NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Note 1— Nature of Business and Summary of Significant
Accounting Policies
Chapter 11 Bankruptcy Proceedings
On April 1, 2019, the Company and its wholly-owned subsidiaries Orchids Paper Products of South Carolina,
and Orchids Lessor SC, LLC (collectively with the Company, the “Debtors”) filed voluntary petitions for relief (the
“Chapter 11 Cases”) under Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”) in the
United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”). In connection with the Chapter
11 Filings, the Company entered into a senior secured superpriority debtor-in-possession credit facility with Black Diamond Commercial
Finance, L.L.C., as administrative agent (the “DIP Agent”) and Orchids Invesetment LLC, as lender (the “DIP Lender”)
(the “DIP Facility”). See Note 19—Subsequent Event for additional information.
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 3). 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 14), 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."
Summary of Significant
Accounting Policies
Basis of Presentation and Going Concern
The accompanying financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities
and commitments in the normal course of business. Should the Company be unable to continue as a going concern, it may be unable
to realize the carrying value of its assets and to meet its liabilities as they become due (see Note 2).
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.
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.
Cash
Cash includes cash on hand and cash in banks
that management expects to utilize for operational activities.
ORCHIDS PAPER PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Note 1—Nature of Business and Summary of Significant
Accounting Policies (Continued)
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.
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, 2018, 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”. Historically, the Company’s goodwill reporting units were defined
as the “at home” business and the “away from home” business. With the completion and ramp-up of the Barnwell
facility with an annual capacity to produce 35,000 tons, or more, of ultra-premium grade paper, the Company’s focus is centered
on its strategy to be a national supplier of high quality consumer tissue products. As a result its reporting units are now 1)
the integrated operations of the U.S.-based mills and converting assets and 2) the Supply Agreement. This change aligns the reporting
units with the Company’s current marketing strategies and how management monitors performance and allocates resources. The
existing goodwill allocation was combined and no reallocation of existing goodwill was required as a result of the change in reporting
units as the goodwill from the Fabrica Transaction is attributable to the Supply Agreement. Based on this qualitative test, management
determined it was more likely than not that the fair value of the Supply Agreement reporting unit was greater than its carrying
amount. As such, the Company determined that performing the second and third steps of the impairment test were not necessary and
that goodwill was not impaired.
ORCHIDS PAPER PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Note 1—Nature of Business and Summary of Significant
Accounting Policies (Continued)
Intangible assets
consist of the Supply Agreement and Equipment Lease Agreements with Fabrica (see Note 3), 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.
In accordance with
ASC 360, management is required to evaluate for impairment when events or changes in circumstances indicate that the carrying value
of an asset group may not be recoverable. Upon the occurrence of a triggering event, management assesses whether the estimated
undiscounted cash flows expected from the use of the asset group and the residual value from the ultimate disposal of the asset
group exceeds the carrying value. In 2018, management considered the continuation of adverse conditions including negative financial
trends, specifically operating losses, working capital deficiency, and other adverse key financial ratios to be a triggering event
and evaluated the asset group for impairment. The Company estimated undiscounted cash flows related to the asset group, which was
determined to be both the Pryor and Barnwell mill and converting assets as they do not generate distinct cash flows. Based on the
estimated undiscounted cash flows of this asset group, it was determined that the recoverable amount exceeded the carrying amount
of those assets, and therefore no further analysis was necessary. The Company had no impairment of long-lived intangible assets
during the years ended December 31, 2018, 2017 or 2016.
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 2018,
2017 and 2016 was $2.0 million, $0.5 million, and $0.3 million, respectively, and has been classified as interest expense in the
statement of operations.
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
FASB issued Accounting Standards Update No. 2016-09,
Compensation – Stock Compensatio
n (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.
ORCHIDS PAPER PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Note 1—Nature of Business and Summary of Significant
Accounting Policies (Continued)
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 operations.
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 operations.
Revenue recognition
The Company’s
revenue streams are derived from sales of various consumer tissue products and parent rolls, which are generally capable of being
distinct and accounted for as single performance obligations to deliver tangible goods. Accordingly, revenue is recognized at the
point in time when control of the asset is transferred to the customer, generally upon delivery of the goods. 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 control passes upon shipment. No revenue is recognized over time, and the Company’s
sales revenues do not give rise to deferred assets and liabilities. The Company records a receivable when revenue is recognized
prior to payment and it has an unconditional right to payment.
Certain of our agreements
with customers provide for cash discounts, trade promotions, customer returns and other deductions. Currently, we recognize revenue
from the sale of goods measured at the fair value of the consideration received or receivable, net of provisions for customer incentives.
Customer discounts and pricing allowances are included in net sales. Revenue net of provisions for customer incentives is only
recognized to the extent that it is probable that a significant reversal of any incremental revenue will not occur. Significant
judgment is required by management to determine the most probable amount of variable consideration to apply as a reduction to net
sales. The Company has also elected to use the practical expedient to not disclose unsatisfied or partially satisfied performance
obligations as no obligations are expected to be satisfied in a period greater than one year.
In many cases, customers
pick up their purchased product, and in these cases, the Company does not recognize freight expense. When, in accordance with agreed
upon terms with customers, the Company arranges for third-party freight companies to deliver the products, freight expense is accrued
and recognized as a component of costs of goods sold as a fulfillment cost when the product is shipped and revenue is recognized.
Expected freight costs are included in quoted prices to customers.
Accounts receivable
are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts.
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.
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
operations. 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 operations.
Advertising costs
Advertising costs,
which include costs related to artwork and packaging development, totaled approximately $0.3 million, $0.5 million, and $0.4 million,
respectively, for the years ended December 31, 2018, 2017 and 2016. These costs are expensed when incurred and included in selling,
general and administrative expenses.
ORCHIDS PAPER PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Note 1—Nature of Business and Summary of Significant
Accounting Policies (Continued)
Recently adopted accounting pronouncements
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 became effective for the Company on January 1, 2018. Adoption of ASU 2017-09 did not
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 became effective, on a retrospective basis, for the Company on January 1, 2018.
All prior periods have been adjusted to conform to the current period presentation, which resulted in an increase in cash used
in investing activities of $1.3 million and $10.7 million for the years ended December 31, 2017 and 2016, respectively, on the
Consolidated Statement of 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 became effective, on a modified retrospective basis, for the Company on January
1, 2018. Adoption of ASU 2016-16 did not have a material impact on the Company’s financial statements.
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 made eight targeted changes to how cash receipts and cash payments are presented and
classified in the statement of cash flows. ASU 2016-15 became effective for the Company on January 1, 2018. The new standard requires
adoption on a retrospective basis unless it is impracticable to apply, in which case it should be applied prospectively as of the
earliest date practicable. Adoption of ASU 2016-15 did not 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 replace most existing revenue recognition guidance in U.S. GAAP. The standard permits the use of either
the retrospective or modified retrospective transition method upon adoption. ASU 2014-09 became effective for the Company on January
1, 2018. The Company elected to use the modified retrospective method of adoption and did not have an adjustment to retained earnings
upon adoption. The Company did not recognize any significant changes in the timing or method of revenue recognition, did not significantly
change any accounting policies or practices, and did not make any significant changes to accounting systems or controls upon adoption
of ASU 2014-09.
ORCHIDS PAPER PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Note 1—Nature of Business and Summary of Significant
Accounting Policies (Continued)
Accounting Pronouncements Issued But Not Currently Effective
In November 2018,
the FASB issued ASU No. 2018-18,
Collaborative Arrangements (Topic 808): Clarifying the Interaction Between Topic 808 and Topic
606
(“ASU 2018-18”). ASU 2018-18 clarifies when certain transactions between collaborative arrangement participants
should be accounted for under ASC 606,
Revenue From Contracts With Customers
(“ASC 606”) and incorporates unit-of-account
guidance consistent with ASC 606 to aid in this determination. ASU 2018-18 is effective for public companies for annual and interim
periods beginning after December 15, 2019, with early adoption permitted. ASU 2018-18 should generally be applied retrospectively
to the date of initial application of Topic 606. Management is currently assessing the impact ASU 2018-18 will have on the Company’s
financial statements.
In October 2018, the
FASB issued ASU No. 2018-17,
Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest
Entities
("ASU 2018-17"). ASU 2018-17 provides that indirect interests held through related parties in common control
arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers
are variable interests. ASU 2018-17 is effective for public companies for annual and interim periods beginning after December 15,
2019, with early adoption permitted. Management is currently evaluating the impact that ASU 2018-17 will have on the Company's
financial statements.
In August 2018, the
FASB issued ASU 2018-13,
Fair Value Measurement - Disclosure Framework (Topic 820)
(“ASU 2018-13”). ASU 2018-13
modifies the disclosure requirements for fair value measurements. ASU 2018-13 is effective for annual and interim periods beginning
after December 15, 2019. Early adoption is permitted for any removed or modified disclosures. Management is currently assessing
the impact ASU 2018-13 will have on the Company, but it is not expected to have a material impact on the Company’s financial
statement disclosures.
In July 2018, the
FASB issued ASU No. 2018-09,
Codification Improvements
(“ASU 2018-09”). ASU 2018-09 provides amendments to a
wide variety of topics in the FASB’s Accounting Standards Codification, which applies to all reporting entities within the
scope of the affected accounting guidance. The transition and effective date guidance are based on the facts and circumstances
of each amendment. Some of the amendments in ASU 2018-09 do not require transition guidance and were effective upon issuance of
ASU 2018-09. However, many of the amendments do have transition guidance with effective dates for annual periods beginning after
December 15, 2018. ASU 2018-09 is not expected to have a material impact on the Company’s financial statements and related
disclosures.
In June 2018, the
FASB issued ASU 2018-07,
Compensation - Stock Compensation (Topic 718): Improvements to Nonemployees Share-Based Payment Accounting
(“ASU 2018-07”). ASU 2018-07 expands the scope of Topic 718 (which currently only includes share-based payments to
employees) to include share-based payments issued to nonemployees for goods or services. With the adoption of ASU 2018-07,
the accounting for share-based payments for nonemployees and employees will be substantially the same. ASU 2018-07 is effective
for public companies for annual and interim periods beginning after December 15, 2018, with early adoption permitted. ASU
2018-07 is not expected to have a material impact on the Company’s financial statements.
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 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 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 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 statements.
ORCHIDS PAPER PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
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”) with further clarifications and improvements
included in ASU No. 2018-10,
Codification Improvements to Topic 842, Leases
and ASU 2018-11,
Leases (Topic 842)
Targeted Improvements
, each issued in July 2018, all of which provide guidance on the recognition, measurement, presentation,
and disclosure of leases. ASU 2016-02
requires a lessee to recognize in
the balance sheet 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 all leases with terms longer than 12 months. Leases with a term of 12 months or less
will be accounted for similar to existing guidance for operating leases. Recognition, measurement and presentation of expenses
will depend on classification as a finance or operating lease
. ASU 2016-02 is effective for interim and annual periods beginning
January 1, 2019, and the Company will adopt this standard on a modified retrospective basis. The Company intends to elect a package
of practical expedients that allows it to carry forward historical conclusions related to (1) whether any expired or existing contract
is a lease or contains a lease, (2) the lease classification of any expired or existing leases and easements, and (3) the initial
direct costs for any existing leases. The Company does not intend to restate comparative periods upon adoption. Based on the Company’s
current lease portfolio, adoption of the standard will result in
the recognition
of both right-of-use assets and lease liabilities for operating leases of
approximately $0.4 million on its Consolidated
Balance Sheets, with no material impact on its Consolidated Statement of Operations. Management is implementing appropriate internal
controls to ensure compliance with the requirements of the standard.
Note 2—Going Concern
The Company’s
decision to enter a court-supervised restructuring process was necessitated by a number of factors which adversely affected its
2018 operating results including negative financial trends, specifically operating losses, working capital deficiency, and other
adverse key financial ratios; the Company’s covenant defaults under the Credit Agreement; and its inability to meet the requirements
established by the milestone dates. Additionally, the impacts of unfavorable industry conditions and significant debt service requirements
on the Company’s financial position, results of operations, and cash flows contributed to this decision.
The accompanying consolidated
financial statements have been prepared assuming that the Company will continue as a going concern and contemplate the realization
of assets and the satisfaction of liabilities in the normal course of business. The Company’s ability to continue
as a going concern is contingent upon the Company’s ability to comply with the financial and other covenants contained in
the DIP Facility, the Bankruptcy Court’s approval of the Company’s Chapter 11 plan or sale strategy and the Company’s
ability to implement these measures, among other factors. See Note 19—Subsequent Event for additional information.
As a result of the
Chapter 11 Cases, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as
debtors-in-possession under Chapter 11, the Company may sell or otherwise dispose of or liquidate assets or settle liabilities,
subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business (and subject to restrictions
contained in the DIP Facility), for amounts other than those reflected in the accompanying consolidated financial statements. In
addition, the accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification
of assets or the amounts and classification of liabilities or any other adjustments that might be necessary should the Company
be unable to continue as a going concern or as a consequence of the Chapter 11 Cases.
ORCHIDS PAPER PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Note 3—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”).
Fabrica Asset Purchase Agreement (“APA”)
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 the Company’s 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 the Company’s 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 the Company of Elgin’s supply agreement with Fabrica which provided
Elgin exclusive supply rights with respect to Fabrica’s U.S. business.
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 20 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 20 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 the Company of a separate papermaking or converting
asset and the entry into of an equipment lease agreement between the Company 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.
ORCHIDS PAPER PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Note 3—Fabrica Transaction (continued)
Intangibles and goodwill
Intangible assets at December 31, 2018
were:
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
|
(in years)
|
|
|
(in thousands)
|
|
Intangible asset - supply and equipment lease agreements
|
|
|
20
|
|
|
$
|
12,800
|
|
|
$
|
2,880
|
|
|
$
|
9,920
|
|
Intangible asset - licenses/trademarks
|
|
|
20
|
|
|
|
1,350
|
|
|
|
305
|
|
|
|
1,045
|
|
Intangible asset - non-compete agreement
|
|
|
2
|
|
|
|
1,150
|
|
|
|
1,150
|
|
|
|
-
|
|
Intangible asset - customer relationships
|
|
|
12
|
|
|
|
2,690
|
|
|
|
1,008
|
|
|
|
1,682
|
|
|
|
|
|
|
|
$
|
17,990
|
|
|
$
|
5,343
|
|
|
$
|
12,647
|
|
Intangible assets at December 31, 2017 were:
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
Life
|
|
|
Amount
|
|
|
Amortization
|
|
|
Value
|
|
|
|
(in years)
|
|
|
(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
|
|
Estimated future
intangible amortization expense is $0.9 million in 2019, 2020, 2021, 2022, and 2023, 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. 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, 2018. 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.
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Revenues
|
|
$
|
35,665
|
|
|
$
|
31,748
|
|
|
$
|
42,045
|
|
Operating income
|
|
|
5,517
|
|
|
|
5,940
|
|
|
|
10,583
|
|
ORCHIDS PAPER PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Note 3—Fabrica Transaction (continued)
Related party transactions
The Company incurred the following transactions
with Fabrica during the years ended December 31, 2018, 2017 and 2016:
|
|
Years Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Products purchased under the Supply Agreement
|
|
$
|
33,090
|
|
|
$
|
26,640
|
|
|
$
|
31,974
|
|
Amounts billed to Fabrica under the Equipment
Lease Agreement
|
|
|
2,342
|
|
|
|
2,027
|
|
|
|
1,647
|
|
Parent rolls purchased by Fabrica
|
|
|
2,535
|
|
|
|
4,889
|
|
|
|
1,777
|
|
Note 4—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 (before deducting unamortized debt issuance costs) is estimated to be $182 million and $171 million at December 31, 2018 and
2017, respectively. Management's estimates are based on periodic comparisons of the characteristics of the Company's obligations,
including floating interest rate, credit rating, maturity and collateral, to current market conditions as stated by an independent
third-party. 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, 2018, 2017 and 2016.
ORCHIDS PAPER PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Note 5—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.
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 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 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
|
|
Purchases under these
gas contracts were approximately $2.1 million for the year ended December 31, 2018. 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).
Severance payments
In June 2018, the Compensation
Committee authorized the Company to enter into agreements with certain key employees providing for severance payments and the continuation
of certain other employee benefits in the event of termination of employment without cause following a change of control of the
Company. As of December 31, 2018, the total potential severance payments for the 10 eligible employees was $0.6 million. The Compensation
Committee believes these agreements for severance payments and benefits will assist the Company in fulfilling its objective of
retaining key managerial talent.
ORCHIDS PAPER PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Note 6—Inventories
Inventories at December 31 were:
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Raw materials
|
|
$
|
6,183
|
|
|
$
|
6,032
|
|
Bulk paper rolls
|
|
|
7,364
|
|
|
|
5,526
|
|
Converted finished goods
|
|
|
8,501
|
|
|
|
9,134
|
|
Inventory valuation reserve
|
|
|
(918
|
)
|
|
|
(129
|
)
|
|
|
$
|
21,130
|
|
|
$
|
20,563
|
|
Note 7—Property, Plant and Equipment
The principal categories and estimated useful
lives of property, plant and equipment at December 31 were:
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
2018
|
|
|
2017
|
|
|
Useful Lives
|
|
|
|
(In thousands)
|
|
|
(in years)
|
|
Land
|
|
$
|
4,582
|
|
|
$
|
4,582
|
|
|
|
-
|
|
Buildings and improvements
|
|
|
62,393
|
|
|
|
62,358
|
|
|
|
7 to 40
|
|
Machinery and equipment
|
|
|
289,835
|
|
|
|
286,291
|
|
|
|
2.5 to 40
|
|
Vehicles
|
|
|
1,956
|
|
|
|
1,836
|
|
|
|
3 to 5
|
|
Nondepreciable machinery and equipment (parts and spares)
|
|
|
13,043
|
|
|
|
12,680
|
|
|
|
-
|
|
Construction-in-process
|
|
|
1,458
|
|
|
|
3,014
|
|
|
|
-
|
|
|
|
$
|
373,267
|
|
|
$
|
370,761
|
|
|
|
|
|
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 and 2016 excludes $3.6 million and $1.7
million, respectively, of interest capitalized on significant projects during the year. No interest expense was capitalized for
the year ended December 31, 2018.
In accordance with
ASC 360-10, the Company is required to evaluate for impairment when events or changes in circumstances indicate that the carrying
value of an asset group may not be recoverable. Upon the occurrence of a triggering event, the Company assesses whether the
estimated undiscounted cash flows expected from the use of the asset group and the residual value from the ultimate disposal of
the asset group exceeds the carrying value. In 2018, the Company considered the continuation of adverse conditions including negative
financial trends, specifically operating losses, working capital deficiency, and other adverse key financial ratios to be a triggering
event and evaluated the asset group for impairment. The Company estimated undiscounted cash flows related to the asset group, which
was determined to be both the Pryor and Barnwell mill and converting assets as they do not generate distinct cash flows. Based
on the estimated undiscounted cash flows of this asset group, it was determined that the recoverable amount exceeded the carrying
amount of those assets, and therefore no further analysis was necessary.
ORCHIDS PAPER PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Note 8—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 facility were used solely to
finance the purchase and installation of new equipment and construction at the Barnwell, South Carolina facility.
Between January 2017
and November 2018, we entered into Amendment Nos. 3 – 10 to the Credit Agreement and Amendment Nos. 3 – 7 to the NMTC
Loan Agreement, which, at various times and among other things:
|
·
|
waived certain financial covenants;
|
|
·
|
increased the total loan commitment and the borrowing capacity under the revolving line of credit;
|
|
·
|
established a debt service reserve of $12.9 million to pay principal and interest payments and payment of fees due to the lenders and agents under the Credit Agreement;
|
|
·
|
removed certain financial covenants and provisions, such as the Fixed Charge Coverage Ratio, Leverage Ratio and minimum EBITDA covenant requirements;
|
|
·
|
amended the pricing schedule;
|
|
·
|
provided more lenient terms for and additional flexibility under certain financial covenant requirements;
|
|
·
|
extended the period during which funds may be drawn under the delayed draw loan;
|
|
·
|
restricted us from making any dividend or other distribution payments with respect to our equity unless we have achieved a Leverage Ratio of less than 4 to 1 for two consecutive fiscal quarters and no Default or Event of Default (as such terms are defined in the Credit Agreement) exists or would exist following such payment; and
|
|
·
|
amended certain reporting requirements.
|
On January 25, 2019, the Company entered into Amendment No. 11 to the Credit Agreement by and among the Company,
the Prepetition Agent (as successor to U.S. Bank National Association), and the Prepetition Secured Lender (as successor to the
lenders party thereto), and Amendment No. 8 to the NMTC Loan Agreement by and between the Company and the Prepetition Secured Lender
(as successor to U.S. Bank National Association), which provided waivers of covenant defaults, deferred future interest and principal
payments until May 1, 2019, amended the pricing schedule, and amended certain reporting and forecast requirements. Additionally,
the amendment provided that
all outstanding loans under
the Credit Agreement shall be converted to, and any revolving loans made in the future shall, bear interest at the base rate, in
each case regardless of the then-current Leverage Ratio, which may have the effect of increasing the average interest rate paid
by the Company. The Company’s credit facilities have been amended or modified for each of the last nine quarters.
The Company previously disclosed its initiative to refinance its existing debt obligations, as well as to
explore alternative financing 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. Amendment No. 8 to the Credit
Agreement and Amendment No. 5 to the NMTC Loan Agreement each included a timeline to achieve milestones associated with seeking
a sale. In light of the Company’s ongoing efforts with interested parties in executing such a solution, the Prepetition Secured
Lender extended until March 1, 2019, the deadline for the Company to deliver (i) an executed purchase agreement for the sale of
the Company’s equity or assets or (ii) a binding commitment from institutional lenders to refinance the Company’s debt
obligations, in either case in an amount sufficient to repay the Company’s debt obligations to the Prepetition Secured Lender
in full and extended until May 1, 2019, the deadline for the Company to consummate such transaction.
ORCHIDS PAPER PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Note 8—Long-Term Debt and Revolving Line of Credit
(Continued)
As of December 31,
2018, 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.
The terms of the Credit
Agreement, as amended, consist of the following:
|
·
|
a $51.9 million revolving line of credit 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 due September 2015 through June 2016, quarterly principal payments of $1.0 million due September 2016 through March 2018, and monthly principal payments of $0.3 million due April 2018 through June 2020; however, under recent amendments to the Credit Agreement, principal payments due September 2018 through April 2019 have been deferred until May 2019; and
|
|
|
|
|
·
|
a $108.5 million delayed draw term loan, due June 2020 with quarterly principal payments of 1.5% of the outstanding balance as of defined measurement dates due September 2017 through March 2018, and monthly principal payments of $0.5 million due April 2018 through June 2020; however, under recent amendments to the Credit Agreement, principal payments due September 2018 through April 2019 have been deferred until May 2019.
|
Additionally, in connection
with the NMTC transaction discussed in Note 14, 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 $0.3 million, beginning in March 2016, with a balloon payment due on the maturity date.
As of December 31,
2018, amounts outstanding under the Credit Agreement bear interest at 12.25%, which is comprised of a variable base rate plus a
specified margin of 6.75%. The specified margin was based on the Company’s quarterly Leverage Ratio. As of December 31, 2018,
commitment fees were 3.55%, and the Company’s weighted average interest rate was 11.9%. As of January 23, 2019, amounts outstanding
under the Credit Agreement bear interest at a base rate of 13.5%, as defined in Amendment No. 11 to the Credit Agreement.
Long-term debt at December
31 consists of:
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Revolving line of credit, maturing on June 25, 2020
|
|
$
|
45,693
|
|
|
$
|
16,844
|
|
Delayed draw term loan, maturing on June 25, 2020
|
|
|
101,093
|
|
|
|
105,305
|
|
Term loan, maturing on June 25, 2020
|
|
|
35,933
|
|
|
|
38,600
|
|
Term loan, maturing on December 29, 2022,
|
|
|
9,437
|
|
|
|
10,019
|
|
Capital lease obligations
|
|
|
31
|
|
|
|
33
|
|
Less: unamortized debt issuance costs
|
|
|
(5,062
|
)
|
|
|
(1,865
|
)
|
|
|
|
187,125
|
|
|
|
168,936
|
|
Less current portion
|
|
|
187,094
|
|
|
|
168,903
|
|
|
|
$
|
31
|
|
|
$
|
33
|
|
ORCHIDS PAPER PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Note 8—Long-Term Debt and Revolving Line of Credit
(Continued)
Unamortized debt issuance costs at December 31 consist of:
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
Revolving line of credit
|
|
$
|
1,149
|
|
|
$
|
432
|
|
Delayed draw term loan, maturing on June 25, 2020
|
|
|
2,380
|
|
|
|
615
|
|
Term loan, maturing on June 25, 2020
|
|
|
899
|
|
|
|
274
|
|
Term loan, maturing on December 29, 2022
|
|
|
634
|
|
|
|
544
|
|
|
|
$
|
5,062
|
|
|
$
|
1,865
|
|
The annual contractual maturities of long-term debt at December
31, 2018, are as follows:
|
|
|
Annual
|
|
|
|
|
Payment
|
|
Year
|
|
|
Amount
|
|
|
|
|
|
(in thousands)
|
|
2019
|
|
|
$
|
14,369
|
|
2020
|
|
|
|
169,600
|
|
2021
|
|
|
|
668
|
|
2022
|
|
|
|
7,527
|
|
2023
|
|
|
|
2
|
|
after 2023
|
|
|
|
21
|
|
|
|
|
$
|
192,187
|
|
Borrowings under the
revolving line of credit are secured, in part, with qualified receivables and qualified inventory. As of December 31, 2018, the
Company had $10.4 million of eligible accounts receivable and $12.4 million of eligible inventory pledged as collateral for the
revolving line of credit. Additionally, as of December 31, 2018, $12.2 million of the $12.9 million debt service reserve had been
used to pay principal, interest and fees due to lenders and agents under the Credit Agreement.
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.
On April 1, 2019, the Company and certain of its subsidiaries filed voluntary petitions for relief under Chapter
11 of the Bankruptcy Code in the Bankruptcy Court, as further discussed in Note 19—Subsequent Events.
Note 9—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,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
United States
|
|
$
|
(42,554
|
)
|
|
$
|
(10,401
|
)
|
|
$
|
18,280
|
|
Foreign
|
|
|
1,780
|
|
|
|
1,574
|
|
|
|
(1,058
|
)
|
Total (loss) income before income taxes
|
|
$
|
(40,774
|
)
|
|
$
|
(8,827
|
)
|
|
$
|
17,222
|
|
ORCHIDS PAPER PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Note 9—Income Taxes (Continued)
The components of the provision for income taxes for each of
the three years ended December 31, were as follows:
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
$
|
(7,487
|
)
|
|
$
|
(31,060
|
)
|
|
$
|
(2,934
|
)
|
U.S. State
|
|
|
7,530
|
|
|
|
(2,048
|
)
|
|
|
(352
|
)
|
Foreign
|
|
|
302
|
|
|
|
240
|
|
|
|
127
|
|
|
|
|
345
|
|
|
|
(32,868
|
)
|
|
|
(3,159
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Federal
|
|
|
(1,164
|
)
|
|
|
16,667
|
|
|
|
7,906
|
|
U.S. State
|
|
|
(2,445
|
)
|
|
|
429
|
|
|
|
(568
|
)
|
Foreign
|
|
|
162
|
|
|
|
271
|
|
|
|
232
|
|
|
|
|
(3,447
|
)
|
|
|
17,367
|
|
|
|
7,570
|
|
Total provision for (benefit from) income taxes
|
|
$
|
(3,102
|
)
|
|
$
|
(15,501
|
)
|
|
$
|
4,411
|
|
Significant components of the Company's deferred income tax
assets and (liabilities) at December 31 were:
|
|
2018
|
|
|
2017
|
|
|
|
(in thousands)
|
|
Deferred income taxes
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
1,053
|
|
|
$
|
1,477
|
|
Prepaid expenses
|
|
|
(105
|
)
|
|
|
(134
|
)
|
Plant and equipment
|
|
|
(33,092
|
)
|
|
|
(31,185
|
)
|
Intangible assets
|
|
|
(488
|
)
|
|
|
(326
|
)
|
Interest expense
|
|
|
3,810
|
|
|
|
-
|
|
Federal net operating loss carryforward
|
|
|
19,089
|
|
|
|
12,010
|
|
Indian employment and other federal credits
|
|
|
766
|
|
|
|
677
|
|
State investment tax credit carryforward
|
|
|
10,293
|
|
|
|
9,036
|
|
State net operating loss carryforward
|
|
|
3,469
|
|
|
|
2,407
|
|
State income taxes - temporary differences
|
|
|
(6,239
|
)
|
|
|
(6,483
|
)
|
State valuation allowance
|
|
|
(7,522
|
)
|
|
|
-
|
|
Stock-based compensation
|
|
|
883
|
|
|
|
862
|
|
Other
|
|
|
52
|
|
|
|
64
|
|
Deferred income tax liabilities, net
|
|
$
|
(8,031
|
)
|
|
$
|
(11,595
|
)
|
The following table
summarizes the differences between the U.S. federal statutory rate and the Company's effective tax rate for financial statement
purposes:
ORCHIDS PAPER PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Note 9—Income Taxes (Continued)
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Statutory tax rate
|
|
|
21.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(18.9
|
)%
|
|
|
-
|
|
|
|
-
|
|
State income taxes, net of U.S. federal tax benefit
|
|
|
3.4
|
%
|
|
|
3.5
|
%
|
|
|
4.6
|
%
|
State investment tax credits
|
|
|
3.1
|
%
|
|
|
14.9
|
%
|
|
|
(10.0
|
)%
|
Indian employment and other federal credits
|
|
|
0.1
|
%
|
|
|
0.9
|
%
|
|
|
(2.1
|
)%
|
Change in estimates
|
|
|
(1.2
|
)%
|
|
|
-
|
|
|
|
(1.8
|
)%
|
Employee and board stock compensation
|
|
|
(0.1
|
)%
|
|
|
(0.5
|
)%
|
|
|
-
|
|
Foreign income taxes, net of U.S. federal tax credits
|
|
|
(0.1
|
)%
|
|
|
2.7
|
%
|
|
|
(1.1
|
)%
|
Change in future years' tax rate
|
|
|
-
|
|
|
|
125.0
|
%
|
|
|
-
|
|
Other
|
|
|
0.3
|
%
|
|
|
(5.9
|
)%
|
|
|
1.0
|
%
|
|
|
|
7.6
|
%
|
|
|
175.6
|
%
|
|
|
25.6
|
%
|
For the year ended
December 31, 2018, the effective tax rate was lower than the statutory rate primarily due to the Company establishing a valuation
allowance. The Company recorded a valuation allowance against its state deferred tax assets of approximately $7.5 million in 2018
as the Company believes it is more likely than not that the deferred tax assets will not be realized. This assessment was based
on the Company's going concern evaluation.
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 for 2017 would have been approximately 51%. Oklahoma Investment Tax Credits (“OITC”)
associated with investments in the Company’s manufacturing operations in Pryor, Oklahoma; federal credits, foreign tax credits
and research and development credits; and 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, foreign tax credits and research and
development credits.
The Company has significant
credit carryforwards for the State of Oklahoma and South Carolina totaling $10.3 million. The OITC carryforward is $9.9 million,
which is primarily associated with significant equipment acquisitions in prior years. The Company has recorded the increase
in credit related to the OITC but has a 100% valuation allowance on the net state deferred tax asset.
The SCITC carryforward
is $0.4 million, which is primarily associated with the Company's $28 million investment in new converting lines in 2016. A
deferred tax asset has been recognized for the 2016 credit carryforward, which has been offset by the 100% valuation allowance
on the net state deferred tax asset.
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. The Company recognizes interest related to income
taxes as interest expense and penalties as selling, general and administrative expenses. The tax years 2015 through 2018 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
December 31, 2018, 2017 and 2016
Note 10—Earnings per Share
The computation of
basic and diluted net income (loss) per common share for the years ended December 31, 2018, 2017 and 2016, is as follows:
|
|
Year Ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2016
|
|
Net income (loss)
|
|
$
|
(37,672
|
)
|
|
$
|
6,674
|
|
|
$
|
12,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
10,670,348
|
|
|
|
10,399,074
|
|
|
|
10,286,373
|
|
Effect of stock options*
|
|
|
-
|
|
|
|
15,797
|
|
|
|
62,901
|
|
Weighted average shares outstanding-assuming dilution
|
|
|
10,670,348
|
|
|
|
10,414,871
|
|
|
|
10,349,274
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3.53
|
)
|
|
$
|
0.64
|
|
|
$
|
1.25
|
|
Diluted
|
|
$
|
(3.53
|
)
|
|
$
|
0.64
|
|
|
$
|
1.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options not included above because they were anti-dilutive
|
|
|
683,010
|
|
|
|
838,925
|
|
|
|
614,250
|
|
*For the year ended December 31, 2018,
potentially dilutive shares from options were excluded from the diluted earnings per share calculations due to the antidilutive
effect such shares would have on net loss per common share.
Note 11—Stock Incentives
In April 2014, the
Orchids Paper Products Company 2014 Stock Incentive Plan (the “2014 Plan”) was approved allowing for total of 400,000
shares to be issued pursuant to the 2014 Plan. The 2014 Plan replaces 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. On April 30, 2018, the stockholders of the Company approved an amendment
to the 2014 Plan increasing the number of shares of the Company’s Common Stock reserved for issuance under the 2014 Plan
from 400,000 to 800,000. As of December 31, 2018, there were 405,990 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
December 31, 2018, 2017 and 2016
Note 11—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 2018,
2017 and 2016:
Grant
|
|
|
Number
|
|
|
Exercise
|
|
|
Grant Date
|
|
|
Risk-Free
|
|
|
Estimated
|
|
|
Dividend
|
|
|
Expected Life
|
|
Date
|
|
|
of Shares
|
|
|
Price
|
|
|
Fair Value
|
|
|
Interest Rate
|
|
|
Volatility
|
|
|
Yield
|
|
|
(in years)
|
|
Apr 2018
|
|
|
|
20,000
|
|
|
$
|
7.90
|
|
|
$
|
3.25
|
|
|
|
2.72% - 2.76%
|
|
|
|
37.7% - 38.6
|
%
|
|
|
-
|
%
|
|
|
6 to 7
|
|
Apr 2018
|
|
|
|
40,000
|
|
|
$
|
6.43
|
|
|
$
|
2.54
|
|
|
|
2.79
|
%
|
|
|
40.6
|
%
|
|
|
-
|
|
|
|
5
|
|
Feb 2018
|
|
|
|
10,000
|
|
|
$
|
11.14
|
|
|
$
|
4.30
|
|
|
|
2.65% - 2.74%
|
|
|
|
36.3% - 38.2
|
%
|
|
|
-
|
|
|
|
5 to 6
|
|
Jul 2017
|
|
|
|
76,500
|
|
|
$
|
12.22
|
|
|
$
|
2.31
|
|
|
|
1.94% - 2.08%
|
|
|
|
33.7% - 33.9
|
%
|
|
|
5.12% - 5.15
|
%
|
|
|
5 to 6
|
|
May 2017
|
|
|
|
40,000
|
|
|
$
|
19.95
|
|
|
$
|
3.40
|
|
|
|
1.81
|
%
|
|
|
32.0
|
%
|
|
|
5.26
|
%
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sep 2016
|
|
|
|
20,000
|
|
|
$
|
28.48
|
|
|
|
$4.28 - $4.83
|
|
|
|
1.21% - 1.50%
|
|
|
|
29%
- 31
|
%
|
|
|
4.92
|
%
|
|
|
5 to 7
|
|
May 2016
|
|
|
|
40,000
|
|
|
$
|
31.33
|
|
|
$
|
7.57
|
|
|
|
1.74
|
%
|
|
|
40.0
|
%
|
|
|
4.47
|
%
|
|
|
5
|
|
Jan 2016
|
|
|
|
5,000
|
|
|
$
|
27.77
|
|
|
$
|
6.56
|
|
|
|
2.00
|
%
|
|
|
40.0
|
%
|
|
|
5.04
|
%
|
|
|
6
|
|
In 2018 and 2016, 22,665 and 4,000, respectively,
of time-based options were forfeited when employees left the Company.
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.
The Board of Directors
has, from time to time, granted certain members of management options to purchase shares of the Company’s common stock with
market-based vesting conditions. 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
|
|
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.
From the date of grant through December 31, 2018, 29,650 options vested when the share price of the Company’s common stock
closed above the applicable benchmark price for three consecutive business days. Additionally, 3,750 options, 1,875 options, and
20,550 options with market-based vesting conditions were forfeited when employees left the Company in 2018, 2017 and 2016, respectively.
ORCHIDS PAPER PRODUCTS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2018, 2017 and 2016
Note 11—Stock Incentives (Continued)
Stock options issued outside of the 2014 Plan
In April 2014, the
Company’s stockholders voted to approve the option 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 became exercisable,
when and if the share price of the Company’s common stock closed 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:
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.
These options were
granted outside of the 2005 Plan and the 2014 Plan. The unvested portion of the option, or 300,000 shares, expired five years from
the date of grant and the vested portion of the option shall terminate ten years from 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 included 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 expensed the cost of these options granted over the implicit service period
of the option based on the completed Monte Carlo models.
The Company recognized the following expenses
related to all options granted during 2018, 2017 and 2016 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, 2018:
The following table summarizes information
about stock option vesting during the years ended December 31:
As of December 31,
2018, there was $0.2 million of unrecognized compensation expense related to non-vested stock options with a time-based vesting
condition for options granted in 2018, 2017, 2016, and 2015. This cost is expected to be recognized on a straight-line basis over
a weighted average period of 1.2 years.
During the years ended
December 31, 2017 and 2016, the Company received $0.1 million, and $0.3 million, respectively, in proceeds from the exercise of
stock options. No stock options were exercised in 2018. Upon adoption of ASU 2017-09 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, and $0.2 million of tax benefits related to stock
option exercises during the years ended December 31, 2017 and 2016, respectively. During 2016, the Company recognized excess tax
benefits of $0.2 million.
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, when 2,000 shares
of restricted stock with a fair value of $53,000 were vested. The Company expensed 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 during 2016
related to the shares granted under the 2005 Plan. No shares of restricted stock were granted in the years ending December 31,
2018, 2017 or 2016.
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, 2018, 2017 and 2016 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, 2018, 2017 and 2016:
*Customer did not account for more than 10% of sales during
the period indicated.
On July 30, 2018,
the Company received notice from a major customer that they intended to transition a significant piece of business to another supplier,
effective 6 months from notice. The reason given for the change was “strategic” as the customer indicated this change
was part of a broader initiative to consolidate their suppliers and was not related to any issue with regards to service, quality,
or cost. The customer provided a six month transition period, which has since been extended by an additional month. This transition
period has allowed the Company to secure alternative customers for the capacity. Subsequent to the initial notice, the customer
has decided to transition the remainder of their business with us to another supplier in the second quarter of 2019. The Company
will redeploy this capacity through new business that includes parent roll, contract manufacturing and retail sales. For the year
ended December 31, 2018, this customer represented approximately 28% of net sales.
The Company was recently
awarded a bid from a national supercenter retailer as the sole supplier of 100% recycled ultra-premium kitchen towel and bath tissue
supporting the sustainable product channel, which will be serviced out of the Barnwell facility using QRT paper. This business
is beganshipping in March of 2019.
At December 31, 2018
and 2017, 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 or accounts receivable 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, 2018, the Company had approximately $2.7 million of non-interest bearing cash balances in excess
of federally insured limits. Additionally, $1.9 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, 2018, $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 $5.6 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, 2018
and 2017, the NMTC Investor’s interest of $5.3 million and $5.2 million, respectively, is recorded in other long-term liabilities
on the consolidated balance sheet. At December 31, 2018 and 2017, the outstanding balance of the amount borrowed from U.S. Bank
to loan to the investment fund was $9.4 million and $10.0 million, respectively, and approximately $0.6 million and $0.5 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 had been utilized to fund capital assets associated with the Barnwell facility.
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,
2018 and 2017, the Company had a note receivable of $0.3 million and $0.2 million, respectively, related to amounts due under the
ODFA pooled financing agreement. The Company recognized other income of $0.7 million, $0.5 million and $0.7 million in 2018, 2017
and 2016, 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 $1.1 million, $1.0 million, and $1.0 million, for
the years ended December 31, 2018, 2017 and 2016, respectively.
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.