10-Q 1 ef20026317_10q.htm 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2024

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________

Commission file number: 001-37763

TURNING POINT BRANDS, INC.
(Exact name of registrant as specified in its charter)

Delaware
 
20-0709285
(State or other jurisdiction of Incorporation or organization)
 
(I.R.S. Employer Identification No.)

5201 Interchange Way, Louisville, KY
 
40229
(Address of principal executive offices)
 
(Zip Code)

(502) 778-4421
(Registrant’s telephone number, including area code)

Former name, former address and former fiscal year, if changed since last report: not applicable

Securities registered pursuant to Section 12(b) of the Act:

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
TPB
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes      No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes      No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
Emerging growth company
     

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes      No 

At April 26, 2024, there were 17,621,706 shares outstanding of the registrant’s voting common stock, par value $0.01 per share.



TURNING POINT BRANDS, INC.
TABLE OF CONTENTS

   
Page No.
PART I—FINANCIAL INFORMATION
 
   
 
ITEM 1
Financial Statements (Unaudited)
 
       
   
5
       
   
6
       
   
7
       
   
8
 

 
   
9
       
   
10
       
 
ITEM 2
30
       
 
ITEM 3
38
       
 
ITEM 4
39
       
PART II—OTHER INFORMATION
 
   
 
ITEM 1
40
       
 
ITEM 1A
40
       
 
ITEM 2
40
       
 
ITEM 3
40
       
 
ITEM 4
40
       
 
ITEM 5
40
       
 
ITEM 6
41
       
  42

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 (this “Quarterly Report”), contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements may generally be identified by the use of words such as “anticipate,” “believe,” “expect,” “intend,” “plan,” and “will” or, in each case, their negative, or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. By their nature, forward-looking statements involve risks and uncertainties because they relate to events, and depend on circumstances, that may or may not occur in the future. As a result, actual events may differ materially from those expressed in, or suggested by, the forward-looking statements. Any forward-looking statement made by Turning Point Brands, Inc. (“TPB”), in this Quarterly Report on Form 10-Q speaks only as of the date hereof. New risks and uncertainties come up from time to time, and it is impossible for TPB to predict these events or how they may affect it. TPB has no obligation, and does not intend, to update any forward-looking statements after the date hereof, except as required by federal securities laws. Factors that could cause these differences include, but are not limited to:


declining sales of tobacco products, and expected continuing decline of sales in the tobacco industry overall;

our dependence on a small number of third-party suppliers and producers;

the possibility that we will be unable to identify or contract with new suppliers or producers in the event of a supply or product disruption, as well as other supply chain concerns, including delays in product shipments and increases in freight cost;

the possibility that our licenses to use certain brands or trademarks will be terminated, challenged or restricted;

failure to maintain consumer brand recognition and loyalty of our customers;

our reliance on relationships with several large retailers and national chains for distribution of our products;

intense competition and our ability to compete effectively;

competition from illicit sources and the damage caused by illicit products to our brand equity;
 
contamination of our tobacco supply or products;

uncertainty and continued evolution of the markets for our products;

complications with the design or implementation of our new enterprise resource planning system could adversely impact our business and operations;

substantial and increasing regulation and changes in U.S. Food and Drug Administration (“FDA”) enforcement priorities;

regulation or marketing denials of our products by the FDA, which has broad regulatory powers;

many of our products contain nicotine, which is considered to be a highly addictive substance;

requirement to maintain compliance with master settlement agreement escrow account;

possible significant increases in federal, state and local municipal tobacco- and nicotine-related taxes;

our products are marketed pursuant to a policy of FDA enforcement priorities which could change, and our products could become subject to increased regulatory burdens by the FDA;

our products are subject to developing and unpredictable regulation, such as court actions that impact obligations;

increase in state and local regulation of our products has been proposed or enacted;

increase in tax of our products could adversely affect our business;

sensitivity of end-customers to increased sales taxes and economic conditions, including as a result of inflation and other declines in purchasing power;

possible increasing international control and regulation;

failure to comply with environmental, health and safety regulations;

imposition of significant tariffs on imports into the U.S.;

the scientific community’s lack of information regarding the long-term health effects of certain substances contained in some of our products;

significant product liability litigation;

our amount of indebtedness;

the terms of our indebtedness, which may restrict our current and future operations;
 
our ability to establish and maintain effective internal controls over financial reporting;

identification of material weaknesses in our internal control over financial reporting, which, if not remediated appropriately or timely, could result in loss of investor confidence and adversely impact our stock price;

our certificate of incorporation and bylaws, as well as Delaware law and certain regulations, could discourage or prohibit acquisition bids or merger proposals, which may adversely affect the market price of our common stock;

our certificate of incorporation limits the ownership of our common stock by individuals and entities that are Restricted Investors. These restrictions may affect the liquidity of our common stock and may result in Restricted Investors (as defined in our Certificate of Incorporation) being required to sell or redeem their shares at a loss or relinquish their voting, dividend and distribution rights;

future sales of our common stock in the public market could reduce our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us;


we may issue preferred stock whose terms could adversely affect the voting power or value of our common stock;

our business may be damaged by events outside of our suppliers’ control, such as the impact of epidemics (e.g., coronavirus), political upheavals, or natural disasters;

adverse impact of climate change;

our reliance on information technology;

cybersecurity and privacy breaches, which have increased in part due to artificial intelligence;

failure to manage our growth;

failure to successfully integrate our acquisitions or otherwise be unable to benefit from pursuing acquisitions;

fluctuations in our results;

exchange rate fluctuations;

adverse U.S. and global economic conditions;

departure of key management personnel or our inability to attract and retain talent;

infringement on or misappropriation of our intellectual property;

third-party claims that we infringe on their intellectual property; and

failure to meet expectations relating to environmental, social and governance factors.

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

Turning Point Brands, Inc.
Consolidated Balance Sheets
(dollars in thousands except share data)

   
(unaudited)
       
    March 31,     December 31,  
ASSETS
 
2024
   
2023
 
Current assets:
           
Cash
 
$
130,903
   
$
117,886
 
Accounts receivable, net of allowances of $43 in 2024 and $78 in 2023
   
8,198
     
9,989
 
Inventories, net
   
105,467
     
98,960
 
Other current assets
   
34,437
     
40,781
 
Total current assets
   
279,005
     
267,616
 
Property, plant, and equipment, net
   
24,790
     
25,300
 
Deferred income taxes
   
1,426
     
1,468
 
Right of use assets
   
10,868
     
11,480
 
Deferred financing costs, net
   
2,305
     
2,450
 
Goodwill
   
136,365
     
136,250
 
Other intangible assets, net
   
80,177
     
80,942
 
Master Settlement Agreement (MSA) escrow deposits
   
28,427
     
28,684
 
Other assets
   
22,953
     
15,166
 
Total assets
 
$
586,316
   
$
569,356
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable
 
$
18,934
   
$
8,407
 
Accrued liabilities
   
30,974
     
33,635
 
Current portion of long-term debt
    59,397       58,294  
Total current liabilities
   
109,305
     
100,336
 
Notes payable and long-term debt
   
306,496
     
307,064
 
Lease liabilities
   
9,360
     
9,950
 
Total liabilities
   
425,161
     
417,350
 
                 
Commitments and contingencies
           
                 
Stockholders’ equity:
               
Preferred stock; $0.01 par value; authorized shares 40,000,000; issued and outstanding shares -0-
   
     
 
Common stock, voting, $0.01 par value; authorized shares, 190,000,000; 20,016,822 issued shares and 17,627,817 outstanding shares at March 31, 2024, and 19,922,137 issued shares and 17,605,677 outstanding shares at December 31, 2023
   
200
     
199
 
Common stock, nonvoting, $0.01 par value; authorized shares, 10,000,000; issued and outstanding shares -0-
   
     
 
Additional paid-in capital
   
119,792
     
119,075
 
Cost of repurchased common stock (2,389,005 shares at March 31, 2024 and 2,316,460 shares December 31, 2023)
   
(80,172
)
   
(78,093
)
Accumulated other comprehensive loss
   
(3,048
)
   
(2,648
)
Accumulated earnings
   
123,192
     
112,443
 
Non-controlling interest
   
1,191
     
1,030
 
Total stockholders’ equity
   
161,155
     
152,006
 
Total liabilities and stockholders’ equity
 
$
586,316
   
$
569,356
 

The accompanying notes are an integral part of the consolidated financial statements.

Turning Point Brands, Inc.
Consolidated Statements of Income
(dollars in thousands except share and per share data)
(unaudited)

 
Three Months Ended
March 31,
 
   
2024
   
2023
 
Net sales
 
$
97,058
   
$
100,956
 
Cost of sales
   
45,146
     
52,339
 
Gross profit
   
51,912
     
48,617
 
Selling, general, and administrative expenses
   
32,646
     
30,775
 
Operating income
   
19,266
     
17,842
 
Interest expense, net
   
3,479
     
4,010
 
Investment (gain) loss
   
(119
)
   
4,799
 
Gain on extinguishment of debt
   
     
(777
)
Income before income taxes
   
15,906
     
9,810
 
Income tax expense
   
3,727
     
2,468
 
Consolidated net income
   
12,179
     
7,342
 
Net income (loss) attributable to non-controlling interest
   
169
     
(255
)
Net income attributable to Turning Point Brands, Inc.
 
$
12,010
   
$
7,597
 
                 
Basic income per common share:
               
Net income attributable to Turning Point Brands, Inc.
 
$
0.68
   
$
0.43
 
Diluted income per common share:
               
Net income attributable to Turning Point Brands, Inc.
 
$
0.63
   
$
0.41
 
Weighted average common shares outstanding:
               
Basic
   
17,654,684
     
17,531,414
 
Diluted
   
20,170,314
     
20,669,152
 

The accompanying notes are an integral part of the consolidated financial statements.

Turning Point Brands, Inc.
Consolidated Statements of Comprehensive Income
(dollars in thousands)
(unaudited)

 
Three Months Ended
March 31,
 
   
2024
   
2023
 
Consolidated net income
 
$
12,179
   
$
7,342
 
                 
Other comprehensive income (loss), net of tax
               
Unrealized loss on MSA investments, net of tax of $15 in 2024 and $176 in 2023
   
(242
)
   
553
 
Foreign currency translation, net of tax of $0 in 2024 and 2023
   
13
     
(78
)
Unrealized loss on derivative instruments, net of tax of $57 in 2024 and $109 in 2023
   
(185
)
   
(344
)
Unrealized gain on investments, net of tax of $0 in 2024
    6        
     
(408
)
   
131
 
Consolidated comprehensive income
   
11,771
     
7,473
 
Comprehensive income (loss) attributable to non-controlling interest
   
169
     
(255
)
Comprehensive income attributable to Turning Point Brands, Inc.
 
$
11,602
   
$
7,728
 

The accompanying notes are an integral part of the consolidated financial statements.

Turning Point Brands, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
(unaudited)


 
Three Months Ended
March 31,
 
   
2024
   
2023
 
Cash flows from operating activities:
           
Consolidated net income
 
$
12,179
   
$
7,342
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Gain on extinguishment of debt
   
     
(777
)
Loss (gain) on sale of property, plant, and equipment
   
1
     
(6
)
Gain on MSA investments
    6        
Depreciation and other amortization expense
   
944
     
776
 
Amortization of other intangible assets
   
779
     
771
 
Amortization of deferred financing costs
   
696
     
626
 
Deferred income tax expense (benefit)
   
114
     
299
 
Stock compensation expense
   
2,062
     
743
 
Noncash lease income
   
(42
)
   
(14
)
Loss on investments
   
     
4,897
 
Changes in operating assets and liabilities:
               
Accounts receivable
   
1,929
     
(216
)
Inventories
   
(6,296
)
   
6,173
 
Other current assets
   
3,130
     
2,639
 
Other assets
   
(270
)
   
(2,895
)
Accounts payable
   
10,525
     
2,051
 
Accrued liabilities and other
   
(3,118
)
   
(7,025
)
Net cash provided by operating activities
 
$
22,639
   
$
15,384
 
                 
Cash flows from investing activities:
               
Capital expenditures
 
$
(366
)
 
$
(2,435
)
Purchases of investments
    (7,119 )    
 
Purchases of non-marketable equity investments
    (500 )      
Proceeds on sale of property, plan and equipment
   
     
3
 
Restricted cash, MSA escrow deposits
    (1 )      
Net cash used in investing activities
 
$
(7,986
)
 
$
(2,432
)
                 
Cash flows from financing activities:
               
Convertible Senior Notes repurchased
  $     $ (13,002 )
Proceeds from call options
          33  
Payment of dividends
   
(1,149
)
   
(1,052
)
Exercise of options
   
3
     
357
 
Redemption of restricted stock units
    (136 )      
Redemption of performance restricted stock units
    (1,212 )     (889 )
Common stock repurchased
   
(2,079
)
   
 
Net cash used in financing activities
 
$
(4,573
)
 
$
(14,553
)
                 
Net increase (decrease) in cash
 
$
10,080
   
$
(1,601
)
Effect of foreign currency translation on cash
 
$
(58
)
 
$
(1
)
                 
Cash, beginning of period:
               
Unrestricted
 
$
117,886
   
$
106,403
 
Restricted
   
4,929
     
4,929
 
Total cash at beginning of period
 
$
122,815
   
$
111,332
 
                 
Cash, end of period:
               
Unrestricted
 
$
130,903
   
$
104,801
 
Restricted
   
1,934
     
4,929
 
Total cash at end of period
 
$
132,837
   
$
109,730
 
                 
Supplemental schedule of noncash investing activities:
               
Accrued capital expenditures
 
$
10
   
$
7
 
                 
Supplemental schedule of noncash financing activities:
               
Dividends declared not paid
 
$
1,261
   
$
1,155
 

The accompanying notes are an integral part of the consolidated financial statements.

Turning Point Brands, Inc.
Consolidated Statements of Changes in Stockholders’ Equity
For the Three Months Ended March 31, 2024 and 2023
(dollars in thousands except share data)
(unaudited)

                      Cost of     Accumulated                    
          Common     Additional    
Repurchased
    Other          
Non-
       
    Voting     Stock,     Paid-In    
Common
   
Comprehensive
    Accumulated     Controlling        

 
Shares
   
Voting
   
Capital
   
Stock
   
Income (Loss)
   
Earnings
   
Interest
   
Total
 
Beginning balance January 1, 2024
   
17,605,677
   
$
199
   
$
119,075
   
$
(78,093
)
 
$
(2,648
)
 
$
112,443
   
$
1,030
   
$
152,006
 
                                                                 
Unrealized loss on MSA investments, net of tax of $15
   
     
     
     
     
(242
)
   
     
     
(242
)
Unrealized loss on derivative instruments, net of tax of $57
                            (185 )                 (185 )
Foreign currency translation, net of tax of $0
   
     
     
     
     
21
     
     
(8
)
   
13
 
Unrealized gain on investments, net of tax of $0
                            6                   6  
Stock compensation expense
   
     
     
2,062
     
     
     
     
     
2,062
 
Exercise of options
   
198
     
     
3
     
     
     
     
     
3
 
Cost of repurchased common stock
    (72,545 )                 (2,079 )                       (2,079 )
Issuance of performance based restricted stock units
    126,109       1                                     1  
Issuance of restricted stock units
    21,697                                            
Redemption of performance based restricted stock units
    (48,177 )           (1,212 )                             (1,212 )
Redemption of restricted stock units
    (5,142 )           (136 )                             (136 )
Dividends
   
     
     
     
     
     
(1,261
)
   
     
(1,261
)
Net income
   
     
     
     
     
     
12,010
     
169
     
12,179
 
Ending balance March 31, 2024
   
17,627,817
   
$
200
   
$
119,792
   
$
(80,172
)
 
$
(3,048
)
 
$
123,192
   
$
1,191
   
$
161,155
 
                                                                 
                                                                 
Beginning balance January 1, 2023
   
17,485,163
   
$
198
   
$
113,242
   
$
(78,093
)
 
$
(2,393
)
 
$
78,691
   
$
1,735
   
$
113,380
 
                                                                 
Unrealized gain on MSA investments, net of tax of $176
   
     
     
     
     
553
     
           
553
 
Unrealized loss on derivative instruments, net of tax of $109
   
                        (344 )                 (344 )
Foreign currency translation, net of tax of $0
                            (50 )           (28 )     (78 )
Stock compensation expense
   
     
     
743
     
     
     
           
743
 
Exercise of options
   
24,955
     
     
357
     
     
     
           
357
 
Performance restricted stock units issuance 
    114,274       1       (1 )                              
Performance restricted stock units redeemed
    (38,863 )           (889 )                             (889 )
Settlement of call options, net of tax of $8
                25                   -       -       25  
Dividends
   
     
     
     
     
     
(1,155
)
         
(1,155
)
Net income
   
     
     
     
     
     
7,597
      (255 )    
7,342
 
Ending balance March 31, 2023
   
17,585,529
   
$
199
   
$
113,477
   
$
(78,093
)
 
$
(2,234
)
 
$
85,133
   
$
1,452
   
$
119,934
 

The accompanying notes are an integral part of the consolidated financial statements.

Turning Point Brands, Inc.
Notes to Consolidated Financial Statements
(dollars in thousands, except where designated and per share data)

Note 1. Description of Business and Basis of Presentation

Description of Business

Turning Point Brands, Inc. and its subsidiaries (collectively referred to herein as the “Company,” “we,” “our,” or “us”) is a leading manufacturer, marketer and distributor of branded consumer products. The Company sells a wide range of products to adult consumers consisting of staple products with its iconic brands Zig-Zag® and Stoker’s® and its next generation products to fulfill evolving consumer preferences. Its segments are led by its core proprietary and iconic brands: Zig-Zag® and CLIPPER® in the Zig-Zag Products segment and Stoker’s® along with Beech-Nut® and Trophy® in the Stoker’s Products segment. The Company’s products are available in more than 217,000 retail outlets in North America. The Company operates in three segments: (i) Zig-Zag Products, (ii) Stoker’s Products, and (iii) Creative Distribution Solutions (formerly known as NewGen).

Basis of Presentation

The accompanying unaudited, interim, consolidated financial statements have been prepared in accordance with the accounting practices described in the Company’s audited, consolidated financial statements as of and for the year ended December 31, 2023. In the opinion of management, the unaudited, interim, consolidated financial statements included herein contain all adjustments necessary to present fairly the financial position, results of operations, and cash flows of the Company for the periods presented. Such adjustments, other than nonrecurring adjustments separately disclosed, are of a normal and recurring nature. The operating results for interim periods are not necessarily indicative of results to be expected for a full year or future interim periods. The unaudited, interim, consolidated financial statements should be read in conjunction with the Company’s audited, consolidated financial statements and accompanying notes as of and for the year ended December 31, 2023. The accompanying interim, consolidated financial statements are presented in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and, accordingly, do not include all the disclosures required by generally accepted accounting principles in the United States (“GAAP”) with respect to annual financial statements.

Note 2. Summary of Significant Accounting Policies

Consolidation

The consolidated financial statements include the accounts of the Company, its subsidiaries, all of which are wholly-owned, and variable interest entities for which the Company is considered the primary beneficiary. All significant intercompany transactions have been eliminated.

Revenue Recognition

The Company recognizes revenues in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (Topic 606), which includes excise taxes and shipping and handling charges billed to customers, net of cash discounts for prompt payment, sales returns and incentives, upon delivery of goods to the customer – at which time the Company’s performance obligation is satisfied - at an amount that the Company expects to be entitled to in exchange for those goods in accordance with the five-step analysis outlined in Topic 606: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations, and (v) recognize revenue when (or as) performance obligations are satisfied. The Company excludes from the transaction price, sales taxes and value-added taxes imposed at the time of sale (which do not include excise taxes on smokeless tobacco, cigars or other nicotine products billed to customers).

The Company records an allowance for sales returns, based principally on historical volume and return rates, which is included in accrued liabilities on the consolidated balance sheets. The Company records sales incentives, which consist of consumer incentives and trade promotion activities, as a reduction in revenues (a portion of which is based on amounts estimated to be due to wholesalers, retailers and consumers at the end of the period) based principally on historical volume and utilization rates. Expected payments for sales incentives are included in accrued liabilities on the consolidated balance sheets.

A further requirement of ASC 606 is for entities to disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors. The Company’s management views business performance through segments that closely resemble the performance of major product lines. Thus, the primary and most useful disaggregation of the Company’s contract revenue for decision making purposes is the disaggregation by segment which can be found in Note 16, “Segment Information”. An additional disaggregation of contract revenue by sales channel can be found within Note 16 as well.

Shipping Costs

The Company records shipping costs incurred as a component of selling, general, and administrative expenses. Shipping costs incurred were approximately $5.6 million and $6.2 million for the three months ending March 31, 2024 and 2023, respectively.

Inventories

Inventories are stated at the lower of cost or net realizable value using the first-in, first-out method. Leaf tobacco is presented in current assets in accordance with standard industry practice, notwithstanding the fact that such tobaccos are carried longer than one year for the purpose of curing.

Fair Value

GAAP establishes a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

The three levels of the fair value hierarchy under GAAP are described below:


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

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

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

Derivative Instruments

The Company enters into foreign currency forward contracts to hedge a portion of its exposure to changes in foreign currency exchange rates on inventory purchase commitments. The Company accounts for its forward contracts under the provisions of ASC 815, Derivatives and Hedging. Under the Company’s policy, the Company may hedge up to 100% of its anticipated purchases of inventory in the denominated invoice currency over a forward period not to exceed twelve months. The Company may also, from time to time, hedge up to 100% of its non-inventory purchases (e.g., production equipment) in the denominated invoice currency. Forward contracts that qualify as hedges are adjusted to their fair value through other comprehensive income as determined by market prices on the measurement date, except any hedge ineffectiveness which is recognized currently in income. Gains and losses on these forward contracts are reclassified from other comprehensive income into inventory as the related inventories are received and are transferred to net income as inventory is sold. Changes in fair value of any contracts that do not qualify for hedge accounting or are not designated as hedges are recognized currently in income.

Risks and Uncertainties

Manufacturers and sellers of tobacco products are subject to regulation at the federal, state, and local levels. Such regulations include, among others, labeling requirements, limitations on advertising, and prohibition of sales to minors. The tobacco industry is likely to continue to be heavily regulated. There can be no assurance as to the ultimate content, timing, or effect of any regulation of tobacco products by any federal, state, or local legislative or regulatory body, nor can there be any assurance that any such legislation or regulation would not have a material adverse effect on the Company’s financial position, results of operations, or cash flows. In a number of states targeted flavor bans have been proposed or enacted legislatively or by the administrative process. Depending on the number and location of such bans, that legislation or regulation could have a material adverse effect on the Company’s financial position, results of operations or cash flows. The U.S. Food and Drug Administration (“FDA”) continues to consider various restrictive regulations around our products, including targeted flavor bans; however, the details, timing, and ultimate implementation of such measures remain unclear.

The tobacco industry has experienced, and is experiencing, significant product liability litigation. Most tobacco liability lawsuits have been brought against manufacturers and sellers of cigarettes for injuries allegedly caused by smoking or exposure to smoke. However, several lawsuits have been brought against manufacturers and sellers of smokeless products for injuries to health allegedly caused by use of smokeless products. Typically, such claims assert that use of smokeless products is addictive and causes oral cancer. Additionally, several lawsuits have been brought against manufacturers and distributors of Creative Distribution Solutions products due to malfunctioning devices. There can be no assurance the Company will not sustain losses in connection with such lawsuits and that such losses will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

Master Settlement Agreement (MSA)

Pursuant to the Master Settlement Agreement (the “MSA”) entered into in November 1998 by most states (represented by their attorneys general acting through the National Association of Attorneys General) and subsequent states’ statutes, a “cigarette manufacturer” (which is defined to include a manufacturer of make-your-own (“MYO”) cigarette tobacco) has the option of either becoming a signatory to the MSA or opening, funding, and maintaining an escrow account to have funds available for certain potential tobacco-related liabilities with sub-accounts on behalf of each settling state. Such companies are entitled to direct the investment of the escrowed funds and withdraw any appreciation but cannot withdraw the principal for twenty-five years from the year of each annual deposit, except to withdraw funds deposited pursuant to an individual state’s escrow statute to pay a final judgement to that state’s plaintiffs in the event of such a final judgement against the Company. The Company chose to open and fund an escrow account as its method of compliance. It is the Company’s policy to record amounts on deposit in the escrow account for prior years as a non-current asset. As of March 31, 2024, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $28.4 million. At December 31, 2023, the Company had on deposit approximately $32.1 million, the fair value of which was approximately $28.7 million. The Company discontinued its generic category of MYO in 2019 and its Zig-Zag branded MYO cigarette smoking tobacco in 2017. Thus, pending a change in MSA legislation, the Company has no remaining product lines covered by the MSA and will not be required to make future escrow deposits.

The Company has chosen to invest a portion of the MSA escrow, from time to time, in U.S. Government securities including TIPS, Treasury Notes, and Treasury Bonds. These investments are classified as available-for-sale and carried at fair value. Realized losses are prohibited under the MSA; any investment in an unrealized loss position will be held until the value is recovered, or until maturity.


Fair values for the U.S. Governmental agency obligations are Level 2 in the fair value hierarchy. The following tables show cost and estimated fair value of the assets held in the MSA account, respectively, as well as the maturities of the U.S. Governmental agency obligations held in such account for the periods indicated.


    As of March 31, 2024     As of December 31, 2023  
         
Gross
   
Estimated
         
Gross
   
Estimated
 
         
Unrealized
   
Fair
         
Unrealized
   
Fair
 
   
Cost
   
Gains (Losses)
   
Value
   
Cost
   
Losses
   
Value
 
Cash and cash equivalents
 
$
1,934
   
$
   
$
1,934
   
$
1,929
   
$
   
$
1,929
 
U.S. Governmental agency obligations (unrealized position < 12 months)
   
1,196
     
6
   
1,202
     
     
   
 
U.S. Governmental agency obligations (unrealized position > 12 months)
   
28,943
     
(3,652
)
   
25,291
     
30,144
     
(3,389
)
   
26,755
 
   
$
32,073
   
$
(3,646
)
 
$
28,427
   
$
32,073
   
$
(3,389
)
 
$
28,684
 

   
As of
 
   
March 31, 2024
 
Less than one year
 
$
3,250
 
One to five years
   
13,775
 
Five to ten years
   
11,159
 
Greater than ten years
   
1,955
 
Total
 
$
30,139
 

The following shows the amount of deposits by sales year for the MSA escrow account:


 
Deposits as of
 
Sales
Year
 
March 31,
2024
   
December 31,
2023
 
1999
 
$
211
   
$
211
 
2000
   
1,017
     
1,017
 
2001
   
1,673
     
1,673
 
2002
   
2,271
     
2,271
 
2003
   
4,249
     
4,249
 
2004
   
3,714
     
3,714
 
2005
   
4,553
     
4,553
 
2006
   
3,847
     
3,847
 
2007
   
4,167
     
4,167
 
2008
   
3,364
     
3,364
 
2009
   
1,619
     
1,619
 
2010
   
406
     
406
 
2011
   
193
     
193
 
2012
   
199
     
199
 
2013
   
173
     
173
 
2014
   
143
     
143
 
2015
   
101
     
101
 
2016
   
91
     
91
 
2017
   
82
     
82
 
                 
 Total   $
32,073
    $
32,073
 

Note 3. Derivative Instruments

Foreign Currency

During the three months ended March 31, 2024, the Company executed no foreign exchange contracts meeting hedge accounting requirements. 

At March 31, 2024, the Company had foreign currency contracts outstanding for the purchase of €9.2 million and sale of €9.2 million. The foreign currency contracts’ fair value at March 31, 2024, resulted in an asset of $0.0 million included in Other current assets and a liability of $0.1 million included in Accrued liabilities. At December 31, 2023, the Company had foreign currency contracts outstanding for the purchase of €15.2 million and sale of €15.2 million. The foreign currency contracts’ fair value at December 31, 2023, resulted in an asset of $0.3 million included in Other current assets and a liability of $0.1 million included in Accrued liabilities.

Note 4. Fair Value of Financial Instruments

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

Cash and Cash Equivalents

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

Accounts Receivable

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

Long-Term Debt

The Company’s Senior Secured Notes (as defined in Note 10) bear interest at a rate of 5.625% per year. As of March 31, 2024, the fair value approximated $237.3 million, with a carrying value of $250 million. As of December 31, 2023, the fair value of the Senior Secured Notes approximated $234.9 million, with a carrying value of $250 million.

The Convertible Senior Notes (as defined in Note 10) bear interest at a rate of 2.50% per year, and the fair value of the Convertible Senior Notes without the conversion feature approximated $117.5 million, with a carrying value of $118.5 million as of March 31, 2024. As of December 31, 2023, the fair value of the Convertible Senior Notes without the conversion feature approximated $114.7 million, with a carrying value of $118.5 million.

See Note 10, “Notes Payable and Long-Term Debt”, for further information regarding the Company’s long-term debt.

Note 5. Inventories

The components of inventories are as follows:

    March 31,     December 31,  

 
2024
   
2023
 
Raw materials and work in process
 
$
7,148
   
$
5,201
 
Leaf tobacco
   
41,461
     
34,894
 
Finished goods - Zig-Zag Products
   
39,103
     
41,783
 
Finished goods - Stoker’s Products
   
10,232
     
8,090
 
Finished goods - Creative Distribution Solutions
   
6,086
     
7,281
 
Other
   
1,437
     
1,711
 
Inventories
 
$
105,467
   
$
98,960
 

The inventory valuation allowance was $20.6 million as of  March 31, 2024 and December 31, 2023.

In December 2023, a third-party warehouse in Tennessee used to store some of the Company’s leaf tobacco incurred significant tornado damage resulting in damage to the leaf tobacco. As a result, the Company recorded a $15.2 million inventory reserve related to its leaf tobacco inventory which is included in Other operating income, net in the consolidated statement of income for the quarter ended December 31, 2023. The leaf tobacco inventory is covered by the Company’s stock throughput insurance policy and the Company believes the inventory loss is probable of being fully recovered under the policy. The Company does not expect to incur any delays in customer deliveries as a result of the damage.

Note 6. Other Current Assets

Other current assets consist of:

    March 31,     December 31,  

 
2024
   
2023
 
Inventory deposits
 
$
7,392
   
$