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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

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, 2017
 
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
 
Emerging growth company
 
       
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  

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 6, 2017, there were 19,209,793 shares outstanding of the registrant’s voting common stock, par value $0.01 per share.
 



TURNING POINT BRANDS, INC.
TABLE OF CONTENTS
 
PART I          FINANCIAL INFORMATION
Page No.
       
ITEM 1
Financial Statements (Unaudited)
 
       
 
3
       
 
4
       
 
5
       
  6
       
  7
       
 
8
       
 
10
       
 
ITEM 2
28
   
 
ITEM 3
42
       
 
ITEM 4
42
       
PART II OTHER INFORMATION
 
       
 
ITEM 1
43
       
 
ITEM 1A
43
       
 
ITEM 2
45
       
 
ITEM 3
45
       
 
ITEM 4
45
       
 
ITEM 5
45
       
 
ITEM 6
45
       
Signatures
Signatures
46
       
47
 
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,
2017
   
December 31,
2016
 
Current assets:
           
Cash
 
$
4,235
   
$
2,865
 
Accounts receivable, net of allowances of $30 in 2017 and $35 in 2016
   
2,960
     
2,181
 
Inventories
   
64,761
     
62,185
 
Other current assets
   
9,457
     
11,625
 
Total current assets
   
81,413
     
78,856
 
Property, plant and equipment, net
   
8,457
     
7,590
 
Deferred income taxes
   
4,161
     
6,288
 
Deferred financing costs, net
   
668
     
139
 
Goodwill
   
134,620
     
134,390
 
Other intangible assets, net
   
26,611
     
27,138
 
Master Settlement Agreement - escrow deposits
   
30,905
     
30,410
 
Other assets
   
529
     
209
 
Total assets
 
$
287,364
   
$
285,020
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
 
$
7,096
   
$
9,153
 
Accrued liabilities
   
13,962
     
15,336
 
Accrued interest expense
   
434
     
394
 
Current portion of long-term debt
   
7,850
     
1,650
 
Revolving credit facility
   
15,550
     
15,034
 
Total current liabilities
   
44,892
     
41,567
 
Notes payable and long-term debt
   
187,453
     
201,541
 
Postretirement benefits
   
4,389
     
4,407
 
Pension benefits
   
217
     
423
 
Other long-term liabilities
   
712
     
3,024
 
Total liabilities
   
237,663
     
250,962
 
                 
Commitments and contingencies
               
                 
Stockholders' equity:
               
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 and outstanding shares, 2017 19,195,153 and 2016 18,402,022
    192       184  
Common stock, nonvoting, $0.01 par value; authorized shares, 10,000,000; issued and outstanding shares -0-
   
-
     
-
 
Additional paid-in capital
   
103,381
     
104,895
 
Accumulated other comprehensive loss
   
(3,590
)
   
(4,049
)
Accumulated deficit
   
(50,282
)
   
(66,972
)
Total stockholders' equity
   
49,701
     
34,058
 
Total liabilities and stockholders' equity
 
$
287,364
   
$
285,020
 
 
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,
2017
   
September 30,
2016
 
Net sales
 
$
73,340
   
$
50,959
 
Cost of sales
   
40,410
     
26,341
 
Gross profit
   
32,930
     
24,618
 
Selling, general and administrative expenses
   
18,554
     
12,727
 
Operating income
   
14,376
     
11,891
 
Interest expense
   
4,023
     
5,557
 
Investment income
   
(131
)
   
(279
)
Income before income taxes
   
10,484
     
6,613
 
Income tax expense (benefit)
   
3,110
     
(180
)
Consolidated net income
 
$
7,374
   
$
6,793
 
                 
Basic earnings per common share:
               
Net income
 
$
0.39
   
$
0.38
 
Diluted earnings per common share:
               
Net income
 
$
0.38
   
$
0.34
 
Weighted average common shares outstanding:
               
Basic
   
19,085,329
     
18,094,592
 
Diluted
   
19,589,424
     
19,729,219
 
 
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,
2017
   
September 30,
2016
 
Net sales
 
$
212,214
   
$
152,406
 
Cost of sales
   
119,623
     
78,267
 
Gross profit
   
92,591
     
74,139
 
Selling, general and administrative expenses
   
53,823
     
40,563
 
Operating income
   
38,768
     
33,576
 
Interest expense
   
13,002
     
20,895
 
Investment income
   
(334
)
   
(611
)
Loss on extinguishment of debt
   
6,116
     
2,824
 
Income before income taxes
   
19,984
     
10,468
 
Income tax expense
   
3,850
     
642
 
Consolidated net income
   
16,134
     
9,826
 
Net loss attributable to non-controlling interest
   
(556
)
   
-
 
Net income attributable to Turning Point Brands, Inc.
 
$
16,690
   
$
9,826
 
                 
Basic earnings per common share:
               
Net income
 
$
0.88
   
$
0.64
 
Diluted earnings per common share:
               
Net income
 
$
0.86
   
$
0.58
 
Weighted average common shares outstanding:
               
Basic
   
18,915,606
     
15,396,155
 
Diluted
   
19,503,130
     
16,968,613
 
 
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,
2017
   
September 30,
2016
 
Consolidated net income
 
$
7,374
   
$
6,793
 
                 
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
   
108
     
117
 
Tax effect
   
(43
)
   
-
 
Unrealized gain on investments, net of tax of $8
   
12
     
-
 
     
83
     
123
 
Consolidated comprehensive income
 
$
7,457
   
$
6,916
 
 
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,
2017
   
September 30,
2016
 
Consolidated net income
 
$
16,134
   
$
9,826
 
 
               
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
   
332
     
351
 
Tax effect
   
(132
)
   
-
 
Unrealized gain on investments, net of tax of $150
   
241
     
-
 
 
   
459
     
369
 
Consolidated comprehensive income
   
16,593
     
10,195
 
Comprehensive loss attributable to non-controlling interest
   
(556
)
   
-
 
Comprehensive income attributable to Turning Point Brands, Inc.
 
$
17,149
   
$
10,195
 
 
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,
2017
   
September 30,
2016
 
Cash flows from operating activities:
           
Consolidated net income
 
$
16,134
   
$
9,826
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Loss on extinguishment of debt
   
6,116
     
2,824
 
Loss on sale of property, plant and equipment
   
17
     
-
 
Depreciation expense
   
1,192
     
896
 
Amortization of deferred financing costs
   
768
     
1,070
 
Amortization of original issue discount
   
66
     
591
 
Amortization of other intangible assets
   
527
     
-
 
Interest incurred but not paid on PIK toggle notes
   
-
     
3,422
 
Interest incurred but not paid on 7% senior notes
   
-
     
329
 
Interest paid on PIK toggle notes
   
-
     
(9,893
)
Deferred income taxes
   
1,847
     
47
 
Stock-based compensation expense
   
498
     
145
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
(779
)
   
546
 
Inventories
   
(970
)
   
(7,405
)
Other current assets
   
2,383
     
1,562
 
Other assets
   
(105
)
   
(45
)
Accounts payable
   
(2,292
)
   
(531
)
Accrued pension liabilities
   
144
     
196
 
Accrued postretirement liabilities
   
(18
)
   
(89
)
Accrued liabilities and other
   
(5,137
)
   
(3,967
)
Net cash provided by (used in) operating activities
   
20,391
     
(476
)
                 
Cash flows from investing activities:
               
Acquisitions, net of cash acquired
   
268
     
-
 
Capital expenditures
   
(1,052
)
   
(1,245
)
Net cash used in investing activities
   
(784
)
   
(1,245
)
 
Turning Point Brands, Inc.
Consolidated Statements of Cash Flows (Cont.)
(dollars in thousands)
(unaudited)
 
   
Nine Months Ended
 
   
September 30,
2017
   
September 30,
2016
 
Cash flows from financing activities:
           
Proceeds from 2017 revolving credit facility
   
15,550
     
-
 
Proceeds from 2017 first lien term loans
   
145,000
     
-
 
Proceeds from 2017 second lien term loan
   
55,000
     
-
 
Payments of 2017 first lien term loans
   
(2,925
)
   
-
 
Payments of financing costs
   
(4,783
)
   
(200
)
Payments of revolving credit facility
   
(15,083
)
   
(18
)
Payments of first lien term loan
   
(147,362
)
   
(3,976
)
Payments of second lien term loan
   
(60,000
)
   
(20,000
)
Payments of Vapor Shark loans
   
(1,867
)
   
-
 
Prepaid equity issuance costs
   
(394
)
   
-
 
Payment of PIK toggle notes
   
-
     
(24,107
)
Redemption of Intrepid options
   
-
     
(661
)
Redemption of Intrepid warrants
   
-
     
(5,500
)
Warrants exercised
   
-
     
4
 
Exercise of options
   
1,371
     
8
 
Redemption of options
   
(1,740
)
   
-
 
Surrender of options
   
(1,000
)
   
-
 
Proceeds from issuance of stock
   
-
     
55,746
 
Distribution to non-controlling interest
   
(4
)
   
-
 
Net cash provided by (used in) financing activities
   
(18,237
)
   
1,296
 
                 
Net increase (decrease) in cash
   
1,370
     
(425
)
Cash, beginning of period
   
2,865
     
4,835
 
Cash, end of period
 
$
4,235
   
$
4,410
 
                 
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. (the “Company), is a holding company which owns North Atlantic Trading Company, Inc. (“NATC”), and its subsidiaries and Turning Point Brands, LLC (“TPLLC”), and its subsidiaries.  Except where the context indicates otherwise, references to the Company include the Company; NATC and its subsidiaries National Tobacco Company, L.P. (“NTC”), National Tobacco Finance Corporation (“NTFC”), North Atlantic Operating Company, Inc. (“NAOC”), Smoke Free Technologies, Inc.—d/b/a VaporBeast (“VaporBeast”)—North Atlantic Cigarette Company, Inc. (“NACC”), and RBJ Sales, Inc. (“RBJ”); and TPLLC and its subsidiaries Intrepid Brands, LLC (“Intrepid”) and Vapor Shark, LLC—f/k/a The Hand Media—and its subsidiaries (collectively, “Vapor Shark”).  Effective September 1, 2017, the Company: (1) dissolved NATC Holding Company, formerly a direct subsidiary of the Company which owned NATC and its subsidiaries; (2) transferred direct ownership of Vapor Shark from the Company to TPLLC; and (3) merged Stoker, Inc., and Fred Stoker & Sons, Inc., with and into RBJ Sales, Inc.

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, 2016, 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 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 or 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, 2016. 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 (“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, its subsidiaries, all of which are wholly-owned, and the results of Vapor Shark from April 1, 2017, through June 30, 2017. All significant intercompany transactions have been eliminated.

Vapor Shark was a variable interest entity (“VIE”) for which the Company was considered the primary beneficiary due to an April 2017 management agreement in which the Company was granted the right to purchase equity of Vapor Shark. The Company did not own Vapor Shark during the second quarter of 2017. On June 30, 2017, the Company exercised a warrant to purchase all of the issued and outstanding equity of Vapor Shark.  Beginning June 30, 2017, Vapor Shark became a wholly owned subsidiary of the Company.  See ‘Note 4 – Acquisitions’ for details regarding the warrant exercise.

Revenue Recognition: The Company recognizes revenues, net of sales incentives and sales returns, including shipping and handling charges billed to customers, upon delivery to the customer. Delivery signifies a transfer of title and risk of loss to the customer in accordance with 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 (“SG&A”) expenses. Shipping costs incurred were approximately $2.9 million and $1.7 million for the three months ended September 30, 2017 and 2016, respectively.  Shipping costs incurred were approximately $7.4 million and $4.8 million for the nine months ended September 30, 2017 and 2016, respectively.

Fair Value: GAAP establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1) and the lowest priority to unobservable inputs (level 3).
 
The three levels of the fair value hierarchy under GAAP are described below:

Level 1 – Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets at the measurement date.

Level 2 – Inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; inputs other than quoted prices observable for the asset or liability; and inputs derived principally from, or corroborated by, observable market data by correlation or other means.

Level 3 – Unobservable inputs which reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

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. Such companies are entitled to direct the investment of the escrowed funds and withdraw any appreciation, but cannot withdraw the principal for twenty-five years from the year of each annual deposit, except to withdraw funds deposited pursuant to an individual state’s escrow statute to pay a final judgment to that state’s plaintiffs in the event of such a final judgment against the company.  The Company has chosen to open, fund, and maintain 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, 2017, the Company had on deposit approximately $32.0 million, the fair value of which was approximately $30.9 million. At December 31, 2016, the Company had on deposit approximately $31.9 million, the fair value of which was approximately $30.4 million.

The Company invests a portion of the MSA escrow in U.S. Government securities including TIPS, Treasury Notes, and Treasury Bonds. These investments are classified as available-for-sale and carried at fair value. Realized losses are prohibited under the MSA. Thus, any investment in an unrealized loss position will be held until the value is recovered or until maturity. The following shows the fair value of the MSA escrow account:
 
   
September 30,
2017
   
December 31,
2016
 
   
Cost
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
   
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Estimated
Fair
Value
 
Cash and cash equivalents
 
$
3,106
   
$
-
   
$
3,106
   
$
2,786
   
$
-
   
$
-
   
$
2,786
 
U.S. Governmental agency obligations(unrealized loss position < 12 months)
   
3,022
     
(86
)
   
2,936
     
29,156
     
19
     
(1,551
)
   
27,624
 
U.S. Governmental agency obligations(unrealized loss position > 12 months)
   
25,918
     
(1,055
)
   
24,863
     
-
     
-
     
-
     
-
 
   
$
32,046
   
$
(1,141
)
 
$
30,905
   
$
31,942
   
$
19
   
$
(1,551
)
 
$
30,410
 
 
Fair value for the U.S. Governmental agency obligations are Level 2. The following schedule shows the maturities of the U.S. Governmental agency obligations:
 
   
September 30,
2017
   
December 31,
2016
 
Less than five years
 
$
7,114
   
$
9,113
 
Six to ten years
   
18,151
     
16,141
 
Greater than ten years
   
3,675
     
3,902
 
Total U.S. Governmental agency obligations
 
$
28,940
   
$
29,156
 
 
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:
 
   
Deposits
 
Sales
Year
 
September 30,
2017
   
December 31,
2016
 
             
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
     
199
 
2013
   
173
     
173
 
2014
   
143
     
142
 
2015
   
101
     
100
 
2016
   
80
     
37
 
2017
   
59
     
-
 
                 
Total
 
$
32,046
   
$
31,942
 
 
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 as “deemed” tobacco products under the FSPTCA.

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 various 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.

On July 28, 2017, the FDA announced a new direction in regulating tobacco products, including the newly “deemed” markets such as cigars and vapor products.  The FDA stated it intends to begin several new rulemaking processes, some of which will outline foundational rules governing the premarket application process for the deemed products, including Substantial Equivalence Applications and Premarket Tobacco Applications. Compliance and related costs could be significant and could increase the costs of operating in our NewGen Segment. The original filing deadlines for newly “deemed” products on the market as of August 8, 2016, have been postponed until August 8, 2021, for “combustible” products (e.g., cigar and pipe) and August 8, 2022, for “non-combustible” products (e.g., vapor products).  No other filing deadlines were altered.  The FDA also acknowledged a “continuum of risk” among tobacco products, i.e., certain tobacco products pose a greater risk to individual and public health than others, that it intends to seek public comment on the role flavors play in attracting youth and the role flavors may play in helping some smokers switch to potentially less harmful forms of nicotine delivery; and that it would be increasing its focus on the regulation of cigarette products.
 
Recent Accounting Pronouncements Adopted:

The Company adopted Accounting Standards Update (“ASU”) 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment in Q1 of 2017.  This ASU simplifies the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The adoption of the ASU had no effect on the Company’s consolidated financial statements.

The Company adopted ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory in Q1 of 2017. 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. The adoption of this ASU had no effect on the Company’s consolidated financial statements.

Recent Accounting Pronouncements:

In May 2014, the Financial Accounting Standards Board (“FASB”) issued 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 standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption ("modified retrospective method"). The Company currently expects to apply the modified retrospective method upon adoption. The Company does not believe the standard will materially impact its recognition of revenue as the Company is primarily a distributor of goods; however, the Company continues to assess the potential impacts to other less significant revenue transactions.

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.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this ASU require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, on a retrospective basis. The Company is currently evaluating the effect the adoption of this standard will have on its financial statements.

In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  This ASU requires that an employer disaggregate the service cost component from the other components of net benefit cost. This ASU also allows only the service cost component of net benefit cost to be eligible for capitalization. ASU 2017-07 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. 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, 2017, through November 9, 2017, 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 2016, the Company increased the total authorized shares of preferred and voting and non-voting common stock by effecting 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 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 $62.1 million. Refer to the 2016 Annual Report on Form 10-K for use of the proceeds.

Note 4. Acquisitions:

In March 2017, the Company entered into a strategic partnership with Vapor Shark in which the Company agreed to make a deposit to Vapor Shark in exchange for a warrant to purchase 100% of the equity interest in Vapor Shark on or before April 15, 2018.  In the event the Company exercised the warrant, the Company granted Vapor Shark’s shareholder the option to purchase from Vapor Shark the retail stores it owns effective as of January 1, 2018.   In April 2017, the Company entered into a management agreement with Vapor Shark whereby the Company obtained control of the operations.

As a result of the management agreement, Vapor Shark became a VIE. The Company determined that it is the primary beneficiary and consolidated Vapor Shark as of April 1, 2017.  Since Vapor Shark is a business, the Company accounted for the consolidation of the VIE as if it were an acquisition and recorded the assets and liabilities at fair value. The Company exercised its warrant on June 30, 2017, and obtained ownership of Vapor Shark as of that date for a nominal purchase price. There was no goodwill assigned as a result of the transaction.  The Company acquired $3.9 million in assets and assumed $3.9 million in liabilities, which includes a liability relating to the option provided to Vapor Shark’s shareholder to purchase the Vapor Shark retail stores it owns.

In November 2016, the Company purchased five chewing tobacco brands from Wind River Tobacco Company (“Wind River”) for $2.5 million.  The Company paid $0.6 million at closing with the remaining $1.9 million payable quarterly through November 2019, of which $1.4 million was outstanding at September 30, 2017.  The transaction was accounted for as an asset purchase with the fair value of the purchase price of $2.4 million assigned to trade names which have an indefinite life.

In November 2016, the Company acquired the outstanding stock of VaporBeast for total consideration of $26.5 million, net of working capital adjustment of $0.4 million. The purchase price was satisfied through $4.0 million paid in cash at closing, $19.0 million in short-term notes which were paid in December 2016, and $4.0 million in payments deferred for eighteen months.

The Company completed the accounting for the acquisition of VaporBeast in 2017 resulting in an increase in goodwill of $0.2 million.

The following purchase price and goodwill are based on the excess of the acquisition price over the estimated fair value of the tangible and intangible assets acquired.
 
Purchase price:
     
Total purchase price
 
$
27,000
 
Adjustments to purchase price:
       
Working capital
   
(400
)
Fair value of holdback
   
(128
)
Adjusted purchase price
 
$
26,472
 
         
Assets acquired:
       
Working capital
 
$
4,270
 
Property and equipment
   
7
 
Other intangible assets
   
16,272
 
Net assets acquired
 
$
20,549
 
         
Goodwill
 
$
5,923
 
 
The goodwill of $5.9 million consists of the synergies and scale expected from combining the operations.  The goodwill is deductible for tax purposes.

Note 5. 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. The carrying amount is a reasonable estimate of fair value.

Accounts Receivable: The fair value of accounts receivable approximates their carrying value due to their short-term nature.

Revolving Credit Facility: The fair value of the revolving credit facility approximates its carrying value as the interest rate fluctuates with changes in market rates.

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 September 30, 2017, the fair values of the 2017 First Lien Term Loans and the 2017 Second Lien Term Loan approximate their face amounts of $142.1 million and $55.0 million, respectively, as the agreements were initiated during the first quarter of 2017. See ‘Note 9: Notes Payable and Long-Term Debt’ for details regarding our credit facilities.

As of December 31, 2016, the fair values of the First Lien Term Loans and the Second Lien Term Loan approximated their face amounts of $147.3 million and $60.0 million, respectively, as they were paid off in February 2017 at face amounts. See ‘Note 9: Notes Payable and Long-Term Debt’ for details regarding our credit facilities.

Foreign Exchange: The Company had no forward contracts outstanding as of September 30, 2017.  The Company had forward contracts as of December 31, 2016 for the purchase of €4.9 million. The fair value of the foreign exchange forward contracts was based upon the quoted market price that resulted in an insignificant liability as of December 31, 2016.

Note 6. Inventories:

Inventories are stated at the lower of cost or market.  Cost is determined on the last-in, first-out (“LIFO”) method for approximately 47% of the inventories and the first-in, first out (“FIFO”) method for the remaining 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 curing.
 
The components of inventories are as follows:
   
September 30,
2017
   
December 31
2016
 
Raw materials and work in process
 
$
2,617
   
$
2,596
 
Leaf tobacco
   
28,011
     
27,391
 
Finished goods - smokeless products
   
5,441
     
4,789
 
Finished goods - smoking products
   
17,413
     
18,384
 
Finished goods - electronic / vaporizer products
   
14,233
     
11,993
 
Other
   
1,492
     
1,232
 
     
69,207
     
66,385
 
LIFO reserve
   
(4,446
)
   
(4,200
)
   
$
64,761
   
$
62,185
 
 
The inventory valuation allowance as of September 30, 2017, and December 31, 2016 was $0.7 million and $0.6 million, respectively.

Note 7. Property, Plant and Equipment:

Property, plant and equipment consists of:
 
   
September 30,
2017
   
December 31,
2016
 
Land
 
$
22
   
$
22
 
Building and improvements
   
1,899
     
1,899
 
Leasehold improvements
   
1,873
     
1,666
 
Machinery and equipment
   
12,066
     
10,532
 
Furniture and fixtures
   
3,726
     
3,409
 
     
19,586
     
17,528
 
Accumulated depreciation
   
(11,129
)
   
(9,938
)
   
$
8,457
   
$
7,590
 
 
Note 8. Accrued Liabilities:

Accrued liabilities consist of:
 
   
September 30,
2017
   
December 31,
2016
 
Accrued payroll and related items
 
$
3,704
   
$
5,331
 
Customer returns and allowances
   
2,172
     
2,818
 
Other
   
8,086
     
7,187
 
   
$
13,962
   
$
15,336
 
 
Note 9. Notes Payable and Long-Term Debt:

Notes payable and long-term debt consists of the following:
 
   
September 30,
2017
   
December 31,
2016
 
2017 First Lien First Out Term Loan
 
$
107,250
   
$
-
 
2017 First Lien Second Out Term Loan
   
34,825
     
-
 
2017 Second Lien Term Loan
   
55,000
     
-
 
Note payable - VaporBeast
   
2,000
     
2,000
 
First Lien Term Loan
   
-
     
146,451
 
Second Lien Term Loan
   
-
     
59,128
 
Total notes payable and long-term debt
   
199,075
     
207,579
 
Less deferred finance charges
   
(3,772
)
   
(4,388
)
Less current maturities
   
(7,850
)
   
(1,650
)
   
$
187,453
   
$
201,541
 
 
Long-term Debt

On February 17, 2017, the Company and NATC entered into a new $250 million secured credit facility, comprised of (i) a First Lien Credit Facility with Fifth Third Bank, as administrative agent, and other lenders (the “2017 First Lien Credit Facility”) and (ii) a Second Lien Credit Facility with Prospect Capital Corporation, as administrative agent, and other lenders (the “2017 Second Lien Credit Facility,” and together with the 2017 First Lien Credit Facility, the “2017 Credit Facility”). The Company used the proceeds of the 2017 Credit Facility to repay, in full, the Company’s First Lien Term Loan, Second Lien Term Loan, Revolving Credit Facility and to pay related fees and expenses.

The 2017 Credit Facility contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts and change in control defaults. The 2017 Credit Facility also contains certain negative covenants customary for facilities of these types including covenants that, subject to exceptions described in the 2017 Credit Facility, restrict the ability of the Company and its subsidiary guarantors: (i) to pledge assets, (ii) to incur additional indebtedness, (iii) to pay dividends, (iv) to make distributions, (v) to sell assets, and (vi) to make investments.

2017 First Lien Credit Facility

The 2017 First Lien Credit Facility consists of: (i) a $50 million revolving credit facility (the “2017 Revolving Credit Facility”), (ii) a $110 million first out term loan facility (the “2017 First Out Term Loan”), and (iii) a $35 million second out term loan facility (the “2017 Second Out Term Loan”), which will be repaid in full only after repayment in full of the 2017 First Out Term Loan. The 2017 First Lien Credit Facility also includes an accordion feature allowing the Company to borrow up to an additional $40 million upon the satisfaction of certain conditions, including obtaining commitments from one or more lenders. Borrowings under the 2017 Revolving Credit Facility may be used for general corporate purposes, including acquisitions.

The 2017 First Out Term Loan and the 2017 Revolving Credit Facility have a maturity date of February 17, 2022, and the 2017 Second Out Term Loan has a maturity date of May 17, 2022. The 2017 First Out Term Loan and the 2017 Revolving Credit Facility bear interest at LIBOR plus a spread of 2.5% to 3.5% based on the Company’s senior leverage ratio. The 2017 First Out Term Loan has quarterly required payments of $1.4 million beginning June 30, 2017, increasing to $2.1 million on June 30, 2019, and increasing to $2.8 million on June 30, 2021. The 2017 Second Out Term Loan bears interest at LIBOR plus 6% (subject to a floor of 1.00%). The 2017 Second Out Term Loan has quarterly required payments of $0.1 million beginning June 30, 2017.  The 2017 First Lien Credit Facility contains certain financial covenants including maximum senior leverage ratio of 3.75x with step-downs to 3.00x, a maximum total leverage ratio of 4.75x with step-downs to 4.00x, and a minimum fixed charge coverage ratio of 1.20x.  The weighted average interest rate at September 30, 2017, on the 2017 Revolving Credit Facility was 4.3%. The weighted average interest rate at September 30, 2017, on the 2017 First Out Term Loan was 4.3%.  The weighted average interest rate at September 30, 2017, on the 2017 Second Out Term Loan was 7.3%.
 
2017 Second Lien Credit Facility

The 2017 Second Lien Credit Facility consists of a $55 million second lien term loan (the “2017 Second Lien Term Loan”) having a maturity date of August 17, 2022. The 2017 Second Lien Term Loan bears interest at a fixed rate of 11%. The 2017 Second Lien Credit Facility contains certain financial covenants including a maximum senior leverage ratio of 4.25x with step-downs to 3.50x, a maximum total leverage ratio of 5.25x with step-downs to 4.50x, and a minimum fixed charge coverage ratio of 1.10x.

Note Payable – VaporBeast

On November 30, 2016, the Company issued a note payable to VaporBeast’s former shareholders (“VaporBeast Note”). The VaporBeast Note is $2.0 million principal with 6% interest compounded monthly and matures on May 30, 2018.

The VaporBeast Note may be prepaid at any time without penalty and is subject to a late-payment penalty of 5% and a default rate of 13% per annum. The VaporBeast Note is subject to customary defaults, including defaults for nonpayment, nonperformance, any material breach under the purchase agreement, and bankruptcy or insolvency.

First Lien Term Loan

All of NATC’s subsidiaries, as well as the Company and NATC Holding, were guarantors under the First Lien Term Loan.  TPLLC and its subsidiary were not guarantors of the First Lien Term Loan. The First Lien Term Loan was 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 loans bore interest at the LIBOR then in effect (but not less than 1.25%) plus 6.50% and the loans designated as base rate loans bore 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 First Lien Term Loan was paid in full with the proceeds from the 2017 Credit Facility.

Second Lien Term Loan

The Second Lien Term Loan was secured by a second priority security interest in the Collateral and was guaranteed by the same entities as the First Lien Term Loan.

Under the Second Lien Term Loan the loans designated as LIBOR loans bore interest at LIBOR then in effect (but not less than 1.25%) plus 10.25%.  The loans designated as base rate loans bore 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 Second Lien Term Loan was paid in full with the proceeds from the 2017 Credit Facility.

Revolving Credit Facility

The Revolving Credit Facility provided for aggregate commitments of up to $40 million subject to a borrowing base, which was calculated as the sum of (i) 85% of eligible accounts receivable, plus (ii) the lesser of (A) the product of 70% and the value of eligible inventory or (B) the product of 85%, the net recovery percentage identified in the most recent inventory appraisal, and the value of eligible inventory, plus (iii) the lesser of (A) the product of 75% and the value of eligible inventory or (B) the product of 85%, the net recovery percentage identified in the most recent inventory appraisal, and the value of the eligible finished goods inventory, minus (iv) the aggregate amount of reserves established by the administrative agent. The outstanding balance on the Revolving Credit Facility was paid in full with proceeds from the 2017 Credit Facility.

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 the IPO of 10.43174381 to 1, the warrants 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 LIBOR 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.

In connection with the IPO, in May 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. As a result of this transaction the Company incurred a loss on extinguishment of debt of $2.8 million during the second quarter of 2016.

7% Senior Notes

In January 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. The 7% Senior Notes were 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 2016, the Company redeemed and retired all of the outstanding 7% Senior Notes in exchange for shares of the Company’s voting common stock.

Note 10. Income Taxes:

The Company’s income tax expense for the three and nine months ended September 30, 2017, does not bear the normal relationship to income before income taxes of approximately 41% due to tax benefits of $0.9 million and $4.5 million relating to stock options exercised during the three and nine months ended September 30, 2017, respectively.  The Company’s income tax expense for the three and nine months ended September 30, 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 follows the provisions of ASC 740-10-25, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. A tax position must be more-likely-than-not to be sustained upon examination by taxing authorities for those benefits to be recognized. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. The Company has determined it did not have any uncertain tax positions requiring recognition under the provisions of ASC 740-10-25. The Company’s policy is to recognize interest and penalties accrued on uncertain tax positions, if any, as part of interest expense. The Company 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 2014.
 
Note 11. Pension and Postretirement Benefit Plans:

The components of Net Periodic Benefit Cost are as follows:
 
 
Pension Benefits
   
Postretirement Benefits
 
   
Three months ended
   
Three months ended
 
   
September 30,
2017
   
September 30,
2016
   
September 30,
2017
   
September 30,
2016
 
                         
Service cost
 
$
26
   
$
26
   
$
-
   
$
-
 
Interest cost
   
164
     
174
     
36
     
52
 
Expected return on plan assets
   
(256
)
   
(258
)
   
-
     
-
 
Amortization of losses
   
114
     
123
     
-
     
-
 
Net periodic benefit cost
 
$
48
   
$
65
   
$
36
   
$
52
 
 
   
Pension Benefits
   
Postretirement Benefits
 
   
Nine months ended
   
Nine months ended
 
   
September 30,
2017
   
September 30,
2016
   
September 30,
2017
   
September 30,
2016
 
                         
Service cost
 
$
78
   
$
78
   
$
-
   
$
-
 
Interest cost
   
484
     
524
     
108
     
157
 
Expected return on plan assets
   
(768
)
   
(775
)
   
-
     
-
 
Amortization of losses
   
350
     
369
     
-
     
-
 
Net periodic benefit cost
 
$
144
   
$
196
   
$
108
   
$
157
 
 
The Company has a defined benefit pension plan. Benefits for hourly employees were based on a stated benefit per year of service, reduced by amounts earned in a previous plan. Benefits for salaried employees were based on years of service and the employees’ final compensation. The defined benefit pension plan is frozen.  The Company expects to make no contributions to the pension plan in the year ending December 31, 2017.

The Company 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.  The Company expects to contribute approximately $0.2 million to its postretirement plan in 2017 for the payment of benefits.

Note 12. 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”), pursuant to which awards 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 the Company’s voting common stock are reserved for issuance as awards to employees, non-employee directors, and consultants 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 vesting criteria for the awards, with such criteria to be specified in the award agreement. As of September 30, 2017, 21,479 shares of restricted stock, 94,000 performance-based restricted stock units, and 187,415 options have been granted to employees of the Company under the 2015 Plan. There are 1,097,106 shares available for grant under the 2015 Plan.

On February 7, 2017, the Board of Directors of the Company approved stock option cash-out agreements with three Company officers and a director for the surrender of 83,400 expiring stock options in exchange for payment to the option holders of $11.99 per share.  This payment equaled the difference between the exercise price of $1.06 and closing stock price of $13.05 on the approval date, or an aggregate of $1.0 million.

On February 8, 2006, the Board of Directors of the Company adopted the 2006 Equity Incentive Plan (the “2006 Plan”)  of North Atlantic Holding Company, Inc., pursuant to which awards may be granted to employees.  The 2006 Plan provides for the granting of nonqualified stock options and restricted stock awards to employees.  Upon the adoption of the Company’s 2015 Equity Incentive Plan in connection with its IPO, the Company determined no additional grants would be made under the 2006 Plan.  However, all awards issued under the 2006 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:
 
   
Stock
Option
Shares
   
Weighted
Average
Exercise
Price
   
Weighted
Average
Grant Date
Fair Value
 
Outstanding, December 31, 2015
   
1,667,671
   
$
2.19
   
$
1.20
 
                         
Granted
   
53,996
     
9.26
     
2.37
 
Exercised
   
(73,135
)
   
2.31
     
1.27
 
Forfeited
   
(10,770
)
   
3.83
     
2.17
 
                         
Outstanding, December 31, 2016
   
1,637,762
     
2.41
     
1.23
 
                         
Granted
   
133,819
     
14.69
     
4.41
 
Exercised
   
(907,852
)
   
1.51
     
0.80
 
Forfeited
   
(401
)
   
15.34
     
4.58
 
Surrendered
   
(83,400
)
   
1.06
     
0.54
 
                         
Outstanding, September 30, 2017
   
779,928
   
$
5.70
   
$
2.35
 
 
Under the 2006 Plan, the total intrinsic value of options exercised during the nine months ended September 30, 2017 and 2016, was $11.7 million and less than $0.1 million, respectively.  The total intrinsic value of options surrendered during the nine months ended September 30, 2017, was $1.0 million.

At September 30, 2017, under the 2006 Plan, the outstanding stock options’ exercise price for 102,536 options is $1.06 per share, all of which are exercisable. The outstanding stock options’ exercise price for 489,977 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 1.17 years for the options with the $1.06 exercise price and 3.91 years for the options with the $3.83 exercise price. The Company estimates the expected life of these 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, a risk-free interest rate of 4.37%, 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, a 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, 2017, under the 2015 Plan, 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 until sufficient information regarding volatility of our share price becomes available or the selected companies are no longer suitable for this purpose. Due to our limited trading history, we are using the “simplified method” to calculate expected holding periods which represent the periods of time for which 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 in the reliability of our calculations. The fair values of these options were determined using the Black-Scholes option pricing model.
 
The following table outlines the assumptions based on the number of options granted under the 2015 Plan.
 
   
August
2016 Grant
   
February
2017 Grant
   
May
2017 Grant
 
Number of options
   
53,996
     
40,000
     
93,819
 
Options outstanding
   
53,996
     
40,000
     
93,419
 
Number exercisable
   
40,497
     
-
     
-
 
Exercise price
 
$
9.26
   
$
13.00
   
$
15.41
 
Remaining lives
   
8.83
     
9.42
     
9.67
 
Risk free interest rate
   
1.16
%
   
1.89
%
   
1.76
%
Expected volatility
   
25.40
%
   
27.44
%
   
26.92
%
Expected life
   
5.375
     
6.000
     
6.000
 
Dividend yield
   
-
     
-
     
-
 
Fair value
 
$
2.37
   
$
3.98
   
$
4.60
 
 
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 related to the options of approximately $0.1 million and less than $0.1 million in the consolidated statements of income for the three months ended September 30, 2017 and 2016, respectively, and approximately $0.2 million and $0.1 million for the nine months ended September 30, 2017 and 2016, respectively.  Total unrecognized compensation expense related to options at September 30, 2017, is $0.4 million which will be expensed over 2.2 years.

Performance-based restricted stock units (“PRSUs”) are restricted stock units subject to both performance-based and service-based vesting conditions.  The number of shares of common stock a recipient will receive upon vesting of a PRSU will be calculated by reference to certain performance metrics related to the Company’s performance over a five-year period.  PRSUs will vest on the measurement date, which is no more than 65 days after the performance period, provided the applicable service and performance conditions are satisfied.  On March 31, 2017, the Committee granted 94,000 PRSUs to employees of the Company, all of which are unvested at September 30, 2017.  The fair value of each PRSU is $15.60, the closing price of the stock on March 31, 2017, the date of grant.  The Company recorded compensation expense related to the PRSUs of approximately $0.1 million and $0.2 million in the consolidated statements of income for the three and nine months ended September 30, 2017, respectively, based on the probability of achieving the performance condition.  Total unrecognized compensation expense related to these awards at September 30, 2017, is $1.3 million which will be expensed over the service period based on the probability of achieving the performance condition.

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,
   
September 30,
 
   
2017
   
2016
 
   
Income
   
Shares
   
Per
Share
   
Income
   
Shares
   
Per
Share
 
Consolidated net income
 
$
7,374
               
$
6,793
             
                                         
Basic EPS:
                                       
Weighted average
           
19,085,329
   
$
0.39
             
18,094,592
   
$
0.38
 
                                                 
Diluted EPS:
                                               
Effect of dilutive securities:
                                               
Stock options and warrants
           
504,095
                     
1,634,627
         
             
19,589,424
   
$
0.38
             
19,729,219
   
$
0.34
 
 
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2017
   
2016
 
   
Income
   
Shares
   
Per
Share
   
Income
   
Shares
   
Per
Share
 
Net income attributable to Turning Point Brands, Inc.
 
$
16,690
               
$
9,826
             
                                         
Basic EPS:
                                       
Weighted average
           
18,915,606
   
$
0.88
             
15,396,155
   
$
0.64
 
                                                 
Diluted EPS:
                                               
Effect of dilutive securities:
                                               
Stock options and warrants
           
587,524
                     
1,572,458
         
             
19,503,130
   
$
0.86
             
16,968,613
   
$
0.58
 
 
Due to the IPO in May 2016, the Company’s weighted average shares and basic and diluted earnings per share are significantly different for the nine months ended September 30, 2017, when compared to the prior period.

Note 15. Segment Information:

In accordance with ASC 280, Segment Reporting, the Company has three reportable segments: (1) Smokeless products, (2) Smoking products, and (3) 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 and (b) imports and markets finished cigars and MYO cigar wraps. The NewGen products segment (a) markets e-cigarettes, e-liquids, vaporizers, and other related products and (b) distributes a wide assortment of vaping products to non-traditional retail outlets. The Company’s smoking and smokeless 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. Elimination includes the elimination of intercompany accounts between segments.

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 tables below present financial information about reported segments:
   
Three Months Ended
 
   
September 30,
2017
   
September 30,
2016
 
             
Net sales
           
Smokeless products
 
$
21,294
   
$
18,909
 
Smoking products
   
26,860
     
28,760
 
NewGen products
   
25,186
     
3,290
 
   
$
73,340
   
$
50,959
 
                 
Operating income (loss)
               
Smokeless products
 
$
6,218
   
$
4,695
 
Smoking products
   
7,403
     
7,645
 
NewGen products
   
780
     
(230
)
Other (1)
   
(25
)
   
(219
)
   
$
14,376
   
$
11,891
 
                 
Interest expense
 
$
(4,023
)
 
$
(5,557
)
Investment income
   
131
   
$
279
 
                 
Income before income taxes
 
$
10,484
   
$
6,613
 
                 
Capital expenditures
               
Smokeless products
 
$
446
   
$
426
 
NewGen products
   
39
     
(40
)
   
$
485
   
$
386
 
                 
Depreciation and amortization
               
Smokeless products
 
$
341
   
$
310
 
NewGen products
   
255
     
-
 
   
$
596
   
$
310
 
 
 
Nine Months Ended
 
   
September 30,
2017
   
September 30,
2016
 
             
Net sales
           
Smokeless products
 
$
63,563
   
$
58,939
 
Smoking products
   
81,056
     
83,434
 
NewGen products
   
67,595
     
10,033
 
   
$
212,214
   
$
152,406
 
                 
Operating income (loss)
               
Smokeless products
 
$
15,088
   
$
13,097
 
Smoking products
   
21,095
     
22,391
 
NewGen products
   
2,646
     
(758
)
Other (1)
   
(61
)
   
(1,154
)
   
$
38,768
   
$
33,576
 
                 
Interest expense
 
$
(13,002
)
 
$
(20,895
)
Investment income
   
334
   
$
611
 
Loss on extinguishment of debt
   
(6,116
)
   
(2,824
)
                 
Income before income taxes
 
$
19,984
   
$
10,468
 
                 
Capital expenditures
               
Smokeless products
 
$
973
   
$
1,160
 
NewGen products
   
79
     
85
 
   
$
1,052
   
$
1,245
 
                 
Depreciation and amortization
               
Smokeless products
 
$
1,046
   
$
896
 
NewGen products
   
672
     
-
 
   
$
1,718
   
$
896
 

   
September 30,
2017
   
December 31,
2016
 
             
Assets
           
Smokeless products
 
$
88,327
   
$
85,559
 
Smoking products
   
149,552
     
150,498
 
NewGen products
   
45,023
     
39,416
 
Other (1)
   
4,462
     
9,547
 
   
$
287,364
   
$
285,020
 

(1)
“Other” includes our assets that are not assigned to our three reportable segments, such as deferred taxes and eliminations. All goodwill has been allocated to our reportable segments.
 
Net Sales - Domestic and Foreign
 
The tables below present financial information about our domestic and foreign net sales:
   
Three Months Ended
 
   
September 30,
2017
   
September 30,
2016
 
Domestic
 
$
69,484
   
$
48,469
 
Foreign
   
3,856
     
2,490
 
Net Sales
 
$
73,340
   
$
50,959
 
 
   
Nine Months Ended
 
   
September 30,
2017
   
September 30,
2016
 
Domestic
 
$
203,210
   
$
144,568
 
Foreign
   
9,004
     
7,838
 
Net Sales
 
$
212,214
   
$
152,406
 
 
Note 16. Subsequent Events:

On November 9, 2017, the Company’s Board of Directors approved the initiation of a cash dividend to shareholders.  The initial quarterly dividend of $0.04 per common share will be paid on December 15, 2017 to shareholders of record at the close of business on November 27, 2017.
 
Cautionary Note Regarding Forward-Looking Statements
 
This document includes, and other information we make public from time to time may include, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include statements about our estimates, expectations, projections, beliefs, intentions, or strategies for the future, and the assumptions underlying such statements. We use the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “forecasts,” “may,” “will,” “should,” and similar expressions to identify our forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from historical experience or our present expectations. Factors that could cause these differences include, but are not limited to, the factors set forth in “Risk Factors” included in our 2016 Annual Report on Form 10-K, in this Quarterly Report on Form 10-Q, and other reports filed with the Securities and Exchange Commission from time to time, as well as:
 
·
declining sales of tobacco products and expected continuing decline of sales in the tobacco industry, overall;
·
our dependence on a small number of third-party suppliers and producers;
·
the possibility we will be unable to identify or contract with new suppliers or producers in the event of a supply or product disruption;
·
the possibility our licenses to use certain brands or trademarks will be terminated, challenged, or restricted;
·
failure to maintain consumer brand recognition and loyalty of our customers;
·
substantial and increasing U.S. regulation;
·
regulation of our products by FDA, which has broad regulatory powers;
·
uncertainty related to the regulation and taxation of our NewGen products;
·
possible significant increases in federal, state, and local municipal tobacco-related taxes;
·
possible increasing international control and regulation;
·
our reliance on relationships with several large retailers and national chains for distribution of our products;
·
intense competition and our ability to compete effectively;
·
significant potential product liability litigation;
·
our distribution of foreign-made vapor products from manufacturers with whom we may have no recourse in the event of significant product liability exposure;
·
the scientific community’s lack of information regarding the long-term health effects of electronic cigarettes, vaporizer and e-liquid use;
·
our amount of indebtedness;
·
the terms of our credit facilities, which may restrict our current and future operations;
·
competition from illicit sources;
·
our reliance on information technology;
·
security and privacy breaches;
 
·
contamination of our tobacco supply or products;
·
infringement on our intellectual property;
·
third-party claims we infringe on their intellectual property;
·
concentration of business with large customers;
·
failure to manage our growth;
·
failure to successfully integrate our acquisitions or otherwise being unable to benefit from pursuing acquisitions;
·
fluctuations in our results;
·
exchange rate fluctuations;
·
adverse U.S. and global economic conditions;
·
failure to comply with certain regulations;
·
departure of key management personnel or our inability to attract and retain talent;
·
decrease in value of our deferred tax assets;
·
imposition of significant tariffs on imports into the U.S.; 
·
reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors, potentially decreasing our stock price;
·
failure to maintain our status as an emerging growth company before the five-year maximum time period a company may retain such status;
·
our principal stockholders will be able to exert significant influence over matters submitted to our stockholders and may take certain actions to prevent takeovers;
·
our certificate of incorporation and bylaws, as well as Delaware law and certain regulations, could discourage or prohibit acquisition bids or merger proposals, which may adversely affect the market price of our common stock;
·
our certificate of incorporation limits the ownership of our common stock by individuals and entities that are Restricted Investors. These restrictions may affect the liquidity of our common stock and may result in Restricted Investors being required to sell or redeem their shares at a loss or relinquish their voting, dividend and distribution rights;
·
future sales of our common stock in the public market could reduce our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us; and
·
we may issue preferred stock whose terms could adversely affect the voting power or value of our common stock.
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
You should read the following discussion of the historical financial condition and results of operations in conjunction with our interim condensed consolidated financial statements and accompanying notes, which are included elsewhere in this Quarterly Report on Form 10-Q, with our annual consolidated financial statements and accompanying notes, which are included in our 2016 Annual Report on Form 10-K.  In addition, this discussion includes forward-looking statements subject to risks and uncertainties which may result in actual results differing from statements we make. See “Cautionary Note Regarding Forward-Looking Statements.” Factors that could cause actual results to differ include those risks and uncertainties discussed in “Risk Factors” in our 2016 Annual Report on Form 10-K, those included in this Quarterly Report on Form 10-Q, and other reports filed with the Securities and Exchange Commission from time to time.
 
The following discussion relates to the interim, unaudited financial statements of the Company included elsewhere in this Quarterly Report on Form 10-Q. In this discussion, unless the context requires otherwise, references to “our Company” “we,” “our,” or “us” refer to Turning Point Brands, Inc., and our consolidated subsidiaries. References to “TPB” refer to Turning Point Brands, Inc., without any of its subsidiaries. Dollars are in thousands, except where designated and in per share data.  Many of the amounts and percentages in this discussion have been rounded for convenience of presentation.
 
Overview
 
We are a leading, independent provider of Other Tobacco Products (“OTP”) in the U.S. We sell a wide range of products across the OTP spectrum including moist snuff tobacco (“MST”), loose leaf chewing tobacco, premium cigarette papers, make-your-own (“MYO”) cigar wraps, cigars, liquid vapor products, and tobacco vaporizer products. We do not sell cigarettes. We estimate the OTP industry generated approximately $10.5 billion in manufacturer revenue in 2016. In contrast to manufactured cigarettes, which have been experiencing declining sales for decades based on data published by the Alcohol and Tobacco Tax and Trade Bureau (“TTB”) the OTP industry is demonstrating increased consumer appeal with low to mid-single digit consumer unit growth as reported by Management Science Associates, Inc. (“MSAi”), a third-party analytics and informatics company.
 
The Company’s reportable segments are (1) smokeless products, which include chewing tobacco and MST, (2) smoking products, which principally include cigarette papers, MYO cigar wraps, and cigars, and (3) NewGen products, which include liquid vapor products, tobacco vaporizer products and non-nicotine/non-tobacco products.
 
Our portfolio of brands includes some of the most widely recognized names in the OTP industry such as Zig-Zag®, Beech-Nut®, Stoker’s®, and VaporBeast.
 
Our core tobacco business generates revenues from the sale of our products primarily to wholesale distributors who, in turn, resell them to retail operations, as well as from the sale of our products directly to retail operations. Additionally, the acquisition of VaporBeast allows us to sell directly to non-traditional retail operations. Our net sales, which include federal excise taxes and FDA fees, consist of gross sales, net of cash discounts, returns, and selling and marketing allowances.
 
Our principal operating expenses include the cost of raw materials, used to produce the limited number of products we manufacture; the cost of finished products, which are purchased goods; federal excise taxes; legal expenses; and compensation expenses, including benefits and costs of salaried personnel. Our other principal expenses include interest expense and amortization of deferred financing costs and other expenses.
 
Recent Developments
 
On November 9, 2017, our Board of Directors approved the initiation of a cash dividend to shareholders.  The initial quarterly dividend of $0.04 per common share will be paid on December 15, 2017 to shareholders of record at the close of business on November 27, 2017.
 
On July 28, 2017, the U.S. Food and Drug Administration (“FDA”) announced a new direction in regulating tobacco products, including the newly “deemed” markets such as cigars and vapor products.  FDA stated it intends to begin several new rulemaking processes, some of which will outline foundational rules governing the premarket application process for the deemed products, including Substantial Equivalence Applications and Premarket Tobacco Applications.  Compliance and related costs could be significant and could increase the costs of operating in our NewGen Segment. The original filing deadlines for the applications of these newly “deemed” products on the market as of August 8, 2016, have been postponed until August 8, 2021, for “combustible” products (e.g., cigar and pipe) and August 8, 2022, for “non-combustible” products (e.g., vapor products).  No other application filing deadlines were altered.  FDA also acknowledged a “continuum of risk” among tobacco products (i.e., that certain tobacco products pose a greater risk to individual and public health than others), that it intends to seek public comment on the role that flavors play in attracting youth and the role that flavors may play in helping some smokers switch to potentially less harmful forms of nicotine delivery, and that it will increase its focus on the regulation of cigarette products.
 
On June 30, 2017, we filed a Form S-3 Registration Statement with the Securities and Exchange Commission providing for the potential to offer up to $200 million in the aggregate of our common stock, preferred stock, depository shares, warrants, and units, as well as a secondary offering and sale of up to approximately 12.8 million shares of TPB common stock by selling shareholders.  We currently have no plans to utilize the offering; however, we believe it provides future flexibility as we continue to drive our strategic organic growth and acquisition initiatives.
 
In March 2017, we entered into a strategic partnership with the Hand Media, Inc., dba Vapor Shark (“Vapor Shark”), a leading distributor and manufacturer of premium vaping e-liquids and hardware with nationwide distribution through independent retail vape shops as well as Vapor Shark retail locations.  Through the strategic partnership, we were issued a warrant to purchase all outstanding stock of Vapor Shark in exchange for a commitment to deposit up to $2.5 million.  In April 2017, we entered into a management agreement with Vapor Shark whereby we gained control of the Vapor Shark operations.  On June 30, 2017, we exercised the warrant and obtained ownership of 100% of the outstanding shares of Vapor Shark. Our exercise of the warrant triggered an option giving Vapor Shark’s former sole shareholder the right to purchase Vapor Shark’s company-owned stores for $1.  The former sole shareholder has notified us of his intent to exercise this option no earlier than January 1, 2018.
 
In November 2016, we purchased all of the capital stock of Smoke Free Technologies, Inc., d/b/a VaporBeast (“VaporBeast”), for an aggregate purchase price of approximately $27 million. VaporBeast is a leading distributor of liquid vapor products servicing the non-traditional retail channel. Also in November 2016, we purchased five regional smokeless tobacco brands from Wind River Tobacco Company (“Wind River”) for a purchase price of approximately $2.5 million.
 
In May 2016, we sold 6,210,000 shares of voting common stock in our IPO (including shares sold pursuant to an underwriters’ option to purchase 810,000 shares to cover over-allotments) at a price of $10.00 per share. The gross proceeds of the IPO totaled $62.1 million. Refer to the 2016 Annual Report on Form 10-K for use of the IPO proceeds.
 
In April 2016, we increased the total authorized shares of preferred and voting and non-voting common stock and effected a 10.43174381 for 1 stock split of our 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 of the Company have been retrospectively restated to reflect the stock split.
 
Segment Information
 
We operate in three reportable segments: (1) smokeless products, (2) smoking products, and (3) 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 and (b) imports and markets finished cigars and MYO cigar wraps. The NewGen products segment (a) markets e-cigarettes, e-liquids, vaporizers and other related products and (b) distributes a wide assortment of vaping products to non-traditional retail outlets.
 
Key Factors Affecting Our Results of Operations
 
We consider the following factors to be the key factors affecting our results of operations:
 
Our ability to further penetrate markets with our existing products;
 
Our ability to introduce new products and product lines that complement our core business;
 
Decreasing interest in tobacco products among consumers;
 
Price sensitivity in our end-markets;
 
Marketing and promotional initiatives, which cause variability in our results;
 
General economic conditions, including consumer access to disposable income;
 
Cost, and increasing regulation, of promotional and advertising activities;
 
Cost of complying with regulation;
 
Counterfeit and other illegal products in our end-markets;
 
Currency fluctuations;
 
Our ability to identify attractive acquisition opportunities in OTP; and
 
Our ability to integrate acquisitions.
 
Critical Accounting Policies and Uses of Estimates
 
There have been no material changes to our critical accounting policies and estimates from the information provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K.

Recent Accounting Pronouncements Adopted:

We adopted Accounting Standard Update (“ASU”) 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment in Q1 of 2017.  This ASU simplifies the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The adoption of the ASU had no effect on our consolidated financial statements.
 
We adopted ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory in Q1 of 2017. 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. The adoption of this ASU had no effect on our consolidated financial statements.
 
Recent Accounting Pronouncements:
 
In May 2014, the Financial Accounting Standards Board (the “FASB”) issued 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 standard may be applied retrospectively to each prior period presented, or retrospectively with the cumulative effect recognized, as of the date of adoption ("modified retrospective method"). We currently expect to apply the modified retrospective method upon adoption. We do not believe the standard will impact our recognition of revenue as we are primarily a distributor of goods; however, we continue to assess the potential impacts to other less significant revenue transactions.
 
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 for users 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 commenced before the effective date of ASU 2016-02. An entity electing to use the practical expedients will, in effect, continue to account for leases 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 tracked and disclosed under previous GAAP. We are currently evaluating the effect the adoption of this standard will have on our financial statements.
 
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this ASU require a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, on a retrospective basis. We are currently evaluating the effect the adoption of this standard will have on our financial statements.
 
In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  This ASU requires an employer to disaggregate the service cost component from the other components of net benefit cost. This ASU also allows only the service cost component of net benefit cost to be eligible for capitalization. ASU 2017-07 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.  We are currently evaluating the effect the adoption of this standard will have on our financial statements.
 
Results of Operations
 
Summary
 
The table and discussion set forth below relate to our consolidated results of operations:
 
   
Three Months Ended September 30,
 
   
2017
   
2016
   
% Change
 
Consolidated Results of Operations Data:
                 
Net sales
                 
Smokeless products
 
$
21,294
   
$
18,909
     
12.6
%
Smoking products
   
26,860
     
28,760
     
-6.6
%
NewGen products
   
25,186
     
3,290
     
665.5
%
Total net sales
   
73,340
     
50,959
     
43.9
%
Cost of sales
   
40,410
     
26,341
     
53.4
%
Gross profit
                       
Smokeless products
   
11,478
     
9,396
     
22.2
%
Smoking products
   
14,201
     
14,411
     
-1.5
%
NewGen products
   
7,251
     
811
     
794.1
%
Total gross profit
   
32,930
     
24,618
     
33.8
%
                         
Selling, general and administrative expenses
   
18,554
     
12,727
     
45.8
%
Operating income
   
14,376
     
11,891
     
20.9
%
Interest expense
   
4,023
     
5,557
     
-27.6
%
Investment income
   
(131
)
   
(279
)
   
-53.0
%
Income before income taxes
   
10,484
     
6,613
     
58.5
%
Income tax expense (benefit)
   
3,110
     
(180
)
   
-1827.8
%
Consolidated net income
 
$
7,374
   
$
6,793
     
8.6
%
 
Comparison of the Three Months Ended September 30, 2017, to the Three Months Ended September 30, 2016
 
Net Sales. For the three months ended September 30, 2017, overall net sales increased to $73.3 million from $51.0 million for the three months ended September 30, 2016, an increase of $22.3 million or 43.9%. For the quarter, volumes increased 39.5% and price/mix increased 4.4%.  This increase was primarily a result of increased net sales in our NewGen segment.
 
Effective July 1, 2017, the tax on all OTP products sold in California increased to 65.1%. Implementation of the tax has led to decreases in 2017 California OTP volume when compared to volume over the same 2016 period.
 
For the three months ended September 30, 2017, net sales in the Smokeless products segment increased to $21.3 million from $18.9 million for the three months ended September 30, 2016, an increase of $2.4 million or 12.6%. For the quarter, volume increased 8.2% and price/mix increased 4.4%. Net sales growth was primarily driven by Stoker’s MST.
 
Pennsylvania implemented a $0.55 per ounce excise tax on smokeless products effective October 1, 2016.  Implementation of the tax has led to decreases in 2017 Pennsylvania volume when compared to volume over the same 2016 period.
 
Year-over-year industry volumes for chewing tobacco declined by approximately 10% in the quarter while MST was down approximately 2% according to MSAi.  The Company outpaced the industry in the quarter and grew its MSAi share in both chewing tobacco and MST on the strength of Stoker’s volumes.
 
For the three months ended September 30, 2017, net sales in the Smoking products segment decreased to $26.9 million from $28.8 million for the three months ended September 30, 2016, a decrease of $1.9 million or 6.6%. For the quarter, Smoking products volumes decreased 9.3% while price/mix increased 2.7%.  The decrease was the result of a strong year ago comparison due to the timing of Zig-Zag MYO cigar wraps promotional purchases, continued weakness in cigars, the California tax on OTP products including MYO cigar wraps, and one fewer shipping day, partially offset by year-over-year strength in Zig-Zag cigarette papers.
 
Industry volumes for cigarette papers increased by mid-single-digits while MYO cigar wraps grew by double-digits, according to MSAi. Zig-Zag maintained its industry-leading share position in both premium cigarette papers and MYO cigar wraps, according to MSAi.
 
For the three months ended September 30, 2017, net sales in the NewGen products segment increased to $25.2 million from $3.3 million for the three months ended September 30, 2016, an increase of $21.9 million or 665.5%. For the quarter, NewGen products volumes increased 645.6%, while price/mix increased 19.9%.  Net sales growth was primarily driven by the inclusion of VaporBeast and Vapor Shark for the quarter.
 
Gross Profit. For the three months ended September 30, 2017, overall gross profit increased to $32.9 million from $24.6 million for the three months ended September 30, 2016, an increase of $8.3 million or 33.8%, primarily due to the inclusion of VaporBeast’s and Vapor Shark’s gross profit in 2017.  As a result of the inclusion of the VaporBeast business, gross margin decreased to 44.9% for the three months ended September 30, 2017, from 48.3% for the three months ended September 30, 2016.
 
For the three months ended September 30, 2017, gross profit in the Smokeless products segment increased to $11.5 million from $9.4 million for the three months ended September 30, 2016, an increase of $2.1 million or 22.2%.  Gross profit as a percentage of net sales increased to 53.9% of net sales for the three months ended September 30, 2017, from 49.7% of net sales for the three months ended September 30, 2016, due to mix, lower product return rates, product price increases, and a favorable LIFO charge.
 
For the three months ended September 30, 2017, gross profit in the Smoking products segment decreased to $14.2 million from $14.4 million for the three months ended September 30, 2016, a decrease of $0.2 million or 1.5%.  Gross profit as a percentage of net sales increased to 52.9% of net sales for the three months ended September 30, 2017, from 50.1% of net sales for the three months ended September 30, 2016, due to product mix.
 
For the three months ended September 30, 2017, gross profit in the NewGen products segment increased to $7.3 million from $0.8 million for the three months ended September 30, 2016, an increase of $6.4 million or 794.1%, primarily as a result of the inclusion of VaporBeast in 2017. Gross profit as a percentage of net sales increased to 28.8% of net sales for the three months ended September 30, 2017, from 24.7% of net sales for the three months ended September 30, 2016.
 
Selling, General and Administrative Expenses. For the three months ended September 30, 2017, selling, general and administrative expenses increased to $18.6 million from $12.7 million for the three months ended September 30, 2016, an increase of $5.8 million or 45.8%, due primarily to the inclusion of SG&A from VaporBeast in the three months ended September 30, 2017, strategic acquisition expenses, and sales and marketing infrastructure investments.
 
Interest Expense. For the three months ended September 30, 2017, interest expense decreased to $4.0 million from $5.6 million for the three months ended September 30, 2016, primarily as a result of our February 2017 debt refinancing.
 
Income Tax Expense (Benefit).  The Company’s income tax expense of $3.1 million for the three months ended September 30, 2017, is lower than expected based on our estimated annual effective tax rate as a result of discrete tax benefits of $0.9 million from the exercise of stock options during the quarter. The Company’s income tax benefit for the three months ended September 30, 2016, does not bear the normal relationship to income before income taxes because of net operating loss carryforwards which were utilized and were partially offset by certain minimum state income taxes.
 
Investment Income. For the three months ended September 30, 2017 and 2016, investment income relating to investments of the MSA escrow deposits was $0.1 million and $0.3 million, respectively.
 
Consolidated Net Income. Due to the factors described above, net income for the three months ended September 30, 2017 and 2016, was $7.4 million and $6.8 million, respectively.

   
Nine Months Ended September 30,
 
   
2017
   
2016
   
% Change
 
Consolidated Results of Operations Data:
                 
Net sales
                 
Smokeless products
 
$
63,563
   
$
58,939
     
7.8
%
Smoking products
   
81,056
     
83,434
     
-2.9
%
NewGen products
   
67,595
     
10,033
     
573.7
%
Total net sales
   
212,214
     
152,406
     
39.2
%
Cost of sales
   
119,623
     
78,267
     
52.8
%
Gross profit
                       
Smokeless products
   
32,270
     
29,498
     
9.4
%
Smoking products
   
42,018
     
42,390
     
-0.9
%
NewGen products
   
18,303
     
2,251
     
713.1
%
Total gross profit
   
92,591
     
74,139
     
24.9
%
                         
Selling, general and administrative expenses
   
53,823
     
40,563
     
32.7
%
Operating income
   
38,768
     
33,576
     
15.5
%
Interest expense
   
13,002
     
20,895
     
-37.8
%
Investment income
   
(334
)
   
(611
)
   
-45.3
%
Loss on extinguishment of debt
   
6,116
     
2,824
     
116.6
%
Income before income taxes
   
19,984
     
10,468
     
90.9
%
Income tax expense
   
3,850
     
642
     
499.7
%
Consolidated net income
   
16,134
     
9,826
     
64.2
%
Net loss attributable to non-controlling interest
   
(556
)
   
-
         
Net income attributable to Turning Point Brands, Inc.
 
$
16,690
   
$
9,826
         
 
Comparison of the Nine Months Ended September 30, 2017, to the Nine Months Ended September 30, 2016
 
Net Sales. For the nine months ended September 30, 2017, overall net sales increased to $212.2 million from $152.4 million for the nine months ended September 30, 2016, an increase of $59.8 million or 39.2%. For the nine months ended September 30, 2017, volumes increased 35.2% and price/mix increased 4.0%.  This increase was primarily a result of increases in the Smokeless products and the NewGen products segments.
 
Effective July 1, 2017, the tax on all OTP products sold in California increased to 65.1%.  Implementation of the tax has led to decreases in 2017 California volume when compared to volume over the same 2016 period.
 
For the nine months ended September 30, 2017, net sales in the Smokeless products segment increased to $63.6 million from $58.9 million for the nine months ended September 30, 2016, an increase of $4.6 million or 7.8%. For the nine months, volume increased 3.6% and price/mix increased 4.2%. Net sales growth was primarily driven by Stoker’s MST.
 
Pennsylvania implemented a $0.55 per ounce excise tax on smokeless products effective October 1, 2016.  Implementation of the tax has led to decreases in 2017 Pennsylvania volume when compared to volume over the same 2016 period.
 
Year-over-year industry volumes for chewing tobacco declined by approximately 10% in the nine months while MST volumes decreased by 1%, according to MSAi.  The Company’s volume performance outpaced the industry in the nine months and grew its MSAi share in both chewing tobacco and MST.
 
For the nine months ended September 30, 2017, net sales in the Smoking products segment decreased to $81.1 million from $83.4 million for the nine months ended September 30, 2016, a decrease of $2.4 million or 2.9%. For the nine months ended September 30, 2017, Smoking products’ volumes decreased 5.2%, while price/mix increased 2.3%.
 
Industry volumes for cigarette papers declined by 1% while MYO cigar wraps grew by 15%, according to MSAi.  Zig-Zag increased its market share versus the year-ago period in cigarette papers and held an 80% share in MYO cigar wraps, according to MSAi.
 
For the nine months ended September 30, 2017, net sales in the NewGen products segment increased to $67.6 million from $10.0 million for the nine months ended September 30, 2016, an increase of $57.6 million or 573.7%. For the nine months ended September 30, 2017, NewGen products volumes increased 556.2%, while price/mix increased 17.5%.  Net sales growth was primarily driven by the inclusion of VaporBeast in the nine-month period and Vapor Shark in the second and third quarters of 2017.
 
Gross Profit. For the nine months ended September 30, 2017, overall gross profit increased to $92.6 million from $74.1 million for the nine months ended September 30, 2016, an increase of $18.5 million or 24.9%, primarily due to the inclusion of nine months of VaporBeast results. Gross margin weakened to 43.6% for the nine months ended September 30, 2017, from 48.6% for the nine months ended September 30, 2016, as a result of the mix impact of VaporBeast’s inherently lower distribution margins.
 
For the nine months ended September 30, 2017, gross profit in the Smokeless products segment increased to $32.3 million from $29.5 million for the nine months ended September 30, 2016, an increase of $2.7 million or 9.4%.  Gross profit as a percentage of net sales increased to 50.8% of net sales for the nine months ended September 30, 2017, from 50.0% of net sales for the nine months ended September 30, 2016.
 
For the nine months ended September 30, 2017, gross profit in the Smoking products segment decreased to $42.0 million from $42.4 million for the nine months ended September 30, 2016, a decrease of $0.4 million or 0.9%.  Gross profit as a percentage of net sales increased to 51.8% of net sales for the nine months ended September 30, 2017, from 50.8% of net sales for the nine months ended September 30, 2016.
 
For the nine months ended September 30, 2017, gross profit in the NewGen products segment increased to $18.3 million from $2.3 million for the nine months ended September 30, 2016, an increase of $16.1 million or 713.1%. Gross profit as a percentage of net sales increased to 27.1% of net sales for the nine months ended September 30, 2017, from 22.4% of net sales for the nine months ended September 30, 2016.
 
Selling, General and Administrative Expenses. For the nine months ended September 30, 2017, selling, general and administrative expenses increased to $53.8 million from $40.6 million for the nine months ended September 30, 2016, an increase of $13.3 million or 32.7%, due primarily to the inclusion of nine months of VaporBeast’s SG&A.
 
Interest Expense. For the nine months ended September 30, 2017, interest expense decreased to $13.0 million from $20.9 million for the nine months ended September 30, 2016, primarily as a result of our 2017 debt refinancing.
 
Income Tax Expense.  The Company’s income tax expense of $3.9 million for the nine months ended September 30, 2017, is lower than expected based on our estimated annual effective tax rate as a result of discrete tax benefits of $4.5 million from the exercise of stock options during the nine-month period. The Company’s income tax expense for the nine months ended September 30, 2016, does not bear the normal relationship to income before income taxes because of net operating loss carryforwards which were utilized and were partially offset by certain minimum state income taxes.
 
Investment Income. In the second quarter of 2016, we began to invest the MSA escrow deposits.  For the nine months ended September 30, 2017 and 2016, investment income relating to investments of the MSA escrow deposits was $0.3 million and $0.6 million, respectively.
 
Loss on Extinguishment of Debt.  For the nine months ended September 30, 2017, loss on extinguishment of debt was $6.1 million as the result of refinancing our credit facility in the first quarter of 2017.  For the nine months ended September 30, 2016, loss on extinguishment of debt was $2.8 million as the result of retiring certain debt with proceeds from our IPO.
 
Consolidated Net Income. Due to the factors described above, net income for the nine months ended September 30, 2017 and 2016, was $16.1 million and $9.8 million, respectively.
 
Net Loss Attributable to Non-Controlling Interest. Net loss attributable to non-controlling interest of $0.6 million for the nine months ended September 30, 2017, is related to Vapor Shark, which was accounted for as a VIE during the second quarter.
 
Net Income Attributable to Turning Point Brands, Inc. Due to the factors described above, net income for the nine months ended September 30, 2017 and 2016, was $16.7 million and $9.8 million, respectively.
 
EBITDA and Adjusted EBITDA:
 
To supplement our financial information presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, we use non-U.S. GAAP financial measures including EBITDA and Adjusted EBITDA. We believe Adjusted EBITDA provides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Adjusted EBITDA is used by management to compare our performance to that of prior periods for trend analyses and planning purposes and is presented to our Board of Directors. We believe that EBITDA and Adjusted EBITDA are appropriate measures of operating performance because they eliminate the impact of expenses that do not relate to business performance.
 
In addition, our credit agreements contain financial covenants which use Adjusted EBITDA calculations.
 
We define “EBITDA” as net income before interest expense, loss on extinguishment of debt, provision for income taxes, depreciation, and amortization. We define “Adjusted EBITDA” as net income before interest expense, loss on extinguishment of debt, provision for income taxes, depreciation, amortization, other non-cash items, and other items we do not consider ordinary course in our evaluation of ongoing operating performance.
 
Non-U.S. GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with U.S. GAAP. Adjusted EBITDA excludes significant expenses required to be recorded in our financial statements by U.S. GAAP and is subject to inherent limitations. Other companies in our industry may calculate this non-U.S. GAAP measure differently than we do, or may not calculate it at all, limiting its usefulness as a comparative measure. The tables below provide a reconciliation between net income and Adjusted EBITDA for the three and nine months ended September 30, 2017 and 2016.
 
   
Three Months Ended
 
   
September 30,
2017
   
September 30,
2016
 
Consolidated net income
 
$
7,374
   
$
6,793
 
Add:
               
Interest expense
   
4,023
     
5,557
 
Income tax expense
   
3,110
     
(180
)
Depreciation expense
   
421
     
310
 
Amortization expense
   
175
     
-
 
EBITDA
 
$
15,103
   
$
12,480
 
Components of Adjusted EBITDA
               
LIFO adjustment (a)
   
(641
)
   
(78
)
Pension/postretirement expense (b)
   
84
     
117
 
Stock options, restricted stock and incentives expense (c)
   
226
     
99
 
Strategic initiatives (d)
   
219
     
9
 
New product launch costs (e)
   
566
     
1,051
 
Product line rationalizations (f)
   
314
     
-
 
Adjusted EBITDA
 
$
15,871
   
$
13,678
 

(a)
Represents expense related to an inventory valuation allowance for last-in, first-out ("LIFO") reporting.
(b)
Represents our non-cash Pension/Postretirement expense.
(c)
Represents non-cash stock options, restricted stock and incentives expense.
(d)
Represents the fees incurred for the study of strategic initiatives and acquisition expenses.
(e)
Represents product launch costs of our new product lines.
(f)
Represents costs associated with discontinued products related to product line rationalization
 
   
Nine Months Ended
 
   
September 30,
2017
   
September 30,
2016
 
Net income attributable to Turning Point Brands, Inc.
 
$
16,690
   
$
9,826
 
Add:
               
Interest expense
   
13,002
     
20,895
 
Loss on extinguishment of debt
   
6,116
     
2,824
 
Income tax expense
   
3,850
     
642
 
Depreciation expense
   
1,192
     
896
 
Amortization expense
   
526
     
-
 
EBITDA
 
$
41,376
   
$
35,083
 
Components of Adjusted EBITDA
               
LIFO adjustment (a)
   
246
     
494
 
Pension/postretirement expense (b)
   
252
     
353
 
Stock options, restricted stock and incentives expense (c)
   
446
     
145
 
Foreign exchange hedging (d)
   
(90
)
   
35
 
Strategic initiatives (e)
   
990
     
471
 
New product launch costs (f)
   
1,727
     
1,769
 
Product line rationalizations (g)
   
314
     
-
 
IPO related compensation costs (h)
   
-
     
605
 
Adjusted EBITDA
 
$
45,261
   
$
38,955
 

(a)
Represents expense related to an inventory valuation allowance for last-in, first-out ("LIFO") reporting.
(b)
Represents our non-cash Pension/Postretirement expense.
(c)
Represents non-cash stock options, restricted stock and incentives expense.
(d)
Represents non-cash gain and loss stemming from our foreign exchange hedging activities.
(e)
Represents the fees incurred for the study of strategic initiatives and acquisition expenses.
(f)
Represents product launch costs of our new product lines.
(g)
Represents costs associated with discontinued products related to product line rationalization
(h)
Represents non-recurring compensation expenses incurred with the May 2016 IPO.
 
Liquidity and Capital Reserves
 
Our principal uses for cash are working capital, debt service, capital expenditures, and acquisitions. We believe our cash flows from operations and borrowing availability under our 2017 Revolving Credit Facility (as defined herein) are adequate to satisfy our operating cash requirements for the foreseeable future.
 
We had working capital, which we define as current assets less current liabilities, of $36.5 million at September 30, 2017, compared to working capital of $37.3 million at December 31, 2016. This decrease is primarily the result of an increase in short-term debt maturities as a result of our February 2017 debt refinancing.
 
   
September 30,
2017
   
December 31,
2016
 
Current Assets
 
$
81,413
   
$
78,856
 
Current Liabilities
   
44,892
     
41,567
 
                 
Working Capital
 
$
36,521
   
$
37,289
 
 
Cash Flows from Operating Activities
 
The following table sets out the principal components of our cash flows from operating activities:
 
   
Nine Months Ended
 
   
September 30,
2017
   
September 30,
2016
 
Cash flows from operating activities:
           
Consolidated net income
 
$
16,134
   
$
9,826
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Loss on extinguishment of debt
   
6,116
     
2,824
 
Loss on sale of property, plant and equipment
   
17
     
-
 
Depreciation expense
   
1,192
     
896
 
Amortization of deferred financing costs
   
768
     
1,070
 
Amortization of original issue discount
   
66
     
591
 
Amortization of other intangible assets
   
527
     
-
 
Interest incurred but not paid on PIK Toggle Notes
   
-
     
3,422
 
Interest incurred but not paid on 7% Senior Notes
   
-
     
329
 
Interest paid on PIK Toggle Notes
   
-
     
(9,893
)
Deferred income taxes