NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS
December 31, 2017, 2016 and 2015
Note 1— Nature of Business and Summary of Significant Accounting
Policies
Business
Orchids Paper Products
Company and its subsidiaries (collectively, “Orchids” or the “Company”) produce bulk tissue paper, known
as parent rolls, and convert parent rolls into finished products, including paper towels, bathroom tissue and paper napkins. The
Company predominately sells its products for use in the "at home" market under private labels to a customer base consisting
primarily of dollar stores, discount retailers and grocery stores that offer limited alternatives across a wide range of products,
and, to a lesser extent, the “away from home” market. The Company has owned and operated its manufacturing facility
in Pryor, Oklahoma since 1998. On June 3, 2014, the Company completed the acquisition of certain assets from Fabrica de Papel San
Francisco, S.A. de C.V. (“Fabrica”) pursuant to an Asset Purchase Agreement (see Note 2). In connection with the acquisition
of these assets, the Company formed three wholly owned subsidiaries: Orchids Mexico DE Holdings, LLC, Orchids Mexico DE Member,
LLC, and OPP Acquisition Mexico, S. de R.L. de C.V. (“Orchids Mexico”). In April 2015, the Company announced the construction
of a new manufacturing facility in Barnwell, South Carolina. In conjunction with this project, the Company established a wholly
owned subsidiary: Orchids Paper Products Company of South Carolina. Furthermore, in connection with a New Market Tax Credit (“NMTC”)
transaction in December 2015 (see Note 13), the Company created Orchids Lessor SC, LLC, another wholly owned subsidiary.
The Company's stock trades
on the NYSE American stock exchange under the ticker symbol "TIS."
Management Plans
In assessing the Company’s
liquidity, management reviews its cash and its operating and capital expenditure commitments. The Company’s liquidity needs
are to meet its working capital requirements, operating expenses and capital expenditure obligations. As of December 31, 2017,
the Company’s current liabilities exceeded the current assets by approximately $148.5 million as $158.0 million of long-term
debt, net of debt issuance costs, with stated maturities beyond 12 months was included in current liabilities due to uncertainty
regarding the Company’s ability to meet existing debt covenants over the next twelve-month period.
At December 31, 2017, the
Company was not in compliance with certain financial covenants under its Second Amended and Restated Credit Agreement (the “Credit
Agreement”) with U.S. Bank National Association (“U.S. Bank”) or its Loan Agreement for New Markets Tax Credit
financing (the “NMTC Loan Agreement”), and obtained a waiver from its lenders. On February 28, 2018, the Company entered
into Amendment No. 7 to the Credit Agreement and on March 1, 2018 the Company entered into Amendment No. 4 to the NMTC Loan Agreement,
each of which, in addition to providing waivers for covenant defaults until the measurement date of June 30, 2018, provides for
a minimum EBITDA covenant, amends the pricing schedule, and amends certain reporting requirements. Including the amendments incorporated
into these waivers, the Company’s credit facilities have been amended for each of the last five quarters. The related covenant
requirements are discussed in Note 7.
The Company sought to refinance
its existing long-term debt in 2017, but did not procure an alternative acceptable to all parties involved. The Company intends
to continue to seek to refinance its existing long-term debt obligations as required by its existing lender and as earnings and
cash flow improve and more opportunities become available. The Company may also need to seek another amendment of its Credit Agreement
with its existing lenders. If the Company is unable to obtain another suitable amendment and/or a refinancing is not completed,
the bank syndicate could declare a default. There can be no assurance that the Company’s lenders will agree to further waivers
or amendments to the existing debt covenants. While management intends to amend or refinance the debt, there can be no assurance
that the Company will be able to obtain additional financing on terms that are satisfactory to it, or at all.
ORCHIDS PAPER PRODUCTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2017, 2016 and 2015
Note 1—Nature of Business and Summary of Significant Accounting
Policies (Continued)
Management is evaluating
all options to refinance its existing long-term debt obligations as well as exploring alternative financing, refinancing, restructuring
and capital-raising activities, in order to address its ongoing liquidity needs and to maintain sufficient access to the loan and
capital markets on commercially acceptable terms to finance its business. In support of these efforts, management is pursuing
various initiatives including, but not limited to, the following:
|
·
|
At the market:
The Company has
access to its "at the market" stock offering program (“ATM Program), with a remaining capacity of $34.7 million
as of December 31, 2017. Management intends to use proceeds generated under the ATM Program for general corporate purposes, including
repayment of debt; capital expenditures, or other working capital requirements;
|
|
·
|
Cash management:
An attentive and
strategic focus on cash flow has been implemented. A weekly cash flow forecast is produced that analyzes cash flow activities
as well as anticipated cash flow. Also, the Company is focused on optimizing working capital management;
|
|
·
|
Operating results:
Management
is committed to focusing on operating results, which is expected to improve operating cash flows and bring the Company’s
financial performance back in line with historical operating results. The Company expects to see continued improvement in cash
flow throughout 2018 as the increase in orders from new customers improve earnings. As production at Barnwell increases, sales
growth is expected to continue to increase and margins to expand as a result of operating leverage;
|
|
·
|
Capital spending:
With the completion
of the Company’s capital expansion plans, management expects to significantly decrease capital expenditures in 2018;
|
|
·
|
Strategic options:
An investment
banker is being engaged to investigate all strategic options, including the disposal of assets; and
|
|
·
|
Debt refinancing:
Continued undertakings to partially or completely refinance the debt.
|
Summary of Significant Accounting Policies
Principles of consolidation
The accompanying consolidated
financial statements include the accounts of Orchids Paper Products Company, its wholly owned subsidiaries, as described above,
and variable interest entities for which Orchids is the primary beneficiary. All significant intercompany transactions and balances
have been eliminated in consolidation.
Cash
Cash includes cash on hand
and cash in banks that management expects to utilize for operational activities.
Accounts receivable
Accounts receivable are
carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts.
A trade receivable is considered to be past due if it is outstanding for more than five days past terms. Management determines
the allowance for doubtful accounts by regularly evaluating individual customer receivables and considering a customer's financial
condition, credit history, and current economic conditions. Receivables are written-off when deemed uncollectible. Recoveries of
receivables previously written-off are recorded when received. The Company does not typically charge interest on trade receivables.
Inventories
Inventories consist of
converted finished goods, bulk paper rolls and raw materials stated at the lower of cost or net realizable value. The Company's
cost is based on standard cost, specific identification, or FIFO (first-in, first-out) method. Standard costs approximate actual
costs on a FIFO basis. Material, labor, and factory overhead necessary to produce the inventories are included in the standard
cost to the extent such input costs do not result in values in excess of net realizable value.
ORCHIDS PAPER PRODUCTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2017, 2016 and 2015
Note 1—Nature of Business and Summary of Significant Accounting
Policies (Continued)
Property, plant and equipment
Property, plant and equipment
are stated at cost. Depreciation of property, plant and equipment is computed using the straight-line method over the estimated
useful lives of the assets. The Company expenses normal maintenance and repair costs as incurred. Spare parts that are maintained
to keep the Company’s machinery and equipment in working order are capitalized and expensed when used rather than depreciated.
Gain and loss on disposal of property, plant and equipment is recognized in the period incurred. The Company capitalizes interest
for major capital projects. Capitalized interest is added to the cost of the underlying assets and is depreciated over the useful
lives of those assets.
Goodwill, intangible assets and long-lived assets
The Company records the
excess of purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed
as goodwill. Goodwill is tested for impairment annually as well as when an event, or change in circumstances, indicates that the
carrying value may not be recoverable.
Under accounting principles
generally accepted in the United States (“U.S. GAAP”), the Company may first assess qualitative factors to determine
whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of
its reporting unit is greater than its carrying amount. If, after assessing the totality of events or circumstances, the Company
determines it is more likely than not that the fair value of a reporting unit is greater than its carrying amount, there is no
need to perform any further testing. However, if the Company concludes otherwise, it is required to perform the first step of a
two-step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount
of the reporting unit. If the fair value of the reporting unit is less than its carrying value, it is required to perform the second
step of the two-step impairment test, in which an impairment loss is calculated and recorded to the extent that the implied fair
value of the goodwill of the reporting unit is less than its carrying value. Alternatively, the Company may bypass the qualitative
assessment in any period and proceed directly to performing the first step of the two-step goodwill impairment test.
The Company performed its
annual goodwill impairment test on October 1, 2017 by performing the first step (e.g. “step zero”), a qualitative impairment
test, to determine whether it was more likely than not that goodwill was impaired. Goodwill is tested at a level of reporting referred
to as the “reporting unit”. The Company has two reporting units, which are defined as the “at home” business
and the “away from home” business. Based on this qualitative test, we determined it was more likely than not that the
fair value of the Company’s reporting units were greater than their carrying amounts; as such, we determined that performing
the second and third steps of the impairment test were not necessary and that goodwill was not impaired.
Intangible assets consist
of the Supply Agreement and Equipment Lease Agreements with Fabrica (see Note 2), licenses, trademarks, customer relationships
and a non-compete agreement. The Company amortizes these assets on a straight-line basis over the expected lives of the assets,
which range from 2 to 20 years.
The Company reviews its
long-lived assets, primarily property, plant and equipment and intangible assets, for impairment whenever events or changes in
circumstances indicate that the carrying values may not be recoverable. Impairment evaluation is based on estimates of remaining
useful lives and the current and expected future profitability and cash flows. The determination of future profitability and cash
flows require significant estimates to be made by the Company’s management. The Company had no impairment of long-lived assets
during the years ended December 31, 2017, 2016 or 2015.
ORCHIDS PAPER PRODUCTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2017, 2016 and 2015
Note 1—Nature of Business and Summary of Significant Accounting
Policies (Continued)
Income taxes
Income taxes are computed
in accordance with the tax rules and regulations of the taxing authorities where the income is earned. Deferred income taxes are
computed using the liability method and are provided on all temporary differences between the financial basis and the tax basis
of the Company's assets and liabilities. Future tax benefits are recognized to the extent that realization of those benefits is
considered to be more likely than not. A valuation allowance is provided for deferred tax assets for which realization is not likely.
The Company uses the flow through method to account for Oklahoma and South Carolina investment tax credits earned on eligible capital
expenditures in the respective states. Under this method, the investment tax credits are recognized as a reduction to income tax
expense when earned.
Deferred debt issuance costs
Costs incurred in obtaining
debt funding are deferred and amortized on an effective interest method over the terms of the loans. Amortization expense for 2017,
2016 and 2015 was $0.5 million, $0.3 million, and $0.2 million, respectively, and has been classified as interest expense in the
statement of income.
Stock compensation expense
Grant-date cost of stock
options and restricted stock are recognized on a straight-line basis over the requisite service periods of the respective options
and shares, based on the fair value of the award on the grant date. The fair value of stock options that have time-based vesting
requirements is estimated using the Black-Scholes option-pricing model. The fair value of stock options that have market-based
vesting requirements is estimated using a Monte-Carlo option-pricing model. The fair value of restricted stock awards is calculated
as the arithmetic mean of the high and low market price of the Company’s stock on the grant date.
In March 2016, the Financial
Accounting Standards Board ("FASB") issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which changed the accounting
for certain aspects of share-based payment to employees. ASU 2016-09 became effective for the Company on January 1, 2017. The primary
impact of adoption was the recognition of excess tax benefits in the provision for income taxes rather than paid-in capital beginning
in the first quarter of 2017. Upon adoption of this standard, excess tax benefits were classified along with other income
tax cash flows as an operating activity on the statement of cash flows. The Company elected to adopt this portion of the standard
on a prospective basis beginning in 2017; therefore, prior periods have not been adjusted. Under the standard, cash flows related
to employee taxes paid for withheld shares are presented as a financing activity on the statement of cash flows on a retrospective
basis. ASU 2016-09 provides an accounting policy election to account for forfeitures as they occur, and the Company opted for this
election.
Prior to the adoption of
ASU 2016-09, excess tax benefits related to share-based compensation that were available to absorb future tax deficiencies related
to share-based compensation were recorded in additional paid-in capital ("APIC pool") when realized. If the amount of
tax deficiencies was greater than the available APIC pool, the excess was recorded as current income tax expense in the statement
of income.
Revenue recognition
Revenues for products loaded
on customer trailers are recognized when the customer has accepted custody and left the Company's dock. Revenues for products shipped
to customers are recognized when title passes upon shipment. Customer discounts and pricing allowances are included in net sales.
Shipping and handling costs
Shipping and handling costs
incurred to ship raw materials to the Company's facilities are included in inventory and cost of sales in the statement of income.
Shipping and handling costs incurred to ship finished goods to customer locations and warehouse locations are included in cost
of sales in the statement of income.
ORCHIDS PAPER PRODUCTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2017, 2016 and 2015
Note 1—Nature of Business and Summary of Significant Accounting
Policies (Continued)
Business interruption insurance
In 2016, the Company received
$1.1 million of proceeds under a business interruption insurance policy for an incident that occurred in its Oklahoma converting
operation in 2015. This amount is recorded as a reduction of cost of sales in the statement of income.
Advertising costs
Advertising costs, which
include costs related to artwork and packaging development, totaled approximately $0.5 million, $0.4 million, and $0.3 million,
respectively, for the years ended December 31, 2017, 2016 and 2015. These costs are expensed when incurred and included in selling,
general and administrative expenses.
Use of estimates
The preparation of financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could
differ significantly from those estimates.
Reclassifications
Certain immaterial prior
period amounts in the accompanying financial statements have been reclassified to conform to the current period presentation. These
reclassifications did not affect previously reported amounts of net income.
New and recently adopted accounting pronouncements
In March 2016, the FASB
issued ASU No. 2016-09,
Compensation – Stock Compensation
(Topic 718):
Improvements to Employee Share-Based
Payment Accounting
(“ASU 2016-09”). ASU 2016-09 requires, among other things, that excess tax benefits and tax
deficiencies be recognized as income tax expense or benefit in the statement of operations rather than as additional paid-in capital,
changes the classification of excess tax benefits from a financing activity to an operating activity in the statement of cash flows,
and allows forfeitures to be accounted for when they occur rather than estimated. ASU 2016-09 became effective for the Company
on January 1, 2017. Adoption of ASU 2016-09 did not have a material impact on the Company’s financial position, results of
operations and cash flows.
In July 2015, the FASB
issued ASU No. 2015-11,
Inventory
(Topic 330):
Simplifying the Measurement of Inventory
(“ASU 2015-11”).
ASU 2015-11 requires inventory measured using all methods other than the last-in, first-out (LIFO) or retail methods to be measured
at the lower of cost or net realizable value. Net realizable value is defined as the estimated selling price in the ordinary course
of business less reasonably predictable costs of completion, disposal and transportation. ASU 2015-11 became effective for the
Company on January 1, 2017. Adoption of ASU 2015-11 did not have a material impact on the Company’s financial position, results
of operations and cash flows.
In May 2017, the FASB issued
ASU No. 2017-09,
Compensation - Stock Compensation
(Topic 718):
Scope of Modification Accounting
(“ASU 2017-09’).
ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to
apply modification accounting. ASU 2017-09 is effective for interim and annual periods beginning after December 15, 2017, with
early adoption permitted. ASU 2017-09 is not expected to have a material impact on the Company’s financial statements.
ORCHIDS PAPER PRODUCTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2017, 2016 and 2015
Note 1—Nature of Business and Summary of Significant Accounting
Policies (Continued)
In
January 2017, the FASB issued ASU No. 2017-04
, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill
Impairment
(“ASU 2017-04”)
.
ASU 2017-04 provides for
a one-step quantitative impairment test, whereby
a goodwill impairment loss will be measured as the excess of a reporting unit’s carrying amount over its fair value (not
to exceed the total goodwill allocated to that reporting unit). It eliminates Step 2 of the current two-step goodwill impairment
test, under which a goodwill impairment loss is measured by comparing the implied fair value of a reporting unit’s goodwill
with the carrying amount of that goodwill. ASU 2017-04 is effective, on a prospective basis, for SEC filers for interim and annual
periods beginning after December 15, 2019, with early adoption permitted. Management is currently assessing the impact ASU
2017-04 will have on the Company, but it is not expected to have a material impact on the Company’s financial statements.
In
January 2017, the FASB issued ASU No. 2017-01
, Business Combinations (Topic 805): Clarifying the Definition of a Business
(“ASU 2017-01”)
.
ASU 2017-01 clarifies the definition of a business with the objective of adding guidance
to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
ASU 2017-01 is effective, on a prospective basis, for
public companies for
interim
and annual reporting periods
beginning after December 15, 2017. ASU 2017-01 is not expected to have a material impact
on the Company’s financial statements.
In
November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows
(Topic 230):
Restricted Cash
(“ASU
2016-18”). ASU 2016-18 requires 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. Therefore, restricted cash
and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows. ASU No 2016-18 is effective, on a retrospective basis, for public
companies for interim and annual periods beginning after December 15, 2017, with early adoption permitted.
ASU 2016-18 is
not expected to have a material impact on the Company’s cash flows.
In
October 2016, the FASB issued ASU No. 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
(“ASU 2016-16”)
.
ASU 2016-16 requires the
recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs.
ASU 2016-16 is effective for public companies for interim and annual reporting periods beginning after December 15, 2017,
with early adoption permitted. The amendments in this ASU should be applied on a modified retrospective basis through a cumulative-effect
adjustment directly to retained earnings as of the beginning of the period of adoption.
ASU 2016-16 is not expected to have
a material impact on the Company’s financial position, results of operations and cash flows.
In August 2016, the FASB
issued
ASU No.
2016-15,
Statement of Cash Flows (Topic
230): Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”). ASU 2016-15 will make eight targeted
changes to how cash receipts and cash payments are presented and classified in the
statement
of cash flows. ASU 2016-15 is effective for public companies for interim and annual periods beginning after December 15, 2017,
with early adoption permitted. The new standard will require adoption on a retrospective basis unless it is impracticable to apply,
in which case it would be required to apply the amendments prospectively as of the earliest date practicable.
ASU 2016-15
is not expected to have a material impact on the Company’s cash flows.
In June 2016, the FASB
issued
ASU No.
2016-13,
Financial Instruments – Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”). ASU 2016-13 replaces
the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration
of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for SEC
filers for interim and annual periods beginning after December 15, 2019. Management is currently assessing the impact ASU 2016-13
will have on the Company, but it is not expected to have a material impact on the Company’s financial position, results of
operations and cash flows.
ORCHIDS PAPER PRODUCTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2017, 2016 and 2015
Note 1—Nature of Business and Summary of Significant Accounting
Policies (Continued)
In February 2016, the FASB
issued
ASU No.
2016-02,
Leases (Topic 842)
(“ASU
2016-02”). ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet but did not
make significant changes to the effects of lessee accounting on the income statement or statement of cash flows. ASU 2016-02 is
effective for public companies for annual and interim periods beginning after December 15, 2018, with early adoption permitted.
Management is currently assessing the impact ASU 2016-02 will have on the Company’s financial position.
In January 2016, the FASB
issued
ASU No.
2016-01,
Financial Instruments – Overall
(Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
(“ASU 2016-01”). ASU
2016-01 addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments, specifically
equity investments and financial instruments measured at amortized cost. ASU 2016-01 is effective for public companies for annual
and interim periods beginning after December 15, 2017. ASU 2016-01 is not expected to have a material impact on the Company’s
financial statements.
In May 2014, the FASB
issued ASU No. 2014-09,
Revenue from Contracts with Customers
(Topic 606) (“ASU 2014-09”). ASU 2014-09
clarifies the principles for recognizing revenue and develops a common revenue standard under U.S. GAAP under which an entity should
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 and all subsequently issued clarifying
ASUs will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard permits the use
of either the retrospective or modified retrospective transition method upon adoption. Management intends to adopt ASU 2014-09
effective January 1, 2018, using the modified retrospective method of adoption, and will not have an adjustment to retained earnings
upon adoption. Based on the Company’s preliminary review of customer contracts, management believes that the impact of adopting
ASU 2014-09 on the Company’s consolidated financial statements will not be material as these transactions generally consist
of a single performance obligation to deliver tangible goods. Management does not expect significant changes in the timing or method
of revenue recognition or a need to significantly change any accounting policies or practices. Furthermore, management does not
expect significant changes to accounting systems or controls upon adoption of ASU 2014-09. However, the adoption of ASU 2014-09
will result in additional disclosures.
Note 2 – Fabrica Transaction
On May 5, 2014, Orchids
Paper Products Company and its wholly owned subsidiary, Orchids Mexico, entered into an asset purchase agreement (“APA”)
with Fabrica to acquire certain assets and 100% of the U.S. business of Fabrica. On June 3, 2014, the Company closed on the transaction
set forth in the APA, and in connection therewith, entered into a supply agreement (“Supply Agreement”) and an equipment
lease agreement (“Equipment Lease Agreement”) (collectively, the “Fabrica Transaction”).
Asset Purchase Agreement and Assignment and Assumption of Supply
Agreement
Pursuant to the terms of
the APA, Orchids Mexico acquired a paper machine, two converting lines, Fabrica’s U.S. customer list, exclusive rights to
all of Fabrica’s trademarks in the United States, and Fabrica’s covenant not to compete in the United States. The purchase
price consisted of 411,650 shares of Orchids’ common stock, which were valued at $12.0 million based on the closing price
of the Company’s shares on the closing date and had a fair market value of $9.6 million on the closing date due to restrictions
on the sale of the stock. In connection with closing the APA, Orchids Paper Products Company also entered into an Assignment and
Assumption of Supply Agreement with Elgin Finance & Investment Corp. (“Elgin”) for $16.7 million in cash and 274,433
shares of Orchids’ common stock, which were valued at $8.0 million based on the closing price of the Company’s shares
on the closing date and had a fair market value of $6.4 million on the closing date due to restrictions on the sale of the stock,
in exchange for the assignment to Orchids of Elgin’s supply agreement with Fabrica which provided Elgin exclusive supply
rights with respect to Fabrica’s U.S. business.
ORCHIDS
PAPER PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2017, 2016 and 2015
Note 2 – Fabrica Transaction (Continued)
Under the Supply Agreement,
the Company has the right to purchase from Fabrica up to 19,800 tons of parent rolls and equivalent converting capacity for certain
specified product during each twelve-month period following the effective date of the Supply Agreement. The Supply Agreement also
allowed the Company to purchase up to an additional 7,700 tons annually in each of the first two years of the agreement. Pursuant
to the terms of the Supply Agreement, Fabrica and its affiliates will be subject to a non-compete provision with respect to business
in the U. S. The Supply Agreement has an initial term of twenty years. In the event of a termination of the Supply Agreement due
to (i) a material breach as a result of intentional, willful or grossly negligent conduct by Fabrica, (ii) a breach of Fabrica’s
covenant not to compete, or (iii) a voluntary filing of bankruptcy by Fabrica, Fabrica must pay the Company $100 million in liquidated
damages. In the event of a change of control of Fabrica, the Company will have a two-year right to terminate the Supply Agreement,
and in such event, Fabrica would be required to pay the Company liquidated damages of $36.7 million.
Equipment Lease Agreement
Pursuant to the terms of
the Equipment Lease Agreement, Orchids Mexico will lease the papermaking and converting assets acquired under the APA back to Fabrica.
The rental fee will be based upon the number of metric tons shipped by Fabrica to the Company, subject to annual adjustment based
on the calculation of the purchase price for product under the Supply Agreement. The Equipment Lease Agreement has a term of twenty
years, but will terminate automatically upon termination of the Supply Agreement.
Upon the earlier of (i)
the termination of the Equipment Lease Agreement or (ii) the purchase by Orchids of a separate paper making or converting asset
and the entry into of an equipment lease agreement between Orchids and Fabrica with respect to such purchased asset, Orchids Mexico
shall have the right to sell to Fabrica the paper assets leased under the Equipment Lease Agreement on an as-is-where-is basis,
for $12.0 million.
Purchase Price Allocation
The acquisition of Fabrica’s
U.S. business in the Fabrica Transaction was accounted for under the FASB Accounting Standards Codification 805, “Business
Combinations”. The $32.7 million purchase price of $16.7 million in cash (financed by a term loan) and $16.0 million in common
stock exceeded the $7.2 million estimated fair value of tangible assets acquired (machinery and equipment) by approximately $25.5
million. Intangible assets totaling approximately $18.0 million have been identified and are being amortized over their expected
useful lives.
Intangibles and goodwill
Intangible assets at December
31, 2017 were:
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Life
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
(in years)
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
|
|
|
(in thousands)
|
|
Intangible asset - supply and equipment lease agreements
|
|
20
|
|
$
|
12,800
|
|
|
$
|
2,240
|
|
|
$
|
10,560
|
|
Intangible asset - licenses/trademarks
|
|
20
|
|
|
1,350
|
|
|
|
237
|
|
|
|
1,113
|
|
Intangible asset - non-compete agreement
|
|
2
|
|
|
1,150
|
|
|
|
1,150
|
|
|
|
-
|
|
Intangible asset - customer relationships
|
|
12
|
|
|
2,690
|
|
|
|
784
|
|
|
|
1,906
|
|
|
|
|
|
$
|
17,990
|
|
|
$
|
4,411
|
|
|
$
|
13,579
|
|
ORCHIDS
PAPER PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2017, 2016 and 2015
Note 2 – Fabrica Transaction (Continued)
Intangible assets at December
31, 2016 were:
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
Life
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
(in years)
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
|
|
|
(in thousands)
|
|
Intangible asset - supply and equipment lease agreements
|
|
20
|
|
$
|
12,800
|
|
|
$
|
1,600
|
|
|
$
|
11,200
|
|
Intangible asset - licenses/trademarks
|
|
20
|
|
|
1,350
|
|
|
|
169
|
|
|
|
1,181
|
|
Intangible asset - non-compete agreement
|
|
2
|
|
|
1,150
|
|
|
|
1,150
|
|
|
|
-
|
|
Intangible asset - customer relationships
|
|
12
|
|
|
2,690
|
|
|
|
560
|
|
|
|
2,130
|
|
|
|
|
|
$
|
17,990
|
|
|
$
|
3,479
|
|
|
$
|
14,511
|
|
Estimated future intangible
amortization expense is $0.9 million in 2018, 2019, 2020, 2021, and 2022, respectively.
Goodwill of $7.6 million
represents the premium the Company was willing to pay to enter into a long-term relationship with Fabrica and the benefits the
Company expects to receive from being able to cost effectively serve its current customers and to develop relationships with new
customers with distribution centers in the western United States. The relationship with Fabrica is expected to provide opportunities
for future production capacity and sales growth. Goodwill is not amortized, but is tested at least annually for impairment, or
if circumstances occur that more likely than not will reduce the fair value of the reporting unit to below its carrying amount.
No goodwill impairment has been recorded as of December 31, 2017. There were no other changes in the carrying amount of goodwill
subsequent to the acquisition. All of the goodwill related to the Fabrica Transaction is expected to be tax-deductible.
Operating Results of Business Acquired
The consolidated statements
of income include the following revenues and operating income related to the U.S. business acquired from Fabrica. Operating income
provided below does not include an allocation of the Company’s overhead or selling, general and administrative expenses.
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Revenues
|
|
$
|
31,748
|
|
|
$
|
42,045
|
|
|
$
|
46,316
|
|
Operating income
|
|
|
5,940
|
|
|
|
10,583
|
|
|
|
10,569
|
|
Related party transactions
The Company incurred the
following transactions with Fabrica during the years ended December 31, 2017, 2016 and 2015:
|
|
Year Ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands)
|
|
Products purchased under the Supply Agreement
|
|
$
|
26,640
|
|
|
$
|
31,974
|
|
|
$
|
37,373
|
|
Amounts billed to Fabrica under the Equipment Lease Agreement
|
|
$
|
2,027
|
|
|
$
|
1,647
|
|
|
$
|
2,172
|
|
Parent rolls purchased by Fabrica
|
|
$
|
4,889
|
|
|
$
|
1,777
|
|
|
$
|
6,119
|
|
ORCHIDS PAPER PRODUCTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2017, 2016 and 2015
Note 3 – Fair Value Measurements
The valuation hierarchy
included in U.S. GAAP considers the transparency of inputs used to value assets and liabilities as of the measurement date. The
less transparent or observable the inputs used to value assets and liabilities, the lower the classification of the assets and
liabilities in the valuation hierarchy. A financial instrument's classification within the valuation hierarchy is based on the
lowest level of input that is significant to its fair value measurement. The three levels of the valuation hierarchy and the classification
of the Company's financial assets and liabilities within the hierarchy are as follows:
Level 1—Quoted prices (unadjusted) in active markets for identical
assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2—Observable inputs other than quoted prices included
within Level 1 for the asset or liability, either directly or indirectly. If an asset or liability has a specified term, a Level
2 input must be observable for substantially the full term of the asset or liability.
Level 3—Unobservable inputs for the asset or liability.
The Company does not report
any assets or liabilities at fair value in the financial statements. However, the fair value of the Company's long-term debt is
estimated by management to approximate the carrying value of $170.8 million and $142.0 million at December 31, 2017 and 2016, respectively.
Management's estimates are based on periodic comparisons of the characteristics of the Company's obligations, including floating
interest rates, credit rating, maturity and collateral, to current market conditions as stated by an independent third-party financial
institution. Such valuation inputs are considered a Level 2 measurement in the fair value valuation hierarchy.
As the Company has no assets
or liabilities reported at fair value in the financial statements, there were no transfers among Level 1, Level 2 or Level 3 assets
during the years ended December 31, 2017, 2016 and 2015.
Note 4—Commitments and Contingencies
The Company may be involved
from time to time in litigation arising from the normal course of business. In management's opinion, as of the date of this report,
the Company is not engaged in legal proceedings, which individually or in the aggregate are expected to have a materially adverse
effect on the Company's results of operations or financial condition.
ORCHIDS PAPER PRODUCTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2017, 2016 and 2015
Note 4—Commitments and Contingencies (Continued)
Gas purchase commitments
In the fourth quarter of
2017, the Company entered into contracts to purchase natural gas for both the Pryor, Oklahoma and the Barnwell, South Carolina
facilities. Contracted volumes with fixed pricing provide for approximately 80% of the Company’s natural gas requirements
at its Pryor facility through December 31, 2019 and approximately 70% of its natural gas requirements at its Barnwell facility
through September 30, 2019. Commitments under these contracts are as follows:
|
|
PRYOR, OKLAHOMA
|
Period
|
|
MMBTUs
|
|
|
Price
per
MMBTU
|
|
|
MMBTUs
|
|
|
Price
per
MMBTU
|
|
|
MMBTUs
|
|
|
Price
per
MMBTU
|
|
|
MMBTUs
|
|
|
Price
per
MMBTU
|
1Q 2018
|
|
|
30,000
|
|
|
$
|
2.89
|
|
|
|
60,000
|
|
|
$
|
2.75
|
|
|
|
15,000
|
|
|
$
|
2.58
|
|
|
|
25,029
|
|
|
*
|
2Q 2018
|
|
|
30,000
|
|
|
$
|
2.89
|
|
|
|
60,000
|
|
|
$
|
2.75
|
|
|
|
15,000
|
|
|
$
|
2.58
|
|
|
|
22,011
|
|
|
*
|
3Q 2018
|
|
|
30,000
|
|
|
$
|
2.89
|
|
|
|
60,000
|
|
|
$
|
2.75
|
|
|
|
15,000
|
|
|
$
|
2.58
|
|
|
|
13,222
|
|
|
*
|
4Q 2018
|
|
|
30,000
|
|
|
$
|
2.89
|
|
|
|
60,000
|
|
|
$
|
2.75
|
|
|
|
15,000
|
|
|
$
|
2.58
|
|
|
|
23,844
|
|
|
*
|
1Q 2019
|
|
|
30,000
|
|
|
$
|
2.89
|
|
|
|
60,000
|
|
|
$
|
2.75
|
|
|
|
15,000
|
|
|
$
|
2.58
|
|
|
|
25,029
|
|
|
*
|
2Q 2019
|
|
|
30,000
|
|
|
$
|
2.89
|
|
|
|
60,000
|
|
|
$
|
2.75
|
|
|
|
15,000
|
|
|
$
|
2.58
|
|
|
|
22,011
|
|
|
*
|
3Q 2019
|
|
|
30,000
|
|
|
$
|
2.89
|
|
|
|
60,000
|
|
|
$
|
2.75
|
|
|
|
15,000
|
|
|
$
|
2.58
|
|
|
|
13,222
|
|
|
*
|
4Q 2019
|
|
|
30,000
|
|
|
$
|
2.89
|
|
|
|
60,000
|
|
|
$
|
2.75
|
|
|
|
15,000
|
|
|
$
|
2.58
|
|
|
|
23,844
|
|
|
*
|
1Q 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
130,029
|
|
|
*
|
2Q 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
127,011
|
|
|
*
|
3Q 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
118,222
|
|
|
*
|
4Q 2020
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
128,844
|
|
|
*
|
*The variable rate is based on the Oneok Gas Transportation rate
plus an adder of $0.01/MMBtu plus all applicable transport and fuel.
|
|
BARNWELL,
SOUTH CAROLINA
|
|
|
|
|
|
|
|
|
MMBTUs
|
|
|
Price
per
MMBTU
|
|
|
MMBTUs
|
|
|
Price
per
MMBTU
|
|
|
MMBTUs
|
|
|
Price
per
MMBTU
|
|
|
|
|
|
|
1Q 2018
|
|
|
12,586
|
|
|
$
|
3.52
|
|
|
|
12,586
|
|
|
$
|
3.43
|
|
|
|
12,586
|
|
|
$
|
3.37
|
|
|
|
|
|
|
|
2Q 2018
|
|
|
12,725
|
|
|
$
|
3.52
|
|
|
|
12,725
|
|
|
$
|
3.43
|
|
|
|
12,725
|
|
|
$
|
3.37
|
|
|
|
|
|
|
|
3Q 2018
|
|
|
12,865
|
|
|
$
|
3.52
|
|
|
|
12,865
|
|
|
$
|
3.43
|
|
|
|
12,865
|
|
|
$
|
3.37
|
|
|
|
|
|
|
|
4Q 2018
|
|
|
12,865
|
|
|
$
|
3.52
|
|
|
|
12,865
|
|
|
$
|
3.43
|
|
|
|
12,865
|
|
|
$
|
3.37
|
|
|
|
|
|
|
|
1Q 2019
|
|
|
12,586
|
|
|
$
|
3.52
|
|
|
|
12,586
|
|
|
$
|
3.43
|
|
|
|
12,586
|
|
|
$
|
3.37
|
|
|
|
|
|
|
|
2Q 2019
|
|
|
12,725
|
|
|
$
|
3.52
|
|
|
|
12,725
|
|
|
$
|
3.43
|
|
|
|
12,725
|
|
|
$
|
3.37
|
|
|
|
|
|
|
|
3Q 2019
|
|
|
12,865
|
|
|
$
|
3.52
|
|
|
|
12,865
|
|
|
$
|
3.43
|
|
|
|
12,865
|
|
|
$
|
3.37
|
|
|
|
|
|
|
|
4Q 2019
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
12,865
|
|
|
$
|
3.37
|
|
|
|
|
|
|
|
If the Company is unable
to purchase the contracted amounts and the market price at that time is less than the contracted price, the Company would be obligated
under the terms of the agreements to reimburse an amount equal to the difference between the contracted amount and the amount actually
purchased, multiplied by the difference between the contract price and a price designated in the contract (approximates spot price).
Other purchase commitments
In April 2015, Orchids
announced projects to build a new integrated paper converting facility in Barnwell, South Carolina. As part of this project, the
Company entered into significant purchase orders for two converting lines and construction of a paper machine. As of December 31,
2017, obligations under purchase orders related to the Barnwell projects totaled approximately $0.1 million.
ORCHIDS PAPER PRODUCTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2017, 2016 and 2015
Note 5 – Inventories
Inventories at December 31 were:
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Raw materials
|
|
$
|
6,032
|
|
|
$
|
4,855
|
|
Bulk paper rolls
|
|
|
5,526
|
|
|
|
3,765
|
|
Converted finished goods
|
|
|
9,134
|
|
|
|
9,859
|
|
Inventory valuation reserve
|
|
|
(129
|
)
|
|
|
(65
|
)
|
|
|
$
|
20,563
|
|
|
$
|
18,414
|
|
Note 6—Property, Plant and Equipment
The principal categories and estimated
useful lives of property, plant and equipment at December 31 were:
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
Useful
|
|
|
2017
|
|
|
2016
|
|
|
Lives
|
|
|
(In thousands)
|
|
|
|
Land
|
|
$
|
4,582
|
|
|
$
|
4,582
|
|
|
-
|
Buildings and improvements
|
|
|
62,358
|
|
|
|
32,428
|
|
|
7 to 40
|
Machinery and equipment
|
|
|
286,291
|
|
|
|
188,531
|
|
|
2.5 to 40
|
Vehicles
|
|
|
1,836
|
|
|
|
1,824
|
|
|
3 to 5
|
Nondepreciable machinery and equipment (parts and spares)
|
|
|
12,680
|
|
|
|
11,976
|
|
|
-
|
Construction-in-process
|
|
|
3,014
|
|
|
|
81,101
|
|
|
-
|
|
|
$
|
370,761
|
|
|
$
|
320,442
|
|
|
|
In January 2016, the Company
received $1.9 million of proceeds from an economic incentive related to the construction of the South Carolina facility. While
there currently are no U.S. GAAP pronouncements relating to the accounting treatment of government grants, the Company recorded
these proceeds as a reduction in the property, plant and equipment related to this project in accordance with non-authoritative
guidance issued by the American Institute of Certified Public Accountants, which recommended that grants related to developing
property be recognized over the useful lives of the assets by recognizing receipt as the related asset is depreciated.
The Company capitalizes
interest for major capital projects. Capitalized interest is added to the cost of the underlying assets and is depreciated over
the useful lives of those assets. Interest expense for the years ended December 31, 2017, 2016 and 2015 excludes $3.6 million,
$1.7 million and $0.5 million, respectively, of interest capitalized on significant projects during the year.
ORCHIDS PAPER PRODUCTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2017, 2016 and 2015
Note 7 – Long-Term Debt and Revolving Line of Credit
In April 2015, the Company
entered into its Second Amended and Restated Credit Agreement (the “Credit Agreement”) with U.S. Bank National Association
(“U.S. Bank”) to add $40 million of borrowing capacity under a delayed draw term loan. In June 2015, the Company entered
into Amendment No. 2 to obtain additional borrowing capacity. This amendment combined $20.0 million outstanding under an existing
revolving line of credit and $27.3 million outstanding under an existing term loan into a $47.3 million term loan, increased the
delayed draw facility from $40 million to $115 million (later amended to $108.5 million), and extended the maturity of the delayed
draw facility from August 2015 to June 2020. Proceeds from the delayed draw term loan were used solely to finance the purchase
and installation of new equipment and construction at the Barnwell, South Carolina facility. In January 2017, the Company entered
into Amendment No. 3, which increased the total loan commitment, modified the pricing grid applicable to interest rates and the
unused commitment fee, amended the financial covenant related to the maintenance of a maximum total Leverage Ratio by increasing
the permitted total Leverage Ratio for fiscal quarters ending on or prior to March 31, 2018, and amended the terms of the draw
loan to provide for additional advance amounts available to the Company for the purposes of acquiring or improving real estate.
In March 2017, the Company entered into Amendment No. 4, which waived the permitted total Leverage Ratio for the first two quarters
of 2017 and increased the permitted total Leverage Ratio for the last two quarters of 2017, lowered the required Fixed Charge Coverage
Ratio for the second and third quarters of 2017, and extended the period during which funds may be drawn under the delayed draw
loan to December 25, 2017. The delayed draw loan of $108.5 million was fully drawn in October of 2017. In June 2017, the Company
entered into Amendment No. 5, which, among other things, waived the required Fixed Charge Coverage Ratio for the period ended June
30, 2017. Additionally, the Company agreed not to make any dividend or other distribution payment with respect to its equity unless
the Company has achieved a Leverage Ratio of less than 4 to 1 for two consecutive fiscal quarters and no Default or Event of Default
(as defined in the Credit Agreement) exists or would exist following such payment. The amount and timing of dividend payments otherwise
remains subject to the judgment and approval of the Board of Directors. On November 7, 2017, the Company entered into Amendment
No. 6 to the Credit Agreement, and Amendment No. 3 to its Loan Agreement for New Markets Tax Credit (the “NMTC Loan Agreement”),
each of which, in addition to providing waivers for covenant defaults, provided for a minimum EBITDA covenant, amended the pricing
schedule, and amended certain reporting requirements. At December 31, 2017, the Company was not in compliance with certain financial
covenants under its Credit Agreement or the NMTC Loan Agreement, and obtained a waiver from its lenders.
On February 28, 2018, the
Company entered into Amendment No. 7 to the Credit Agreement and on March 1, 2018 the Company entered into Amendment No. 4 to the
NMTC Loan Agreement, each of which, in addition to providing waivers for covenant defaults until the measurement date of June 30,
2018, provides for a minimum EBITDA covenant, amends the pricing schedule, and amends certain reporting requirements. Including
the amendments incorporated into these waivers, the Company’s credit facilities have been amended for each of the last five
quarters. The financial covenant requirements remaining in effect at this time are as follows: Fixed Charge Coverage Ratio of 1.2
to 1.0 at December 31, 2017 and quarter-ends thereafter; Leverage Ratios of 4.5 at December 31, 2017, 3.5 at March 31, 2018, 5.5
at June 30, 2018, and 3.5 at quarter-ends thereafter; and minimum EBITDA for the most recent three-month period of $5.0 million
at December 31, 2017, $4.6 million at January 31, 2018, and February 28, 2018, and at increasing levels as of the last day of each
month thereafter. In addition, the Company is required to comply with other conditions and meet certain milestones in an allocated
time, including that the Company must (i) by March 15, 2018, retain consultants to assist us in formulating a strategic plan to
facilitate such activities; and (ii) by June 1, 2018, initiate a strategic alternative acceptable to its lenders to facilitate
repayment of its outstanding debt obligations.
The Company sought to refinance
its existing long-term debt in 2017, but did not procure an alternative acceptable to all parties involved. The Company intends
to continue to seek to refinance its existing long-term debt obligations as required by its existing lender and as earnings and
cash flow improve and more opportunities become available. The Company may also need to seek another amendment of its Credit Agreement
with its existing lenders. If the Company is unable to obtain another suitable amendment and/or a refinancing is not completed,
the bank syndicate could declare a default. There can be no assurance that the Company’s lenders will agree to further waivers
or amendments to the existing debt covenants. While management is exploring options to refinance its existing long-term debt obligations,
as well as alternative financing, refinancing, restructuring and capital-raising activities, in order to address the Company’s
ongoing liquidity needs and to maintain sufficient access to the loan and capital markets on commercially acceptable terms to finance
its business, there can be no assurance that the Company will be able to obtain additional financing on terms that are satisfactory
to it, or at all. As of December 31, 2017, the borrowings under the Credit Agreement and the term loan otherwise due in 2022 were
classified as current on the balance sheet due to these uncertainties regarding the Company’s ability to meet the existing
debt covenants over the next twelve-month period.
ORCHIDS PAPER PRODUCTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2017, 2016 and 2015
Note 7—Long-Term Debt and Revolving Line of Credit (Continued)
The terms of the Credit
Agreement, as amended, consist of the following:
|
·
|
a $25.0 million revolving credit line due June 2020;
|
|
·
|
a $47.3 million Term Loan with a 5-year term due June 2020 with quarterly principal payments of $0.7 million for September
2015 through June 2016, $1.0 million for September 2016 through March 2018, and beginning in April 2018 through June 2020, monthly
payments of $0.3 million.
|
|
·
|
a $108.5 million delayed draw term loan, which was fully drawn in October 2017, due June 2020 with quarterly principal payments
beginning in September 2017 of 1.5% of the outstanding balance as of defined measurement dates through the draw period ending December
2017. Beginning in December 2017 through March 2018, quarterly principal payments are $1.6 million, and beginning in April 2018
monthly payments of $0.5 million will be paid through June 2020.
|
Additionally, in connection
with the NMTC transaction discussed in Note 13, the Company entered into an $11.1 million term loan with U.S. Bank. This loan bears
interest at a fixed rate of 4.4% and matures on December 29, 2022. The loan requires quarterly payments of principal and interest
of approximately $255,000, beginning in March 2016, with a balloon payment due on the maturity date.
Under the terms of the
Credit Agreement, as amended, amounts outstanding will bear interest at a variable rate of LIBOR plus a specified margin. The specified
margin is based on the Company’s quarterly Leverage Ratio, as defined in the Credit Agreement, as amended. The following
table outlines the specified margins and the commitment fees payable under the Credit Agreement, as amended, as of March 1, 2018:
|
|
LIBOR
|
|
|
Base
|
|
|
Commitment
|
|
Leverage Ratio
|
|
Margin
|
|
|
Margin
|
|
|
Fee
|
|
Less than 1.00
|
|
|
1.25
|
%
|
|
|
0.00
|
%
|
|
|
0.15
|
%
|
Greater than or equal to 1.00 but less than 2.00
|
|
|
1.50
|
%
|
|
|
0.00
|
%
|
|
|
0.20
|
%
|
Greater than or equal to 2.00 but less than 3.00
|
|
|
1.75
|
%
|
|
|
0.00
|
%
|
|
|
0.25
|
%
|
Greater than or equal to 3.00 but less than 3.50
|
|
|
2.25
|
%
|
|
|
0.00
|
%
|
|
|
0.30
|
%
|
Greater than or equal to 3.50 but less than 4.00
|
|
|
2.50
|
%
|
|
|
0.25
|
%
|
|
|
0.35
|
%
|
Greater than or equal to 4.00 but less than 4.50
|
|
|
3.00
|
%
|
|
|
0.75
|
%
|
|
|
0.40
|
%
|
Greater than or equal to 4.50 but less than 5.00
|
|
|
3.50
|
%
|
|
|
1.25
|
%
|
|
|
0.45
|
%
|
Greater than or equal to 5.00 but less than 6.00
|
|
|
4.00
|
%
|
|
|
1.75
|
%
|
|
|
0.50
|
%
|
Greater than or equal to 6.00
|
|
|
7.00
|
%
|
|
|
4.75
|
%
|
|
|
1.55
|
%
|
As of December 31, 2017, the Company’s weighted-average interest
rate was 7.3%.
ORCHIDS PAPER PRODUCTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2017, 2016 and 2015
Note 7—Long-Term Debt and Revolving Line of Credit (Continued)
Long-term debt at December 31 consists of:
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Revolving line of credit, maturing on June 25, 2020
|
|
$
|
16,844
|
|
|
$
|
16,447
|
|
Delayed draw term loan, maturing on June 25, 2020, with quarterly principal payments beginning in September 2017 of 1.5% of the outstanding balance as of defined measurement dates through the draw period ending December 2017. Beginning in December 2017 through March 2018, quarterly principal payments are $1.6 million, and beginning in April 2018 monthly payments of $0.5 million will be paid through June 2020, excluding interest paid separately.
|
|
|
105,305
|
|
|
|
72,342
|
|
Term loan, maturing on June 25, 2020, with quarterly principal payments of $0.7 million for September 2015 through June 2016, $1.0 million for September 2016 through March 2018, and beginning in April 2018 through June 2020, monthly payments of $0.3 million, excluding interest paid separately.
|
|
|
38,600
|
|
|
|
42,600
|
|
Term loan, maturing on December 29, 2022, due in quarterly installments of $255,000, including interest
|
|
|
10,019
|
|
|
|
10,577
|
|
Capital lease obligations
|
|
|
33
|
|
|
|
-
|
|
Less: unamortized debt issuance costs
|
|
|
(1,865
|
)
|
|
|
(1,249
|
)
|
|
|
|
168,936
|
|
|
|
140,717
|
|
Less current portion
|
|
|
168,903
|
|
|
|
6,728
|
|
|
|
$
|
33
|
|
|
$
|
133,989
|
|
Unamortized debt issuance costs at December 31 consist
of:
|
|
2017
|
|
|
2016
|
|
|
|
(In thousands)
|
|
Revolving line of credit
|
|
$
|
432
|
|
|
$
|
229
|
|
Delayed draw term loan, maturing on June 25, 2020
|
|
|
615
|
|
|
|
283
|
|
Term loan, maturing on June 25, 2020
|
|
|
274
|
|
|
|
146
|
|
Term loan, maturing on December 29, 2022
|
|
|
544
|
|
|
|
591
|
|
|
|
$
|
1,865
|
|
|
$
|
1,249
|
|
The annual maturities of long-term debt at December 31,
2017, are as follows:
|
|
Annual
|
|
|
|
Payment
|
|
Year
|
|
Amount
|
|
|
|
(in thousands)
|
|
2018
|
|
$
|
10,903
|
|
2019
|
|
|
10,929
|
|
2020
|
|
|
140,751
|
|
2021
|
|
|
668
|
|
2022
|
|
|
7,527
|
|
after 2022
|
|
|
23
|
|
|
|
$
|
170,801
|
|
ORCHIDS PAPER PRODUCTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2017, 2016 and 2015
Note 7—Long-Term Debt and Revolving Line of Credit (Continued)
The amount available under
the revolving credit line may be reduced in the event that the Company's borrowing base, which is based upon qualified receivables
and qualified inventory, is less than $25.0 million. As of December 31, 2017, the Company’s borrowing base was $19.3 million,
including $9.3 million of eligible accounts receivable and $10.0 million of eligible inventory. The amount available under the
revolving credit line was $2.4 million as of December 31, 2017.
Obligations under the Credit
Agreement and the NMTC loan are secured by substantially all of the Company's assets. The Credit Agreement contains representations
and warranties, and affirmative and negative covenants customary for financings of this type, including, but not limited to, limitations
on additional borrowings, additional investments and asset sales. The Company has the right to prepay borrowings under the Credit
Agreement at any time without penalty.
Note 8—Income Taxes
The Company is subject
to income tax in the United States and Mexico. Income from continuing operations before taxes subject to United States and foreign
income taxes for each of the three years ended December 31, were as follows:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
United States
|
|
$
|
(10,401
|
)
|
|
$
|
18,280
|
|
|
$
|
17,902
|
|
Foreign
|
|
|
1,574
|
|
|
|
(1,058
|
)
|
|
|
1,710
|
|
Total (loss) income before income taxes
|
|
$
|
(8,827
|
)
|
|
$
|
17,222
|
|
|
$
|
19,612
|
|
The components of the provision
for income taxes for each of the three years ended December 31, were as follows:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
(31,060
|
)
|
|
$
|
(2,934
|
)
|
|
$
|
1,945
|
|
U.S. State
|
|
|
(2,048
|
)
|
|
|
(352
|
)
|
|
|
(224
|
)
|
Foreign
|
|
|
240
|
|
|
|
127
|
|
|
|
99
|
|
|
|
|
(32,868
|
)
|
|
|
(3,159
|
)
|
|
|
1,820
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
16,667
|
|
|
|
7,906
|
|
|
|
3,930
|
|
U.S. State
|
|
|
429
|
|
|
|
(568
|
)
|
|
|
-
|
|
Foreign
|
|
|
271
|
|
|
|
232
|
|
|
|
305
|
|
|
|
|
17,367
|
|
|
|
7,570
|
|
|
|
4,235
|
|
Total provision for (benefit from) income taxes
|
|
$
|
(15,501
|
)
|
|
$
|
4,411
|
|
|
$
|
6,055
|
|
ORCHIDS PAPER PRODUCTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2017, 2016 and 2015
Note 8—Income Taxes (Continued)
Significant components
of the Company's deferred income tax assets and (liabilities) at December 31 were:
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
1,477
|
|
|
$
|
1,576
|
|
Prepaid expenses
|
|
|
(134
|
)
|
|
|
(209
|
)
|
Accrued vacation
|
|
|
14
|
|
|
|
70
|
|
Plant and equipment
|
|
|
(31,185
|
)
|
|
|
(34,114
|
)
|
Federal net operating loss carryforward
|
|
|
12,010
|
|
|
|
-
|
|
State investment tax credit carryforward
|
|
|
9,036
|
|
|
|
7,721
|
|
State net operating loss carryforward
|
|
|
2,407
|
|
|
|
352
|
|
Stock-based compensation
|
|
|
862
|
|
|
|
1,375
|
|
State income taxes - temporary differences
|
|
|
(6,483
|
)
|
|
|
(4,738
|
)
|
R&D and other federal credits
|
|
|
677
|
|
|
|
766
|
|
Intangible assets
|
|
|
(326
|
)
|
|
|
(273
|
)
|
Other
|
|
|
50
|
|
|
|
140
|
|
Deferred income tax liabilities, net
|
|
$
|
(11,595
|
)
|
|
$
|
(27,334
|
)
|
The following table summarizes
the differences between the U.S. federal statutory rate and the Company's effective tax rate for financial statement purposes:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Statutory tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Change in future years' tax rate
|
|
|
125.0
|
%
|
|
|
-
|
|
|
|
-
|
|
State income taxes, net of U.S. federal tax benefit
|
|
|
3.5
|
%
|
|
|
4.6
|
%
|
|
|
3.3
|
%
|
R&D and other federal credits
|
|
|
0.9
|
%
|
|
|
(2.1
|
%)
|
|
|
(1.2
|
%)
|
Employee and board stock compensation
|
|
|
(0.5
|
%)
|
|
|
-
|
|
|
|
0.1
|
%
|
State investment tax credits
|
|
|
14.9
|
%
|
|
|
(10.0
|
%)
|
|
|
(5.5
|
%)
|
Section 199 manufacturing deduction
|
|
|
-
|
|
|
|
-
|
|
|
|
(1.5
|
%)
|
Change in estimates
|
|
|
-
|
|
|
|
(1.8
|
%)
|
|
|
-
|
|
Foreign income taxes, net of U.S. federal tax credits
|
|
|
2.7
|
%
|
|
|
(1.1
|
%)
|
|
|
0.6
|
%
|
Other
|
|
|
(5.9
|
%)
|
|
|
1.0
|
%
|
|
|
0.1
|
%
|
|
|
|
175.6
|
%
|
|
|
25.6
|
%
|
|
|
30.9
|
%
|
ORCHIDS PAPER PRODUCTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2017, 2016 and 2015
Note 8—Income Taxes (Continued)
For the year ended December
31, 2017, the effective tax rate was impacted by the Tax Cuts and Job Act for future tax years as enacted in December 2017. Deferred
tax assets and liabilities are measured based on applicable enacted tax rates and provisions of enacted tax laws. Accordingly,
all deferred tax assets and liabilities as of December 31, 2017, were restated at a 21% tax rate. Since the Company has a
net deferred tax liability, this resulted in a net tax benefit of approximately $11 million. The effect on the effective tax rate
was 125% as shown in the rate reconciliation table above. Exclusive of the $11 million benefit from the change in the tax laws,
the Company’s effective tax rate would have been approximately 51%. Oklahoma Investment Tax Credits (“OITC”)
associated with investments in our manufacturing operations in Pryor, Oklahoma; federal credits, foreign tax credits and research
and development credits; and the Company’s pre-tax net losses contributed to the difference between the U.S. federal statutory
rate and the Company’s effective tax rate for 2017.
For the year ended December
31, 2016, the effective tax rate was lower than the statutory rate primarily due to South Carolina Investment Tax Credits (“SCITC”)
and OITC associated with investments in the Company’s manufacturing operations in Barnwell, South Carolina and Pryor, Oklahoma,
respectively, and federal credits, including Indian Employment Credits (“IEC”), foreign tax credits and research and
development credits.
For the year ended December
31, 2015, the effective tax rate was lower than the statutory rate primarily due to OITC associated with investments in the Company’s
manufacturing operations in Pryor, Oklahoma, manufacturing tax deductions and IEC.
The Company has significant
carryforwards for the State of Oklahoma and South Carolina totaling $9.0 million. For Oklahoma the OITC is $8.6 million,
which is primarily associated with significant equipment acquisitions in the current and prior years. The Company believes
that its future state taxable income will be sufficient to allow realization before the OITC expires in varying amounts from 2021
through 2032. Accordingly, deferred tax assets have been recognized for this credit.
The SCITC carryforward
is approximately $0.4 million and is primarily associated with the Company's $28 million investment in 2016 with new converting
lines. While the Company believes that its future state taxable income will be sufficient to allow realization before the
2016 SCITC expires in ten years, it does not believe that sufficient future state taxable income will allow any additional SCITC.
Accordingly, a deferred tax asset has been recognized only for the 2016 credit carryforward.
The U.S. tax code requires
that certain types of income produced by non-U.S. subsidiaries be currently taxed without regard to actual distribution (Subpart
F income). Income earned by Orchids Mexico meets the definition of Subpart F income. As a result, U.S. current and deferred federal
income tax has been recorded on these earnings. Upon remittance of these earnings, no significant incremental U.S. tax is expected.
Based upon a review of
its income tax filing positions, the Company believes that its positions would be sustained upon an audit and does not anticipate
any adjustments that would result in a material change to its financial position. However, the 2014 tax return has been selected
for audit by the Internal Revenue Service. The Company recognizes interest related to income taxes as interest expense and penalties
as selling, general and administrative expenses. The tax years 2014 through 2017 remain open to examination by major taxing jurisdictions
in which the Company files income tax returns.
ORCHIDS PAPER PRODUCTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2017, 2016 and 2015
Note 9—Earnings per Share
During the first quarter
of 2013, the Company granted restricted stock to certain employees. These awards include a nonforfeitable right to receive dividends
and therefore are considered to participate in undistributed earnings with common stockholders. Therefore, the Company calculates
basic and diluted earnings per common share using the two-class method, under which net earnings are allocated to each class of
common stock and participating security. The computation of basic and diluted net income per common share for the years ended December
31, 2017, 2016 and 2015, is as follows:
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
(In thousands, except share and per share data)
|
|
Net income
|
|
$
|
6,674
|
|
|
$
|
12,811
|
|
|
$
|
13,557
|
|
Less: distributed earnings allocable to participating securities
|
|
|
-
|
|
|
|
-
|
|
|
|
(3
|
)
|
Distributed and undistributed earnings
allocable to common shareholders
|
|
$
|
6,674
|
|
|
$
|
12,811
|
|
|
$
|
13,554
|
|
Weighted average shares outstanding
|
|
|
10,399,074
|
|
|
|
10,286,373
|
|
|
|
9,778,167
|
|
Effect of stock options
|
|
|
15,797
|
|
|
|
62,901
|
|
|
|
66,054
|
|
Weighted average shares outstanding - assuming dilution
|
|
|
10,414,871
|
|
|
|
10,349,274
|
|
|
|
9,844,221
|
|
Net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.64
|
|
|
$
|
1.25
|
|
|
$
|
1.39
|
|
Diluted
|
|
$
|
0.64
|
|
|
$
|
1.24
|
|
|
$
|
1.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options not included above because they were anti-dilutive
|
|
|
838,925
|
|
|
|
614,250
|
|
|
|
598,000
|
|
Note 10—Stock Incentives
In April 2014, the Orchids
Paper Products Company 2014 Stock Incentive Plan (the “2014 Plan”) was approved. The 2014 Plan replaced the Orchids
Paper Products Company 2005 Stock Incentive Plan (the “2005 Plan”) and provides for the granting of stock options and
other stock based awards to employees and Board members selected by the Board's compensation committee. The Company's policy is
to issue shares of remaining authorized common stock to satisfy option exercises under the 2014 Plan. A total of 400,000 shares
may be issued pursuant to the 2014 Plan. As of December 31, 2017, there were 49,575 shares available for issuance under the 2014
Plan. The exercise price of each option is generally equal to the arithmetic mean of the high and low sales price per share of
the Company's common stock on the grant date. Options granted to Board members under the Plan generally vest immediately. Options
granted to employees generally vest over a service period of zero to five years or are market-based and vest when the share price
of the Company’s common stock closes at or above a certain percentage of the purchase price of the option for three consecutive
business days. Options granted with market-based vesting expire if they remain unvested five years after the grant date. Options
granted under the 2014 Plan have a 10-year life.
Stock options with time-based vesting conditions
The Company uses the Black-Scholes
option valuation model to estimate the grant date fair value of stock options issued with time-based vesting conditions, as this
model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable.
Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Estimated
volatility is calculated based on actual historical volatility of the Company's common stock from the Company's initial public
offering date to the grant date. The Company's dividend yield assumption is based on the expected dividend yield as of the grant
date. Expected life is calculated based on the average of the service period and the contractual term of the option, using the
simplified method for "plain vanilla" options, due to limited available exercise information. The Company expenses the
cost of these options granted over the vesting period of the option based on the grant-date fair value of the award.
ORCHIDS PAPER PRODUCTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2017, 2016 and 2015
Note 10—Stock Incentives (Continued)
The following table details
the options granted to certain members of the board of directors and management that were valued using the Black-Scholes valuation
model and the weighted-average assumptions used in the Black-Scholes option valuation model for those grants during 2015, 2016
and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
|
Grant
|
|
Number
|
|
|
Exercise
|
|
|
Grant Date
|
|
|
Risk-Free
|
|
|
Estimated
|
|
|
Dividend
|
|
|
Life
|
Date
|
|
of Shares
|
|
|
Price
|
|
|
Fair Value
|
|
|
Interest Rate
|
|
|
Volatility
|
|
|
Yield
|
|
|
(in years)
|
May 2015
|
|
|
40,000
|
|
|
$
|
22.49
|
|
|
$
|
4.64
|
|
|
|
2.13
|
%
|
|
|
40
|
%
|
|
|
6.23
|
%
|
|
5
|
Nov 2015
|
|
|
68,000
|
|
|
|
29.58
|
|
|
|
7.37
|
|
|
|
2.32
|
|
|
|
40
|
|
|
|
4.73
|
|
|
6
|
Jan 2016
|
|
|
5,000
|
|
|
|
27.77
|
|
|
|
6.56
|
|
|
|
2.00
|
|
|
|
40
|
|
|
|
5.04
|
|
|
6
|
May 2016
|
|
|
40,000
|
|
|
|
31.33
|
|
|
|
7.57
|
|
|
|
1.74
|
|
|
|
40
|
|
|
|
4.47
|
|
|
5
|
Sep 2016
|
|
|
20,000
|
|
|
|
28.48
|
|
|
|
4.28
- 4.83
|
|
|
|
1.21 - 1.50
|
|
|
|
29 - 31
|
|
|
|
4.92
|
|
|
5 to 7
|
May 2017
|
|
|
40,000
|
|
|
|
19.95
|
|
|
|
3.40
|
|
|
|
1.81
|
|
|
|
32
|
|
|
|
5.26
|
|
|
5
|
Jul 2017
|
|
|
76,500
|
|
|
|
12.22
|
|
|
|
2.31
|
|
|
|
1.94 - 2.08
|
|
|
|
33.7 - 33.9
|
|
|
|
5.12 - 5.15
|
|
|
5 to 6
|
In 2016, 4,000 of time-based options
were forfeited when an employee left the Company. In 2015, 3,750 of time-based options granted in 2005 expired unexercised.
Stock options with market-based vesting conditions
The Company uses
a Monte Carlo option valuation model to estimate the grant date fair value of stock options issued with market-based vesting conditions,
as these options include a market condition. Option valuation models require the input of highly subjective assumptions including
the expected stock price volatility, dividend yield and expected life of the option. Estimated volatility is calculated based on
a mix of historical and implied volatility during the expected life of the options. Historical volatility is considered since the
Company’s initial public offering and implied volatility is based on the publicly traded options of a three-company peer
group within the paper industry. The Company's dividend yield assumption is based on the Company’s average historical dividend
yield and current dividend yield as of the grant date. Expected life is calculated based on the average of the service period and
the contractual term of the option, using the simplified method for "plain vanilla" options. The Company expenses the
cost of these options granted over the implicit, or derived, service period of the option based on the completed Monte Carlo models.
During 2014 and 2015, the
Board of Directors granted options to purchase 145,000 and 28,600 shares, respectively, of the Company’s common stock to
certain members of management. These options will become exercisable in four equal tranches, if at all, if and when the share price
of the Company’s common stock closes at or above a certain percentage of the purchase price of the option for three consecutive
business days, in accordance with the following vesting schedule:
Share price required to achieve vesting
|
|
2014
options
|
|
|
2015
options
|
|
Tranche 1
|
|
$
|
34.79
|
|
|
$
|
29.56
|
|
Tranche 2
|
|
|
42.35
|
|
|
|
36.00
|
|
Tranche 3
|
|
|
51.43
|
|
|
|
43.71
|
|
Tranche 4
|
|
|
60.50
|
|
|
|
51.43
|
|
ORCHIDS PAPER PRODUCTS COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
December 31, 2017, 2016 and 2015
Note 10—Stock Incentives (Continued)
Any unvested portion of
the options shall expire five years from the date of grant and the options shall terminate ten years after the date of grant. The
following table details the options granted to certain members of management that were valued using the Monte Carlo valuation model
and the assumptions used in the valuation model for those grants during 2014 and 2015:
|
|
|
|
|
|
|
|
|
|
Grant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derived
|
|
|
|
|
|
Number
|
|
|
|
|
|
Date
|
|
|
Risk-Free
|
|
|
|
|
|
|
|
|
Expected
|
|
|
Service
|
|
|
|
of
|
|
|
Exercise
|
|
|
Fair
|
|
|
Interest
|
|
|
Estimated
|
|
|
Dividend
|
|
|
Life
|
|
|
Period
|
|
Grant Date
|
|
Shares
|
|
|
Price
|
|
|
Value
|
|
|
Rate
|
|
|
Volatility
|
|
|
Yield
|
|
|
(in
years)
|
|
|
(in
years)
|
|
Jan 2014
|
|
-Tranche 1
|
|
|
10,000
|
|
|
$
|
31.13
|
|
|
$
|
5.64
|
|
|
|
1.98
|
%
|
|
|
31
|
%
|
|
|
4.50
|
%
|
|
|
5.15
|
|
|
|
0.31
|
|
Jan 2014
|
|
-Tranche 2
|
|
|
10,000
|
|
|
|
31.13
|
|
|
|
5.46
|
|
|
|
1.98
|
|
|
|
31
|
|
|
|
4.50
|
|
|
|
5.58
|
|
|
|
1.15
|
|
Jan 2014
|
|
-Tranche 3
|
|
|
10,000
|
|
|
|
31.13
|
|
|
|
5.03
|
|
|
|
1.98
|
|
|
|
31
|
|
|
|
4.50
|
|
|
|
5.97
|
|
|
|
1.94
|
|
Jan 2014
|
|
-Tranche 4
|
|
|
10,000
|
|
|
|
31.13
|
|
|
|
4.27
|
|
|
|
1.98
|
|
|
|
31
|
|
|
|
4.50
|
|
|
|
6.25
|
|
|
|
2.50
|
|
Feb 2014
|
|
-Tranche 1
|
|
|
25,000
|
|
|
|
30.88
|
|
|
|
5.51
|
|
|
|
1.98
|
|
|
|
31
|
|
|
|
4.60
|
|
|
|
5.17
|
|
|
|
0.35
|
|
Feb 2014
|
|
-Tranche 2
|
|
|
25,000
|
|
|
|
30.88
|
|
|
|
5.35
|
|
|
|
1.98
|
|
|
|
31
|
|
|
|
4.60
|
|
|
|
5.60
|
|
|
|
1.19
|
|
Feb 2014
|
|
-Tranche 3
|
|
|
25,000
|
|
|
|
30.88
|
|
|
|
4.88
|
|
|
|
1.98
|
|
|
|
31
|
|
|
|
4.60
|
|
|
|
5.99
|
|
|
|
1.98
|
|
Feb 2014
|
|
-Tranche 4
|
|
|
25,000
|
|
|
|
30.88
|
|
|
|
4.15
|
|
|
|
1.98
|
|
|
|
31
|
|
|
|
4.60
|
|
|
|
6.27
|
|
|
|
2.54
|
|
May 2014
|
|
-Tranche 1
|
|
|
1,250
|
|
|
|
28.19
|
|
|
|
5.06
|
|
|
|
2.03
|
|
|
|
31
|
|
|
|
4.70
|
|
|
|
5.36
|
|
|
|
0.71
|
|
May 2014
|
|
-Tranche 2
|
|
|
1,250
|
|
|
|
28.19
|
|
|
|
4.74
|
|
|
|
2.03
|
|
|
|
31
|
|
|
|
4.70
|
|
|
|
5.78
|
|
|
|
1.56
|
|
May 2014
|
|
-Tranche 3
|
|
|
1,250
|
|
|
|
28.19
|
|
|
|
4.02
|
|
|
|
2.03
|
|
|
|
31
|
|
|
|
4.70
|
|
|
|
6.14
|
|
|
|
2.29
|
|
May 2014
|
|
-Tranche 4
|
|
|
1,250
|
|
|
|
28.19
|
|
|
|
3.29
|
|
|
|
2.03
|
|
|
|
31
|
|
|
|
4.70
|
|
|
|
6.39
|
|
|
|
2.79
|
|
Sep 2015
|
|
-Tranche 1
|
|
|
7,150
|
|
|
|
25.24
|
|
|
|
4.44
|
|
|
|
1.82
|
|
|
|
34
|
|
|
|
5.20
|
|
|
|
5.20
|
|
|
|
0.40
|
|
Sep 2015
|
|
-Tranche 2
|
|
|
7,150
|
|
|
|
25.24
|
|
|
|
3.92
|
|
|
|
1.82
|
|
|
|
34
|
|
|
|
5.20
|
|
|
|
5.51
|
|
|
|
1.02
|
|
Sep 2015
|
|
-Tranche 3
|
|
|
7,150
|
|
|
|
25.24
|
|
|
|
3.11
|
|
|
|
1.82
|
|
|
|
34
|
|
|
|
5.20
|
|
|
|
5.77
|
|
|
|
1.54
|
|
Sep 2015
|
|
-Tranche 4
|
|
|
7,150
|
|
|
|
25.24
|
|
|
|
2.36
|
|
|
|
1.82
|
|
|
|
34
|
|
|
|
5.20
|
|
|
|
5.93
|
|
|
|
1.87
|
|
In 2015, Tranche 1 of the
options granted in September 2015, or 7,150 options, vested when the share price of the Company’s common stock closed above
$29.56 for three consecutive business days. In 2016, Tranche 1 of the options granted in January 2014, or 3,750 options, and Tranche
1 of the options granted in February 2014, or 18,750 options, vested when the share price of the Company’s common stock closed
above $34.79 for three consecutive business days. Additionally, 1,875 options, 20,550 options and 30,000 options with market-based
vesting conditions were forfeited when employees left the Company in 2017, 2016 and 2015, respectively.
Stock options issued outside of the 2014 Plan
In April 2014, the Company’s
stockholders voted to approve the options granted to Mr. Jeffrey S. Schoen, the Company’s President and Chief Executive Officer,
on November 8, 2013. Upon his appointment as an officer of the Company, Mr. Schoen was granted an option to purchase up to 400,000
shares of the common stock of the Company at a purchase price of $30.25 per share. The option will become exercisable, if at all,
if and when the share price of the Company’s common stock closes at or above a certain percentage of the purchase price of
the option for three consecutive business days, in accordance with the following vesting schedule:
These options were granted
outside of the 2005 Plan and the 2014 Plan. Any unvested portion of the option shall expire five years from the date of grant and
the option shall terminate ten years after the date of grant. The Company used a Monte Carlo option valuation model to estimate
the grant date fair value of each tranche of 100,000 options, as they include a market condition. Assumptions used in the valuation
model were the same as those for the stock options with market-based vesting conditions issued to employees, which are noted above.
The Company expenses the cost of these options granted over the implicit service period of the option based on the completed Monte
Carlo models. The following table details the assumption used in the valuation model for the options granted to Mr. Schoen:
In 2016, Tranche 1 of the
options granted to Mr. Schoen, or 100,000 options, vested when the share price of the Company’s common stock closed above
$34.79 for three consecutive business days.
The Company recognized
the following expenses related to all options granted during 2017, 2016 and 2015 under the 2005 Plan, the 2014 Plan and the Schoen
options:
The following tables summarize
activity related to options granted under the 2005 Plan, the 2014 Plan and the Schoen options:
The following table summarizes
options outstanding and exercisable under the 2005 Plan, the 2014 Plan and the Schoen options as of December 31, 2017:
As of December 31, 2017,
there was $0.3 million of unrecognized compensation expense related to non-vested stock options with a time-based vesting condition
for options granted in 2017, 2016 and 2015. This cost is expected to be recognized on a straight-line basis over a weighted average
period of 1.8 years.
During the years ended
December 31, 2017, 2016 and 2015, the Company received $0.1 million, $0.3 million, and $0.2 million, respectively, in proceeds
from the exercise of stock options. Upon adoption of ASU 2016-09 on January 1, 2017, the Company began to recognize excess tax
benefits related to stock option exercises in the provision for income taxes rather than paid-in capital. Prior to the adoption
of ASU 2016-09, excess tax benefits related to stock option exercises were recorded to APIC pool when realized and were available
to offset future tax deficiencies. The Company realized $0.1 million, $0.2 million, and an immaterial amount of tax benefits related
to stock option exercises during the years ended December 31, 2017, 2016 and 2015, respectively. During 2016, the Company recognized
excess tax benefits of $0.2 million and in 2015 recognized an immaterial deficiency.
In February 2013, the Company
granted 16,000 shares of restricted stock to certain employees under the 2005 Plan. These awards were valued at the arithmetic
mean of the high and low market price of the Company's stock on the grant date, which was $21.695 per share, and vested ratably
over a three-year period beginning on the first anniversary of the grant date and were fully vested in 2016. The Company expenses
the cost of restricted stock granted over the vesting period of the shares based on the grant-date fair value of the award. The
Company recognized expense of $3,000 and $44,000 during 2016 and 2015, respectively, related to the shares granted under the 2005
Plan. No shares of restricted stock were granted in the years ending December 31, 2017, 2016 or 2015. The following table summarizes
information about restricted stock vesting during the years ended December 31:
The Company sells its paper
production in the form of parent rolls and converted products. Revenues from converted product sales and parent roll sales in the
years ended December 31, 2017, 2016 and 2015 were:
Credit risk for the Company
was concentrated in the following customers who each comprised more than 10% of the Company's total sales during the years ended
December 31, 2017, 2016 and 2015:
*Customer did not account for more than 10% of sales during the
period indicated.
At December 31, 2017 and
2016, the significant customers accounted for the following amounts of the Company's accounts receivable (in thousands):
*Customer did not account for more than 10% of accounts receivable
during the period indicated.
No other customers of the
Company accounted for more than 10% of sales during these periods. The Company generally does not require collateral from its customers
and has not incurred any significant losses on uncollectible accounts receivable.
On February 20, 2008, the
Company signed an exclusive supply agreement with Dixie Pulp and Paper, Inc. to supply all of its recycled fiber needs. This agreement
was effective beginning April 1, 2008 and carried an initial five-year term through April 1, 2013. However, the agreement automatically
renews for successive one-year periods unless either party gives 90 days' notice. As of the date of this report, the Company has
not received notice of intention not to renew the agreement nor has the Company provided such a notice to the counterparty, and
the agreement is in effect.
Much of the Company's cash
is maintained at financial institutions, which are insured by the Federal Deposit Insurance Corporation ("FDIC") up to
$250,000 per depositor at each financial institution. At times, balances may exceed these federally insured limits or may be contained
in foreign bank accounts, which are not insured by the FDIC. The Company has never experienced any losses related to these accounts.
At December 31, 2017, the Company had approximately $1.9 million of non-interest bearing cash balances in excess of federally insured
limits. Additionally, $1.7 million of the Company’s cash was in bank accounts in Mexico, which are not insured by the FDIC.
In May 2017, the Company
established an "at the market" stock offering program ("ATM Program") through which it may, from time to time,
issue and sell shares of its common stock having an aggregate gross sales price of up to $40.0 million through its sales agent.
Sales of the shares of common stock may be made on the NYSE American stock exchange at market prices and such other sales as agreed
upon by us and the sales agent. The Company intends to use the net proceeds from sales under the ATM Program for general corporate
purposes, which may include, among other things, repayment of debt; strategic investments and acquisitions; capital expenditures;
or for other working capital requirements. During the year ended December 31, 2017, 359,957 shares of common stock were sold under
the ATM Program at a weighted average price of $14.71, generating net proceeds of $5.0 million after giving effect to $0.3 million
in sales agent commissions and other stock issuance costs. As of December 31, 2017, $34.7 million of common stock remained available
for issuance under the ATM Program.
In December 2015, the Company
received approximately $5.1 million in net proceeds from financing agreements related to capital expenditures at its Barnwell,
South Carolina facility. This financing arrangement was structured with a third party financial institution (the “NMTC Investor”)
associated with U.S. Bank, an investment fund, and two community development entities (the “CDEs”) majority owned by
the investment fund. This transaction was designed to qualify under the federal NMTC program, pursuant to Section 45D of the Internal
Revenue Code of 1986, as amended. Through this transaction, the Company has secured low interest financing and the potential for
future debt forgiveness related to the South Carolina facility. Upon closing of the NMTC transaction, the Company provided an aggregate
of approximately $11.1 million, which was borrowed from U.S. Bank, to the investment fund, in the form of a loan receivable, with
a term of 25 years, bearing an interest rate of 1.0% per annum. This $11.1 million in proceeds plus $5.1 million of net capital
from the NMTC Investor were contributed to and used by the CDEs to make loans in the aggregate of $16.2 million to a subsidiary
of the Company, Orchids Lessor SC, LLC (“Orchids Lessor”). These loans bear interest at a fixed rate of 1.275%. Orchids
Lessor used the loan proceeds to partially fund $18.0 million of the Company’s capital assets associated with the Barnwell
facility. These capital assets will serve as collateral to the financing arrangement. This transaction also includes a put/call
feature whereby, at the end of a seven-year compliance period, we may be obligated or entitled to repurchase the NMTC Investor’s
interest in the investment fund. The value attributable to the put price is nominal. Consequently, if exercised, the put could
result in the forgiveness of the NMTC Investor’s interest in the investment fund, and result in a net non-operating gain
of up to $5.1 million. The call price will be valued at the net present value of the cash flows of the lease inherent in the transaction.
The NMTC Investor is subject
to 100% recapture of the New Market Tax Credits it receives for a period of seven years as provided in the Internal Revenue Code
and applicable U.S. Treasury regulations. The Company is required to comply with various regulations and contractual provisions
that apply to the New Market Tax Credit arrangement. Noncompliance with applicable requirements could result in the NMTC Investor’s
projected tax benefits not being realized and, therefore, require the Company to indemnify the NMTC Investor for any loss or recapture
of New Market Tax Credits related to the financing until the recapture provisions have expired under the applicable statute of
limitations. The Company does not anticipate any credit recapture will be required in connection with this financing arrangement.
The investment fund and
the community development entities are considered Variable Interest Entities (VIEs) and the Company is the primary beneficiary
of the VIEs. This conclusion was reached based on the following:
Because the Company is
the primary beneficiary of the VIEs, they have been included in the consolidated financial statements. There are no other assets,
liabilities or transactions in these VIEs outside of the financing transactions executed as part of the NMTC transaction.
At December 31, 2017 and
2016, the NMTC Investor’s interest of $5.2 million is recorded in other long-term liabilities on the consolidated balance
sheet. At December 31, 2017 and 2016, the outstanding balance of the amount borrowed from U.S. Bank to loan to the investment fund
was $10.0 million and $10.6 million, respectively, and approximately $0.5 million and $0.6 million, respectively, of unamortized
debt issuance costs related to the above transactions are being amortized over the life of the agreements. As of December
31, 2017, all proceeds from the arrangement have been utilized to fund capital assets associated with the Barnwell facility. At
December 31, 2016, unspent proceeds from the arrangement of approximately $1.3 million were obligated for funding the specified
capital assets at the Barnwell facility and were included in restricted cash.
In September 2014, the
Company entered into an agreement with the Oklahoma Development Finance Authority (“ODFA”) whereby the ODFA agreed
to provide the Company up to $3.5 million to fund a portion of the cost of a new paper production line before September 1, 2020.
The agreement provides for the Oklahoma state withholding payroll taxes withheld by the Company from its employees to be placed
into the Community Economic Development Pooled Finance Revolving Fund – Orchids Paper Products (“Revolving Fund”).
Each year on September 1, beginning in 2015 and ending in 2020, the ODFA will return these state withholding taxes in the Revolving
Fund to the Company, up to an amount totaling $3.5 million. These amounts are recognized as a note receivable in other current
assets in the consolidated balance sheet and in other income in the consolidated statements of income as they are withheld from
employees.
As of December 31, 2017
and 2016, the Company had a note receivable of $0.2 million and $0.5 million, respectively, related to amounts due under the ODFA
pooled financing agreement. The Company recognized other income of $0.5 million, $0.7 million and $0.7 million in 2017, 2016 and
2015, respectively, related to this agreement.
The Company sponsors three
separate defined contribution plans covering substantially all employees. Company contributions are based on either a percentage
of participant contributions or as required by collective bargaining agreements. Participants immediately vest in Company contributions
to each of the three plans. Contribution expense recognized by the Company was $1.0 million, $1.0 million, and $0.6 million, for
the years ended December 31, 2017, 2016 and 2015, respectively.
In April 2015, the Company
completed an underwritten public follow-on offering of 1,500,000 shares of its common stock at $23.00 per share. The underwriters
were granted an option to purchase up to an additional 225,000 shares for a period of 30 days, which was not exercised. Net proceeds
to the Company were $32.1 million, after giving effect to expenses incurred related to the offering.
On September 16, 2015,
the Company’s shelf Registration Statement on Form S-3 (the “Registration Statement”) was declared effective
by the Securities and Exchange Commission. Pursuant to the Registration Statement, the Company, from time to time, may sell common
stock, warrants or units comprised of the other securities described in the Registration Statement, in a single or multiple offerings
up to a total dollar amount of $50 million, at prices and terms that will be determined at the time of the offering.
The Company’s willingness
and ability to raise capital pursuant to the Registration Statement will depend upon a number of circumstances, including, without
limitation, the Company’s need for additional capital to fund operations, organic growth or acquisitions, the Company’s
financial and operating performance and the receptiveness of the capital markets to potential offerings by the Company. As of the
date of this report, the Company does not have any agreements with respect to the issuance of securities pursuant to the Registration
Statement.