   
December 31,
2015
 
Accrued payroll and related items
 
$
2,922
   
$
3,659
 
Customer returns and allowances
   
2,346
     
2,015
 
Other
   
4,659
     
5,379
 
   
$
9,927
   
$
11,053
 

 
 
 
 
 
 
 
Note 8. Notes Payable and Long-Term Debt:
 
Notes payable and long-term debt consists of the following in order of preference:

   
September 30,
2016
   
December 31,
2015
 
First Lien Term Loan
 
$
146,792
   
$
150,555
 
Second Lien Term Loan
   
59,067
     
78,882
 
PIK Toggle Notes
   
-
     
58,882
 
7% Senior Notes
   
-
     
10,360
 
     
205,859
     
298,679
 
Less deferred finance charges
   
(4,721
)
   
(6,257
)
Less current maturities
   
(1,650
)
   
(1,650
)
Total Notes Payable and Long-Term Debt
 
$
199,488
   
$
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 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 “Revolving Credit Facility”).
 
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.  TPLLC and its subsidiary are not guarantors of 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 thereunder, including a pledge of the capital stock of NATC and its subsidiaries held by NATC Holding, NATC or any guarantor, 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 September 30, 2016 was 9.0%. 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 the 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) the 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 September 30, 2016 was 11.5%. The Second Lien Credit Agreement matures in July 2020. In connection with the Company’s IPO in May of 2016, the Company prepaid $20 million of the borrowings under the Second Lien Credit Agreement (see Note 3).
 
Revolving Credit Facility
 
The Revolving Credit Facility 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 Revolving Credit Facility 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 Revolving Credit Facility matures in January 2019 and there was no outstanding balance at September 30, 2016.
 
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 were scheduled to mature and the warrants to 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 was 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.
 
The PIK Toggle Notes contained covenants which limited 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 were unsecured and did not limit the Company’s ability to incur additional debt or liens.
 
In connection with the IPO, in May of 2016, the Company redeemed and retired all of the outstanding PIK Toggle Notes in exchange for a combination of cash and shares of the Company’s voting common stock (see Note 3).
 
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 were initially valued at $8.2 million. The 7% Senior Notes were scheduled to mature and the warrants to expire on December 31, 2023.
 
The 7% Senior Notes accrued interest at a fixed rate of 7% per annum. Interest was 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 7% Senior Notes were the general unsecured obligations of the Company and ranked equally with the Company’s other unsecured and unsubordinated debt from time to time outstanding. Redemptions of the 7% Senior Notes could be made by the Company at any time without penalty or premium.
 
In connection with the IPO, in May of 2016, we redeemed and retired all of the outstanding 7% Senior Notes in exchange for shares of the Company’s voting common stock (see Note 3).
 
Restricted / Non-Restricted Condensed Consolidating Financial Statements
 
The payment of principal and interest on the First Lien Term Loan, Second Lien Term Loan and Revolving Credit Facility 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 Revolving Credit Facility. 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 Revolving Credit Facility. 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 September 30, 2016 and December 31, 2015 and for the three and nine months ended September 30, 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
September 30, 2016
(in thousands)

   
Issuer/
Restricted
   
Non-Restricted
   
Eliminations
   
Consolidated
 
                         
ASSETS
                   
Current assets:
                       
Cash
 
$
3,766
   
$
644
   
$
-
   
$
4,410
 
Accounts receivable
   
3,184
     
210
     
-
     
3,394
 
Inventories
   
44,391
     
7,353
     
-
     
51,744
 
Other current assets
   
6,815
     
2,461
     
-
     
9,276
 
Total current assets
   
58,156
     
10,668
     
-
     
68,824
 
                                 
Property, plant and equipment, net
   
5,867
     
85
     
-
     
5,952
 
Deferred income taxes
   
3,999
     
-
     
(3,999
)
   
-
 
Deferred financing costs, net
   
157
     
-
     
-
     
157
 
Goodwill
   
128,697
     
-
     
-
     
128,697
 
Investment in subsidiaries
   
44,674
     
-
     
(44,674
)
   
-
 
Note receivable
   
500
     
-
     
(500
)
   
-
 
Other intangible assets, net
   
8,553
     
-
     
-
     
8,553
 
Master Settlement Agreement - escrow deposits
   
31,924
     
-
     
-
     
31,924
 
Other assets
   
234
     
393
     
-
     
627
 
Total assets
 
$
282,761
   
$
11,146
   
$
(49,173
)
 
$
244,734
 
                                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
                         
Current liabilities:
                               
Accounts payable
 
$
3,222
   
$
334
   
$
-
   
$
3,556
 
Accrued expenses
   
9,079
     
848
     
-
     
9,927
 
Accrued interest expense
   
359
     
-
     
-
     
359
 
First lien term loan
   
1,650
     
-
     
-
     
1,650
 
Note payable
   
-
     
500
     
(500
)
   
-
 
Total current liabilities
   
14,310
     
1,682
     
(500
)
   
15,492
 
                                 
Notes payable and long-term debt
   
199,488
     
-
     
-
     
199,488
 
Deferred income taxes
   
11,059
     
-
     
(3,999
)
   
7,060
 
Postretirement benefits
   
4,577
     
-
     
-
     
4,577
 
Pension benefits
   
314
     
-
     
-
     
314
 
Total Liabilities
   
229,748
     
1,682
     
(4,499
)
   
226,931
 
                                 
Stockholders' equity (deficit):
                               
Common stock, voting
   
183
     
-
     
-
     
183
 
Additional paid-in capital
   
168,917
     
10,900
     
(74,995
)
   
104,822
 
Advance to TPB
   
2,324
     
(2,324
)
   
-
     
-
 
Accumulated other comprehensive loss
   
(3,143
)
   
-
     
-
     
(3,143
)
Retained earnings (accumulated deficit)
   
(115,268
)
   
888
     
30,321
     
(84,059
)
Total stockholders' equity (deficit)
   
53,013
     
9,464
     
(44,674
)
   
17,803
 
Total liabilities and stockholders' equity (deficit)
 
$
282,761
   
$
11,146
   
$
(49,173
)
 
$
244,734
 
 
Turning Point Brands, Inc.
Consolidating Statement of Operations
for the three months ended September 30, 2016
(in thousands)

   
Issuer/
Restricted
   
Non-Restricted
   
Consolidated
 
Net sales
 
$
47,669
   
$
3,290
   
$
50,959
 
Cost of sales
   
23,862
     
2,479
     
26,341
 
Gross profit
   
23,807
     
811
     
24,618
 
Selling, general and administrative expenses
   
11,686
     
1,041
     
12,727
 
Operating income (loss)
   
12,121
     
(230
)
   
11,891
 
Interest expense and financing costs
   
5,524
     
33
     
5,557
 
Investment income
   
(279
)
   
-
     
(279
)
Income before income taxes
   
6,876
     
(263
)
   
6,613
 
Income tax benefit
   
(180
)
   
-
     
(180
)
Net income (loss)
 
$
7,056
   
$
(263
)
 
$
6,793
 
 
Turning Point Brands, Inc.
Consolidating Statement of Operations
for the nine months ended September 30, 2016
(in thousands)

   
Issuer/
Restricted
   
Non-Restricted
   
Consolidated
 
Net sales
 
$
142,373
   
$
10,033
   
$
152,406
 
Cost of sales
   
70,485
     
7,782
     
78,267
 
Gross profit
   
71,888
     
2,251
     
74,139
 
Selling, general and administrative expenses
   
37,554
     
3,009
     
40,563
 
Operating income (loss)
   
34,334
     
(758
)
   
33,576
 
Interest expense and financing costs
   
20,845
     
50
     
20,895
 
Investment income
   
(611
)
   
-
     
(611
)
Loss on extinguishment of debt
   
2,824
     
-
     
2,824
 
Income (loss) before income taxes
   
11,276
     
(808
)
   
10,468
 
Income tax expense
   
642
     
-
     
642
 
Net income (loss)
 
$
10,634
   
$
(808
)
 
$
9,826
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Turning Point Brands, Inc.
Consolidating Statement of Cash Flows
for the nine months ended September 30, 2016
(in thousands)

   
Issuer/
Restricted
   
Non-Restricted
   
Consolidated
 
Cash flows from operating activities:
                 
Net income (loss)
 
$
10,634
   
$
(808
)
 
$
9,826
 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                       
Loss on extinguishment of debt
   
2,824
     
-
     
2,824
 
Depreciation expense
   
896
     
-
     
896
 
Amortization of deferred financing costs
   
1,070
     
-
     
1,070
 
Amortization of original issue discount
   
591
     
-
     
591
 
Interest incurred but not paid on PIK toggle notes
   
3,422
     
-
     
3,422
 
Interest incurred but not paid on 7% senior notes
   
329
     
-
     
329
 
Interest  paid on PIK toggle notes
   
(9,893
)
   
-
     
(9,893
)
Deferred income taxes
   
47
     
-
     
47
 
Stock compensation expense
   
103
     
-
     
103
 
Restricted stock compensation expense
   
29
     
-
     
29
 
Member unit compensation expense
   
-
     
13
     
13
 
Changes in operating assets and liabilities:
                       
Accounts receivable
   
644
     
(98
)
   
546
 
Inventories
   
(6,326
)
   
(1,079
)
   
(7,405
)
Other current assets
   
(1,225
)
   
2,787
     
1,562
 
Other assets
   
(82
)
   
37
     
(45
)
Accounts payable
   
(816
)
   
285
     
(531
)
Accrued pension liabilities
   
196
     
-
     
196
 
Accrued postretirement liabilities
   
(89
)
   
-
     
(89
)
Accrued expenses and other
   
(3,719
)
   
(248
)
   
(3,967
)
Net cash provided by (used in) operating activities
   
(1,365
)
   
889
     
(476
)
                         
Cash flows from investing activities:
                       
Capital expenditures
   
(1,160
)
   
(85
)
   
(1,245
)
Note receivable
   
(500
)
   
500
     
-
 
Net cash used in investing activities
   
(1,660
)
   
415
     
(1,245
)
                         
Cash flows from financing activities:
                       
Proceeds from revolving credit facility, net
   
(18
)
   
-
     
(18
)
Proceeds from (payment to) parent, net
   
1,567
     
(1,567
)
   
-
 
Payment of financing costs
   
(200
)
   
-
     
(200
)
Payment for first lien term loan
   
(3,976
)
   
-
     
(3,976
)
Payment for second lien term loan
   
(20,000
)
   
-
     
(20,000
)
Payment of PIK toggle notes
   
(24,107
)
   
-
     
(24,107
)
Redemption of Intrepid options
   
-
     
(661
)
   
(661
)
Redemption of Intrepid warrants
   
(5,500
)
   
-
     
(5,500
)
Warrants exercised
   
4
     
-
     
4
 
Stock options exercised
   
8
     
-
     
8
 
Proceeds from issuance of stock
   
55,746
     
-
     
55,746
 
Net cash provided by financing activities
   
3,524
     
(2,228
)
   
1,296
 
                         
Net increase (decrease) in cash
   
499
     
(924
)
   
(425
)
Cash, beginning of period
   
3,267
     
1,568
     
4,835
 
Cash, end of period
 
$
3,766
   
$
644
   
$
4,410
 
 
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 Operations
for the three months ended September 30, 2015
(in thousands)

   
Issuer/
Restricted
   
Non-Restricted
   
Consolidated
 
Net sales
 
$
47,883
   
$
3,548
   
$
51,431
 
Cost of sales
   
23,497
     
2,573
     
26,070
 
Gross profit
   
24,386
     
975
     
25,361
 
Selling, general and administrative expenses
   
10,665
     
1,174
     
11,839
 
Operating income (loss)
   
13,721
     
(199
)
   
13,522
 
Interest expense and financing costs
   
8,627
     
49
     
8,676
 
Income (loss) before income taxes
   
5,094
     
(248
)
   
4,846
 
Income tax expense
   
76
     
-
     
76
 
Net income (loss)
 
$
5,018
   
$
(248
)
 
$
4,770
 
 
Turning Point Brands, Inc.
Consolidating Statement of Operations
for the nine months ended September 30, 2015
(in thousands)

   
Issuer/
Restricted
   
Non-Restricted
   
Consolidated
 
Net sales
 
$
136,776
   
$
13,740
   
$
150,516
 
Cost of sales
   
68,284
     
9,605
     
77,889
 
Gross profit
   
68,492
     
4,135
     
72,627
 
Selling, general and administrative expenses
   
34,746
     
4,639
     
39,385
 
Operating income (loss)
   
33,746
     
(504
)
   
33,242
 
Interest expense and financing costs
   
25,627
     
105
     
25,732
 
Income (loss) before income taxes
   
8,119
     
(609
)
   
7,510
 
Income tax expense
   
734
     
-
     
734
 
Net income (loss)
 
$
7,385
   
$
(609
)
 
$
6,776
 
 
Turning Point Brands, Inc.
Consolidating Statement of Cash Flows
for the nine months ended September 30, 2015
(in thousands)

   
Issuer/
Restricted
   
Non-Restricted
   
Consolidated
 
Cash flows from operating activities:
                 
Net income (loss)
 
$
7,385
   
$
(609
)
 
$
6,776
 
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
                       
Gain on sale of fixed assets
   
(1
)
   
-
     
(1
)
Depreciation expense
   
784
     
-
     
784
 
Amortization of deferred financing costs
   
1,086
     
-
     
1,086
 
Amortization of original issue discount
   
785
     
-
     
785
 
Interest incurred but not paid on PIK toggle note
   
6,057
     
-
     
6,057
 
Interest incurred but not paid on 7% senior notes
   
426
     
-
     
426
 
Deferred income taxes
   
(7
)
   
-
     
(7
)
Stock compensation expense
   
129
     
-
     
129
 
Member unit compensation expense
   
-
     
82
     
82
 
Changes in operating assets and liabilities:
                       
Accounts receivable
   
(2,181
)
   
(387
)
   
(2,568
)
Inventories
   
(4,132
)
   
3,891
     
(241
)
Other current assets
   
149
     
(2,201
)
   
(2,052
)
Other assets
   
(106
)
   
-
     
(106
)
Accounts payable
   
2,442
     
(933
)
   
1,509
 
Accrued pension liabilities
   
123
     
-
     
123
 
Accrued postretirement liabilities
   
(94
)
   
-
     
(94
)
Accrued expenses and other
   
820
     
(883
)
   
(63
)
Net cash provided by (used in) operating activities
   
13,665
     
(1,040
)
   
12,625
 
                         
Cash flows from investing activities:
                       
Capital expenditures
   
(1,100
)
   
-
     
(1,100
)
Proceeds from sale of fixed assets
   
2
     
-
     
2
 
Note receivable
   
-
     
(430
)
   
(430
)
Net cash used in investing activities
   
(1,098
)
   
(430
)
   
(1,528
)
                         
Cash flows from financing activities:
                       
Proceeds from (payments for) revolving credit facility, net
   
(3,184
)
   
-
     
(3,184
)
Proceeds from (payments for) note receivable
   
(1,600
)
   
1,600
     
-
 
Proceeds from issuance of stock
   
1
     
-
     
1
 
Payments for first lien term loan
   
(6,237
)
   
-
     
(6,237
)
Prepaid equity issuance costs
   
(305
)
   
-
     
(305
)
Net cash provided by (used in) financing activities
   
(11,325
)
   
1,600
     
(9,725
)
                         
Net increase in cash
   
1,242
     
130
     
1,372
 
Cash, beginning of period
   
8,015
     
452
     
8,467
 
Cash, end of period
 
$
9,257
   
$
582
   
$
9,839
 
 
Note 9. Income Taxes:
 
The Company has determined, that at September 30, 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 nine months ended September 30, 2016 and 2015 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 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 2013.
 
Note 10. Pension and Postretirement Benefit Plans:
 
The components of Net Periodic Benefit Cost are as follows:

   
Pension Benefits
   
Postretirement Benefits
 
For the three months ended September 30
 
2016
   
2015
   
2016
   
2015
 
                         
Service cost
 
$
26
   
$
31
   
$
-
   
$
-
 
Interest cost
   
174
     
174
     
52
     
53
 
Expected return on plan assets
   
(258
)
   
(296
)
   
-
     
-
 
Amortization of gains and losses
   
123
     
131
     
-
     
-
 
Net periodic benefit cost
 
$
65
   
$
40
   
$
52
   
$
53
 

   
Pension Benefits
   
Postretirement Benefits
 
For the nine months ended September 30
 
2016
   
2015
   
2016
   
2015
 
                         
Service cost
 
$
78
   
$
93
   
$
-
   
$
-
 
Interest cost
   
524
     
522
     
157
     
157
 
Expected return on plan assets
   
(775
)
   
(887
)
   
-
     
-
 
Amortization of gains and losses
   
369
     
394
     
-
     
-
 
Net periodic benefit cost
 
$
196
   
$
122
   
$
157
   
$
157
 

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 $247 and $250 for the nine months ended September 30, 2016 and 2015, respectively. NATC expects to make no contributions to the pension plan in the year ending December 31, 2016.
 
Note 11. Share Incentive Plans:
 
On April 28, 2016, the Board of Directors of the Company adopted the Turning Point Brands, Inc. 2015 Equity Incentive Plan (the “2015 Plan”) and approved a form of Restricted Stock Award Agreement (the “Form Award Agreement”) pursuant to which awards under the 2015 Plan may be granted to employees, non-employee directors and consultants. In addition, the 2015 Plan provides for the granting of nonqualified stock options to employees of the Company or any subsidiary of the Company. Pursuant to the 2015 Plan, 1,400,000 shares of common stock of the Company are reserved for issuance as awards to employees, consultants and non-employee directors as compensation for past or future services or the attainment of certain performance goals. The 2015 Plan is scheduled to terminate on April 27, 2026. The 2015 Plan is administrated by a committee (the “Committee”) of the Company’s Board of Directors. The Committee determines the criteria for the vesting period, with such criteria to be specified in the award agreement. As of September 30, 2016, 26,508 shares of restricted stock and 53,996 options have been granted to employees of NATC under the 2015 Plan. There are 1,319,496 shares available for grant under the 2015 Plan.
 
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 2006 Plan provides for the granting of nonqualified stock options and restricted stock awards.  Upon the adoption of the Company’s 2015 Equity Incentive Plan in connection with its IPO (see Note 3) 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.
 
There are no shares available for grant under the 2006 Plan. Stock option activity for the 2006 and 2015 Plans 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
 
                         
Exercised
   
(1,043
)
   
1.06
     
0.54
 
Forfeited
   
(23,337
)
   
1.06
     
0.54
 
                         
Outstanding, December 31, 2015
   
1,667,671
     
2.19
     
1.20
 
                         
Granted
   
53,996
     
9.26
     
2.37
 
Exercised
   
(6,652
)
   
1.22
     
0.64
 
Forfeited
   
(7,246
)
   
3.83
     
2.17
 
                         
Outstanding, September 30, 2016
   
1,707,769
   
$
2.41
   
$
1.24
 

Under the 2006 Plan, the total intrinsic value of options exercised during the three months ended September 30, 2016 and 2015 was $0. The total intrinsic value of options exercised during the nine months ended September 30, 2016 and 2015 was $9 and $7, respectively.
 
At September 30, 2016, under the 2006 Plan, the outstanding stock options’ exercise price for 980,096 options is $1.06 per share all of which are exercisable. The outstanding stock options’ exercise price for 673,677 options is $3.83 per share all of which are exercisable. The weighted average of the remaining lives of the outstanding stock options is approximately 1.2 years for the options with the $1.06 exercise price, and 6.0 years for the options with the $3.83 exercise price. The Company 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.
 
At September 30, 2016, under the 2015 Plan, the outstanding stock options’ exercise price for 53,996 options is $9.26 per share of which 26,998 are exercisable. The weighted average of the remaining lives of the outstanding stock options is approximately 9.8 years. The risk free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. The expected volatility is based on the average long-term historical volatilities of peer companies. We intend to continue to consistently use the same group of publicly traded peer companies to determine expected volatility in the future until sufficient information regarding volatility of our share price becomes available or the selected companies are no longer suitable for this purpose. Also, due to our limited trading history, we are using the “simplified method” to calculate expected holding periods, which represent the period of time that options granted are expected to be outstanding. We will continue to use this method until we have sufficient historical exercise experience to give us confidence that our calculations based on such experience will be reliable. Based on these assumptions we are using, a current share and exercise price of $9.26, risk free interest rate of 1.159%, expected volatility of 25.4%, expected life of options of 5.375 years and no assumed dividend yield, the fair value of these options determined using the Black-Scholes option pricing model is approximately $2.37 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 $99 and $37 in the consolidated statements of income for the three months ended September 30, 2016 and 2015, respectively and approximately $132 and $129 for the nine months ended September 30, 2016 and 2015, respectively.
 
Note 12. 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 was 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.
 
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 3). With the repurchase of the options, the 2014 Plan was terminated.
 
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 8). 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 were scheduled to 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 3).
 
Note 13. 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 14. 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
 
     
September 30,
2016
     
September 30,
2015
 
 
   
Income
   
Shares
   
Per
Share
   
Income
   
Shares
   
Per
Share
 
Net income (loss)
 
$
6,793
               
$
4,770
             
                                         
Basic EPS:
                                       
Weighted average
           
18,094,592
   
$
0.38
             
7,197,928
   
$
0.66
 
                                                 
Diluted EPS:
                                               
Effect of Dilutive securities:
                                         
Stock options and warrants