SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2017

☐ 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 001-36696

STANDARD DIVERSIFIED OPPORTUNITIES INC.

(Exact name of registrant as specified in its charter)

Delaware	56-1581761
(State or other jurisdiction of incorporation or organization)	(I.R.S. employer identification no.)

1521 Concord Pike, Suite 301
Wilmington, Delaware	19803
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (302) 824-7062

 Former name, former address and former fiscal year, if changed since last report:

SPECIAL DIVERSIFIED OPPORTUNITIES INC.

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).     Yes   ☑    No   ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 ☐
(Do not check if a smaller reporting 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 August 8, 2017, there were 8,298,153 shares outstanding of the registrant’s Class A common stock, par value $0.01 per share, and 8,114,125 shares outstanding of the registrant’s Class B common stock, par value $0.01 per share.

STANDARD DIVERSIFIED OPPORTUNITIES INC. AND SUBSIDIARIES

TABLE OF CONTENTS

		Page No.
PART I    FINANCIAL INFORMATION
ITEM 1	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016	3
	Condensed Consolidated Statements of Income for the three and six months ended June 30, 2017 and 2016	4
	Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016	5
	Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2017	6
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016	7
	Notes to Condensed Consolidated Financial Statements	8
ITEM 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	32
ITEM 3	Quantitative and Qualitative Disclosures about Market Risk	47
ITEM 4	Controls and Procedures	49
PART II   OTHER INFORMATION
ITEM 1	Legal Proceedings	50
ITEM 1A	Risk Factors	50
ITEM 2	Unregistered Sales of Equity Securities and Use of Proceeds	90
ITEM 3	Defaults Upon Senior Securities	90
ITEM 4	Mine Safety Disclosures	90
ITEM 5	Other Information	90
ITEM 6	Exhibits	90
Signatures	Signatures	91
Index to Exhibits		92

2

Item 1. Financial Statements

Standard Diversified Opportunities Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(dollars in thousands except share data)

(unaudited)

ASSETS	June 30, 2017			December 31, 2016
Current assets:
Cash and cash equivalents	$	20,496		$	2,865
Accounts receivable, net of allowances of $32 in 2017 and $35 in 2016		2,802			2,181
Inventories		67,826			62,185
Other current assets		11,758			11,625
Total current assets		102,882			78,856
Property, plant and equipment, net		8,393			7,590
Deferred income taxes		5,688			6,288
Deferred financing costs, net		707			139
Goodwill		134,620			134,390
Other intangible assets, net		26,787			27,138
Master Settlement Agreement - escrow deposits		30,853			30,410
Other assets		372			209
Total assets	$	310,302		$	285,020
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	8,759		$	9,153
Accrued liabilities		14,529			15,336
Accrued interest expense		362			394
Current portion of long-term debt		7,850			1,650
Revolving credit facility		25,000			15,034
Total current liabilities		56,500			41,567
Notes payable and long-term debt		188,735			201,541
Postretirement benefits		4,404			4,407
Pension benefits		283			423
Other long-term liabilities		883			3,024
Total liabilities		250,805			250,962
Commitments and contingencies
Equity:
Preferred stock, $0.01 par value; authorized shares 500,000,000; -0- issued and outstanding shares		-			-
Class A common stock, $0.01 par value; authorized shares, 300,000,000; 8,246,670 and 857,748 issued shares at June 30, 2017 and December 31, 2016, respectively		82			9
Class B common stock, $0.01 par value; authorized shares, 30,000,000; 8,166,262 and 857,748 issued and outstanding shares at June 30, 2017 and December 31, 2016, respectively; convertible into Class A shares on a one-for-one basis		82			9
Additional paid-in capital		72,185			105,616
Class A Treasury stock, 16,266 common shares at cost at June 30, 2017 and December 31, 2016, respectively		(555	)		(555	)
Accumulated other comprehensive loss		(1,916	)		(4,049	)
Accumulated deficit		(30,579	)		(66,972	)
Total stockholders’ equity		39,299			34,058
Noncontrolling interests		20,198			-
Total equity		59,497			34,058
Total liabilities and equity	$	310,302		$	285,020

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

3

Standard Diversified Opportunities Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(dollars in thousands except share data)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Net sales	$	72,086		$	51,581		$	138,874		$	101,447
Cost of sales		40,091			26,707			79,213			51,926
Gross profit		31,995			24,874			59,661			49,521
Selling, general and administrative expenses		18,879			14,098			35,788			27,836
Operating income		13,116			10,776			23,873			21,685
Interest expense		4,046			6,876			8,979			15,338
Interest income		(9	)		-			(9	)		-
Investment income		(89	)		(332	)		(203	)		(332	)
Loss on extinguishment of debt		-			2,824			6,116			2,824
Income before income taxes		9,168			1,408			8,990			3,855
Income tax expense		2,795			609			740			822
Net income		6,373			799			8,250			3,033
Amounts attributable to noncontrolling interests		(1,470	)		-			(1,470	)		-
Net income attributable to Standard Diversified Opportunities Inc.	$	4,903		$	799		$	6,780		$	3,033
Net income per Class A and Class B Common Share – Basic	$	0.20		$	0.04		$	0.26		$	0.16
Net income per Class A and Class B Common Share – Diluted	$	0.20		$	0.03		$	0.26		$	0.15
Weighted Average Class A and Class B Common Shares Outstanding – Basic		24,314,895			22,766,562			26,136,568			18,596,550
Weighted Average Class A and Class B Common Shares Outstanding – Diluted		24,329,200			23,961,082			26,143,760			19,675,603

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

4

Standard Diversified Opportunities Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(dollars in thousands)

(unaudited)

	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017			2016
Net income	$	6,373		$	799	$	8,250		$	3,033
Other comprehensive income:
Pension and postretirement
Amortization of unrealized losses recorded in cost of sales		6			6		12			12
Amortization of unrealized losses recorded in selling, general and administrative expenses		110			117		224			234
Tax effect		(89	)		-		(89	)		-
Unrealized gain on investments, net of tax of $98 and $141		158			-		229			-
Other comprehensive income		185			123		376			246
Amounts attributable to noncontrolling interests		(1,501	)		-		(1,501	)		-
Comprehensive income attributable to Standard Diversified Opportunities Inc.	$	5,057		$	922	$	7,125		$	3,279

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

5

Standard Diversified Opportunities Inc. and Subsidiaries

Condensed Consolidated Statement of Equity

(dollars in thousands, except share data)

(unaudited)

	Standard Diversified Opportunities Inc. Shareholders
	Class A CommonShares				Class B CommonShares					Class A Treasury Shares						AdditionalPaid-In Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Noncontrolling Interests			Total
	Shares		Amount		Shares			Amount		Shares			Amount
Balance January 1, 2017 (shares adjusted for reverse stock split and reclassification)		857,748	$	9		857,748		$	9		(16,266	)	$	(555	)	$	105,616		$	(4,049	)	$	(66,972	)	$	-		$	34,058
Vesting of SDOI restricted stock		13,700		-		13,700			-		-			-			-			-			-			-			-
Issuance of Class A and Class B Common shares to former holders of Turning Point Brands shares in reverse acquisition		7,335,018		73		7,335,018			73		-			-			18,000			-			-			-			18,146
Allocation of Turning Point Brands equity to noncontrolling interests as part of reverse acquisition		-		-		-			-		-			-			(50,234	)		1,788			29,613			18,833			-
Conversion of Class B common stock into Class A common stock		40,204		-		(40,204	)		-		-			-			-			-			-			-			-
Unrecognized pension and postretirement cost adjustment		-		-		-			-		-			-			-			143			-			4			147
Unrealized gain on investments		-		-		-			-		-			-			-			202			-			27			229
SDOI stock-based compensation		-		-		-			-		-			-			23			-			-			-			23
Impact of Turning Point equity transactions on APIC and NCI		-		-		-			-		-			-			(660	)		-			-			(692	)		(1,352	)
Turning Point acquisition of noncontrolling interest		-		-		-			-		-			-			(560	)		-			-			560			-
Turning Point distribution to noncontrolling interest		-		-		-			-		-			-			-			-			-			(4	)		(4	)
Net income		-		-		-			-		-			-			-			-			6,780			1,470			8,250
Balance June 30, 2017		8,246,670	$	82		8,166,262		$	82		(16,266	)	$	(555	)	$	72,185		$	(1,916	)	$	(30,579	)	$	20,198		$	59,497

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

6

Standard Diversified Opportunities Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(dollars in thousands)

(unaudited)

	Six Months Ended
	June 30, 2017			June 30, 2016
Cash flows from operating activities:
Net income	$	8,250		$	3,033
Adjustments to reconcile net income to net cash used in operating activities:
Loss on extinguishment of debt		6,116			2,824
Loss on sale of property, plant and equipment		17			-
Depreciation expense		771			586
Amortization of deferred financing costs		530			719
Amortization of original issue discount		66			459
Amortization of other intangible assets		351			-
Interest incurred but not paid on PIK Toggle Notes		-			3,422
Interest incurred but not paid on 7% Senior Notes		-			329
Interest paid on PIK Toggle Notes		-			(9,893	)
Deferred income taxes		371			50
Stock compensation expense		295			46
Changes in operating assets and liabilities:
Accounts receivable		(621	)		(1,269	)
Inventories		(4,035	)		(7,417	)
Other current assets		320			943
Other assets		(72	)		(62	)
Accounts payable		(629	)		1,234
Accrued pension liabilities		96			131
Accrued postretirement liabilities		(3	)		(59	)
Accrued expenses and other		(6,900	)		(4,188	)
Net cash provided by (used in) operating activities		4,923			(9,112	)
Cash flows from investing activities:
Cash and cash equivalents acquired in reverse acquisition		20,253			-
Acquisitions, net of cash acquired		268			-
Capital expenditures		(567	)		(859	)
Net cash provided by (used in) investing activities		19,954			(859	)
Cash flows from financing activities:
Proceeds from 2017 revolving credit facility		25,000			-
Proceeds from 2017 first lien term loans		145,000			-
Proceeds from 2017 second lien term loans		55,000			-
Payments of 2017 first lien term loans		(1,462	)		-
Payment of financing costs		(4,765	)		(200	)
Proceeds from (payments of) revolving credit facility		(15,083	)		6,603
Payment of first lien term loan		(147,362	)		(3,563	)
Payment of second lien term loan		(60,000	)		(20,000	)
Payments of Vapor Shark loans		(1,867	)		-
Prepaid Turning Point Brands equity issuance costs		(164	)		-
Payment of PIK Toggle Notes		-			(24,107	)
Redemption of subsidiary options by Turning Point Brands		-			(661	)
Redemption of subsidiary warrants by Turning Point Brands		-			(5,500	)
Turning Point Brands exercise of stock options		1,097			8
Turning Point Brands redemption of options		(1,636	)		-
Turning Point Brands surrender of options		(1,000	)		-
Proceeds from issuance of Turning Point Brands stock		-			56,168
Distribution to noncontrolling interest of Turning Point Brands		(4	)		-
Net cash (used in) provided by financing activities		(7,246	)		8,748
Net increase (decrease) in cash		17,631			(1,223	)
Cash, beginning of period		2,865			4,835
Cash, end of period	$	20,496		$	3,612
Supplemental schedule of noncash financing activities:
Issuance of Turning Point Brands restricted stock	$	-		$	279
Conversion of PIK Toggle Notes to equity	$	-		$	29,014
Conversion of 7% Senior Notes to equity	$	-		$	10,074
Accrued expenses incurred for issuance of Turning Point Brands stock	$	48		$	423
Common stock issued in connection with reverse acquisition	$	18,146		$	-

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

7

Standard Diversified Opportunities Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollars in thousands, except where designated and per share data)

(unaudited)

Note 1. Organization and Description of Business

The accompanying condensed consolidated financial statements include the results of operations of Standard Diversified Opportunities Inc. (“SDOI”), a holding company, and its subsidiaries (collectively, “the Company”).

SDOI (f/k/a Special Diversified Opportunities Inc. and Strategic Diagnostics Inc.) was incorporated in the State of Delaware in 1990, and, until 2013, engaged in bio-services and industrial bio-detection (collectively, the “Life Sciences Business”). On July 12, 2013, SDOI sold substantially all of its rights, title and interest in substantially all of its non-cash assets related to the Life Sciences Business and became a “shell company,” as such term is defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended.

On June 1, 2017, SDOI consummated a Contribution and Exchange Transaction (the “Contribution and Exchange”) to acquire a 52.1% controlling interest in Turning Point Brands, Inc. (“Turning Point”). The transaction was accounted for as a recapitalization or reverse acquisition. Turning Point was the accounting acquirer for financial reporting purposes, notwithstanding the legal form of the transaction.  The primary reason the transaction was treated as a purchase by Turning Point rather than a purchase by SDOI was because SDOI was a shell company with limited operations and Turning Point’s stockholders gained majority control of the outstanding voting power of the Company’s equity securities through their collective ownership of a majority of the outstanding shares of Company common stock. Consequently, reverse acquisition accounting has been applied to the transaction. As of June 30, 2017, SDOI has a 51.7% ownership interest in Turning Point.

Accordingly, the historical financial statements of Turning Point became the Company’s historical financial statements, including the comparative prior periods.

Prior to the consummation of the Contribution and Exchange, SDOI amended and restated its certificate of incorporation to provide for, among other things, (i) the reclassification of every 25 shares of its common stock, par value $0.01 per share, into one share of a new class of common stock, par value $0.01 per share, designated as Class A Common Stock (the “Class A Common Stock”) and (ii) the authorization for issuance of an additional class of common stock, par value $0.01 per share, of SDOI designated as Class B Common Stock (the “Class B Common Stock”). Prior to the closing of the Contribution and Exchange, SDOI declared a dividend of one share of Class B Common Stock for each outstanding share of Class A Common Stock, payable to holders of record of Class A Common Stock on June 2, 2017.

The capital structure, including the number and type of shares issued appearing in the consolidated balance sheets for the periods presented, reflects that of the legal parent or accounting acquiree, SDOI, including the shares issued to effect the reverse acquisition after the Contribution and Exchange and the capital structure modified by the 1-for-25 exchange ratio of the SDOI shares outstanding prior to the consummation of the Contribution and Exchange. As a result of the reverse acquisition, stockholders’ equity has been retrospectively adjusted as of the earliest period presented in these consolidated financial statements. These adjustments include an increase of $9 to the par value of Class A common stock issued, an increase of $9 to the par value of Class B common stock issued, a decrease of $184 in the par value of common stock, an increase of $(555) in treasury stock and an increase of $721 to additional paid-in capital as of January 1, 2017. There was no change to Turning Point’s historical total stockholders’ equity as a result of the reverse acquisition.

8

All references in the unaudited condensed consolidated financial statements presented herein to the number of shares and per share amounts of common stock have been retroactively restated to reflect the reclassification of common stock, the shares issued in the Contribution and Exchange and the dividend of Class B Common Stock. Refer to Note 3, Acquisitions, for further information. As a result of the consummation of the Contribution and Exchange, SDOI is no longer a shell company.

Note 2. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

SDOI is now a holding company and its consolidated financial statements include Turning Point and its subsidiaries.  Turning Point is also a holding company which owns NATC Holding Company, Inc. (“NATC Holding”) and its subsidiaries, Turning Point Brands, LLC (“TPLLC”) and its subsidiary, Intrepid Brands, LLC (“Intrepid”), and Vapor Shark, LLC (fka The Hand Media, Inc.) and its subsidiaries (collectively, “Vapor Shark”). Except where the context otherwise requires, references to Turning Point include Turning Point, NATC Holding and its subsidiary, North Atlantic Trading Company, Inc. (“NATC”) and its subsidiaries, National Tobacco Company, L.P. (“NTC”), North Atlantic Operating Company, Inc. (“NAOC”), North Atlantic Cigarette Company, Inc. (“NACC”), National Tobacco Finance Corporation (“NTFC”), Smoke Free Technologies, Inc. d/b/a VaporBeast (“VaporBeast”), Fred Stoker & Sons, Inc., RBJ Sales, Inc. and Stoker, Inc. (collectively, “Stoker”) and TPLLC, Intrepid and Vapor Shark.

The unaudited condensed consolidated financial statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring adjustments, considered necessary for a fair statement of the financial statements have been included. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. As a result of the consummation of the Contribution and Exchange, the historical financial statements of Turning Point became the Company’s historical financial statements. Accordingly, the historical financial statements of Turning Point are included in the comparative prior periods.  The operating results of SDOI are included in these financial statements beginning on June 1, 2017. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes of SDOI and Turning Point contained in Amendment No. 4 to the Company’s registration statement on Form S-4 filed with the Securities and Exchange Commission on May 4, 2017.

The unaudited condensed consolidated financial statements include the accounts of the Company, its subsidiaries, all of which are wholly-owned and the results of Vapor Shark from April 1, 2017 through June 30, 2017. All significant intercompany transactions have been eliminated.

Noncontrolling Interests

These condensed consolidated financial statements reflect the application of Accounting Standards Codification Topic 810, Consolidations (“ASC 810”) which establishes accounting and reporting standards that require: (i) the ownership interest in subsidiaries held by parties other than the parent to be clearly identified and presented in the consolidated balance sheet within shareholder’s equity, but separate from the parent’s equity; (ii) the amount of consolidated net income attributable to the parent and the noncontrolling interest to be clearly identified and presented on the face of the consolidated statements of income; and (iii) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently.

9

SDOI acquired a 52.1% interest in Turning Point on June 1, 2017 through a reverse acquisition as described in Note 1. Amounts pertaining to the noncontrolling ownership interest held by third parties in the financial position and operating results of the Company are reported as noncontrolling interests in the accompanying condensed consolidated financial statements. As of June 30, 2017, SDOI has an ownership interest of 51.7% in Turning Point.

Vapor Shark is a variable interest entity (“VIE”) for which Turning Point is considered the primary beneficiary due to a management agreement in which Turning Point obtained control of the operations in April 2017. Turning Point did not own Vapor Shark during the second quarter of 2017. On June 30, 2017, Turning Point exercised a warrant to purchase all of the issued and outstanding equity of Vapor Shark.  Beginning June 30, 2017, Vapor Shark is considered a wholly owned subsidiary of Turning Point.  See Note 3 – Acquisitions for details relating to the warrant exercise.

Use of Estimates

The preparation of the condensed consolidated financial statements requires the management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the period. The Company’s significant estimates include those affecting the valuation of goodwill and other intangible assets, assumptions used in determining pension and postretirement benefit obligations and deferred income tax valuation allowances. Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments that have maturities of three months or less when acquired to be cash equivalents.

Revenue Recognition

Turning Point recognizes revenues, net of sales incentives and sales returns, including shipping and handling charges billed to customers, upon delivery to the customer at which time there is a transfer of title and risk of loss to the customer in accordance with the ASC 605-10-S99. Turning Point classifies customer rebates as sales deductions in accordance with the requirements of ASC 605-50-25.

Shipping Costs

Turning Point records shipping costs incurred as a component of selling, general and administrative expenses. Shipping costs incurred were approximately $2.3 million and $1.6 million for the three months ended June 30, 2017 and 2016, respectively. Shipping costs incurred were approximately $4.5 million and $3.1 million for the six months ended June 30, 2017 and 2016, respectively.

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:

10

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.

Master Settlement Agreement Escrow Account

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.  Turning Point has chosen to open and fund an escrow account as its method of compliance. It is Turning Point’s policy to record amounts on deposit in the escrow account for prior years as a non-current asset.  Each year’s annual obligation is required to be deposited in the escrow account by April 15 of the following year.  In addition to the annual deposit, many states have elected to require quarterly deposits for the previous quarter’s sales. As of June 30, 2017, Turning Point had on deposit approximately $32.0 million, the fair value of which was approximately $30.9 million. At December 31, 2016, Turning Point had on deposit approximately $31.9 million, the fair value of which was approximately $30.4 million.

Turning Point invests a portion of the MSA escrow 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 and thus any investment in an unrealized loss position will be held until the value is recovered or until maturity. The following shows the fair value of the MSA escrow account:

	June 30, 2017							December 31, 2016
		Cost		Gross Unrealized Losses			Estimated Fair Value		Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value
Cash and cash equivalents	$	3,798	$	-		$	3,798	$	2,786	$	-	$	-		$	2,786
U.S. Governmental agency obligations		28,217		(1,162	)		27,055		29,156		19		(1,551	)		27,624
	$	32,015	$	(1,162	)	$	30,853	$	31,942	$	19	$	(1,551	)	$	30,410

Fair value for the U.S. Governmental agency obligations are Level 2. All investments have been in an unrealized loss position for less than 12 months.  The following shows the maturities of the U.S. Governmental agency obligations:

	June 30, 2017		December 31, 2016
Less than five years	$	9,113	$	9,113
Six to ten years		16,153		16,141
Greater than ten years		2,951		3,902
Total U.S. Governmental agency obligations	$	28,217	$	29,156

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The following table represents the amount of deposits by sales year for the MSA escrow account and reflects the decline in annual deposits beginning in 2009, due to the significant increase in federal excise taxes, as described above:

	Deposits
Sales Year	June 30, 2017		December 31, 2016
1999	$	211	$	211
2000		1,017		1,017
2001		1,673		1,673
2002		2,271		2,271
2003		4,249		4,249
2004		3,715		3,715
2005		4,552		4,552
2006		3,847		3,847
2007		4,167		4,167
2008		3,364		3,364
2009		1,626		1,626
2010		406		406
2011		193		193
2012		199		199
2013		173		173
2014		142		142
2015		101		100
2016		82		37
2017		27		-
Total	$	32,015	$	31,942

 Food and Drug Administration (“FDA”)

On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”) authorized the Food and Drug Administration (“FDA”) to immediately regulate the manufacture, sale and marketing of four categories of tobacco products – cigarettes, cigarette tobacco, roll-your-own tobacco and smokeless tobacco. On August 8, 2016, the FDA deeming regulation became effective. The deeming regulation gave the FDA the authority to additionally regulate cigars, pipe tobacco, e-cigarettes, vaporizers and e-liquids as “deemed” tobacco products under the FSPTCA.

The FDA assesses tobacco product user fees on six classes of regulated tobacco products and computes user fees using a methodology similar to the methodology used by the U.S Department of Agriculture to compute the Tobacco Transition Payment Program (“TTPP”, also known as the “Tobacco Buyout”) assessment. First, the total annual congressionally established user fee assessment is allocated among the six classes of tobacco products using the federal excise tax weighted market share of tobacco products subject to regulation. Then, the assessment for each class of tobacco products is divided among individual manufacturers and importers.

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Prior to October 1, 2016, these FDA user fees applied only to those products then regulated by the FDA.  Effective October 1, 2016, the FDA began additionally applying FDA user fees to newly deemed tobacco products subject to FDA user fees as described above, i.e., cigars and pipe tobacco.

On July 28, 2017, FDA announced a new direction in regulating tobacco products, including the newly “deemed” markets, such as cigars and vapor products. FDA stated that it intends to begin several new rulemaking processes, some of which will outline foundational rules governing the premarket application process for the deemed products, including Substantial Equivalence applications and Premarket Tobacco Applications. Accordingly, the original filing deadlines for newly “deemed” products on the market as of August 8, 2016, have been postponed until August 8, 2021, for “combustible” products (e.g., cigar and pipe), and August 8, 2022, for “non-combustible” products (e.g., vapor products). No other filing deadlines were altered. Also noteworthy was that FDA acknowledged a “continuum of risk” among tobacco products, i.e., that certain tobacco products pose a greater risk to individual and public health than others; that it intends to seek public comment on the role that flavors play in attracting youth and the role that flavors may play in helping some smokers switch to potentially less harmful forms of nicotine delivery; and that FDA would be increasing its focus on the regulation of cigarette products.

Stock-Based Compensation

The Company accounts for stock-based compensation using the fair value method, which requires that compensation costs related to employee share based payment transactions are measured in the financial statements at the fair value on the date of grant and are recognized over the vesting period of the award.

Recent Accounting Pronouncements Adopted

The Company adopted Accounting Standards Update (“ASU”), ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment on January 1, 2017. This ASU simplifies the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The adoption of the ASU had no effect on the Company’s consolidated financial statements.

The Company adopted ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory on January 1, 2017. The amendments in this ASU require entities that measure inventory using the first-in, first-out or average cost methods to measure inventory at the lower of cost and net realizable value. Net realizable value is defined as estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. The adoption of this ASU had no effect on the Company’s consolidated financial statements.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606), which delayed the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting year. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption (“modified retrospective method”). The Company currently expects to apply the modified retrospective method upon adoption. The Company does not believe the standard will impact its recognition of revenue as the Company is primarily a distributor of goods; however the Company continues to assess the potential impacts to other less significant revenue transactions.

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In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases. ASU 2016-02 requires a lessee to recognize in the statement of financial position 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 leases with a term of 12 months or less for which there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities and should recognize lease expense for such leases generally on a straight-line basis over the lease term. Certain qualitative disclosures along with specific quantitative disclosures will be required, so that users are able to understand more about the nature of an entity’s leasing activities. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. At transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients related to the identification and classification of leases that commenced before the effective date of ASU 2016-02. An entity that elects to use the practical expedients will, in effect, continue to account for leases that commenced before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. The Company is currently evaluating the effect the adoption of this standard will have on its financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this ASU require 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. ASU 2016-18 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 on a retrospective basis. The Company is currently evaluating the effect the adoption of this standard will have on its financial statements.

In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  This ASU requires that an employer disaggregate the service cost component from the other components of net benefit cost. This ASU also allows only the service cost component of net benefit cost to be eligible for capitalization. ASU 2017-07 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating the effect the adoption of this standard will have on its financial statements.

Note 3. Acquisitions

Acquisition by SDOI

On November 25, 2016, SDOI and Standard General Master Fund L.P., P Standard General Ltd. and Standard General Focus Fund L.P. (collectively the “SG Parties”), entered into a Contribution and Exchange Agreement, as amended by the: (1) First Amendment to Contribution and Exchange Agreement, dated January 25, 2017, (2) Second Amendment to Contribution and Exchange Agreement, dated April 5, 2017, and (3) Third Amendment to Contribution and Exchange Agreement, dated May 3, 2017 (as amended, the “Contribution and Exchange Agreement”).  Pursuant to the Contribution and Exchange Agreement, the SG Parties agreed to contribute approximately 9,842,373 shares of voting Turning Point Common Stock in exchange for shares of the Company based on an exchange ratio, calculated as of the closing of the Contribution and Exchange, equal to the lesser of (i) the 30-calendar day trailing VWAP of the Turning Point Common Stock divided by the 30-calendar day trailing VWAP of the Common Stock of the Company (as adjusted to reflect the reclassification of the Common Stock of the Company and (ii) the 30-calendar day trailing VWAP of the Turning Point Common Stock divided by the pro forma book value per share of the Company.

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On June 1, 2017, at the consummation of the Contribution and Exchange, the SG Parties contributed to SDOI 9,842,373 shares of Turning Point Common Stock, representing a 52.1% ownership interest of Turning Point in exchange for 7,335,018 shares of Class A Common Stock of SDOI, based on the exchange ratio described above. Immediately after the consummation of the Contribution and Exchange, SDOI distributed a dividend of 7,335,018 shares of Class B Common Stock to the SG Parties. As of June 30, 2017, SDOI has an ownership interest of 51.7% in Turning Point.

The transaction was accounted for as a recapitalization or reverse acquisition. Turning Point was the accounting acquirer and SDOI was the accounting acquiree for financial reporting purposes. Accordingly, the historical financial statements of Turning Point became the Company’s historical financial statements, including the comparative prior periods. As such, the historical cost bases of assets and liabilities of Turning Point are maintained in the consolidated financial statements of the merged company and the assets and liabilities of the SDOI are accounted for at fair value. In this case, since the assets of SDOI at the acquisition date consist principally of cash and cash equivalents, there is no significant difference between book value and fair value. Results of operations of SDOI are included in the financial statements of the combined company only from the June 1, 2017 transaction date.

The following table summarizes the preliminary allocation of the purchase price to the assets acquired and liabilities assumed as of the acquisition date:

	Preliminary purchase price  allocation as of June 1, 2017
Cash and cash equivalents	$	20,253
Other current assets		277
Accrued liabilities		(2,384	)
Net assets acquired	$	18,146

The Company’s condensed consolidated financial statements for the six months ended June 30, 2017 include SDOI’s results of operations from the acquisition date of June 1, 2017 through June 30, 2017. Net loss attributable to SDOI during this period and included in the Company’s condensed consolidated financial statements for the six months ended June 30, 2017 was $0.5 million.

Acquisitions by Turning Point

In March 2017, Turning Point entered into a strategic partnership with Vapor Shark in which Turning Point agreed to make a deposit to Vapor Shark in exchange for a warrant to purchase 100% of the equity interest in Vapor Shark on or before April 15, 2018.  In the event Turning Point exercised the warrant, Turning Point granted Vapor Shark’s shareholder the option to purchase from Vapor Shark the retail stores it owns effective as of January 1, 2018.   In April 2017, Turning Point entered into a management agreement with Vapor Shark whereby Turning Point obtained control of the operations. Turning Point exercised its warrant on June 30, 2017 and obtained ownership of Vapor Shark.

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As a result of the management agreement, Vapor Shark became a VIE and Turning Point determined that it is the primary beneficiary and consolidated Vapor Shark as of April 1, 2017.  Since Vapor Shark is a business, Turning Point accounted for the consolidation of the VIE as if it were an acquisition and recorded the assets and liabilities at fair value.  The purchase price was nominal and there was no goodwill assigned as a result of the transaction.  Turning Point acquired $3.9 million in assets and assumed $3.9 million in liabilities which includes a liability relating to the option provided to Vapor Shark’s shareholder to purchase the Vapor Shark retail stores it owns.

In November 2016, Turning Point purchased five chewing tobacco brands from Wind River Tobacco Company for $2.5 million. Turning Point paid $0.6 million at closing with the remaining $1.9 million payable quarterly through November 2019 of which $1.6 million was outstanding at June 30, 2017.  The transaction was accounted for as an asset purchase with the fair value of the purchase price of $2.4 million assigned to trade names which have an indefinite life.

In November 2016, Turning Point also acquired the outstanding stock of VaporBeast for total consideration of $26.5 million, net of working capital adjustment of $0.4 million, due from the sellers. The purchase price was satisfied through $4.0 million in cash at closing, $19.0 million in short-term notes paid in December 2016, plus $4.0 million in payments deferred for eighteen months. Turning Point completed the accounting for the acquisition of VaporBeast in 2017, resulting in an increase in goodwill of $0.2 million.

The following purchase price and goodwill are based on the excess of the acquisition price over the estimated fair value of the tangible and intangible assets acquired:

Purchase price:
Total purchase price	$	27,000
Adjustments to purchase price:
Working capital		(400	)
Fair value of holdback		(128	)
Adjusted purchase price	$	26,472
Assets acquired:
Working capital	$	4,270
Property and equipment		7
Other intangible assets		16,272
Net assets acquired	$	20,549
Goodwill	$	5,923

The goodwill of $5.9 million consists of the synergies and scale expected from combining the operations.  The goodwill is currently deductible for tax purposes.

Note 4. Fair Value of Financial Instruments

The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of ASC 825, 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.

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Cash and Cash Equivalents

The Company has used Level 1 inputs to determine the fair value of its cash equivalents. As of June 30, 2017 and December 31, 2016, cost represented fair value of the Company’s cash and cash equivalents.

Accounts Receivable

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

Revolving Credit Facility

The fair value of the revolving credit facility approximates its carrying value as the interest rate fluctuates with changes in market rates.

Long-Term Debt

The fair value of Turning Point’s long-term debt is estimated based on the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.

As of June 30, 2017, the fair values of the 2017 First Lien Term Loans and the 2017 Second Lien Term Loan were $143.5 million and $55.0 million, respectively as the agreements were entered into during the first quarter of 2017.

As of December 31, 2016, the fair values of the First Lien Term Loans and the Second Lien Term Loan approximate their face amounts of $147.3 million and $60.0 million, respectively as they were paid off in February 2017 at face amounts.

Foreign Exchange

Turning Point had no forward contracts outstanding as of June 30, 2017.  Turning Point had forward contracts as of December 31, 2016 for the purchase of €4.9 million. The fair value of the foreign exchange forward contracts was based upon the quoted market price that resulted in an insignificant liability as of December 31, 2016.

Note 5. Inventories

Inventories are stated at the lower of cost or market.  Cost is determined on the last-in, first-out (“LIFO”) method for approximately 49% of the inventories and the first-in, first out (“FIFO”) method for the remaining inventories.  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.

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The components of inventories are as follows:

	June 30, 2017			December 31, 2016
Raw materials and work in process	$	2,494		$	2,596
Leaf tobacco		28,969			27,391
Finished goods - smokeless products		6,384			4,789
Finished goods - smoking products		18,646			18,384
Finished goods - electronic / vaporizer products		15,172			11,993
Other		1,247			1,232
		72,912			66,385
LIFO reserve		(5,086	)		(4,200	)
	$	67,826		$	62,185

The inventory valuation allowance at June 30, 2017 and December 31, 2016 was $0.8 million and $0.6 million, respectively.

Note 6. Property, Plant and Equipment

Property, plant and equipment consists of:

	June 30, 2017			December 31, 2016
Land	$	22		$	22
Building and improvements		1,899			1,899
Leasehold improvements		1,873			1,666
Machinery and equipment		11,642			10,532
Furniture and fixtures		3,666			3,409
		19,102			17,528
Accumulated depreciation		(10,709	)		(9,938	)
	$	8,393		$	7,590

Note 7. Accrued Expenses

Accrued expenses consist of:

	June 30, 2017		December 31, 2016
Accrued payroll and related items	$	2,962	$	5,331
Customer returns and allowances		2,051		2,818
Other		9,516		7,187
	$	14,529	$	15,336

Note 8. Notes Payable and Long-Term Debt

Notes payable and long-term debt consists of the following:

	June 30, 2017			December 31, 2016
2017 First Lien First Out Term Loan	$	108,625		$	-
2017 First Lien Second Out Term Loan		34,913			-
2017 Second Lien Term Loan		55,000			-
Note payable - VaporBeast		2,000			2,000
First Lien Term Loan		-			146,451
Second Lien Term Loan		-			59,128
Total Notes Payable and Long-Term Debt		200,538			207,579
Less deferred finance charges		(3,953	)		(4,388	)
Less current maturities		(7,850	)		(1,650	)
	$	188,735		$	201,541

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Long-term Debt

On February 17, 2017, Turning Point and its wholly-owned subsidiary, NATC Holding Company, Inc. (“NATC”), entered into a new $250 million secured credit facility, comprised of (i) a First Lien Credit Facility with Fifth Third Bank, as administrative agent, and other lenders (the “2017 First Lien Credit Facility”), and (ii) a Second Lien Credit Facility with Prospect Capital Corporation, as administrative agent, and other lenders (the “2017 Second Lien Credit Facility,” and together with the 2017 First Lien Credit Facility, the “2017 Credit Facility”). Turning Point used the proceeds of the 2017 Credit Facility to repay in full Turning Point’s First Lien Term Loan, Second Lien Term Loan, Revolving Credit Facility and to pay related fees and expenses.

The 2017 Credit Facility contains customary events of default, including payment defaults, breaches of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness in excess of specified amounts, certain events of bankruptcy and insolvency, certain ERISA events, judgments in excess of specified amounts and change in control defaults. The 2017 Credit Facility also contains certain negative covenants customary for facilities of these types including, covenants that, subject to exceptions described in the 2017 Credit Facility, restrict the ability of the Company and its subsidiary guarantors: (i) to pledge assets; (ii) to incur additional indebtedness; (iii) to pay dividends; (iv) to make distributions; (v) to sell assets; and (vi) to make investments.

2017 First Lien Credit Facility

The 2017 First Lien Credit Facility consists of: (i) a $50 million revolving credit facility (the “2017 Revolving Credit Facility”); (ii) a $110 million first out term loan facility (the “2017 First Out Term Loan”), and (iii) a $35 million second out term loan facility (the “2017 Second Out Term Loan”), which will be repaid in full only after repayment in full of the 2017 First Out Term Loan. The 2017 First Lien Credit Facility also includes an accordion feature that allows Turning Point to borrow up to an additional $40 million upon the satisfaction of certain conditions, including obtaining commitments from one or more lenders. Borrowings under the 2017 Revolving Credit Facility may be used for general corporate purposes, including acquisitions.

The 2017 First Out Term Loan and the 2017 Revolving Credit Facility have a maturity date of February 17, 2022, and the 2017 Second Out Term Loan has a maturity date of May 17, 2022. The 2017 First Out Term Loan and the 2017 Revolving Credit Facility bear interest at LIBOR plus a spread of 2.5% to 3.5% based on Turning Point’s senior leverage ratio. The 2017 First Out Term Loan has quarterly required payments of $1.4 million beginning June 30, 2017 increasing to $2.1 million on June 30, 2019 and increasing to $2.8 million on June 30, 2021. The 2017 Second Out Term Loan bears interest at LIBOR plus 6% (subject to a floor of 1.00%). The 2017 Second Out Term Loan has quarterly required payments of $0.1 million beginning June 30, 2017. The 2017 First Lien Credit Facility contains certain financial covenants, including maximum senior leverage ratio of 3.75x with step-downs to 3.00x, a maximum total leverage ratio of 4.75x with step-downs to 4.00x, and a minimum fixed charge coverage ratio of 1.20x.  The weighted average interest rate at June 30, 2017 on the 2017 Revolving Credit Facility was 5.2%. The weighted average interest rate at June 30, 2017 on the 2017 First Term Loan was 4.5%.  The weighted average interest rate at June 30, 2017 on the 2017 Second Out Term Loan was 7.3%.

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2017 Second Lien Credit Facility

The 2017 Second Lien Credit Facility consists of a $55 million second lien term loan (the “2017 Second Lien Term Loan”) having a maturity date of August 17, 2022. The 2017 Second Lien Term Loan bears interest at a fixed rate of 11%. The 2017 Second Lien Credit Facility contains certain financial covenants, including a maximum senior leverage ratio of 4.25x with step-downs to 3.50x, a maximum total leverage ratio of 5.25x with step-downs to 4.50x, and a minimum fixed charge coverage ratio of 1.10x.

Note Payable – VaporBeast

On November 30, 2016, Turning Point issued a note payable to VaporBeast’s shareholders (“VaporBeast Note.”) The VaporBeast Note is $2.0 million principal with 6% interest compounded monthly and matures on May 30, 2018.

The VaporBeast Note may be prepaid at any time without penalty and is subject to a late payment penalty of 5% and a default rate of 13% per annum. The VaporBeast Note is subject to customary defaults, including defaults for nonpayment, nonperformance, any material breach under the purchase agreement and bankruptcy or insolvency.

First Lien Term Loan

All of NATC’s subsidiaries, as well as Turning Point and NATC Holding, were guarantors under the First Lien Term Loan.  Turning Point Brands, LLC and its subsidiary were not guarantors of the First Lien Term Loan. The First Lien Term Loan was secured by a first priority lien on substantially all of the assets of the borrowers and the guarantors thereunder, including a pledge of the capital stock of NATC and its subsidiaries held by NATC Holding, NATC or any guarantor, other than certain excluded assets (the “Collateral”).  The loans designated as LIBOR rate loans bore interest at LIBOR Rate then in effect (but not less than 1.25%) plus 6.50% and the loans designated as base rate loans bore interest at the (i) highest of (A) the Prime Rate, (B) the Federal Funds Rate plus 0.50%, (C) LIBOR for an interest period of one month plus 1.00% and (D) 2.25% per year plus (ii) 5.50%. The First Lien Term Loan was paid in full with the proceeds from the February 2017 Credit Facility.

Second Lien Term Loan

The Second Lien Term Loan had the benefit of a second priority security interest in the Collateral and was guaranteed by the same entities as the First Lien Term Loan.

Under the Second Lien Term Loan the loans designated as LIBOR rate loans bore interest at the LIBOR Rate then in effect (but not less than 1.25%) plus 10.25% and the loans designated as base rate loans bore interest at (i) the highest of (A) the Prime Rate, (B) the Federal Funds Rate plus 0.50%, (C) LIBOR for an interest period of one month plus 1.00% and (D) 2.25% per year plus (ii) 9.25%.  The Second Lien Term Loan was paid in full with the proceeds from the February 2017 Credit Facility.

Revolving Credit Facility

The Revolving Credit Facility provided for aggregate commitments of up to $40 million, subject to a borrowing base, which is calculated as the sum of (i) 85% of eligible accounts receivable, plus (ii) the lesser of (A) the product of 70% multiplied by the value of  eligible inventory  and (B) the product of 85% multiplied by the net recovery percentage identified in the most recent inventory appraisal multiplied by the value of eligible inventory, plus (iii) the lesser of (A) the product of 75% multiplied by the value of eligible inventory and (B) the product of 85% multiplied by the net recovery percentage identified in the most recent inventory appraisal multiplied by the value of the eligible finished goods inventory, minus (iv) the aggregate amount of reserves established by the administrative agent. The outstanding balance on the Revolving Credit Facility was paid in full with the proceeds from the February 2017 Credit Facility.

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PIK Toggle Notes

On January 13, 2014, Turning Point issued PIK Toggle Notes (“PIK Toggle Notes”) to Standard General Master Fund, L.P. (“Standard General”) with a principal amount of $45 million and warrants to purchase 42,424 of Turning Point’s common stock at $.01 per share, as adjusted for stock splits and other events specified in the agreement. After adjustment for the stock split effected in connection with the IPO of 10.43174381 to 1, the warrants were adjusted to provide for the purchase of 442,558 of Turning Point’s common stock. Due to the issuance of the warrants, the PIK Toggle Notes had an original issue discount of $1.7 million and were initially valued at $43.3 million. The PIK Toggle Notes were scheduled to mature and the warrants to expire on January 13, 2021.

The PIK Toggle Notes accrued interest based on the LIBOR Rate then in effect (but not less than 1.25%) plus 13.75%. Interest was payable on the last day of each quarter and upon maturity. Turning Point had the flexibility to pay interest in kind through an increase in the principal amount at the same interest rate as the PIK Toggle Notes. Turning Point chose to increase the PIK Toggle Notes for all interest for the first three months of 2016.

In connection with the Turning Point IPO, in May of 2016, Turning Point redeemed and retired all of the outstanding PIK Toggle Notes in exchange for a combination of cash and shares of Turning Point’s voting common stock. As a result of this transaction, Turning Point incurred a loss on extinguishment of debt of $2.8 million during the second quarter of 2016.

7% Senior Notes

In January of 2014, Turning Point issued 7% Senior Notes to various stockholders with a principal amount of $11 million and warrants to purchase 11,000,000 units of membership interests in Intrepid, a subsidiary of Turning Point, which represented 40% of the Intrepid Common Units outstanding on a fully diluted basis, at a purchase price of $1.00 per unit. Due to the issuance of the Intrepid warrants, the 7% Senior Notes had an original issue discount of $2.8 million and were initially valued at $8.2 million. The 7% Senior Notes were scheduled to mature and the warrants to expire on December 31, 2023.

The 7% Senior Notes accrued interest at a fixed rate of 7% per annum. The 7% Senior Notes were general unsecured obligations of Turning Point and ranked equally with Turning Point’s other unsecured and unsubordinated debt from time to time outstanding. Redemptions of the 7% Senior Notes could be made by Turning Point at any time without penalty or premium.

In connection with the Turning Point IPO in May of 2016, Turning Point redeemed and retired all of the outstanding 7% Senior Notes in exchange for shares of the Company’s voting common stock.

Note 9. Pension and Postretirement Benefit Plans

Turning Point has a defined benefit pension plan. Benefits for the hourly employees’ plan were based on a stated benefit per year of service, reduced by amounts earned in a previous plan. Benefits for the salaried employees plan were based on years of service and the employees’ final compensation. The defined benefit plan is frozen. Turning Point expects to make no contributions to the pension plan in the year ending December 31, 2017.

Turning Point also sponsored a defined benefit postretirement plan that covered hourly employees. This plan provides medical and dental benefits. This plan is contributory, with retiree contributions adjusted annually.  Turning Point expects to contribute approximately $0.2 million to its postretirement plan in 2017 for the payment of benefits.

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The components of Net Periodic Benefit Cost are as follows:

	Pension Benefits						Postretirement Benefits
For the three months ended June 30,	2017			2016			2017		2016
Service cost	$	26		$	26		$	-	$	-
Interest cost		150			175			14		53
Expected return on plan assets		(256	)		(258	)		-		-
Amortization of gains and losses		116			123			-		-
Net periodic benefit cost	$	36		$	66		$	14	$	53

	Pension Benefits						Postretirement Benefits
For the six months ended June 30,	2017			2016			2017		2016
Service cost	$	52		$	52		$	-	$	-
Interest cost		320			350			72		105
Expected return on plan assets		(512	)		(517	)		-		-
Amortization of gains and losses		236			246			-		-
Net periodic benefit cost	$	96		$	131		$	72	$	105

Note 10. Stockholders’ Equity

Common Stock

As described in Note 1, just prior to the Contribution and Exchange, the Company’s issued and outstanding common stock was reclassified such that every 25 shares of common stock became one fully paid and nonassessable share of Class A Common Stock. Any fractional shares were rounded up and an additional share was issued. At the consummation of the Contribution and Exchange, the Company issued 7,335,018 shares of its Class A Common Stock to Turning Point shareholders, in exchange for 9,842,373 shares of Turning Point stock, and 857,748 shares of its Class A Common Stock, in exchange for the Company’s outstanding common stock. The Company also issued 13,700 shares of Class A Common Stock to holders of the Company’s restricted stock, which vested at the time of the Contribution and Exchange. Following the consummation of the Contribution and Exchange, the Company distributed a dividend of one share of Class B Common Stock for each outstanding share of Class A Common Stock, for a total issuance of 8,206,466 shares of Class B Common Stock.

In addition, under the Fifth Amended and Restated Certificate of Incorporation, which became effective at the time of the Contribution and Exchange, the number of authorized shares of the Company’s Common Stock, $0.01 par value per share, was increased from 50,000,000 to 330,000,000, of which 300,000,000 are Class A Common Stock and 30,000,000 are Class B Common Stock. Shares of Class A Common Stock and Class B Common Stock have the same rights and powers, rank equally (including as todividends and distributions, and upon any liquidation, dissolution or winding up of the Company), share ratably and are identical in all respects and as to all matters. The holders of shares of Class A Common Stock and Class B Common Stock will vote together as a single class on all matters (including the election of directors) submitted to a vote or for the written consent of the stockholders of the Company. Each holder of Class A Common Stock has the right to one vote per share of Class A Common Stock and each holder of Class B Common Stock has the right to ten votes per share of Class B Common Stock. The shares of Class B Common Stock are convertible into shares of Class A Common Stock automatically upon the transfer of such shares of Class B Common Stock, with certain exceptions, or upon the affirmative vote of holders of two-thirds of the then-outstanding shares of Class B Common Stock or voluntarily by the holder of such shares of Class B Common Stock. Subsequent to the issuance of the Class B Common Stock through June 30, 2017, 40,204 shares of Class B Common Stock were converted to Class A Common Stock.

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The Sixth Amended and Restated Certificate of Incorporation was approved by the Company’s stockholders by partial written consent on July 14, 2017, and in accordance with the rules of the Securities and Exchange Commission and Delaware corporation law regarding approval by partial written consent, will become effective when filed with the Secretary of State of the State of Delaware on or about August 17, 2017.

Preferred Stock

On May 30, 2017, under the Fifth Amended and Restated Certificate of Incorporation, the Company increased the number of authorized shares of the Company’s Preferred Stock, $0.01 par value per share, from 19,664,362 to 500,000,000, all of which is designated as blank check preferred stock

Common Stock Repurchase Program

On June 29, 2017, the Company’s Board of Directors authorized a program, effective immediately, to repurchase over a period of twelve months shares of the Company’s Class A Common Stock or Class B Common Stock, par value $0.01 per share, constituting, in the aggregate, up to 5% of the outstanding shares of Common Stock. Shares of the Common Stock may be repurchased in the open market or through negotiated transactions. The program may be terminated or suspended at any time at the discretion of the Company.

The time of purchases and the exact number of shares to be purchased, if any, will depend on market conditions. The repurchase program does not include specific price targets or timetables. The Company intends to finance the purchases using available working capital. As of June 30, 2017, no repurchases of common stock have been made pursuant to this program.

Note 11. Share-Based Compensation

The Company has a stock option plan (the “2000 Plan”) which authorizes the granting of incentive and nonqualified stock options and restricted stock units. Incentive stock options are granted at not less than 100% of fair market value at the date of grant (110% for stockholders owning more than 10% of the Company’s common stock). Nonqualified stock options are granted at not less than 85% of fair market value at the date of grant. A maximum of 8,000,000 shares of common stock are issuable under the 2000 Plan. Certain additional options have been granted outside the 2000 Plan. These options generally follow the provisions of the 2000 Plan. The Company issues new shares to satisfy option exercises and the vesting of restricted stock awards.  As of the effective date of the 2017 Plan, described further below, no additional grants will be made under the 2000 Plan.

On June 9, 2017, the Company’s Board of Directors adopted the 2017 Omnibus Equity Compensation Plan (the “2017 Plan”) in order to provide employees of the Company and its subsidiaries, certain consultants and advisors who perform services for the Company or its subsidiaries, and non-employee members of the Board of Directors of the Company with the opportunity to receive grants of incentive stock options, nonqualified stock options, stock appreciation rights, stock awards, stock units, and other stock-based awards. The Board authorized 1,000,000 shares of the Class A Common Stock of the Company to be issued under the Plan. The Plan was approved by the Company’s stockholders by partial written consent on July 14, 2017, and in accordance with the rules of the Securities and Exchange Commission and Delaware corporation law regarding approval by partial written consent, will become effective on or about August 17, 2017. As of June 30, 2017, no awards had been granted under this plan.

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The Company also has an Employee Stock Purchase Plan (the “ESPP”). The ESPP allows eligible full-time employees to purchase shares of common stock at 90 percent of the lower of the fair market value of a share of common stock on the first or last day of the quarter. Eligible employees are provided the opportunity to acquire Company common stock during each quarter. No more than 26,447 shares of common stock may be issued under the ESPP. Such stock may be unissued shares or treasury shares of the Company or may be outstanding shares purchased in the open market or otherwise on behalf of the ESPP. The Company’s ESPP is compensatory and therefore, the Company is required to recognize compensation expense related to the discount from market value of shares sold under the ESPP. The Company issues new shares to satisfy shares purchased under the ESPP.

Including the share-based compensation expense of SDOI’s subsidiaries, there was share-based compensation expense of $0.3 million recorded for the three and six months ended June 30, 2017 and less than $0.1 million for the three and six months ended June 30, 2016. This expense is a component of selling, general and administrative expense.

No options of SDOI were exercised in the three and six month periods ended June 30, 2017 and 2016.

Upon consummation of the reverse merger with Turning Point on June 1, 2017, all outstanding options to purchase SDOI common shares were converted into stock options to purchase SDOI Class A common stock on terms substantially identical to those in effect prior to the reverse merger, except for adjustments to the underlying number of shares and the exercise price based on the 25-for-1 reverse stock split and reclassification. Information with respect to the adjusted activity of outstanding stock options is summarized as follows:

	Number of Shares			Price Range					Weighted Average Remaining Contractual term	Aggregate Intrinsic Value
Balance, January 1, 2017		18,757		$	31.00	-	$	93.50
Granted		-
Cancelled		(4,694	)	$	31.25	-	$	93.50
Forfeited		(2,000	)	$	54.75	-	$	54.75
Balance, June 30, 2017		12,063		$	31.00	-	$	56.25	3.10 years	$	-
Vested and exercisable at June 30, 2017		12,063		$	31.00	-	$	56.25	3.10 years	$	-

The following table provides additional information about the Company’s stock options outstanding and exercisable at June 30, 2017:

		Options Outstanding							Options Exercisable
				Weighted Average							Wtd. Average
Range of Exercise Prices		Number of Shares		Remaining Contractual Life			Exercise Price		Number of Shares		Exercise Price
$	31.00 - $37.50		5,800		2.9	Years	$	34.45		5,800	$	34.45
$	42.25 - $46.25		2,463		2.5	Years	$	44.36		2,463	$	44.36
$	50.00 - $56.25		3,800		3.8	Years	$	51.71		3,800	$	51.71
$	31.00 - $56.25		12,063		3.1	Years	$	41.91		12,063	$	41.91

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The Company grants restricted stock awards (“RSA”) which is the right to receive shares. The fair value of RSAs is based on the market price for the stock at the date of grant. RSAs generally vest over a period of three years.

The following table summarizes the changes in non-vested RSAs for the six months ended June 30, 2017:

	Shares			Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
Non-vested RSAs at January 1, 2017		13,700		$	28.25
Granted		113,448			10.58
Vested		(13,700	)		28.25
Cancelled/Forfeited		-			-
Non-vested RSAs at June 30, 2017		113,448		$	10.58	$	24,108

The RSAs outstanding as of January 1, 2017 vested upon the consummation of the Contribution and Exchange transaction as the performance-based criteria required for vesting were satisfied.

Note 12. Income Taxes

On June 1, 2017, SDOI consummated the Contribution and Exchange to acquire a 52.1% controlling interest in Turning Point (see Note 3 above).  The structuring of this acquisition results in SDOI consolidating Turning Point in its consolidated financial statements.  However, SDOI’s controlling interest does not meet the ownership threshold to file a consolidated federal tax return with Turning Point.  Therefore, the parent company will continue to file a separate federal tax return apart from Turning Point.

The Company’s income tax expense for the three and six months ended June 30, 2017 does not bear the normal relationship to income before income taxes of approximately 41% because of tax benefits relating to Turning Point stock options exercised of $1.6 million and $3.6 million for the three and six months ended June 30, 2017, respectively.  In addition, SDOI incurred a net operating loss for its one month of operating results included in the three and six months ended June 30, 2017, respectively, for which no tax benefit has been recorded due to its full valuation allowance offsetting its net deferred tax assets, as described below.  The Company’s income tax expense for the three and six months ended June 30, 2016 does not bear the normal relationship to income before income taxes because of Turning Point net operating loss carryforwards that were utilized by Turning Point and were partially offset by certain minimum state income taxes.

SDOI has recorded a full valuation allowance, as of June 30, 2017, offsetting its U.S. federal and state net deferred tax assets which primarily represent net operating loss carry forwards (“NOLs”). At June 30, 2017, the Company’s management concluded, based upon the evaluation of all available evidence, that it is more likely than not that the U.S. federal and state net deferred tax assets will not be realized.  Due to the reverse acquisition transaction with Turning Point, the Company determined that SDOI has experienced a “change in control” as defined in Internal Revenue Code Section 382, which will result in an annual limitation on SDOI’s utilization of NOLs in future periods.  The Company is currently evaluating the effects of Section 382 on SDOI’s future utilization of its NOLs.

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The Company follows the provisions of ASC 740-10-25, which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement.  As of June 30, 2017, SDOI had approximately $628 of unrecognized tax benefits under the provisions of ASC 740-10-25, $622 of which were recorded as a reduction to existing net operating loss and tax credit carry forwards, and therefore require no accrual for interest or penalty.  The remaining $6 includes de minimis interest and penalties where required.  SDOI does not expect that the total amount of unrecognized tax benefits related to positions taken in prior periods will change significantly during the next twelve months.  Turning Point has determined that it did not have any uncertain tax positions requiring recognition under the provisions of ASC 740-10-25. The Company’s policy is to recognize interest and penalties accrued on uncertain tax positions, if any, as part of interest expense. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state jurisdictions.  For federal purposes, SDOI’s post-1992 tax years remain open to examination as a result of earlier net operating losses being utilized in recent years.  For state purposes, the statute of limitations for SDOI remains open in a similar manner for states that have generated NOLs.  In general, Turning Point is no longer subject to U.S. federal and state tax examinations for years prior to 2013.

Note 13. Contingencies

The Company is involved in various claims and actions that arise in the normal course of business. While the outcome of these legal proceedings cannot be predicted with certainty, it is the opinion of management that the resolution of the proceedings should not have a material adverse effect on the financial position, results of operations or cash flows of the Company.

Note 14. Earnings Per Share

The Company has two classes of common stock, Class A and Class B; shares of Class B Common Stock are convertible into shares of Class A Common Stock at any time, on a one-for-one basis. Shares of Class A Common Stock and Class B Common Stock have the same rights and powers, rank equally, share ratably and are identical in all respects and as to all matters, except that (i) each share of Class B Common Stock shall have the right to 10 votes per share and (ii) the shares of Class B Common Stock shall be convertible into shares of Class A Common Stock automatically upon the transfer of such shares of Class B Common Stock, with certain exceptions, or upon the affirmative vote of holders of two-thirds of the then-outstanding shares of Class B Common Stock or voluntarily by the holder of such shares of Class B Common Stock.

Diluted earnings per share is calculated similarly to basic earnings per share, except that the calculation includes the dilutive effect of the assumed exercise of options issuable under the Company’s stock incentive plans and the Company’s unvested restricted stock awards.

Basic net income per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income per share is computed using the weighted-average number of common shares and the weighted average effect of potentially dilutive securities outstanding during the period. Potentially dilutive securities consist of stock options and restricted stock awards and the dilutive effect of such awards is reflected in diluted earnings per share by application of the treasury stock method. Due to the reverse acquisition, the basic weighted average number of common shares outstanding for the three and six months ended June 30, 2016 have been calculated using Turning Point’s historical weighted average number of common shares outstanding multiplied by the conversion ratio used in the reverse acquisition. For the three and six months ended June 30, 2017, the basic weighted average shares outstanding has been calculated using the number of common shares outstanding of Turning Point from January 1, 2017 through the June 1, 2017 acquisition date multiplied by the exchange ratio used in the transaction and the number of common shares outstanding of the Company from June 1, 2017 through June 30, 2017.

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The following tables set forth the computation of basic and diluted net income per share of Class A and Class B common stock (in thousands, except share amounts and per share amounts):

	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Basic net income per common share calculation:
Net income attributable to SDOI		4,903		799		6,780		3,033
Weighted average Class A common shares outstanding – basic		12,160,721		11,383,281		13,069,930		9,298,275
Weighted average Class B common shares outstanding – basic		12,154,174		11,383,281		13,066,638		9,298,275
Weighted average common shares outstanding – basic (1)		24,314,895		22,766,562		26,136,568		18,596,550
Net income per share of common stock – basic	$	0.20	$	0.04	$	0.26	$	0.16

	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017			2016
Diluted net income per common share calculation:
Net income attributable to SDOI		4,903			799		6,780			3,033
Impact of subsidiary dilutive securities (1)		(73	)		-		(73	)		-
Net income attributable to SDOI - diluted		4,830			799		6,707			3,033
Weighted average Class A common shares outstanding – basic		12,160,721			11,383,281		13,069,930			9,298,275
Weighted average Class B common shares outstanding – basic		12,154,174			11,383,281		13,066,638			9,298,275
Dilutive impact of stock options and restricted stock awards		14,305			1,194,520		7,192			1,079,053
Weighted average common shares outstanding – diluted		24,329,200			23,961,082		26,143,760			19,675,603
Net income per share of common stock – diluted	$	0.20		$	0.03	$	0.26		$	0.15

(1) The dilutive impact of subsidiary stock-based awards on the Company’s reported net income is recorded as an adjustment to net income for the three and six months ended June 30, 2017, for the purposes of calculating income per share. There is no adjustment to the three and six months ended June 30, 2016 because the reverse acquisition of Turning Point by SDOI did not occur until June 1, 2017.

The following outstanding securities at June 30, 2017 have been excluded from the computation of diluted weighted average shares outstanding, as they are anti-dilutive:

	June 30, 2017
Stock options		12,063

Note 15. Segment Information

In accordance with ASC 280, Segment Reporting, the Company has three reportable segments, (1) Smokeless products; (2) Smoking products; and (3) NewGen products. The smokeless products segment: (a) manufactures and markets moist snuff and (b) contracts for and markets chewing tobacco products. The smoking products segment: (a) imports and markets cigarette papers, tubes and related products and (b) imports and markets finished cigars and MYO cigar wraps. The NewGen products segment (a) markets e-cigarettes, e-liquids, vaporizers and other related products and (b) distributes a wide assortment of vaping products to non-traditional retail outlets. The Company’s smoking and smokeless products are distributed primarily through wholesale distributors in the United States. The Other segment includes the results of operations of SDOI, assets of the Company not assigned to the three reportable segments and Elimination includes the elimination of intercompany accounts between segments.

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The accounting policies of these segments are the same as those of the Company. Segment data includes a charge allocating corporate costs to the three reportable segments based on their respective net sales. The Company evaluates the performance of its segments and allocates resources to them based on operating income.

The tables below present financial information about reported segments:

For the three months ended	June 30, 2017			June 30, 2016
Net Sales
Smokeless Products	$	22,021		$	21,691
Smoking Products		27,019			26,789
NewGen Products		23,046			3,101
	$	72,086		$	51,581
Operating Income
Smokeless Products	$	5,433		$	4,843
Smoking Products		7,138			7,206
NewGen Products		938			(644	)
Other		(393	)		(629	)
	$	13,116		$	10,776
Interest expense		(4,046	)		(6,876	)
Investment income		98			332
Loss on extinguishment of debt		-			(2,824	)
Income before income taxes	$	9,168		$	1,408
Capital Expenditures
Smokeless Products	$	154		$	405
NewGen Products		45			-
	$	199		$	405
Depreciation and amortization
Smokeless products	$	352		$	293
NewGen Products		241			-
	$	593		$	293

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For the six months ended	June 30, 2017			June 30, 2016
Net Sales
Smokeless Products	$	42,269		$	40,030
Smoking Products		54,196			54,674
NewGen Products		42,409			6,743
	$	138,874		$	101,447
Operating Income
Smokeless Products	$	8,870		$	8,402
Smoking Products		13,692			14,746
NewGen Products		1,850			(528	)
Other		(539	)		(935	)
	$	23,873		$	21,685
Interest expense		(8,979	)		(15,338	)
Investment income		212			332
Loss on extinguishment of debt		(6,116	)		(2,824	)
Income before income taxes	$	8,990		$	3,855
Capital Expenditures
Smokeless Products	$	520		$	734
NewGen Products		47			125
	$	567		$	859
Depreciation and amortization
Smokeless products	$	704		$	586
NewGen Products		418			-
	$	1,122		$	586

	June 30, 2017		December 31, 2016
Assets
Smokeless Products	$	88,207		85,559
Smoking Products		150,267		150,498
NewGen Products		44,914		39,416
Other (1)		26,914		9,547
	$	310,302	$	285,020

(1) “Other” includes assets that are not assigned to our three reportable segments, such as assets of SDOI and Turning Point deferred taxes. All goodwill has been allocated to reportable segments.

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Net Sales - Domestic and Foreign

(in thousands)

The tables below present financial information about domestic and foreign net sales for the three and six months ended June 30, 2017 and 2016:

	Three Months Ended
		June 30, 2017		June 30, 2016
Domestic	$	69,355	$	49,126
Foreign		2,731		2,455
Net Sales	$	72,086	$	51,581

	Six Months Ended
		June 30, 2017		June 30, 2016
Domestic	$	133,726	$	96,100
Foreign		5,148		5,347
Net Sales	$	138,874	$	101,447

Note 16. Subsequent Events

On July 3, 2017, the Company acquired assets consisting of five billboards located in several counties near Austin, Texas for consideration of $0.3 million.

On November 23, 2016, the Company and Interboro LLC (“Interboro”) entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”). Pursuant to the Stock Purchase Agreement, the Company will acquire all of the outstanding capital stock of Interboro for a cash purchase price of $2.5 million, subject to adjustment as provided in the Stock Purchase Agreement. Under the name Maidstone Insurance Company, Interboro offers personal automobile insurance, primarily in the State of New York. The consummation of the transaction is pending receipt of regulatory approvals.

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Cautionary Note Regarding Forward-Looking Statements

This Form 10-Q contains certain forward-looking statements reflecting the current expectations of Special Diversified Opportunities Inc. and its subsidiaries (the “Company” or “SDOI”). In addition, when used in this quarterly report, the words “anticipate,” “enable,” “estimate,” “intend,” “expect,” “believe,” “potential,” “may,” “will,” “should,” “project” and similar expressions as they relate to the Company are intended to identify said forward-looking statements. Investors are cautioned that all forward-looking statements involve risks and uncertainties, which may cause actual results to differ from those anticipated at this time. Such risks and uncertainties include the factors described below under Item 1A of Part II of this Form 10-Q and other reports filed with the Securities and Exchange Commission from time to time, as well as:

· 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;

· 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;

· substantial and increasing U.S. regulation;

· regulation of our products by FDA, which has broad regulatory powers;

· uncertainty related to the regulation and taxation of our NewGen products;

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

· possible increasing international control and regulation;

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

· intense competition and our ability to compete effectively;

· significant potential product liability litigation;

· our distribution of foreign-made vapor products from manufacturers from whom we may have no recourse in the event of significant product liability exposure;

· the scientific community’s lack of information regarding the long-term health effects of electronic cigarettes, vaporizer and e-liquid use;

· our amount of indebtedness;

· the terms of our credit facilities, which may restrict our current and future operations;

· competition from illicit sources;

· our reliance on information technology;

· security and privacy breaches;

· contamination of our tobacco supply or products;

· infringement on our intellectual property;

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

· concentration of business with large customers;

· failure to manage our growth;

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

· failure to achieve the expected benefits of the VaporBeast acquisition and to integrate VaporBeast’s operations with ours;

· fluctuations in our results;

· exchange rate fluctuations;

· adverse U.S. and global economic conditions;

· failure to comply with certain regulations;

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

· decrease in value of our deferred tax assets;

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

· reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors, potentially decreasing our stock price;

· failure to maintain our status as an emerging growth company before the five-year maximum time period a company may retain such status;

· our principal stockholders will be able to exert significant influence over matters submitted to our stockholders and may take certain actions to prevent takeovers;

· 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 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; and

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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of the historical financial condition and results of operations in conjunction with our interim condensed consolidated financial statements and accompanying notes, which are included elsewhere in this Quarterly Report on Form 10-Q and with Amendment No. 4 to the Company’s Form S-4, filed with the Commission on May 4, 2017. In addition, this discussion includes forward-looking statements that 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 that are discussed in “Risk Factors” in Amendment No. 4 to the Company’s Form S-4, filed with the Commission on May 4, 2017.

The following discussion relates to the interim unaudited financial statements of the Company included elsewhere in this Quarterly Report on Form 10-Q. In this discussion, unless the context requires otherwise, references to “our Company” “we,” “our,” or “us” refer to Standard Diversified Opportunities Inc. and our consolidated subsidiaries. References to “SDOI” refer to Standard Diversified Opportunities Inc. without any of its subsidiaries. Dollars are in thousands, except where designated and per share data.  Many of the amounts and percentages in this discussion have been rounded for convenience of presentation.

Overview

We are a holding company. Our subsidiaries are engaged in the following lines of business:

· Other tobacco products (Turning Point Brands, Inc. (“Turning Point”), a 52.1% owned subsidiary); and

· Outdoor advertising (Standard Outdoor Southwest, LLC (“Standard Outdoor”), a wholly owned subsidiary), beginning in July 2017

Turning Point is a leading independent provider of Other Tobacco Products (“OTP”) in the U.S. Turning Point sells a wide range of products across the OTP spectrum, including moist snuff tobacco (“MST”), loose leaf chewing tobacco, premium cigarette papers, make-your-own (“MYO”) cigar wraps, cigars, liquid vapor products and tobacco vaporizer products. Turning Point does not sell cigarettes. Turning Point estimates that the OTP industry generated approximately $10.5 billion in manufacturer revenue in 2016. In contrast to manufactured cigarettes, which have been experiencing declining sales for decades based on data published by the Alcohol and Tobacco Tax and Trade Bureau (“TTB”), the OTP industry is demonstrating increased consumer appealwith low to mid-single digit consumer unit growth as reported byManagement Science Associates, Inc. (“MSAi”), a third party analytics and informatics company.

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The Company’s reportable segments are (1) smokeless products, which include chewing tobacco and MST, (2) smoking products, which principally include cigarette papers, MYO cigar wraps and cigars, and (3) NewGen products, which include liquid vapor products, tobacco vaporizer products and non-nicotine/non-tobacco products.

Turning Point’s portfolio of brands include some of the most widely recognized names in the OTP industry, such as Zig-Zag^®, Beech-Nut^®, Stoker’s^® and VaporBeast^™.

Turning Point generates revenues from the sale of our products primarily to wholesale distributors who in turn resell them to retail operations, as well as from the sale of our products directly to retail operations. Turning Points’s net sales, which include federal excise taxes and FDA fees, consist of gross sales, net of cash discounts, returns, and selling and marketing allowances.

Turning Point’s principal operating expenses include the cost of raw materials used to manufacture the limited number of products which Turning Point manufactures; the cost of finished products, which are purchased goods; federal excise taxes; legal expenses and compensation expenses, including benefits and costs of salaried personnel. Turning Point’s other principal expenses include interest expense and amortization of deferred financing costs and other expenses.

Recent Developments

On June 1, 2017, SDOI consummated a Contribution and Exchange Transaction (“Contribution and Exchange”) to acquire a 52.1% controlling interest in Turning Point Brands, Inc. (“Turning Point”). The transaction was accounted for as a recapitalization or reverse acquisition. Turning Point was the accounting acquirer for financial reporting purposes. Accordingly, the historical financial statements of Turning Point became our historical financial statements, including the comparative prior periods.

Prior to the consummation of the Contribution and Exchange, SDOI amended and restated its certificate of incorporation to provide for, among other things, the reclassification of every 25 shares of its common stock, par value $0.01 per share, into one share of a new class of common stock, par value $0.01 per share, designated as Class A Common Stock (the “Class A Common Stock”) and the authorization for issuance of an additional class of common stock, par value $0.01 per share, of SDOI designated as Class B Common Stock (the “Class B Common Stock”). Prior to the closing of the Contribution and Exchange, SDOI declared a dividend of one share of Class B Common Stock for each outstanding share of Class A Common Stock, payable to holders of record of Class A Common Stock on June 2, 2017. All references in the unaudited condensed consolidated financial statements to the number of shares and per share amounts of common stock have been retroactively restated to reflect the reclassification of common stock, the shares issued in the Contribution and Exchange and the dividend of Class B Common Stock. Refer to Note 3, Acquisitions, for further information. As a result of the consummation of the Contribution and Exchange, SDOI is no longer a shell company.

On July 28, 2017, the U.S. Food and Drug Administration (“FDA”) announced a new direction in regulating tobacco products, including the newly “deemed” markets, such as cigars and vapor products.  FDA stated that it intends to begin several new rulemaking processes, some of which will outline foundational rules governing the premarket application process for the deemed products, including Substantial Equivalence applications and Premarket Tobacco Applications.  Accordingly, the original filing deadlines for newly “deemed” products on the market as of August 8, 2016, have been postponed until August 8, 2021, for “combustible” products (e.g., cigar and pipe), and August 8, 2022, for “non-combustible” products (e.g., vapor products).  No other filing deadlines were altered.  Also noteworthy was that FDA acknowledged a “continuum of risk” among tobacco products, i.e., that certain tobacco products pose a greater risk to individual and public health than others; that it intends to seek public comment on the role that flavors play in attracting youth and the role that flavors may play in helping some smokers switch to potentially less harmful forms of nicotine delivery and that FDA would be increasing its focus on the regulation of cigarette products.

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On July 3, 2017, we acquired assets consisting of five billboards located in several counties near Austin, Texas for consideration of $0.3 million.

On June 30, 2017 Turning Point filed a Form S-3 Registration Statement with the Securities and Exchange Commission to provide for the potential to offer up to $200 million in the aggregate of Turning Point’s common stock, preferred stock, depository shares, warrants and units as well as a secondary offering and sale of up to approximately 12.8 million shares of Turning Point common stock by selling shareholders.  Turning Point has no plans to utilize the offering at the present time, however Turning point believes it provides future flexibility as Turning Point continues to drive its strategic organic growth and acquisition initiatives.

In March 2017, Turning Point entered into a strategic partnership with the Hand Media, Inc. dba Vapor Shark (“Vapor Shark”), a leading distributor and manufacturer of premium vaping e-liquids and hardware, with nationwide distribution through independent retail vape shops as well as Vapor Shark retail locations. Through the strategic partnership, Turning Point was given a warrant for all outstanding stock of Vapor Shark in exchange for a commitment to deposit up to $2.5 million. In addition, Turning Point gave the sole shareholder of Vapor Shark an option to purchase the company owned Vapor Shark stores for $1. The shareholder has notified Turning Point of his intent to exercise the option no earlier than January 1, 2018. In April 2017, Turning Point entered into a management agreement with Vapor Shark whereby it gained control of the Vapor Shark operations.  On June 30, 2017, Turning Point exercised the warrant and obtained ownership of 100% of the outstanding shares of Vapor Shark.

In November 2016, a subsidiary of the Turning Point purchased all of the capital stock of Smoke Free Technologies, Inc. d/b/a VaporBeast (“VaporBeast”) for an aggregate purchase price of approximately $27 million. VaporBeast is a leading distributor of liquid vapor products servicing the non-traditional retail channel. Also in November 2016, Turning Point purchased five regional smokeless tobacco brands from Wind River Tobacco Company (“Wind River”) for a purchase price of approximately $2.5 million.

In November 2016, SDOI and Interboro LLC (“Interboro”) entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”). Pursuant to the Stock Purchase Agreement, SDOI will acquire all of the outstanding capital stock of Interboro for a cash purchase price of $2.5 million, subject to adjustment as provided in the Stock Purchase Agreement. Under the name Maidstone Insurance Company, Interboro offers personal automobile insurance, primarily in the State of New York. The consummation of the transaction is pending receipt of regulatory approvals.

In May 2016, Turning Point sold 6,210,000 shares of voting common stock in its IPO (including shares sold pursuant to an underwriters’ option to purchase 810,000 shares to cover over-allotments) at a price of $10.00 per share. The gross proceeds of the IPO totaled $62.1 million.

Segment Information

We operate in three reportable segments, (1) smokeless products; (2) smoking products; and (3) NewGen products. The smokeless products segment: (a) manufactures and markets moist snuff and (b) contracts for and markets chewing tobacco products. The smoking products segment: (a) imports and markets cigarette papers, tubes and related products and (b) imports and markets finished cigars and MYO cigar wraps. The NewGen products segment (a) markets e-cigarettes, e-liquids, vaporizers and other related products and (b) distributes a wide assortment of vaping products to non-traditional retail outlets. The results of operations of SDOI and of Turning Point not allocated to the other three reportable segments are included in Other.

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Key Factors Affecting Turning Point’s Results of Operations

Turning Point considers the following factors to be the key factors affecting its results of operations:

• Its ability to further penetrate markets with its existing products;

• Its ability to introduce new products and product lines that complement its core business;

• Decreasing interest in tobacco products among consumers;

• Price sensitivity in its end-markets;

• Marketing and promotional initiatives, which cause variability in its results;

• General economic conditions, including consumer access to disposable income;

• Cost and increasing regulation of promotional and advertising activities;

• Cost of complying with regulation;

• Counterfeit and other illegal products in its end-markets;

• Currency fluctuations;

• Its ability to identify attractive acquisition opportunities in OTP; and

• Its ability to integrate acquisitions.

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 Amendment No. 4 to the Company’s Form S-4, filed with the Commission on May 4, 2017.

Recent Accounting Pronouncements Adopted:

We adopted ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment in Q1 of 2017. This ASU simplifies the measurement of goodwill by eliminating Step 2 from the goodwill impairment test. The adoption of the ASU had no effect on our consolidated financial statements.

We adopted ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory in Q1 of 2017. The amendments in this ASU require entities that measure inventory using the first-in, first-out or average cost methods to measure inventory at the lower of cost and net realizable value. Net realizable value is defined as estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal and transportation. The adoption of this ASU had no effect on our consolidated financial statements.

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Recent Accounting Pronouncements:

In May 2014, the FASB issued Accounting Standards Update (“ASU”), ASU 2014-09, Revenue from Contracts with Customers (Topic 606), requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or retrospective with cumulative effect transition method. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606), which delayed the effective date of ASU 2014-09 by one year. ASU 2014-09 is now effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting year. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The standard may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption (“modified retrospective method”). We currently expect to apply the modified retrospective method upon adoption. We do not believe the standard will impact our recognition of revenue as we are primarily a distributor of goods; however we continue to assess the potential impacts to other less significant revenue transactions.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases. ASU 2016-02 requires a lessee to recognize in the statement of financial position 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 leases with a term of 12 months or less for which there is not an option to purchase the underlying asset that the lessee is reasonably certain to exercise, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities and should recognize lease expense for such leases generally on a straight-line basis over the lease term. Certain qualitative disclosures along with specific quantitative disclosures will be required, so that users are able to understand more about the nature of an entity’s leasing activities. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. At transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which includes a number of optional practical expedients related to the identification and classification of leases that commenced before the effective date of ASU 2016-02. An entity that elects to use the practical expedients will, in effect, continue to account for leases that commenced before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees are required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. We are currently evaluating the effect the adoption of this standard will have on our financial statements.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this ASU require 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. ASU 2016-18 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017 on a retrospective basis. We are currently evaluating the effect the adoption of this standard will have on our financial statements.

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In March 2017, the FASB issued ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.  This ASU requires that an employer disaggregate the service cost component from the other components of net benefit cost. This ASU also allows only the service cost component of net benefit cost to be eligible for capitalization. ASU 2017-07 is effective for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.  We are currently evaluating the effect the adoption of this standard will have on our financial statements.

Consolidated Results of Operations

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

	Three Months Ended June 30,
	2017			2016			% Change
Consolidated Results of Operations Data:
Net sales
Smokeless products	$	22,021		$	21,691			1.5	%
Smoking products		27,019			26,789			0.9	%
NewGen products		23,046			3,101			643.2	%
Total net sales		72,086			51,581			39.8	%
Cost of sales		40,091			26,707			50.1	%
Gross profit
Smokeless products		11,538			10,892			5.9	%
Smoking products		14,117			13,671			3.3	%
NewGen products		6,340			311			1938.6	%
Total gross profit		31,995			24,874			28.6	%
Selling, general and administrative expenses		18,879			14,098			33.9	%
Operating income		13,116			10,776			21.7	%
Interest expense		4,046			6,876			-41.1	%
Investment income		(98	)		(332	)		-70.5	%
Loss on extinguishment of debt		-			2,824			-100.0	%
Income before income taxes		9,168			1,408			551.1	%
Income tax expense		(2,795	)		(609	)		358.9	%
Net income		6,373			799			697.6	%
Amounts attributable to noncontrolling interests		(1,470	)		-
Net income attributable to SDOI	$	4,903		$	799

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	Six Months Ended June 30,
	2017		2016		% Change
Consolidated Results of Operations Data:
Net sales
Smokeless products	$	42,269	$	40,030		5.6	%
Smoking products		54,196		54,674		-0.9	%
NewGen products		42,409		6,743		528.9	%
Total net sales		138,874		101,447		36.9	%
Cost of sales		79,213		51,926		52.5	%
Gross profit
Smokeless products		20,792		20,102		3.4	%
Smoking products		27,817		27,979		-0.6	%
NewGen products		11,052		1,440		667.5	%
Total gross profit		59,661		49,521