Item 1A. Risk Factors
Item 1A. Risk Factors
In addition to the other information set forth in this report and in our other filings with the Securities and Exchange Commission, investors should carefully consider our risk factors, which could materially affect our business, financial condition, or operating results. Except as set forth below, as of the date of this report, there are no material changes or updates to the risk factors previously disclosed in Part I, Item 1A "Risk Factors" in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2024.
The impact of proposed regulations to prohibit the sale of cigarettes in the United States other than low-nicotine cigarettes, if they are adopted and become effective, is uncertain, but they could materially adversely affect our business, results of operations, and financial condition.
On January 15, 2025, the U.S. Food and Drug Administration (the "FDA") published a proposed rule (the "Proposed Rule") that limits the nicotine level at 0.7 milligrams per gram of tobacco in cigarettes and certain other combusted tobacco products, which is significantly lower than the average concentration in these products on the market today. The FDA’s proposal would apply to cigarettes, cigarette tobacco, roll-your-own tobacco, most cigars (including little cigars, cigarillos, and most large cigars), and pipe tobacco. The Proposed Rule does not include e-cigarettes, nicotine pouches, noncombusted cigarettes (such as heated tobacco products that meet the definition of a cigarette), waterpipe tobacco (hookah), smokeless tobacco products, or premium cigars.
The Proposed Rule is subject to public comment prior to being adopted by the FDA. Accordingly, the terms of any such final rule are uncertain and the date of effectiveness of such a rule is also uncertain. While the FDA announced that reducing the nicotine levels of cigarettes would reduce consumption of cigarettes by future generations and facilitate current smokers to stop consuming cigarettes, it is uncertain whether the Proposed Rule, if it is adopted and becomes effective, will have such effect. While the impact of the Proposed Rule on the Company is also uncertain, regulations consistent with those set forth in the Proposed Rule, if they are adopted and become effective, could materially adversely affect our business, results of operations, and financial condition.
Shifts in customer requirements for sourcing tobacco may negatively affect our organizational structure, asset base, and results of operations, including shifts resulting from the imposition of tariffs.
If our customers significantly alter their requirements for tobacco volumes from certain regions, we may have to change our production facilities and alter our fixed asset base in certain origins. Shifts in sourcing of tobacco may occur as a result of currency fluctuations, including changes in currency exchange rates against the United States Dollar ("USD"), the imposition of tariffs and other changes in international trade policies. For example, tariffs imposed in 2018 by China on U.S. agricultural products, including tobacco, in response to tariffs on goods from China imposed by the U.S. adversely impacted our shipping volumes from the U.S. at that time, as impacted customers sought to source tobacco from jurisdictions not subject to the tariffs. This shift in customer sourcing requirements adversely affected our results of operations for some time as it is not possible to immediately adjust to such customer-driven shifts in sourcing origins. Recent tariffs announced by the U.S. government, including for example, on goods from China, Canada, and/or Mexico, could result in the imposition of retaliatory tariffs by impacted governments. We may not be able to timely or efficiently adjust to shifts in sourcing origins as a result of such tariffs, or any other tariffs and retaliatory tariffs that may be imposed in the future, which could similarly adversely affect our results of operations.
We have incurred, and may continue to incur, restructuring charges as we continue to adjust to shifts in sourcing. Adjusting our capacity and adjusting to shifts in sourcing may have an adverse impact on our ability to manage our costs and could have an adverse effect on our financial performance. In addition, certain of our most significant customers, including Philip Morris International Inc. and British American Tobacco, have publicly announced intentions to move toward smoke-free products, with smoke-free products replacing traditional cigarettes. Generally, smoke-free products require less tobacco in production than traditional cigarettes. An increasing trend toward the replacement of traditional cigarettes with smoke-free products, whether driven by our customers or by consumers, could materially adversely affect our results of operations.
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