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Share Incentive Plans
9 Months Ended
Sep. 30, 2019
Share Incentive Plans [Abstract]  
Share Incentive Plans
Note 15. Share Incentive Plans

On April 28, 2016, the Board of Directors of the Company adopted the Turning Point Brands, Inc., 2015 Equity Incentive Plan (the “2015 Plan”), pursuant to which awards may be granted to employees, non-employee directors, and consultants. In addition, the 2015 Plan provides for the granting of nonqualified stock options to employees of the Company or any subsidiary of the Company. Pursuant to the 2015 Plan, 1,400,000 shares of the Company’s voting common stock are reserved for issuance as awards to employees, non-employee directors, and consultants as compensation for past or future services or the attainment of certain performance goals. The 2015 Plan is scheduled to terminate on April 27, 2026. The 2015 Plan is administered by a committee (the “Committee”) of the Company’s Board of Directors. The Committee determines the vesting criteria for the awards, with such criteria to be specified in the award agreement. As of September 30, 2019, net of forfeitures, there were 16,159 shares of restricted stock, 359,008 performance-based restricted stock units, and 441,964 options granted under the 2015 Plan. There are 582,869 shares available for grant under the 2015 Plan.

On February 8, 2006, the Board of Directors of the Company adopted the 2006 Equity Incentive Plan (the “2006 Plan”) of North Atlantic Holding Company, Inc., pursuant to which awards may be granted to employees. The 2006 Plan provides for the granting of nonqualified stock options and restricted stock awards to employees. Upon the adoption of the Company’s 2015 Equity Incentive Plan in connection with its IPO, the Company determined no additional grants would be made under the 2006 Plan. However, all awards issued under the 2006 Plan that have not been previously terminated or forfeited remain outstanding and continue unaffected.

There are no shares available for grant under the 2006 Plan. Stock option activity for the 2006 and 2015 Plans is summarized below:

  
Stock
Option
Shares
  
Weighted
Average
Exercise
Price
  
Weighted
Average
Grant Date
Fair Value
 
Outstanding, December 31, 2017
  
763,672
   
5.73
   
2.36
 
             
Granted
  
124,100
   
21.27
   
6.33
 
Exercised
  
(209,943
)
  
3.97
   
1.47
 
Forfeited
  
(18,255
)
  
13.46
   
3.90
 
Outstanding, December 31, 2018
  
659,574
  
$
9.00
  
$
3.34
 
             
Granted
  
155,780
   
47.58
   
15.63
 
Exercised
  
(110,382
)
  
5.78
   
2.60
 
Forfeited
  
(7,376
)
  
33.49
   
10.73
 
Outstanding, September 30, 2019
  
697,596
  
$
17.87
  
$
6.13
 

Under the 2006 and 2015 Plans, the total intrinsic value of options exercised during the nine months ended September 30, 2019 and 2018, was $4.6 million, and $5.2 million, respectively.

At September 30, 2019, under the 2006 Plan, the outstanding stock options’ exercise price for 326,232 options is $3.83 per share, all of which are exercisable. The weighted average of the remaining lives of the outstanding stock options with an exercise price of $3.83 is approximately 3.83 years. The Company estimates the expected life of these stock options is ten years from the date of grant. For the $3.83 per share options, the weighted average fair value of options was determined using the Black-Scholes model assuming a ten-year life from grant date, a current share price and exercise price of $3.83, a risk-free interest rate of 3.57%, volatility of 40%, and no assumed dividend yield.  Based on these assumptions, the fair value of these options is approximately $2.17 per share option granted.
 
At September 30, 2019, under the 2015 Plan, the risk-free interest rate is based on the U.S. Treasury rate for the expected life at the time of grant. The expected volatility is based on the average long-term historical volatilities of peer companies. We intend to continue to consistently use the same group of publicly traded peer companies to determine expected volatility until sufficient information regarding volatility of our share price becomes available or until the selected companies are no longer suitable for this purpose. Due to our limited trading history, we are using the simplified method presented by SEC Staff Accounting Bulletin No. 107 to calculate expected holding periods, which represent the periods of time for which options granted are expected to be outstanding. We will continue to use this method until we have sufficient historical exercise experience to give us confidence in the reliability of our calculations. The fair values of these options were determined using the Black-Scholes option pricing model.
 
The following table outlines the assumptions based on the number of options granted under the 2015 Plan.
 
  
February 10,
2017
  
May 17,
2017
  
March 7,
2018
  
March 13,
2018
  
March 20,
2019
 
Number of options granted
  
40,000
   
93,819
   
98,100
   
26,000
   
155,780
 
Options outstanding at September 30, 2019
  
30,700
   
73,352
   
89,272
   
26,000
   
152,040
 
Number exercisable at September 30, 2019
  
19,150
   
48,131
   
30,532
   
17,420
   
-
 
Exercise price
 
$
13.00
  
$
15.41
  
$
21.21
  
$
21.49
  
$
47.58
 
Remaining lives
  
7.37
   
7.63
   
8.44
   
8.46
   
9.48
 
Risk free interest rate
  
1.89
%
  
1.76
%
  
2.65
%
  
2.62
%
  
2.34
%
Expected volatility
  
27.44
%
  
26.92
%
  
28.76
%
  
28.76
%
  
30.95
%
Expected life
  
6.000
   
6.000
   
6.000
   
5.495
   
6.000
 
Dividend yield
  
-
   
-
   
0.83
%
  
0.82
%
  
0.42
%
Fair value at grant date
 
$
3.98
  
$
4.60
  
$
6.37
  
$
6.18
  
$
15.63
 

The Company has recorded compensation expense related to the options based on the provisions of ASC 718 under which the fixed portion of such expense is determined as the fair value of the options on the date of grant and amortized over the vesting period. The Company recorded compensation expense related to the options of approximately $0.5 million and $0.2 million for the three months ended September 30, 2019 and 2018, respectively. The Company recorded compensation expense related to the options of approximately $1.2 million and $0.6 million for the nine months ended September 30, 2019 and 2018, respectively. Total unrecognized compensation expense related to options at September 30, 2019, is $1.5 million, which will be expensed over 2.15 years.

Performance-Based Restricted Stock Units (“PRSUs”)
 
PRSUs are restricted stock units subject to both performance-based and service-based vesting conditions. The number of common stock shares a recipient will receive upon vesting of a PRSU will be calculated by reference to certain performance metrics related to the Company’s performance over a five-year period.  PRSUs will vest on the measurement date, which is no more than 65 days after the performance period (provided the applicable service and performance conditions are satisfied). On July 19, 2019 the Company’s Board of Directors granted 88,582 PRSUs to employees of the Company. As of September 30, 2019, there are 359,008 PRSUs outstanding, all of which are unvested. The following table outlines the PRSUs granted and outstanding as of September 30, 2019.

  
March 31,
2017
  
March 7,
2018
  
March 20,
2019
  
March 20,
2019
  
July 19,
2019
 
Number of PRSUs granted
  
94,000
   
96,000
   
92,500
   
4,901
   
88,582
 
PRSUs outstanding at September 30, 2019
  
83,000
   
93,000
   
89,550
   
4,876
   
88,582
 
Fair value as of grant date
 
$
15.60
  
$
21.21
  
$
47.58
  
$
47.58
  
$
52.15
 
Remaining lives
  
2.25
   
3.25
   
4.25
   
0.25
   
3.25
 

The Company recorded compensation expense related to the PRSUs of approximately $0.6 million and $0.2 million in the consolidated statements of income for the three months ended September 30, 2019 and 2018, based on the probability of achieving the performance condition. The Company recorded compensation expense related to the PRSUs of approximately $1.3 million and $0.4 million in the consolidated statements of income for the nine months ended September 30, 2019 and 2018, respectively. Total unrecognized compensation expense related to these awards at September 30, 2019, is $10.2 million which will be expensed over the service periods based on the probability of achieving the performance condition.