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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)

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

			Page No.
PART I    FINANCIAL INFORMATION
	ITEM 1	Financial Statements (Unaudited)
		Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015	3
		Consolidated Statements of Operations for the three months ended September 30, 2016 and 2015	4
		Consolidated Statements of Income for the nine months ended September 30, 2016 and 2015	5
		Consolidated Statements of Comprehensive Income for the three months ended September 30, 2016 and 2015	6
		Consolidated Statements of Comprehensive Income for the nine months ended September 30, 2016 and 2015	7
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015	8
		Notes of Consolidated Financial Statements	10
	ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
	ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	51
	ITEM 4	Controls and Procedures	51
PART II     OTHER INFORMATION
	ITEM 1	Legal Proceedings	52
	ITEM 1A	Risk Factors	52
	ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	52
	ITEM 3	Defaults Upon Senior Securities	52
	ITEM 4	Mine Safety Disclosures	52
	ITEM 5	Other Information	52
	ITEM 6	Exhibits	52
	Signatures	Signatures	53
	Index to Exhibits		54

ASSETS		September 30, 2016				December 31, 2015
Current assets:
Cash		$	4,410			$	4,835
Accounts receivable, net of allowances of $29 in 2016 and $137 in 2015			3,394				3,940
Inventories			51,744				44,339
Other current assets			9,276				10,838
Total current assets			68,824				63,952
Property, plant and equipment, net			5,952				5,603
Deferred financing costs, net			157				208
Goodwill			128,697				128,697
Other intangible assets, net			8,553				8,553
Master Settlement Agreement - escrow deposits			31,924				31,842
Other assets			627				3,608
Total assets		$	244,734			$	242,463
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	3,556			$	4,087
Accrued expenses			9,927				11,053
Accrued interest expense			359				4,329
First lien term loan			1,650				1,650
Revolving credit facility			-				18
Total current liabilities			15,492				21,137
Notes payable and long-term debt			199,488				290,772
Deferred income taxes			7,060				7,013
Postretirement benefits			4,577				4,666
Pension benefits			314				487
Total liabilities			226,931				324,075
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock; $0.01 par value; authorized shares 40,000,000; issued shares -0-
Common stock, voting, $0.01 par value; authorized shares, 190,000,000; issued shares, 2016 18,342,312 and 2015 6,259,480			183				63
Common stock, nonvoting, $0.01 par value; authorized shares, 10,000,000; issued shares, 2016 0 and 2015 938,857			-				9
Additional paid-in capital			104,822				12,628
Accumulated other comprehensive loss			(3,143	)			(3,512	)
Accumulated deficit			(84,059	)			(90,800	)
Total stockholders' equity (deficit)			17,803				(81,612	)
Total liabilities and stockholders' equity (deficit)		$	244,734			$	242,463

		Three Months Ended
		September 30, 2016				September 30, 2015
Net sales		$	50,959			$	51,431
Cost of sales			26,341				26,070
Gross profit			24,618				25,361
Selling, general and administrative expenses			12,727				11,839
Operating income			11,891				13,522
Interest expense and financing costs			5,557				8,676
Investment income			(279	)			-
Income before income taxes			6,613				4,846
Income tax expense (benefit)			(180	)			76
Net income		$	6,793			$	4,770
Basic earnings per common share:
Net income		$	0.38			$	0.66
Diluted earnings per common share:
Net income		$	0.34			$	0.57
Weighted average common shares outstanding:
Basic - inclusive of voting and non-voting shares			18,094,592				7,197,928
Diluted - inclusive of voting and non-voting shares			19,729,219				8,335,308

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

		Three Months Ended
		September 30, 2016				September 30, 2015
Net income		$	6,793			$	4,770
Other comprehensive income, net of tax -
Pension and postretirement
Amortization of unrealized losses recorded in cost of sales			6				6
Amortization of unrealized losses recorded in selling, general and administrative expenses			117				125
			123				131
Comprehensive income		$	6,916			$	4,901

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

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

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

The following table represents the amount of deposits by sales year for the MSA escrow account and reflects the decline in annual deposits beginning in 2009, due to the significant increase in federal excise taxes, as described above:

		Deposits
Sales Year		September 30, 2016				December 31, 2015
1999		$	211			$	211
2000			1,017				1,017
2001			1,673				1,673
2002			2,271				2,271
2003			4,249				4,249
2004			3,715				3,715
2005			4,552				4,552
2006			3,847				3,847
2007			4,167				4,167
2008			3,364				3,364
2009			1,626				1,626
2010			406				406
2011			193				193
2012			199				198
2013			173				173
2014			142				142
2015			97				38
2016			22				-
Total		$	31,924			$	31,842

Food and Drug Administration (“FDA”):

 

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

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

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

Recent Accounting Pronouncements Adopted:

 

The Company adopted ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost in 2016. This ASU requires that debt issuance costs related to a recognized debt liability be presented as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Based on the requirements of this ASU, the Company has retrospectively applied ASU 2015-03 to the December 31, 2015 Consolidated Balance Sheet, which has resulted in $6.3 million being reclassified to direct deduction of the carrying amount of the debt.

 

The Company adopted ASU 2015-17, Income Taxes (Topic 740): Balance sheet classification of deferred taxes in 2016. This ASU requires that deferred tax liabilities and assets be classified as noncurrent in a classified balance sheet. The Company has retrospectively applied ASU 2015-17 to the December 31, 2015 Consolidated Balance Sheet, which has resulted in $0.4 million of deferred tax liabilities being reclassified to a noncurrent deferred tax liability.

 

The Company adopted ASU 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting in 2016. This ASU simplifies several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes, statutory tax withholding requirements and classifications on the statement of cash flows. This ASU results in excess tax benefits and deficiencies from share-based payment awards to be recognized as income tax expense or benefit in the statement of income. The adoption of this ASU had no effect on the Company’s balance sheet or statements of income for 2016.

 

Recent Accounting Pronouncements:

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”), ASU 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606), which delayed the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting year. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on the consolidated financial statements.

 

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in this ASU require entities that measure inventory using the first-in, first-out or average cost methods to measure inventory at the lower of cost and net realizable value. Net realizable value is defined as estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 on a prospective basis. The Company is currently evaluating the effects adoption of this guidance will have on its consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases. ASU 2016-02 requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less for which there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities and should recognize lease expense for such leases generally on a straight-line basis over the lease term. Certain qualitative disclosures along with specific quantitative disclosures will be required, so that users are able to understand more about the nature of an entity’s leasing activities. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. At transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients related to the identification and classification of leases that commenced before the effective date of ASU 2016-02. An entity that elects to use the practical expedients will, in effect, continue to account for leases that commenced before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. The Company is currently evaluating the effect the adoption of this standard will have on its financial statements.

 

Subsequent Events:

 

The Company’s management has evaluated events and transactions that occurred from October 1, 2016 through November 10, 2016, the date these unaudited condensed consolidated financial statements were issued, for subsequent events requiring recognition or disclosure in the financial statements.

 

Note 3. Initial Public Offering (“IPO”):

 

In April of 2016, the Company increased the total authorized shares of preferred and voting and non-voting common stock and effected a 10.43174381 for 1 stock split of the voting and non-voting common stock. As a result of the stock split, all previously reported share amounts (including options and warrants) in the accompanying financial statements and related notes have been retrospectively restated to reflect the stock split.

 

In May of 2016, the Company sold 6,210,000 shares of voting common stock in its IPO (including shares sold pursuant to the underwriters’ option to purchase 810,000 shares to cover over-allotments) at a price of $10.00 per share. The gross proceeds totaled $62,100. The IPO proceeds were used as follows: 1) $3,884 for the payment of expenses in connection with the IPO; 2) $3,250 to purchase and retire Intrepid Warrants (See Note 12, for definition and information); 3) $34,000 to redeem and retire PIK Toggle Notes (See Note 8, for definition and information); 4) $20,200 to redeem and retire $20,000 in principal amount of Second Lien Term Notes and pay $200 as a 1% prepayment penalty (See Note 8, for definition and information); 5) $683 to purchase and retire all outstanding options to buy Intrepid Common Units which include $22 of payroll taxes (See Note 12, for definition and information); and 6) increased cash of $83.

 

In addition, in connection with the IPO the Company also: 1) issued 1,289,819 shares of voting common stock in exchange for all of the outstanding 7% Senior Notes (See Note 8); 2) issued 3,168,438 shares of voting common stock in exchange for all of the remaining outstanding PIK Toggle Notes not repurchased for cash as described above (See Note 8); and 3) paid $2,250 to retire all the remaining Intrepid Warrants (for a total expenditure of $5,500 to retire all the Intrepid Warrants).

 

As a result of the transactions summarized above, the Company has fully repurchased and retired the PIK Toggle Notes and 7% Senior Notes (See Note 8) and fully repurchased and retired all outstanding Intrepid Warrants and options to buy Intrepid Common Units.

 

The Company had the following voting and non-voting shares of common stock outstanding after the transactions summarized above:

Voting shares outstanding before transactions			6,259,480
Shares issued by the Initial Public Offering			6,210,000
Shares issued for 7% Senior Notes			1,289,819
Shares issued for PIK Toggle Notes			3,168,438
Voting shares outstanding after transactions			16,927,737
Non-Voting shares outstanding before and after transactions			938,857

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

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

 

 

 

 

 

 

 

Note 4. Fair Value of Financial Instruments:

 

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of ASC 825, Financial Instruments. The estimated fair value amounts have been determined by the Company using the methods and assumptions described below. However, considerable judgment is required to interpret market data to develop estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

Cash and Cash Equivalents: Cash and cash equivalents are by definition short-term and the carrying amount is a reasonable estimate of fair value.

 

Accounts Receivable: The fair value of accounts receivable approximates their carrying value.

 

Revolving Credit Facility: The fair value of the revolving credit facility approximates its carrying value.

 

Long-Term Debt: The fair value of the Company’s long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. At December 31, 2015, the fair value of the PIK Toggle Notes approximates their face amounts of $60.1 million. At December 31, 2015, the fair value of the 7% Senior Notes approximates their face amounts of $12.6 million.

 

As of September 30, 2016, the fair value of NATC’s First Lien Term Loan and NATC’s Second Lien Term Loan approximate their face amounts of $147.7 million and $60.0 million, respectively. At December 31, 2015, the fair value of NATC’s First Lien Term Loan and NATC’s Second Lien Term Loan approximate their face amounts of $151.7 million and $80.0 million, respectively.

 

Foreign Exchange: As of September 30, 2016, the Company had no open foreign exchange forward contracts.  As of December 31, 2015, the Company had seven outstanding foreign exchange forward contracts for the purchase of 5.1 million Euros.  The fair value of the foreign exchange forward contracts was based upon the quoted market price that resulted in an insignificant asset as of December 31, 2015.

 

Note 5. Inventories:

 

Inventories are stated at the lower of cost or market.  Cost is determined on the last-in, first-out (“LIFO”) method for approximately 55% of the inventories.  Leaf tobacco is presented in current assets in accordance with standard industry practice, notwithstanding the fact that such tobaccos are carried longer than one year for the purpose of curing.

 

The components of inventories are as follows:

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

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

 

Note 6. Property, Plant and Equipment:

 

Property, plant and equipment at September 30, 2016 and December 31, 2015 consists of:

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

 

 

 

 

 

 

 

 

 

Note 7. Accrued Expenses:

 

Accrued expenses at September 30, 2016 and December 31, 2015 consist of:

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

 

 

 

 

 

 

 

Note 8. Notes Payable and Long-Term Debt:

 

Notes payable and long-term debt consists of the following in order of preference:

		September 30, 2016				December 31, 2015
First Lien Term Loan		$	146,792			$	150,555
Second Lien Term Loan			59,067				78,882
PIK Toggle Notes			-				58,882
7% Senior Notes			-				10,360
			205,859				298,679
Less deferred finance charges			(4,721	)			(6,257	)
Less current maturities			(1,650	)			(1,650	)
Total Notes Payable and Long-Term Debt		$	199,488			$	290,772

 

 

 

 

 

 

 

 

 

 

 

Long-term Debt

 

On January 13, 2014, NATC entered into (i) a $170 million First Lien Term Loan Credit Agreement among NATC, the Company, NATC Holding and Wells Fargo Bank, National Association, as administrative agent (the “First Lien Credit Agreement”), (ii) a $80 million Second Lien Term Loan Credit Agreement among NATC, the Company, NATC Holding and Wells Fargo Bank, National Association, as administrative agent (the “Second Lien Credit Agreement”), and (iii) a $40 million ABL Credit Agreement among NATC, NATC Holding and Wells Fargo Bank, National Association,  as ABL Agent (the “Revolving Credit Facility”).

 

First Lien Credit Agreement

 

All of NATC’s subsidiaries, as well as the Company and NATC Holding, are guarantors under the First Lien Credit Agreement.  TPLLC and its subsidiary are not guarantors of the First Lien Credit Agreement. The First Lien Credit Agreement is secured by a first priority lien on substantially all of the assets of the borrowers and the guarantors thereunder, including a pledge of the capital stock of NATC and its subsidiaries held by NATC Holding, NATC or any guarantor, other than certain excluded assets (the “Collateral”).  The loans designated as LIBOR rate loans bear interest at LIBOR Rate then in effect (but not less than 1.25%) plus 6.50% and the loans designated as base rate loans bear interest at the (i) highest of (A) the Prime Rate, (B) the Federal Funds Rate plus 0.50%, (C) LIBOR for an interest period of one month plus 1.00% and (D) 2.25% per year plus (ii) 5.50%. The weighted average interest rate at September 30, 2016 was 9.0%. The First Lien Credit Agreement matures in January 2020.

 

The First Lien Credit Agreement contains customary representations and warranties, events of default, affirmative covenants and negative covenants, which impose restrictions on, among other things, the ability of NATC and its subsidiaries to make investments, pay dividends, sell assets, and incur debt and additional liens. In addition, the First Lien Credit Agreement requires NATC to maintain a total leverage ratio as follows:

Period	Maximum Ratio
Closing Date through March 31, 2015	6.50 to 1.00
April 1, 2015 through September 30, 2016	6.25 to 1.00
October 1, 2016 through September 30, 2017	6.00 to 1.00
October 1, 2017 through September 30, 2018	5.75 to 1.00
October 1, 2018 and thereafter	5.50 to 1.00

NATC is required to make prepayments under the First Lien Credit Agreement upon the occurrence of certain events, including sales of certain assets, casualty events and the incurrence of additional indebtedness, subject to certain exceptions and reinvestment rights. NATC made a prepayment of approximately $2.7 million during the first quarter of 2016.

 

Second Lien Credit Agreement

 

The Second Lien Credit Agreement has the benefit of a second priority security interest in the Collateral and is guaranteed by the same entities as the First Lien Credit Agreement.  The Second Lien Credit Agreement, contains substantially similar representations and warranties, events of default and covenants as the First Lien Credit Agreement; provided, however, that the total leverage ratio required to be maintained by NATC under the Second Lien Credit Agreement is as follows:

Period	Maximum Ratio
Closing Date through March 31, 2015	6.75 to 1.00
April 1, 2015 through September 30, 2016	6.50 to 1.00
October 1, 2016 through September 30, 2017	6.25 to 1.00
October 1, 2017 through September 30, 2018	6.00 to 1.00
October 1, 2018 and thereafter	5.75 to 1.00

Under the Second Lien Credit Agreement the loans designated as LIBOR rate loans bear interest at the LIBOR Rate then in effect (but not less than 1.25%) plus 10.25% and the loans designated as base rate loans bear interest at (i) the highest of (A) the Prime Rate, (B) the Federal Funds Rate plus 0.50%, (C) LIBOR for an interest period of one month plus 1.00% and (D) 2.25% per year plus (ii) 9.25%.  The weighted average interest rate at September 30, 2016 was 11.5%. The Second Lien Credit Agreement matures in July 2020. In connection with the Company’s IPO in May of 2016, the Company prepaid $20 million of the borrowings under the Second Lien Credit Agreement (see Note 3).

 

Revolving Credit Facility

 

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

 

The interest rates per annum applicable to loans under the Revolving Credit Facility are, at the option of NATC, equal to the applicable Base Rate or LIBOR Rate plus the applicable Interest Margin, as defined below:

Pricing Level	Average Excess Availability	Applicable Margin for Base Rate Loans (the “Base Rate Margin”)	Applicable Margin for LIBOR Rate Loans (the “LIBOR Rate Margin”)
I	> $30,000,000	1.25%	2.25%
II	< $30,000,000 but > $15,000,000	1.50%	2.50%
III	< $15,000,000	1.75%	2.75%

The Revolving Credit Facility matures in January 2019 and there was no outstanding balance at September 30, 2016.

 

PIK Toggle Notes

 

On January 13, 2014, the Company issued PIK Toggle Notes (“PIK Toggle Notes”) to Standard General Master Fund, L.P. (“Standard General”) with a principal amount of $45 million and warrants to purchase 42,424 of the Company’s common stock at $.01 per share, as adjusted for stock splits and other events specified in the agreement. After adjustment for the stock split effected in connection with our IPO of 10.43174381 to 1, the warrants have been adjusted to provide for the purchase of 442,558 of the Company’s common stock. Due to the issuance of the warrants, the PIK Toggle Notes had an original issue discount of $1.7 million and were initially valued at $43.3 million. The PIK Toggle Notes were scheduled to mature and the warrants to expire on January 13, 2021.

 

The PIK Toggle Notes accrued interest based on the LIBOR Rate then in effect (but not less than 1.25%) plus 13.75%. Interest was payable on the last day of each quarter and upon maturity. The Company had the flexibility to pay interest in kind through an increase in the principal amount at the same interest rate as the PIK Toggle Notes. The Company chose to increase the PIK Toggle Notes for all interest for the first three months of 2016.

 

The PIK Toggle Notes contained covenants which limited the ability of the Company to enter into transactions with affiliates and make dividends or other distributions or repurchase capital stock. The PIK Toggle Notes were unsecured and did not limit the Company’s ability to incur additional debt or liens.

 

In connection with the IPO, in May of 2016, the Company redeemed and retired all of the outstanding PIK Toggle Notes in exchange for a combination of cash and shares of the Company’s voting common stock (see Note 3).

 

7% Senior Notes

 

In January of 2014, the Company issued 7% Senior Notes to various stockholders with a principal amount of $11 million and warrants to purchase 11,000,000 units of membership interests in Intrepid, which represented 40% of the Intrepid Common Units outstanding on a fully diluted basis, at a purchase price of $1.00 per unit. Due to the issuance of the Intrepid warrants, the 7% Senior Notes had an original issue discount of $2.8 million and were initially valued at $8.2 million. The 7% Senior Notes were scheduled to mature and the warrants to expire on December 31, 2023.

 

The 7% Senior Notes accrued interest at a fixed rate of 7% per annum. Interest was payable on the last business day of June and December in each year and provided that the Company was permitted to elect to pay all or a portion of the interest in kind. The Company made such election for all of 2014 and 2015.

 

The 7% Senior Notes were the general unsecured obligations of the Company and ranked equally with the Company’s other unsecured and unsubordinated debt from time to time outstanding. Redemptions of the 7% Senior Notes could be made by the Company at any time without penalty or premium.

 

In connection with the IPO, in May of 2016, we redeemed and retired all of the outstanding 7% Senior Notes in exchange for shares of the Company’s voting common stock (see Note 3).

 

Restricted / Non-Restricted Condensed Consolidating Financial Statements

 

The payment of principal and interest on the First Lien Term Loan, Second Lien Term Loan and Revolving Credit Facility are guaranteed by or obligations of NATC and its subsidiaries (“Issuer/Restricted”). TPLLC and its subsidiary (“Non-Restricted”) are not guarantors of the First Lien Term Loan, Second Lien Term Loan and Revolving Credit Facility. The separate financial statements of the Issuer/Restricted are not included herein because the Issuer/Restricted are the Company’s wholly-owned consolidated subsidiaries and are jointly, severally, fully and unconditionally liable for the obligations represented by the First Lien Term Loan, Second Lien Term Loan and Revolving Credit Facility. The Company believes that the consolidating financial information for the Issuer/Restricted and the Non-Restricted provide information that is more meaningful in understanding the financial position of the Issuer/Restricted than separate financial statements of the Issuer/Restricted.

 

The following consolidating financial information presents consolidating financial data for the Issuer/Restricted, Non-Restricted and an elimination column for adjustments to arrive at the information for the Company on a consolidated basis as of September 30, 2016 and December 31, 2015 and for the three and nine months ended September 30, 2016 and 2015. The principal elimination entries set forth below eliminate investments in subsidiaries and intercompany balances and transactions.

 

Turning Point Brands, Inc.

Consolidating Balance Sheet

September 30, 2016

(in thousands)

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

 

Turning Point Brands, Inc.

Consolidating Statement of Operations

for the three months ended September 30, 2016

(in thousands)

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

 

Turning Point Brands, Inc.

Consolidating Statement of Operations

for the nine months ended September 30, 2016

(in thousands)

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Turning Point Brands, Inc.

Consolidating Statement of Cash Flows

for the nine months ended September 30, 2016

(in thousands)

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

 

Turning Point Brands, Inc.

Consolidating Balance Sheet

December 31, 2015

(in thousands)

		Issuer/ Restricted				Non-Restricted				Eliminations				Consolidated
	ASSETS
Current assets:
Cash		$	3,267			$	1,568			$	-			$	4,835
Accounts receivable			3,828				112				-				3,940
Inventories			38,065				6,274				-				44,339
Other current assets			5,590				5,248				-				10,838
Total current assets			50,750				13,202				-				63,952
Property, plant and equipment, net			5,603				-				-				5,603
Deferred financing costs, net			208				-				-				208
Goodwill			128,697				-				-				128,697
Investment in subsidiaries			31,489				-				(31,489	)			-
Other intangible assets, net			8,553				-				-				8,553
Master Settlement Agreement - escrow deposits			31,842				-				-				31,842
Other assets			3,178				430				-				3,608
Total assets		$	260,320			$	13,632			$	(31,489	)		$	242,463
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable		$	4,038			$	49			$	-			$	4,087
Accrued expenses			9,956				1,097				-				11,053
Accrued interest expense			4,329				-				-				4,329
First lien term loan			1,650				-				-				1,650
Revolving credit facility			18				-				-				18
Total current liabilities			19,991				1,146				-				21,137
Notes payable and long-term debt			290,772				-				-				290,772
Deferred Income Taxes			7,013				-				-				7,013
Postretirement benefits			4,666				-				-				4,666
Pension benefits			487				-				-				487
Total Liabilities			322,929				1,146				-				324,075
Stockholders' equity (deficit):
Common stock, voting			63				-				-				63
Common stock, non-voting			9				-				-				9
Additional paid-in capital			76,410				11,213				(74,995	)			12,628
Advance to TPB			793				(793	)			-				-
Accumulated other comprehensive loss			(3,512	)			-				-				(3,512	)
Retained earnings (accumulated deficit)			(136,372	)			2,066				43,506				(90,800	)
Total stockholders' equity (deficit)			(62,609	)			12,486				(31,489	)			(81,612	)
Total liabilities and stockholders' equity (deficit)		$	260,320			$	13,632			$	(31,489	)		$	242,463

 

Turning Point Brands, Inc.

Consolidating Statement of Operations

for the three months ended September 30, 2015

(in thousands)

		Issuer/ Restricted				Non-Restricted				Consolidated
Net sales		$	47,883			$	3,548			$	51,431
Cost of sales			23,497				2,573				26,070
Gross profit			24,386				975				25,361
Selling, general and administrative expenses			10,665				1,174				11,839
Operating income (loss)			13,721				(199	)			13,522
Interest expense and financing costs			8,627				49				8,676
Income (loss) before income taxes			5,094				(248	)			4,846
Income tax expense			76				-				76
Net income (loss)		$	5,018			$	(248	)		$	4,770

 

Turning Point Brands, Inc.

Consolidating Statement of Operations

for the nine months ended September 30, 2015

(in thousands)

		Issuer/ Restricted				Non-Restricted				Consolidated
Net sales		$	136,776			$	13,740			$	150,516
Cost of sales			68,284				9,605				77,889
Gross profit			68,492				4,135				72,627
Selling, general and administrative expenses			34,746				4,639				39,385
Operating income (loss)			33,746				(504	)			33,242
Interest expense and financing costs			25,627				105				25,732
Income (loss) before income taxes			8,119				(609	)			7,510
Income tax expense			734				-				734
Net income (loss)		$	7,385			$	(609	)		$	6,776

 

Turning Point Brands, Inc.

Consolidating Statement of Cash Flows

for the nine months ended September 30, 2015

(in thousands)

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