Quarterly Report for Quarter Ending March 31, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of the historical financial conditions and results of operations in conjunction with our consolidated financial statements and accompanying notes, which are included elsewhere in this Quarterly Report on Form 10-Q. In addition, this discussion includes forward-looking statements which are subject to risks and uncertainties that may result in actual results differing from statements we make. See "Cautionary Note Regarding Forward-Looking Statements." Factors that could cause actual results to differ include those risks and uncertainties discussed in "Risk Factors" contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2025.

The following Management's Discussion and Analysis ("MD&A") relates to the unaudited financial statements of Turning Point Brands, Inc., included elsewhere in this Quarterly Report on Form 10-Q. The MD&A is intended to enable the reader to understand the Company's financial condition and results of operations, including any material changes in the Company's financial condition and results of operations since December 31, 2025, and as compared with the three months ended March 31, 2025. The MD&A is provided as a supplement to and should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in this Quarterly report on Form 10-Q, as well as "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the Annual Report on Form 10-K for the fiscal year ended December 31, 2025 (the "2025 Annual Report").

In this MD&A, unless the context requires otherwise, references to "our Company" "we," "our," or "us" refer to Turning Point Brands, Inc., and its consolidated subsidiaries. References to "TPB" refer to Turning Point Brands, Inc., without any of its subsidiaries. Many of the amounts and percentages in this discussion have been rounded for convenience of presentation.

Overview

Turning Point Brands, Inc. is a leading manufacturer, marketer and distributor of branded consumer products. We sell a wide range of products to adult consumers consisting of staple products with our iconic brands Zig-Zag® and Stoker's® and our next-generation products to fulfill evolving consumer preferences. Among other markets, we compete in the alternative smoking accessories and Other Tobacco Products ("OTP") industries. The alternative smoking accessories market is a dynamic market experiencing robust secular growth driven by cannabinoid legalization in the U.S. and Canada and positively evolving consumer perception and acceptance in North America. The OTP industry, which consists of non-cigarette tobacco products, exhibited flat consumer unit annualized growth during the full year period ended 2025 as reported by MSAi a third-party analytics and information company. Our segments are led by our core proprietary and iconic brands: Zig-Zag® in the Zig-Zag products segment and Stoker's® along with FRE®, Beech-Nut® and Trophy® in the Stoker's products segment. Our businesses generate solid cash flow which we use to invest in our business, finance acquisitions, increase brand support, expand our distribution infrastructure, and strengthen our capital position. We currently ship to approximately 900 distributors with an additional approximately 600 secondary, indirect wholesalers in the U.S. that carry and sell our products. Under the leadership of a senior management team with extensive experience in the consumer products, alternative smoking accessories and tobacco industries, we have grown and diversified our business through new product launches, category expansions and acquisitions while concurrently improving operational efficiency.

We believe there are meaningful opportunities to expand through investing in organic growth via acquisitions and joint ventures across all product categories. Our products are currently available in approximately 220,000 retail locations in North America. Our sales team targets widespread distribution to all traditional retail channels, including convenience stores, and we have a growing e-commerce business.

Recent Developments

Products

We operate in two segments: Zig-Zag products and Stoker's products segments. In our Zig-Zag products segment, we principally market and distribute (i) rolling papers, tubes and related products; (ii) finished cigars and make-your-own ("MYO") cigar wraps; and (iii) lighters and other accessories. In addition, we have a majority stake in Turning Point Brands Canada which is a specialty marketing and distribution firm focused on building brands in the Canadian cannabis accessories, tobacco and alternative products categories. In our Stoker's products segment, we (i) manufacture and market moist snuff tobacco ("MST"); (ii) contract for and market modern oral products; and (iii) contract for and market loose-leaf chewing tobacco products.

Operations

Our Zig-Zag products and Stoker's products segments primarily generate revenues from the sale of our products to wholesale distributors who, in turn, resell the products to retail operations. Our net sales, which include federal excise taxes, consist of gross sales net of cash discounts, returns, and selling and marketing allowances.

We rely on long-standing relationships with high-quality, established manufacturers to provide the majority of our produced products. Approximately 75% of our production, as measured by net sales, is outsourced to suppliers. The remaining production consists primarily of our moist snuff tobacco operations located in Dresden, Tennessee and Louisville, Kentucky. Our principal operating expenses include the cost of raw materials used to manufacture the limited number of our products which we produce in-house; the cost of finished products, which are generally purchased goods; federal excise taxes; legal expenses; and compensation expenses, including benefits and costs of salaried personnel.

Key Factors Affecting Our Results of Operations

We consider the following to be the key factors affecting our results of operations:

Critical Accounting Policies and Uses of Estimates

There have been no material changes to our critical accounting policies and estimates from the information provided in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2025 Annual Report on Form 10-K.

Recent Accounting Pronouncements

See Item 1 of Part I, "Notes to Consolidated Financial Statements - Note 2 - Summary of Significant Accounting Policies - Recent Accounting Pronouncements."

Results of Operations

Summary

The table and discussion set forth below relates to our consolidated results of continuing operations:

Comparison of the Three Months Ended March 31, 2026, to the Three Months Ended March 31, 2025

Net Sales: For the three months ended March 31, 2026, consolidated net sales increased $17.8 million, or 16.8% compared to the prior year period, driven primarily by an increase in the Stoker's products segment.

For the three months ended March 31, 2026, net sales in the Zig-Zag products segment decreased $10.6 million, or 22.4% compared to the prior year period. The decrease in net sales was driven primarily by declines of $7.4 million in U.S. papers and wraps, $1.7 million in the Clipper lighter business, and $0.9 million in our Canadian products.

For the three months ended March 31, 2026, net sales in the Stoker's products segment increased $28.4 million, or 48.1% compared to the prior year period. The increase in net sales was primarily driven by $29.7 million of growth in modern oral products.

Gross Profit: For the three months ended March 31, 2026, consolidated gross profit increased $8.7 million, or 14.6% compared to the prior year period. Gross profit as a percentage of net sales decreased to 55.0% for the three months ended March 31, 2026, compared to 56.0% for the three months ended March 31, 2025. The overall increase in gross profit was driven by increases in net sales in the Stoker's products segment and driven by margin contribution from modern oral products.

For the three months ended March 31, 2026, gross profit in the Zig-Zag products segment decreased $4.6 million, or 18.1% compared to the prior year period. Gross profit as a percentage of net sales increased to 57.1% of net sales for the three months ended March 31, 2026, from 54.1% of net sales for the three months ended March 31, 2025, driven primarily by product mix.

For the three months ended March 31, 2026, gross profit in the Stoker's products segment increased $13.3 million, or 39.1% compared to the prior year period. Gross profit as a percentage of net sales decreased to 54.0% of net sales for the three months ended March 31, 2026, from 57.5% of net sales for the three months ended March 31, 2025, primarily driven by margin contribution from modern oral products.

Selling, General, and Administrative Expenses: For the three months ended March 31, 2026, selling, general, and administrative expenses increased $19.4 million, or 53.2% compared to the prior year period, primarily due to increased shipping and selling costs related to the increase in modern oral sales in the quarter compared to the prior year period. Selling, general and administrative expenses in the three months ended March 31, 2026, included $0.3 million of expense related to PMTA, $2.9 million of stock options, restricted stock and incentives expense, $0.2 million of legal expenses incurred in connection with litigation related to an insurance claim, and $0.1 million of expense related to corporate restructuring. Selling, general and administrative expenses in the three months ended March 31, 2025, included $1.7 million of stock options, restricted stock and incentives expense, $1.6 million of expense related to PMTA, $0.2 million of transaction costs, and $0.2 million of expense related to the implementation of the new ERP and CRM systems.

Operating Income: For the three months ended March 31, 2026, consolidated operating income decreased $10.7 million, or 46.2% compared to the prior year period. Operating income as a percentage of net sales decreased to 10.0% of net sales for the three months ended March 31, 2026 from 21.8% of net sales for the three months ended March 31, 2025, primarily driven by increased selling, general and administrative costs.

For the three months ended March 31, 2026, operating income in the Zig-Zag products segment decreased $5.7 million, or 33.7% compared to the prior year period. Operating income as a percentage of net sales decreased to 30.6% of net sales for the three months ended March 31, 2026 from 35.8% of net sales for the three months ended March 31, 2025, primarily driven by improved margins on product mix offset by an increase in sales and marketing costs.

For the three months ended March 31, 2026, operating income in the Stoker's products segment decreased $4.4 million, or 18.1% compared to the prior year period. Operating income as a percentage of net sales decreased to 22.6% of net sales for the three months ended March 31, 2026 from 40.8% of net sales for the three months ended March 31, 2025, primarily driven by margin contribution of modern oral products and higher sales and marketing costs to drive sales.

Included in consolidated operating income are costs of the Company which are not assigned to one of the two reportable segments and include: (i) corporate overhead expense, including executive management, finance, legal and information technology salaries, and professional services, such as audit, external legal costs and information technology services, as well as (ii) costs related to the FDA premarket tobacco product application. For the three months ended March 31, 2026, unallocated costs were $18.5 million compared to $17.9 million in the prior year period, an increase of $0.6 million or 3.6%, primarily driven by joint venture related corporate expenses.

Other Expense, net: For the three months ended March 31, 2026, other income increased $0.1 million compared to the prior year period due to an honorarium gift in the current year period that was not applicable in the prior year period.

Interest Expense, net: For the three months ended March 31, 2026, interest expense, net was $4.4 million, consistent with the prior year period. The level of interest expense remained stable due to no significant changes in average borrowings, interest rates or debt structure during the period.

Investment Gain: For the three months ended March 31, 2026, investment gain was $0.2 million, consistent with the prior year period. The year-over-year stability reflects comparable investment performance and an unchanged investment portfolio composition during the period.

Income From Equity Method Investments: For the three months ended March 31, 2026, income from investments in equity securities increased $2.8 million compared to the prior year period as a result of GWO.

Loss on Extinguishment of Debt: There was no loss on extinguishment of debt for the three months ended March 31, 2026. Loss on extinguishment of debt for the three months ended March 31, 2025 was $1.2 million as a result of the redemption of the 2026 Notes in February 2025.

Income Tax (Benefit) Expense: Our income tax benefit of $2.8 million was (25.2%of income before income taxes for the three months ended March 31, 2026. Our effective income tax rate was 11.4% for the three months ended March 31, 2025. The change in tax rate is primarily attributable to the release of a valuation allowance on deferred tax assets.

Net Income Attributable to Non-Controlling Interest: Net income attributable to non-controlling interest was $2.3 million and $1.4 million, respectively, for the three months ended March 31, 2026 and 2025. The increase in non-controlling interest compared to the prior year period is primarily due to higher sales volumes and improved net income.

Net Income Attributable to Turning Point Brands, Inc.: Due to the factors described above, net income attributable to Turning Point Brands, Inc. for the three months ended March 31, 2026 and 2025, was $11.7 million and $14.4 million, respectively.

EBITDA and Adjusted EBITDA

To supplement our financial information presented in accordance with generally accepted accounting principles in the United States, or U.S. GAAP, we use non-U.S. GAAP financial measures including EBITDA and Adjusted EBITDA. We believe Adjusted EBITDA provides useful information to management and investors regarding certain financial and business trends relating to our financial condition and results of operations. Adjusted EBITDA is used by management to compare our performance to that of prior periods for trend analyses and planning purposes and is presented to our Board of Directors. We believe that EBITDA and Adjusted EBITDA are appropriate measures of operating performance because they eliminate the impact of expenses that do not relate to operating performance. In addition, our debt instruments contain covenants which use Adjusted EBITDA calculations.

We define "EBITDA" as net income attributable to Turning Point Brands, Inc. before interest expense, gain (loss) on extinguishment of debt, income tax expense, depreciation and amortization. We define "Adjusted EBITDA" as net income before interest expense, gain (loss) on extinguishment of debt, income tax expense, depreciation, amortization, other non-cash items and other items we do not consider the ordinary course in our evaluation of ongoing operating performance noted in the reconciliation below. Among other items that we adjust Adjusted EBITDA for is FDA PMTA expense. The Company believes it is appropriate to adjust for this spend as the costs are incurred in connection with what we view as a non-traditional regulatory process that requires applications be submitted for covered products that are already on the market. As a result, Company's management believes it is most appropriate to assess the performance of the Company's business - the sale of our various products - without regard to these costs and believes that adjusting for these costs provides investors and the public markets with the most meaningful metrics to assess performance of the business. The Company reconciles its EBITDA metrics to Net income attributable to Turning Point Brands, Inc. because that measure reflects the Company's portion of the profitability from consolidated joint ventures after removing results attributable to our partners in such joint ventures.

Non-U.S. GAAP measures should not be considered a substitute for, or superior to, financial measures calculated in accordance with U.S. GAAP. Adjusted EBITDA excludes significant expenses required to be recorded in our financial statements by U.S. GAAP and is subject to inherent limitations. Other companies in our industry may calculate this non-U.S. GAAP measure differently than we do or may not calculate it at all, limiting its usefulness as a comparative measure. The tables below provide reconciliations between net income and Adjusted EBITDA.

Liquidity and Capital Resources

As of March 31, 2026, we have $192.4 million of cash on hand and $72.6 million of availability under the 2023 ABL Facility. We have no borrowings outstanding under our 2023 ABL Facility as of March 31, 2026. Our principal uses for cash are working capital, debt service, and capital expenditures.

Our adjusted working capital, which we define as current assets less cash and current liabilities, increased $35.1 million compared to the prior year end. The increase in working capital is primarily the result of a $1.7 million increase in accounts receivable, an $21.6 million increase in inventory and a $8.0 million increase in other current assets, partially offset by an increase of $15.5 million in accounts payable and a $19.2 million decrease in accrued liabilities. With our strong cash balance, free cash flow generation and borrowing availability under the 2023 ABL Facility, we expect to have ample liquidity to satisfy our operating cash requirements for the foreseeable future.

Cash Flows from Continuing Operations

Our cash flows from continuing operations as reflected in the Consolidated Statements of Cash Flows are summarized as follows:

Cash Flows from Operating Activities

For the three months ended March 31, 2026, net cash used in operating activities was $22.3 million, a increase of $39.7 million compared to the prior year period. The increase is primarily due to unfavorable changes of $34.5 million in working capital, $1.2 million in other assets, decrease in net income, net of non-cash items of $6.3 million. The primary drivers of non-cash items were a $1.6 million increase in deferred tax benefit, a $0.4 million increase in depreciation and amortization, a $2.8 million increase in income from equity method investment and a $1.2 million decrease in loss on extinguishment of debt compared to the prior year period. The decrease in cash from working capital compared to the prior year period was primarily driven by the timing of payments.

Cash Flows from Investing Activities

For the three months ended March 31, 2026, net cash used in investing activities was $5.1 million, a decrease of $0.2 million compared to the prior year period, primarily due to an increase in capital expenditures of $3.0 million offset by $2.8 million decrease for investments.

Cash Flows from Financing Activities

For the three months ended March 31, 2026, net cash used in financing activities was $2.7 million, a decrease of $41.2 million compared to the prior year period, primarily due to a net decrease in cash of $43.4 million related to the February 2025 issuance of the 2032 Notes, and $2.5 million related to stock compensation activity.

Dividends, Share Issuances, and Shares Repurchases

A dividend of $0.08 per common share was paid on April 10, 2026, to shareholders of record at the close of business on March 20, 2026.

On February 25, 2020, our Board of Directors approved a $50.0 million share repurchase program, which is intended for opportunistic execution based upon a variety of factors including market dynamics. The program is subject to the ongoing discretion of the Board of Directors. On October 25, 2021, the Board of Directors increased the approved share repurchase program by $30.7 million, and by $24.6 million on February 24, 2022. On November 6, 2024, the Company's Board of Directors increased the Company's share repurchase authorization by $77.9 million to an aggregate amount of $100.0 million. On November 4, 2025, the Company's Board of Directors increased the share repurchase authorization by $100.0 million to an aggregate amount of $200.0 million. For the three months ended March 31, 2026, there were no repurchases under the share repurchase program. As of March 31, 2026, there was $200.0 million in remaining repurchase authority under the plan.

The Company entered into an at-the-market offering program (the "ATM Program") on December 13, 2024, with B. Riley Securities Inc. and Barclays Capital Inc. Between August 15, 2025, and September 11, 2025, the Company sold 1,014,262 shares of our Common Stock under the ATM Program at an average selling price of $98.59 per share for gross proceeds of $100.0 million, less underwriter's commission and expenses of approximately $2.5 million, for net proceeds of $97.5 million. The shares were issued from repurchased common stock on a first in first out basis. The Company recorded the gain, corresponding to the difference in between the reacquisition cost of treasury stock and the value of treasury stock reissued, into APIC within the Consolidated Statements of Changes in Stockholders' Equity. As of March 31, 2026, there was $200.0 million of capacity remaining under the ATM Program.

Long-Term Debt

Notes payable and long-term debt consisted of the following at March 31, 2026 and December 31, 2025, in order of preference:

2032 Notes

In February 2025, the Company closed a private offering of $300.0 million aggregate principal amount of 7.625% senior secured notes due to mature on March 15, 2032 (the "2032 Notes"). Interest on the 2032 Notes is payable semi-annually on March 15 and September 15 of each year, commencing on September 15, 2025. We used the proceeds from the offering (i) to repay all obligations under and redeem all of our 5.625% senior secured notes due 2026 (the "2026 Notes), (ii) to pay related fees, costs and expenses and (iii) for general corporate purposes. The 2032 Notes are fully and unconditionally guaranteed on a senior secured basis, jointly and severally, by each current and future wholly-owned domestic restricted subsidiary of the Company that guaranteed the 2026 Notes (collectively, the "Guarantors" as defined in the indenture governing the 2032 Notes or the "2032 Notes Indenture"). The 2032 Notes and the related guarantees are secured by first-priority liens on substantially all of the assets of the Company and the Guarantors, subject to certain exceptions. Proceeds from the offering were approximately $293.0 million.

The 2032 Notes Indenture contains covenants that, among other things, restrict the ability of the Company and its restricted subsidiaries to: (i) grant or incur liens; (ii) incur, assume or guarantee additional indebtedness; (iii) sell or otherwise dispose of assets, including capital stock of subsidiaries; (iv) make certain investments; (v) pay dividends, make distributions or redeem or repurchase capital stock; (vi) engage in certain transactions with affiliates; and (vii) consolidate or merge with or into, or sell substantially all of our assets to another entity. These covenants are subject to several limitations and exceptions set forth in the 2032 Notes Indenture. For instance, the Company is generally permitted to make restricted payments, including the payment of dividends to shareholders, provided that, at the time of payment, or as a result of payment, the Company is not in default on its debt covenants; however, there are earnings and market capitalization requirements that if not met could limit the aggregate amount of quarterly dividends payable during a fiscal year. The 2032 Notes Indenture provides for customary events of default. The Company was in compliance with all covenants under the 2032 Notes as of March 31, 2026.

We incurred debt issuance costs attributable to the 2032 Notes of $7.3 million which are amortized to interest expense using the straight-line method over the expected life of the 2032 Notes.

2023 ABL Facility

On November 7, 2023, TPB Specialty Finance, LLC, a wholly-owned subsidiary of the Company (the "ABL Borrower"), entered into a new $75.0 million asset-backed revolving credit facility (the "2023 ABL Facility"), with the several lenders thereunder, and Barclays Bank Plc, as administrative agent (the "Administrative Agent") and as collateral agent and First-Citizens Bank & Trust Company as additional collateral agent (the "Additional Collateral Agent"). Under the 2023 ABL Facility, the ABL Borrower may draw up to $75.0 million under Revolving Credit Loans and Last In Last Out ("LILO") Loans. The 2023 ABL Facility includes a $40.0 million accordion feature. In connection with the 2023 ABL Facility, Turning Point Brands contributed certain existing inventory to the ABL Borrower. The 2023 ABL Facility is secured on a first priority basis (subject to customary exceptions) by all assets of the ABL Borrower.

The 2023 ABL Facility contains customary borrowing conditions including a borrowing base equal to the sum of (a) the lesser of (1) 85% of the lower of (A) the market value (on a first in first out basis) of the sum of eligible inventory, plus eligible in-transit inventory of the ABL Borrower and (B) 85% of the cost of the sum of eligible inventory, plus eligible in-transit inventory of the ABL Borrower and (2) 85% of the net orderly liquidation value ("NOLV") percentage of the lower of (1)(A) or (1)(B); plus (b) 85% of the face value of all eligible accounts of the ABL Borrower minus (c) the amount of all eligible reserves. The 2023 ABL Facility also includes a LILO borrowing base equal to the sum of (a) the lesser of: (1) 10% of the lower of (A) the market value (on a first in first out basis) of the sum of eligible inventory, plus eligible in-transit inventory of the ABL Borrower and (B) the cost of the sum of eligible inventory, plus eligible in-transit inventory and (2) 10% of the NOLV percentage of the lower of (1)(A) or (1)(B); plus (b) 10% of the face amount of eligible account; minus (c) the amount of all eligible reserves.

Amounts borrowed under the 2023 ABL Facility are subject to an interest rate margin per annum equal to (a) from and after the closing date until the last day of the first full fiscal quarter ended after the closing date, (i) 1.25% per annum, in the case base rate loans, and (ii) 2.25% per annum, in the case of revolving credit loans that are secured overnight financing rate ("SOFR") loans, (b)(i) 2.25% per annum, in the case of LILO loans that are base rate loans, and (ii) 3.25% per annum, in the case of LILO loans that are SOFR loans, (c) on the first day of each fiscal quarter, the applicable interest rate margins will be determined from the pricing grid below based upon the historical excess availability for the most recent fiscal quarter ended immediately prior to the relevant date, as calculated by the Administrative Agent.

The 2023 ABL Facility also requires the Company and its restricted subsidiaries to maintain a fixed charge coverage ratio of at least 1.00 to 1.00 as of the end of any four consecutive fiscal quarters if excess availability is less than the greater of (a) 12.5% of the line cap and (b) $9.4 million, at any time and continuing until excess availability is equal to or exceeds the greater of (i) 12.5% of the line and (ii) $9.4 million for thirty (30) consecutive calendar days with the $9.4 million level automatically increased in proportion to the amount of any increase in the aggregate revolving credit commitments thereunder in connection with any incremental facility.

The 2023 ABL Facility will mature on the earlier of (x) November 7, 2027 and (y) the date that is 91 days prior to the maturity date of any material debt of the ABL Borrower or the Company or any of its restricted subsidiaries (subject to customary extensions agreed by the lenders thereunder); provided that clause (y) will not apply to the extent that on any applicable date of determination (on any date prior to the date set forth in clause (y)), (A) the sum of (x) cash that is held in escrow for the repayment of such material debt pursuant to arrangements satisfactory to the Administrative Agent, (y) cash that is held in accounts with the Administrative Agent and/or the Additional Collateral Agent, plus (z) excess availability, is sufficient to repay such material debt and (B) the ABL Borrower has excess availability of at least $15.0 million after giving effect to such repayment of material debt, including any borrowings under the commitments in connection therewith.

The Company has not drawn any borrowings under the 2023 ABL Facility but has letters of credit of approximately $2.3 million outstanding under the facility and has an available balance of $72.6 million based on the borrowing base as of March 31, 2026.

The Company incurred debt issuance costs attributable to the 2023 ABL Facility of $2.6 million which are amortized to interest expense using the straight-line method over the expected life of the 2023 ABL Facility.

Additional Information with Respect to Unrestricted Subsidiaries

Under the terms of the 2032 Notes, and the 2026 Notes that were redeemed with proceeds from the February 2025 issuance of the 2032 Notes, the Company designated certain of its subsidiaries as "Unrestricted Subsidiaries", including Interchange Partners LLC and Intrepid Brands, LLC. The Company is required under the terms of the indenture governing the 2032 Notes to present additional information that reflects the financial condition and results of operations of the Company and its Restricted Subsidiaries separate from the financial condition and results of operations of the Company's Unrestricted Subsidiaries as of and for the periods presented. This additional information is presented below.

Income Statements for the three months ended March 31, 2026 and 2025 (unaudited):

Balance Sheet as of March 31, 2026 (unaudited):

Balance Sheet as of December 31, 2025:

Off-balance Sheet Arrangements

At March 31, 2026 and December 31, 2025 we had no foreign currency contracts outstanding.

Inflation

Inflation has a substantial negative effect on the purchasing power of consumers. While historically, we have been able to increase prices at a rate equal to or greater than that of inflation, doing so could be difficult in an inflationary environment. However, we have implemented price increases in areas where doing so has been feasible. In addition, we have been able to maintain a relatively stable variable cost structure for our products due, in part, to our existing contractual agreements for the purchases of tobacco and our premium cigarette rolling papers.