UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

[X]

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

For the quarterly period ended ~~June 30, 2017~~March 31, 2018

[ ]

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: 1-13906

BALLANTYNE STRONG, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware		47-0587703
(State or Other Jurisdiction of		(IRS Employer
Incorporation or Organization)		Identification Number)

11422 Miracle Hills Drive, Suite 300, Omaha, Nebraska		68154
(Address of Principal Executive Offices)		(Zip Code)

(402) 453-4444

(Registrant’s telephone number, including area ~~code:)~~code)

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 twelve 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 [X] 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 [X] No [ ]

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

Large accelerated filer	[ ]	Accelerated filer	[X]
Non-accelerated filer	[ ] (Do not check if a smaller reporting company)
Smaller reporting company	[ ]	Emerging growth company	[ ]

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

Class		Outstanding as of ~~August 4, 2017~~April 30, 2018
Common Stock, $.01, par value		~~14,416,040~~14,422,090 shares

TABLE OF CONTENTS

		Page No.

	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets, ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016~~2017	3

	Condensed Consolidated Statements of Operations for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~	4

	Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~	5

	Condensed Consolidated Statements of Cash Flows for the ~~Six~~Three Months Ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~	6

	Notes to the Condensed Consolidated Financial Statements	78

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20

~~Item 3.~~	~~Quantitative and Qualitative Disclosures about Market Risk~~	26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32

Item 4.	Controls and Procedures	2633

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	2733

Item 1A.	Risk Factors	2733

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2733

Item 6.	Exhibits	2834

	Signatures	3035

PART I. Financial Information

Item 1. Financial Statements

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except par values)

	June 30, 2017			December 31, 2016			March 31, 2018			December 31, 2017
	(Unaudited)						(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	2,800		$	7,596		$	3,348		$	4,870
Accounts receivable (net of allowance for doubtful accounts of $1,482 and $1,097, respectively)		16,943			16,316
Accounts receivable (net of allowance for doubtful accounts of $1,976 and $1,877, respectively)								10,749			10,766
Inventories:
Raw materials and components, net								1,248			1,376
Work in process								496			362
Finished goods, net		1,261			1,341			2,449			3,083
Work in process		418			247
Raw materials and components, net		5,285			4,975
Total inventories, net		6,964			6,563			4,193			4,821
Recoverable income taxes		1,041			672			492			495
Deposit on equipment to be leased		2,500			—
Other current assets		1,996			1,746			1,572			1,290
Current assets held for sale		—			188
Total current assets		32,244			33,081			20,354			22,242
Property, plant and equipment (net of accumulated depreciation of $7,968 and $7,066, respectively)		11,187			11,187
Property, plant and equipment (net of accumulated depreciation of $9,037 and $8,780 respectively)								10,542			10,826
Equity method investments		18,134			13,098			17,833			18,053
Intangible assets, net		3,641			2,357			3,947			3,972
Goodwill		920			889			926			952
Notes receivable		1,669			1,669			2,773			2,815
Deferred income taxes		—			84
Other assets		165			74			656			154
Total assets	$	67,960		$	62,439		$	57,031		$	59,014
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	7,062		$	5,175		$	4,221		$	3,425
Accrued expenses		3,793			4,097			3,562			3,071
Short-term debt		2,500			—			500			500
Current portion of long-term debt		63			—			65			65
Customer deposits/deferred revenue		3,201			4,211
Deferred revenue and customer deposits								2,314			1,619
Income tax payable		198			108			40			-
Current liabilities held for sale		—			57
Total current liabilities		16,817			13,648			10,702			8,680
Long-term debt, net of current portion		1,899			—
Deferred revenue		1,226			1,226
Long-term debt, net of current portion and debt issuance costs								1,855			1,870
Deferred revenue and customer deposits, net of current portion								1,207			1,207
Deferred income taxes		2,704			1,841			2,852			2,816
Other accrued expenses, net of current portion		491			570			257			319
Total liabilities		23,137			17,285			16,873			14,892
Stockholders’ equity:
Preferred stock, par value $.01 per share; authorized 1,000 shares, none outstanding		—			—
Common stock, par value $.01 per share; authorized 25,000 shares; issued 17,210 and 17,047 shares at June 30, 2017 and December 31, 2016, respectively; 14,416 and 14,268 shares outstanding at June 30, 2017 and December 31, 2016, respectively		169			169
Preferred stock, par value $.01 per share; authorized 1,000 shares; none outstanding								-			-
Common stock, par value $.01 per share; authorized 25,000 shares; issued 17,216 shares; outstanding 14,422 shares								169			169
Additional paid-in capital		40,121			39,758			40,820			40,565
Accumulated other comprehensive income:
Accumulated other comprehensive income (loss):
Foreign currency translation		(4,891	)		(5,709	)		(4,515	)		(4,048	)
Postretirement benefit obligations		97			97			108			99
Unrealized gain on available-for-sale securities of equity method investment		315			136
Unrealized gain on available-for-sale securities of equity method investments								301			353
Retained earnings		27,598			29,187			21,861			25,570
		63,409			63,638			58,744			62,708
Less 2,794 and 2,779 of common shares in treasury, at cost at June 30, 2017 and December 31, 2016, respectively		(18,586	)		(18,484	)
Less 2,794 of common shares in treasury, at cost								(18,586	)		(18,586	)
Total stockholders’ equity		44,823			45,154			40,158			44,122
Total liabilities and stockholders’ equity	$	67,960		$	62,439		$	57,031		$	59,014

See accompanying notes to condensed consolidated financial statements.

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~

(In thousands, except per share data)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2017			2016			2017			2016			2018			2017
Net product sales	$	12,917		$	14,862		$	25,493		$	26,597		$	8,639		$	12,456
Net service revenues		6,483			5,696			11,832			11,075			7,189			5,470
Total net revenues		19,400			20,558			37,325			37,672			15,828			17,926
Cost of products sold		10,429			11,280			20,817			20,038			5,812			10,308
Cost of services		3,697			3,129			6,795			6,249			7,166			3,179
Total cost of revenues		14,126			14,409			27,612			26,287			12,978			13,487
Gross profit		5,274			6,149			9,713			11,385			2,850			4,439
Selling and administrative expenses:
Selling		1,419			1,149			2,909			2,174			1,225			1,490
Administrative		4,688			3,037			8,234			6,135			4,709			3,547
Total selling and administrative expenses		6,107			4,186			11,143			8,309			5,934			5,037
(Loss) income from operations		(833	)		1,963			(1,430	)		3,076
Other (expense) income:
Loss from operations														(3,084	)		(598	)
Other income (expense):
Interest income		—			27			22			40			-			22
Interest expense		(28	)		(27	)		(38	)		(40	)		(45	)		(10	)
Foreign currency transaction loss		(107	)		(180	)		(104	)		(1,005	)
Change in value of marketable securities		—			116			—			(366	)
Excess distribution from joint venture		—			502			—			502
Other income, net		7			6			10			43
Total other (expense) income		(128	)		444			(110	)		(826	)
(Loss) earnings before income taxes and equity method investment (loss) income		(961	)		2,407			(1,540	)		2,250
Foreign currency transaction gain														104			3
Fair value adjustment to notes receivable														(42	)		-
Other (expense) income, net														(10	)		5
Total other income														7			20
Loss before income taxes and equity method investment (loss) income														(3,077	)		(578	)
Income tax expense		776			653			2,269			1,337			698			1,493
Equity method investment (loss) income		(212	)		—			2,269			41			(10	)		2,481
Net (loss) earnings from continuing operations		(1,949	)		1,754			(1,540	)		954			(3,785	)		410
Net loss from discontinued operations, net of tax		(26	)		(921	)		(49	)		(734	)		-			(23	)
Net (loss) earnings	$	(1,975	)	$	833		$	(1,589	)	$	220		$	(3,785	)	$	387
Net (loss) earnings per share - basic
Net (loss) earnings from continuing operations	$	(0.14	)	$	0.12		$	(0.11	)	$	0.07		$	(0.26	)	$	0.03
Net loss from discontinued operations		(0.00	)		(0.06	)		(0.00	)		(0.05	)		-			(0.00	)
Net (loss) earnings	$	(0.14	)	$	0.06		$	(0.11	)	$	0.02			(0.26	)		0.03
Net (loss) earnings per share - diluted
Net (loss) earnings from continuing operations	$	(0.14	)	$	0.12		$	(0.11	)	$	0.07		$	(0.26	)	$	0.03
Net loss from discontinued operations		(0.00	)		(0.06	)		(0.00	)		(0.05	)		-			(0.00	)
Net (loss) earnings	$	(0.14	)	$	0.06		$	(0.11	)	$	0.02			(0.26	)		0.03

See accompanying notes to condensed consolidated financial statements.

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive (Loss) Income

Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~

(In thousands)

(Unaudited)

Three Months Ended
June 30,

Six Months Ended
June 30,

2017 2016 2017 2016
Net (loss) earnings $ (1,975 ) $ 833 $ (1,589 ) $ 220
Currency translation adjustment:
Unrealized net change arising during period 709 33 818 1,625
Unrealized gain on available-for-sale securities of equity method investments, net of tax 181 21 179 21
Total other comprehensive income 890 54 997 1,646
Comprehensive (loss) income $ (1,085 ) $ 887 $ (592 ) $ 1,866
Three Months Ended March 31,
2018 2017
Net (loss) earnings $ (3,785 ) $ 387
Adjustment to postretirement benefits 9 -
Currency translation adjustment:
Unrealized net change arising during period (467 ) 109
Unrealized loss on available-for-sale securities of equity method investments, net of tax (52 ) -
Total other comprehensive (loss) income (510 ) 109
Comprehensive (loss) income $ (4,295 ) $ 496

See accompanying notes to condensed consolidated financial statements.

5

Ballantyne Strong, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
~~Six~~Three Months Ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016~~
(In thousands)
(Unaudited)

Six Months Ended June 30,
2017 2016
Cash flows from operating activities:
Net (loss) earnings $ (1,589 ) $ 220
Net loss from discontinued operations, net of tax 49 734
Net (loss) earnings from continuing operations (1,540 ) 954
Adjustments to reconcile net (loss) earnings from continuing operations to net cash used in operating activities:
Provision for doubtful accounts 418 (44 )
Provision for obsolete inventory (175 ) 47
Provision for warranty 171 171
Depreciation and amortization 1,004 1,127
Equity method investment income (2,269 ) (41 )
Unrealized loss on marketable securities — 366
Deferred income taxes 913 (146 )
Stock-based compensation expense 330 244
Changes in operating assets and liabilities:
Accounts receivable (935 ) (2,684 )
Inventories (170 ) (522 )
Other current assets (247 ) (321 )
Accounts payable 2,497 1,361
Accrued expenses (438 ) 358
Customer deposits/deferred revenue (1,023 ) (570 )
Current income taxes (247 ) (1,620 )
Other assets (474 ) (124 )
Net cash flows from operating activities – continuing operations (2,185 ) (1,444 )
Net cash flows from operating activities – discontinued operations (146 ) (2,724 )
Net cash used in operating activities (2,331 ) (4,168 )

Cash flows from investing activities:
Purchase of equity securities (2,525 ) (3,764 )
Dividends received from investee in excess of cumulative earnings 103 103
Capital expenditures (2,103 ) (653 )
Proceeds from sale of business 60 —
Net cash used in investing activities (4,465 ) (4,314 )

Cash flows from financing activities:
Proceeds from issuance of long-term debt 2,000 —
Payment of debt issuance costs (36 ) —
Principal payments on long-term debt (2 ) —
Purchase of treasury stock (102 ) (133 )
Proceeds from exercise of stock options 33 53
Payments on capital lease obligations (134 ) (159 )
Excess tax benefits from share-based arrangements — 6
Net cash provided by (used in) financing activities – continuing operations 1,759 (233 )
Effect of exchange rate changes on cash and cash equivalents –continuing operations 66 916
Effect of exchange rate changes on cash and cash equivalents – discontinued operations — (69 )
Net decrease in cash and cash equivalents (4,971 ) (7,868 )
Discontinued operations cash activity included above:
Add: Cash balance included in assets held for sale at beginning of period 175 4,208
Less: Cash balance included in assets held for sale at end of period — (1,415 )
Cash and cash equivalents at beginning of period 7,596 17,862
Cash and cash equivalents at end of period $ 2,800 $ 12,787
Supplemental disclosure of non-cash investing and financing activities:
Issuance of short-term progress payment note payable (See Note 9) $ 2,500 $ —
Three Months Ended March 31,
2018 2017
Cash flows from operating activities:
Net (loss) earnings $ (3,785 ) $ 387
Net loss from discontinued operations, net of tax - (23 )
Net (loss) earnings from continuing operations (3,785 ) 410
Adjustments to reconcile net (loss) earnings from continuing operations to net cash (used in) provided by operating activities:
Provision for doubtful accounts 103 3
Provision for obsolete inventory 44 68
Provision for warranty 79 18
Depreciation and amortization 524 482
Equity method investment loss (income) 10 (2,481 )
Fair value adjustment to notes receivable 42 -
Deferred income taxes 87 867
Amortization of contract acquisition costs 57 -
Stock-based compensation expense 255 136
Changes in operating assets and liabilities:
Accounts receivable (178 ) (282 )
Inventories 537 (514 )
Other current assets 5 (102 )
Accounts payable 256 2,321
Accrued expenses 429 154
Customer deposits/deferred revenue 704 (86 )
Current income taxes 36 (156 )
Other assets (796 ) (271 )
Net cash flows (used in) provided by operating activities - continuing operations (1,591 ) 567
Net cash flows used in operating activities - discontinued operations - (24 )
Net cash (used in) provided by operating activities (1,591 ) 543
(Continued on following page)

See accompanying notes to condensed consolidated financial statements.

6

Ballantyne Strong, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows - Continued
Three Months Ended March 31, 2018 and 2017
(In thousands)
(Unaudited)
Three Months Ended March 31,
2018 2017
Cash flows from investing activities:
Purchase of equity securities $ - $ (2,525 )
Dividends received from investee in excess of cumulative earnings 23 103
Capital expenditures (356 ) (1,120 )
Net cash used in investing activities - continuing operations (333 ) (3,542 )

Cash flows from financing activities:
Principal payments on long-term debt (16 ) -
Purchase of treasury stock - (65 )
Payments on capital lease obligations (53 ) (67 )
Net cash used in financing activities - continuing operations (69 ) (132 )
Effect of exchange rate changes on cash and cash equivalents - continuing operations 471 39
Net decrease in cash and cash equivalents (1,522 ) (3,092 )
Discontinued operations activity included above:
Add: Cash balance included in assets held for sale at beginning of period - 175
Less: Cash balance included in assets held for sale at end of period - (150 )
Cash and cash equivalents at beginning of period 4,870 7,596
Cash and cash equivalents at end of period $ 3,348 $ 4,529
See accompanying notes to condensed consolidated financial statements.
7
Ballantyne Strong, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)

1. Nature of Operations

Ballantyne Strong, Inc. (“Ballantyne” or the “Company”), a Delaware corporation, is a holding company with diverse business activities focused on serving the cinema, retail, financial, advertising and government markets. The Company, and its wholly owned subsidiaries Strong Technical Services, Inc., Strong/MDI Screen Systems, Inc. (“Strong/MDI”), ~~Convergent Corporation, and~~ Convergent Media Systems Corporation ~~(“Convergent” or “CMS”),~~and Strong Digital Media, LLC design, integrate and install technology solutions for a broad range of applications; develop and deliver out-of-home messaging, advertising and communications; manufacture projection screens; and provide managed services including monitoring of networked equipment to our customers. ~~On November 4, 2016, Strong Westrex (Beijing) Technology Inc. (“SWBTI”), a subsidiary of Strong Westrex, Inc. (“SWI”), was sold, and on May 17, 2017, SWI was sold (see Note 2).~~
~~The Company’s products are distributed to the retail, financial, government and cinema markets throughout the world.~~

2. Discontinued Operations

On June 23, 2016, the Company’s Board of Directors approved a plan to pursue a sale of the operations conducted by its subsidiaries SWBTI and SWI (the “China Operations”) which have historically been included in the Cinema segment. The purpose of the plan was to focus the efforts of the Company on the business units that have opportunities for higher return on invested capital. We reflected the results of the China Operations as discontinued operations for all periods presented. The assets and liabilities of the China Operations have been reclassified as assets and liabilities held for sale in the condensed consolidated balance sheets for all periods presented.
~~On November 4, 2016,~~In May 2017, the Company sold ~~SWBTI to GABO Filter,~~the operational assets of Strong Westrex, Inc. for total proceeds of ~~$0.4 million. On May 17, 2017, SWI was sold for total proceeds of $0.1 million. The Company recorded an insignificant gain on the sale of SWI.~~$60 thousand.

The summary ~~comparative~~ financial results of discontinued operations for the three months ended March 31, 2017 were as follows (in thousands):

Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 2016
Total net revenues $ 12 $ 2,435 $ 24 $ 5,857 $ 12
Total cost of revenues 22 2,899 48 5,791 26
Total selling and administrative expenses 43 346 53 706 9
Loss from operations of discontinued operations (53 ) (810 ) (77 ) (640 ) (23 )
Loss before income taxes (26 ) (807 ) (49 ) (620 ) (23 )
Income tax expense — (114 ) — (114 ) -
Net loss from discontinued operations, net of tax $ (26 ) $ (921 ) $ (49 ) $ (734 ) $ (23 )

~~Depreciation~~
There was no depreciation and amortization related to discontinued operations ~~was immaterial~~recorded for the three ~~and six~~ month ~~periods~~period ended ~~June 30, 2017 and 2016.~~March 31, 2017. There were no capital expenditures related to discontinued operations ~~for~~during the ~~six months~~three month period ended ~~June 30, 2017 and 2016.~~March 31, 2017.

3. Summary of Significant Accounting Policies

Basis of Presentation and Principles of Consolidation

The condensed consolidated financial statements include the accounts of the Company and all majority owned and controlled domestic and foreign subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.

The condensed consolidated financial statements included in this report are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America for annual reporting purposes or those made in the Company’s Annual Report on Form ~~10-K/A.~~10-K. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form ~~10-K/A~~10-K for the fiscal year ended December 31, ~~2016.~~2017.

The condensed consolidated balance sheet as of December 31, ~~2016~~2017 was derived from the Company’s audited consolidated balance sheet as of that date. All other condensed consolidated financial statements contained herein are unaudited and, in the opinion of management, reflect all adjustments of a normal recurring nature necessary to present a fair statement of the financial position and the results of operations and cash flows for the respective interim periods. The results for interim periods are not necessarily indicative of trends or results expected for a full year.

8
During the second quarter of 2017, the Company began classifying software in development as an intangible asset rather than property, plant and equipment, to be consistent with its classification of software assets in service. Accordingly, approximately $0.5 million of software in development at December 31, 2016 was reclassified to intangible assets from property, plant and equipment on the condensed consolidated balance sheet to conform to the current period presentation. This reclassification had no effect on the Company’s reported results of operations, comprehensive income, or cash flows.

Use of Management Estimates

The preparation of ~~condensed~~ consolidated financial statements in conformity with U.S. generally accepted accounting principles ~~(“U.S. GAAP”)~~ requires management to make estimates and assumptions that affect the reported amounts 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 revenues and expenses during the reporting period. Actual results and changes in facts and circumstances may alter such estimates and affect results of operations and financial position in future periods.
~~Marketable Securities~~
For the six months ended June 30, 2016, the Company’s marketable securities were comprised of investments in the common stock of a publicly traded company. Changes in fair value, based on the market price of the investee’s stock, were recognized in other income in the condensed consolidated statement of operations. The Company used the fair value option to account for the investment to more appropriately recognize the value of this investment in our condensed consolidated financial statements since the Company did not exert significant influence over the investment, in which case the equity method of accounting would have been applied. None of the Company’s investments were classified as marketable securities or accounted for using the fair value option during the six months ended June 30, 2017.

Equity Method Investments

We apply the equity method of accounting to investments when we have significant influence, but not controlling interest in the investee. Judgment regarding the level of influence over each equity method investment includes considering key factors such as ownership interest, representation on the board of directors, participation in policy-making decisions and material intercompany transactions. The Company’s proportionate share of the net income (loss) ~~income~~ resulting from these investments is reported under the line item captioned “equity method investment (loss) income” in our condensed consolidated statements of operations. The carrying value of our equity method investments is reported in equity method investments in the condensed consolidated balance sheets. The Company’s equity method investments are reported ~~initially~~ at cost and adjusted each period for the Company’s share of the investee’s income or loss and dividend paid, if any. The Company’s share of the investee’s income or loss is recorded on a one quarter lag for all equity method investments. The Company classifies distributions received from equity method investments using the cumulative earnings approach on the condensed consolidated statements of cash flows. The Company assesses investments for impairment whenever events or changes in circumstances indicate that the carrying value of an investment may not be recoverable. The Company did not record any impairments related to its investments during the three ~~and six month periods~~months ended ~~June 30, 2017~~March 31, 2018 or ~~2016.~~2017. Note 56 contains additional information on our equity method investments, which are held by ~~the Company’s~~our Cinema segment.
Fair Value of Financial Instruments

Assets and liabilities measured at fair value are categorized into a fair value hierarchy based upon the observability of inputs to the valuation of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk. The categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

● Level 1 -– inputs to the valuation techniques are quoted prices in active markets for identical assets or liabilities

● Level 2 -– inputs to the valuation techniques are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly

● Level 3 -– inputs to the valuation techniques are unobservable for the assets or liabilities
9
The following tables present the Company’s financial assets measured at fair value based upon the level within the fair value hierarchy in which the fair value measurements fall, as of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016.~~2017.

Fair values measured on a recurring basis at ~~June 30, 2017~~March 31, 2018 (in thousands):

Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Cash and cash equivalents $ 2,800 $ — $ — $ 2,800 $ 3,348 $ - $ - $ 3,348
Notes receivable — — 1,669 1,669 - - 2,773 $ 2,773
Total $ 2,800 $ — $ 1,669 $ 4,469 $ 3,348 $ - $ 2,773 $ 6,121

Fair values measured on a recurring basis at December 31, ~~2016~~2017 (in thousands):

Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Cash and cash equivalents $ 7,596 $ — $ — $ 7,596 $ 4,870 $ - $ - $ 4,870
Notes receivable — — 1,669 1,669 - - 2,815 $ 2,815
Total $ 7,596 $ — $ 1,669 $ 9,265 $ 4,870 $ - $ 2,815 $ 7,685

Quantitative information about the Company’s level 3 fair value measurements at ~~June 30, 2017~~March 31, 2018 is set forth below:

Fair Value at
6/30/2017
(in thousands)
Valuation Technique Unobservable input Range
Notes receivable $ 1,669 Discounted cash flow Probability of default 53 %
Discount rate 18 %

Fair value at 3/31/18
(in thousands)
Valuation technique Unobservable input Range
Notes receivable $ 2,773 Discounted cash flow Default percentage 49 %
Discount rate 18 %

During 2011, the Company entered into certain unsecured notes receivable arrangements with CDF2 Holdings, LLC pertaining to the sale and installation of digital projection equipment. The notes receivable accrue interest at a rate of 15% per annum. Interest not paid in any particular year is added to the principal and also accrues interest at 15%. The notes receivable are recorded at estimated fair value. In order to estimate the fair value, ~~at June 30,~~the Company reviews the financial position and estimated cash flows of the debtor of the notes receivable. During the first quarter of 2018, the Company updated its estimated future cash flow assumptions. This resulted in a decrease to the fair value of the notes receivable of $42 thousand recorded in earnings during the quarter ended March 31, 2018. There was no adjustment to the estimated fair value of the notes receivable during the quarter ended March 31, 2017.

The significant unobservable inputs used in the fair value measurement of the Company’s notes receivable are discount rate and ~~probability~~percentage of default. Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value measurement. ~~There were no changes in the fair value of the Company’s notes receivable recorded during the three and six months ended June 30, 2017 or 2016.~~

The Company’s short-term and long-term debt ~~are~~is recorded at historical cost. As of ~~June 30, 2017,~~March 31, 2018, the Company’s long-term debt, including current maturities, had a carrying value of ~~$2.0~~$1.95 million. Based on discounted cash flows using current quoted interest rates (Level 2 of the fair value hierarchy), the estimated fair value at ~~June 30, 2017~~March 31, 2018 was ~~$2.0~~$1.90 million.

The carrying values of all other financial assets and liabilities, including accounts receivable, accounts payable, accrued expenses and short-term debt, reported in the condensed consolidated balance sheets equal or approximate their fair values due to the short-term nature of these instruments. Note 6 includes fair value information related to our equity method investments. All non-financial assets that are not recognized or disclosed at fair value in the financial statements on a recurring basis, which ~~includes~~include non-financial long-lived assets, are measured at fair value in certain circumstances (for example, when there is evidence of impairment). During the ~~six~~three months ended ~~June 30,~~March 31, 2018 and 2017, the Company did not have any significant non-recurring measurements of non-financial assets or liabilities.

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Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” “(ASC 606)”. The ASU replaced most existing revenue recognition guidance in U.S. GAAP. The Company adopted ASC 606 effective January 1, 2018 using the modified retrospective method. The Company recorded a transition adjustment of approximately $76 thousand increasing the opening balance of retained earnings, primarily related to the deferral and amortization of direct and incremental costs of obtaining contracts. See Note 4 for further information about the nature and pattern of revenue recognition for the different types of contracts with customers.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall: Recognition and Measurement of Financial Assets and Financial Liabilities.” ASU 2016-01 requires equity investments that do not result in consolidation and are not accounted under the equity method to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets; and modifies certain fair value disclosure requirements. The Company adopted ASU 2016-01 prospectively on January 1, 2018. The adoption of this ASU did not significantly impact the Company’s results of operations and financial position.
In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.” The new guidance describes the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting. The Company adopted this ASU effective January 1, 2018. The adoption of this ASU did not significantly impact the Company’s results of operations and financial position.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers (Topic 606)”. ASU 2014-09 requires 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 ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The guidance is effective for the Company beginning January 1, 2018. An entity may adopt this ASU either retrospectively or through a cumulative effect adjustment as of the start of the first period for which it applies the ASU. The Company has obtained an understanding of ASU 2014-09 and has begun to analyze the impact of the new standard on its financial results. The Company has completed a high-level assessment of the attributes within its contracts for its major products and services, and has started assessing potential impacts to its internal processes, control environment, and disclosures. The Company expects to adopt this ASU through a cumulative effect adjustment as of January 1, 2018. While the Company has not yet quantified the impact that the adoption of ASU 2014-09 will have on the consolidated financial statements, the Company is continuing to evaluate the impact of the new standard on our financial results and other possible impacts. The Company will continue to provide enhanced disclosures as we continue our assessment.
In July 2015, the FASB issued ASU 2015-11, “Simplifying the Measurement of Inventory”. ASU 2015-11 requires an entity utilizing the first in-first out inventory method to change their measurement principle for inventory changes from the lower of cost or market to lower of cost or net realizable value. The Company prospectively adopted the guidance effective January 1, 2017. The adoption of ASU 2015-11 did not have a material effect on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments—Overall: Recognition and Measurement of Financial Assets and Financial Liabilities”. ASU 2016-01 requires equity investments that do not result in consolidation and are not accounted under the equity method to be measured at fair value with changes in fair value recognized in net income; simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments; requires separate presentation of financial assets and financial liabilities by measurement category and form of financial assets on the balance sheet or the accompanying notes to the financial statements; clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets; and modifies certain fair value disclosure requirements. ASU 2016-01 is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is not permitted. The adoption of ASU 2016-01 is not expected to have a material effect on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).”. ASU 2016-02 requires lessees to recognize a lease liability and a right-to-use asset for all leases, including operating leases, with a term greater than twelve months, on its balance sheet. This ASU is effective in fiscal years beginning after December 15, 2018, with early adoption permitted, and requires a modified retrospective transition method. The Company is evaluating the requirements of ASU 2016-02 and its potential impact on the Company’s financial statements. The Company has leases primarily for property and equipment and is in the process of identifying and evaluating these leases for purposes of ASU 2016-02. For each of these leases, the term will be evaluated, including extension and renewal options as well as the lease payments. While the Company has not yet quantified the impact that the adoption of ASU 2016-02 will have on its consolidated financial statements, the Company expects to record assets and liabilities on its balance sheet upon adoption of this standard, which may be material. The Company will continue to provide enhanced disclosures as it continues its assessment.

In March 2016, the FASB issued ASU 2016-09, “Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. ASU 2016-09 simplifies accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, an option to recognize gross stock compensation expense with actual forfeitures recognized as they occur, and certain classifications on the statement of cash flows. The Company adopted the guidance effective January 1, 2017 on a prospective basis. Additionally, as required by ASU 2016-09, when calculating diluted earnings per share, excess tax benefits were excluded from the calculation of assumed proceeds since such amounts are recognized in the income statement. The Company applied the cash flow presentation requirements prospectively, and the 2016 statement of cash flows was not adjusted. ASU 2016-09 also allows an entity to elect as an accounting policy either to estimate the total number of awards for which the requisite service period will not be rendered or to account for forfeitures for service-based awards as they occur. The Company has elected to account for forfeitures as they occur.
In June 2016, the FASB issued ASU 2016-13, “Financial ~~Instruments—~~Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial ~~Instruments”.~~Instruments.” This ASU will require the measurement of all expected credit losses for financial assets, including trade receivables, held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years. The Company believes its adoption will not significantly impact the Company’s results of operations and financial position.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,” which eliminates the diversity in practice related to eight cash flow classification issues. The Company adopted this ASU in the first quarter of 2017 on a prospective basis. Adoption affected the classification of dividends received from equity method investees on the statement of cash flows, but did not have any other impact.
In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill ~~Impairment”.~~Impairment.” The new guidance eliminates Step 2 of the goodwill impairment testing which requires the fair value of individual assets and liabilities of a reporting unit to be determined when measuring goodwill impairment. The new guidance may result in different amounts of impairment that could be recognized compared to existing guidance. In addition, failing step 1 of the impairment test ~~where the carrying value of a reporting unit is compared to its fair value,~~ may not result in impairment under existing guidance. However, under the revised guidance, failing step 1 will always result in a goodwill impairment. ASU 2017-04 is to be applied prospectively for goodwill impairment testing performed in years beginning after December 15, 2019. The Company does not believe ~~the~~its adoption will significantly impact the Company’s results of operations or financial position.
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4. Revenue
On January 1, 2018, the Company adopted ASC 606 using the modified retrospective method for all contracts not completed as of the date of adoption. Results for reporting periods beginning on or after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period.
Under ASC 606, the Company accounts for revenue using the following steps:
● Identify the contract, or contracts, with a customer
● Identify the performance obligations in the contract
● Determine the transaction price
● Allocate the transaction price to the identified performance obligations
● Recognize revenue when, or as, the Company satisfies the performance obligations
The Company combines contracts with the same customer into a single contract for accounting purposes when the contracts are entered into at or near the same time and the contracts are negotiated as a single commercial package, consideration in one contract depends on the other contract, or the services are considered a single performance obligation. If an arrangement involves multiple performance obligations, the items are analyzed to determine the separate units of accounting, whether the items have value on a standalone basis and whether there is objective and reliable evidence of their standalone selling price. The total contract transaction price is allocated to the identified performance obligations based upon the relative standalone selling prices of the performance obligations. The standalone selling price is based on an observable price for services sold to other comparable customers, when available, or an estimated selling price using a cost plus margin approach. The Company estimates the amount of total contract consideration it expects to receive for variable arrangements by determining the most likely amount it expects to earn from the arrangement based on the expected quantities of services it expects to provide and the contractual pricing based on those quantities. The Company only includes some or a portion of variable consideration in the transaction price when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The Company considers the sensitivity of the estimate, its relationship and experience with the client and variable services being performed, the range of possible revenue amounts and the magnitude of the variable consideration to the overall arrangement.
As discussed in more detail below, revenue is recognized when a customer obtains control of promised goods or services under the terms of a contract and is measured as the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. The Company does not have any material extended payment terms as payment is due at or shortly after the time of the sale. Observable prices are used to determine the standalone selling price of separate performance obligations or a cost plus margin approach when one is not available. Sales, value-added and other taxes collected concurrently with revenue producing activities are excluded from revenue.
The Company recognizes contract assets or unbilled receivables related to revenue recognized for services completed but not yet invoiced to the clients. Unbilled receivables are recorded as accounts receivable when the Company has an unconditional right to contract consideration. A contract liability is recognized as deferred revenue when the Company invoices clients in advance of performing the related services under the terms of a contract. Deferred revenue is recognized as revenue when the Company has satisfied the related performance obligation.
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Deferred contract acquisition costs are included in other assets. Beginning January 1, 2018, with the adoption of ASC 606, the Company defers costs to acquire contracts, including commissions, incentives and payroll taxes, if they are incremental and recoverable costs of obtaining a customer contract with a term exceeding one year. Deferred contract costs are reported within other assets and amortized to selling expense over the contract term, which generally ranges from one to five years. The Company has elected to recognize the incremental costs of obtaining a contract with a term of less than one year as a selling expense when incurred. Prior to 2018, all contract acquisition costs were expensed as incurred. The Company recorded a transition adjustment of approximately $76 thousand increasing the opening balance of retained earnings, primarily related to the deferral and amortization of direct and incremental costs of obtaining contracts. The following table summarizes the changes in the Company’s contract asset balance during the three months ended March 31, 2018 (in thousands):
Deferred contract acquisition costs as of January 1, 2018 $ 76
Costs capitalized 10
Amortization (14 )
Impairment -
Deferred contract acquisition costs as of March 31, 2018 $ 72
The following tables summarize the impact the adoption of ASC 606 had on the Company’s consolidated financial statements (in thousands, except per share data):
Condensed Consolidated Balance Sheet:
As reported
March 31, 2018 Adjustments Balances
without
adoption of ASC 606
Total current assets $ 20,354 $ 146 $ 20,500
Total noncurrent assets 36,677 (14 ) 36,663
Total assets $ 57,031 $ 132 $ 57,163

Total current liabilities $ 10,702 $ 258 $ 10,960
Total noncurrent liabilities 6,171 - 6,171
Total liabilities 16,873 258 17,131

Retained earnings 21,861 (126 ) 21,735
Other stockholders’ equity 18,297 - 18,297
Total stockholders’ equity 40,158 (126 ) 40,032
Total liabilities and stockholders’ equity $ 57,031 $ 132 $ 57,163
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Condensed Consolidated Statement of Operations:
As reported for
the three
months ended
March 31, 2018 Adjustments Balances
without
adoption of ASC 606
Total net revenues $ 15,828 $ (57 ) $ 15,771
Total cost of revenues 12,978 (2 ) 12,976
Gross profit 2,850 (55 ) 2,795
Total selling and administrative expenses 5,934 (5 ) 5,929
Loss from operations (3,084 ) (50 ) (3,134 )
Other income 7 - 7
Loss before income taxes and equity method investment loss (3,077 ) (50 ) (3,127 )
Income tax expense 698 - 698
Equity method investment loss (10 ) - (10 )
Net loss $ (3,785 ) $ (50 ) $ (3,835 )
Net loss per share of common stock:
Basic $ (0.26 ) (0.00 ) $ (0.26 )
Diluted $ (0.26 ) (0.00 ) $ (0.26 )
The adoption of ASC 606 did not have any net impact on other comprehensive loss or cash flows.
The following table disaggregates the Company’s revenue by major source for the three months ended March 31, 2018:
Cinema Digital Media Other Eliminations Total
Screen system sales $ 4,005 $ - $ - $ - $ 4,005
Digital equipment sales 3,158 766 - (216 ) 3,708
Field maintenance and monitoring services 2,944 2,114 - (138 ) 4,920
Installation services 328 1,360 - - 1,688
Extended warranty sales 342 - - - 342
Other 672 477 16 - 1,165
Total $ 11,449 $ 4,717 $ 16 $ (354 ) $ 15,828
Screen system sales
The Company recognizes revenue on the sale of its screen systems when control of the screen is transferred to the customer, usually at time of shipment. However, revenue is recognized upon delivery for certain international shipments with longer shipping transit time because control does not transfer to the customer until delivery.
Digital equipment sales
The Company recognizes revenue on sales of digital equipment when the control of the equipment is transferred, which occurs at the time of shipment from the Company’s warehouse or drop-shipment from a third party. The cost of freight and shipping to the customer is recognized in cost of sales at the time of transfer of control to the customer.
Field maintenance and monitoring services
The Company sells service contracts that provide maintenance and monitoring services to Cinema and Digital Media customers. In the Cinema segment, these contracts are generally 12 months in length, while the term for service contracts in the Digital Media segment can be for multiple years. Revenue is recognized over the term of the agreement in proportion to the costs incurred in fulfilling performance obligations under the contract.
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The Company also performs time and materials-based maintenance and repair work for customers in the Cinema and Digital Media segments. Revenue is recognized at a point in time when the performance obligation has been fully satisfied.
Installation services
The Company performs installation services for both its Cinema and Digital Media customers and recognizes revenue upon completion of the installations.
Extended warranty sales
The Company sells extended warranties to its Cinema customers. When the Company is the primary obligor, revenue is recognized on a gross basis over the term of the extended warranty in proportion to the costs incurred in fulfilling performance obligations under the extended warranty. In third party extended warranty sales, the Company is not the primary obligor, and revenue is recognized on a net basis at the time of the sale.
At January 1, 2018, $0.8 million of unearned revenue associated with maintenance and monitoring services and extended warranty sales in which the Company is the primary obligor was reported in deferred revenue and customer deposits. During the three months ended March 31, 2018, $0.4 million of this balance was earned and recognized as revenue. At March 31, 2018, the unearned revenue amount was $0.8 million. The Company expects to recognize $0.7 million of unearned revenue amounts throughout the rest of 2018, and immaterial amounts each year from 2019 through 2023.
The following table disaggregates the Company’s revenue by the timing of transfer of goods or services to the customer for the three months ended March 31, 2018 (in thousands):
Cinema Digital Media Other Eliminations Total
Point in time $ 9,598 $ 2,529 $ 16 $ (354 ) $ 11,789
Over time 1,851 2,188 - - 4,039
Total $ 11,449 $ 4,717 $ 16 $ (354 ) $ 15,828
5. (Loss) Earnings Per Common Share

Basic (loss) earnings per share has been computed on the basis of the weighted average number of shares of common stock outstanding. Diluted (loss) earnings per share has been computed on the basis of the weighted average number of shares of common stock outstanding after giving effect to potential common shares from dilutive stock options and certain non-vested shares of restricted ~~stock.~~stock and restricted stock units. The following table provides the reconciliation between average shares used to compute basic and diluted (loss) earnings per share:

Three Months Ended June 30, Six Months Ended June 30, Three Months Ended March 31,
2017 2016 2017 2016 2018 2017
Weighted average shares outstanding (in thousands):
Basic weighted average shares outstanding 14,263 14,213 14,264 14,208 14,341 14,264
Dilutive effect of stock options and certain non-vested shares of restricted stock — 80 — 87 - 156
Diluted weighted average shares outstanding 14,263 14,293 14,264 14,295 14,341 14,420

For ~~each of~~ the three ~~and six~~ month ~~periods~~period ended ~~June 30, 2017,~~March 31, 2018, options to purchase ~~445,000~~490,000 shares of common stock were outstanding but were not included in the computation of diluted loss per share as the option’s exercise price was greater than the average market price of the common shares for ~~the~~ each period. An additional ~~156,606 and 176,479~~129,525 common stock equivalents related to options and restricted stock awards were excluded for the three ~~and six~~ months ended ~~June 30, 2017,~~March 31, 2018, respectively, as their inclusion would be anti-dilutive, thereby decreasing the net losses per share. For the three ~~and six~~ month ~~periods~~period ended ~~June 30, 2016,~~March 31, 2017, options to purchase ~~350,000 and 430,000~~385,000 shares of common stock ~~respectively,~~ were outstanding but were not included in the computation of diluted earnings per share as the option’s exercise price was greater than the average market price of the common shares for the respective periods. An additional 79,167 and 87,387 common stock equivalents related to options and restricted stock awards were excluded from the calculation of diluted net loss per share from discontinued operations for the three and six months ended June 30, 2016, respectively, as their inclusion would be anti-dilutive, thereby decreasing the net losses per share.
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5.6. Equity Method Investments

The following summarizes our equity method ~~investments:~~investments (dollars in thousands):

June 30, 2017 December 31, 2016
(dollars in thousands) March 31, 2018 December 31, 2017
Entity Carrying
Amount Economic
Interest Carrying
Amount Economic
Interest Carrying Amount Economic Interest Carrying Amount Economic Interest
RELM Wireless Corporation $ 4,328 8.3 % $ 4,382 8.3 % $ 4,102 8.3 % $ 4,473 8.3 %
Itasca Capital, Ltd. 5,870 32.3 % 3,368 32.3 % 5,814 32.3 % 5,870 32.3 %
1347 Property Insurance Holdings, Inc. 7,936 17.4 % 5,348 12.1 % 7,917 17.4 % 7,710 17.4 %
Total $ 18,134 $ 13,098 $ 17,833 $ 18,053

The following summarizes the (loss) income of equity method investees reflected in the Statement of ~~Operations:~~Operations (in thousands):

Three Months Ended June 30, Six Months Ended June 30,
2017 2016 2017 2016 Three months ended March 31,
Entity (in thousands) 2018 2017
RELM Wireless Corporation $ (105 ) $ — $ (97 ) $ 41 $ (354 ) $ 8
Itasca Capital, Ltd. (150 ) — 2,311 — 103 2,461
1347 Property Insurance Holdings, Inc. 43 — 55 — 241 12
Total (loss) income $ (212 ) $ — $ 2,269 $ 41
Total $ (10 ) $ 2,481
RELM Wireless Corporation (“RELM”) is a publicly traded company that designs, manufactures and markets two-way land mobile radios, repeaters, base stations and related components and subsystems. The Company’s Chief Executive Officer is chairman of the board of directors of RELM, and controls entities that, when combined with the Company’s ownership in RELM, own greater than 20% of RELM, providing the Company with significant influence over RELM, but not controlling interest. The Company received dividends of $23 thousand and $0.1 million ~~and $0~~ for the three month periods ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016, respectively. The Company received dividends of $0.2 million and $0 for the six month periods ended June 30, 2017 and 2016,~~ respectively. Based on quoted market prices, the market value of the Company’s ownership in RELM was ~~$4.3~~$4.5 million at ~~June 30, 2017.~~March 31, 2018.

Itasca Capital, Ltd. (“Itasca”) is a publicly traded Canadian company that is an investment vehicle seeking transformative strategic investments. The Company’s Chief Executive Officer is a member of the board of directors of Itasca. This board seat, combined with the Company’s 32.3% ownership of Itasca, provide the Company with significant influence over Itasca, but not controlling interest. The Company did not receive dividends from Itasca during the three ~~and six~~ month periods ended ~~June 30, 2017~~March 31, 2018 or ~~2016.~~2017. Based on quoted market prices, the market value of the Company’s ownership in Itasca was ~~$3.8~~$3.5 million at ~~June 30, 2017.~~March 31, 2018.

~~As of December 31, 2016, the Company owned 12.1% of~~ 1347 Property Insurance Holdings, Inc. (“PIH”) ~~and purchased shares increasing its ownership to 17.4% during the six months ended June 30, 2017 for an additional $2.5 million. PIH~~ is a publicly traded company that provides property and casualty insurance in the States of Louisiana, Texas and Florida. The Company’s Chief Executive Officer ~~was named to~~is a member of the board of directors of PIH, ~~in December 2016. This board seat~~ and ~~the Chief Executive Officer’s control of other~~controls entities that, ~~own shares of PIH,~~when combined with the Company’s ~~17.4%~~ ownership in PIH, own greater than 20% of PIH, ~~provide~~providing the Company with significant influence over PIH, but not controlling interest. The Company did not receive dividends from PIH during the three ~~and six~~ month periods ended ~~June 30, 2017 or 2016.~~March 31, 2018 and 2017. Based on quoted market prices, the market value of the Company’s ownership in PIH was ~~$8.3~~$7.4 million at ~~June 30, 2017.~~March 31, 2018.
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As of ~~June 30, 2017, our~~March 31, 2018, the Company’s retained earnings included undistributed earnings from our equity method investees of ~~$1.9~~$1.5 million.

The summarized financial information presented below reflects the financial information of the Company’s ~~significant~~ equity method ~~investee, Itasca,~~investees for the ~~six~~three months ended ~~March~~December 31, 2017, consistent with the Company’s recognition of the results of its equity method investments on a one-quarter lag. ~~The summarized financial information is presented only for the periods when the Company owned its investment.~~

For the six months ended March 31, 2017
For the three months ended December 31, 2017 2016
(in thousands) (in thousands)
Revenue $ — $ 20,576 $ 15,358
Gross profit $ —
Operating loss from continuing operations $ (114 ) $ (2,034 ) $ 2,590
Net income $ 7,207 ⁽¹⁾ $ (2,557 ) $ 9,351
~~(1) Net income primarily related to unrealized gains on investments.~~

6.7. Intangible Assets

Intangible assets consisted of the following at ~~June 30, 2017:~~March 31, 2018 (dollars in thousands):

Useful
life
Gross Accumulated
amortization Net Useful life Gross Accumulated Amortization Net
(Years) (in thousands) (Years)
Intangible assets not yet subject to amortization:
Software in development $ 1,273 $ — $ 1,273 $ 877 $ - $ 877
Intangible assets subject to amortization:
Software in service 5 2,496 (285 ) 2,211 5 3,718 (768 ) 2,950
Product formulation 10 470 (313 ) 157 10 473 (353 ) 120
Total $ 4,239 $ (598 ) $ 3,641 $ 5,068 $ (1,121 ) $ 3,947
Intangible assets consisted of the following at December 31, ~~2016:~~2017 (dollars in thousands):

Useful
life
Gross Accumulated
amortization Net Useful life Gross Accumulated Amortization Net
(Years) (in thousands) (Years)
Intangible assets not yet subject to amortization:
Software in development $ 508 $ — $ 508 $ 1,243 $ - $ 1,243
Intangible assets subject to amortization:
Software in service 5 1,764 (93 ) 1,671 5 3,191 (597 ) 2,594
Product formulation 10 454 (276 ) 178 10 486 (351 ) 135
Total $ 2,726 $ (369 ) $ 2,357 $ 4,920 $ (948 ) $ 3,972

Amortization expense relating to intangible assets was $0.2 million and ~~insignificant, respectively,~~$0.1 million for the ~~six~~three months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016.~~respectively.
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The following table shows the Company’s estimated future amortization expense related to intangible assets currently subject to amortization for the next five ~~years.~~years (in thousands):

Amount Amount
(in thousands) ��
Remainder 2017 $ 286
2018 561
Remainder 2018 $ 639
2019 550 840
2020 541 831
2021 405 670
2022 86
Thereafter 25 4
Total $ 2,368 $ 3,070

7.8. Goodwill

The following represents a summary of changes in the Company’s carrying amount of goodwill for the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018 (in thousands):

Balance as of December 31, 2016 $ 889
Foreign currency translation 31
Balance as of June 30, 2017 $ 920
Balance as of December 31, 2017 $ 952
Foreign currency translation (26 )
Balance as of March 31, 2018 $ 926

8.9. Warranty Reserves

In most instances, the Company’s digital projection products are covered by the manufacturing firm’s original warranty; however, for certain customers the Company may grant warranties in excess of the manufacturer’s ~~warranty for digital products.~~warranty. In addition, the Company provides warranty coverage on screens it manufactures. The Company accrues for these costs at the time of sale. The following table summarizes warranty activity for the three ~~and six~~ months ended ~~June 30,~~March 31, 2018 and 2017 ~~and 2016:~~(in thousands):

Three Months Ended
June 30, Six Months Ended
June 30,
2017 2016 2017 2016 Three Months Ended March 31,
(in thousands) 2018 2017
Warranty accrual at beginning of period $ 462 $ 314 $ 645 $ 310 $ 521 $ 645
Charged to expense 128 191 175 348 84 47
Claims paid, net of recoveries (142 ) (123 ) (373 ) (281 ) (30 ) (231 )
Foreign currency adjustment 9 (2 ) 10 3 (11 ) 1
Warranty accrual at end of period $ 457 $ 380 $ 457 $ 380 $ 564 $ 462

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~~9. Debt~~
~~Long-term debt~~10. Debt

The Company’s ~~long-term~~ debt consists of the following (in thousands):

June 30, 2017 December 31, 2016 March 31, 2018 December 31, 2017
Short-term debt:
Revolving line of credit $ 500 $ 500
Current portion of long-term debt 65 65
Total short-term debt 565 565
Long-term debt:
$2 million term loan $ 1,998 $ — 1,951 1,968
Less: current portion (63 ) — (65 ) (65 )
Less: unamortized debt issuance costs (37 ) — (31 ) (33 )
Long-term debt $ 1,899 $ —
Total long-term debt 1,855 1,870
Total short-term and long-term debt $ 2,420 $ 2,435

On April 27, 2017, the Company entered into a debt agreement with a bank consisting of 1) a $2$2.0 million five-year term loan secured by a first lien deed of trust on the Company’s Alpharetta, GA facility, bearing interest at a fixed rate of 4.5% and payable in equal monthly installments of principal and interest calculated based on a 20-year amortization schedule with a final balloon payment of approximately $1.7 million due on May 10, 2022 and 2) a line of credit of up to $1$1.0 million secured by a second lien deed of trust on the Company’s Alpharetta, GA facility, bearing interest at the Prime Rate published in the Wall Street Journal plus 0.25% (5.00% at March 31, 2018) and with a term ending May 10, 2018. On April 23, 2018, the Company entered into a one-year extension of the maturity date of the line of credit through May 10, 2019. The debt agreement requires the Company to maintain a ratio of total liabilities to tangible net worth not in excess of 3:1 and maintain minimum liquidity of $2$2.0 million. The Company was in compliance with its debt covenants as of ~~June 30, 2017. There were no borrowings outstanding on the line of credit as of June 30, 2017.~~March 31, 2018. The Company’s Chairman and Chief Executive Officer is also a member of the bank’s board of directors.

On September 5, 2017, the Company’s Canadian subsidiary, Strong/MDI, entered into a demand credit agreement with a bank consisting of a revolving line of credit for up to CDN$3.5 million subject to a borrowing base requirement, a 20-year installment loan for up to CDN$6.0 million and a 5-year installment loan for up to CDN$500,000. Amounts outstanding under the line of credit are payable on demand and will bear interest at the prime rate established by the lender. Amounts outstanding under the installment loans will bear interest at the prime rate plus 0.5% and are payable in monthly installments, including interest, over their respective borrowing periods. The lender may also demand repayment of the installment loans at any time. The Strong/MDI credit facilities are secured by a lien on Strong/MDI’s Quebec, Canada facility and substantially all of Strong/MDI’s assets. The credit agreement requires Strong/MDI to maintain a ratio of liabilities to “effective equity” (tangible stockholders’ equity, less amounts receivable from affiliates and equity method investments) not exceeding 2 to 1, a current ratio (excluding amounts due from related parties) of at least 1.5 to 1 and minimum “effective equity” of CDN$8.0 million. There were no borrowings outstanding at March 31, 2018 on any of the Strong/MDI credit facilities, as Strong/MDI had not yet drawn on the facilities. On April 24, 2018, the Company borrowed CDN$3.5 million on the 20-year installment loan. Strong/MDI was in compliance with its debt covenants as of March 31, 2018.
19
Scheduled ~~long-term debt~~ repayments are as follows for the Company’s long-term debt outstanding as of March 31, 2018 (in thousands):

Remainder of 2017 $ 31
2018 64
2019 68
2020 70
2021 74
Thereafter 1,691
Total $ 1,998
Remainder of 2018 $ 48
2019 68
2020 70
2021 74
2022 1,691
Thereafter -
Total $ 1,951
~~Short-term Debt~~
Short-term debt at June 30, 2017 consists of a $2.5 million progress payment note to facilitate the lessor’s purchase of equipment to be leased by the Company. The total purchase price for the equipment is expected to be approximately $5.6 million. The lessor made a progress payment of $2.5 million to the seller of the equipment on June 26, 2017, which represents the principal amount under the note and was recorded as a deposit on equipment to be leased on the condensed consolidated balance sheet. The note bears interest at a rate of 3.25% and will be considered repaid when the lessor pays the remaining balance of the purchase price to the seller of the equipment and the Company executes a lease for the equipment under a master lease agreement. Any outstanding principal balance on the note not considered repaid on or before August 31, 2017 will become due and payable on demand.

~~10.~~11. Income Taxes

In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income. The Company considers the scheduled reversal of taxable temporary differences, projected future taxable income and tax planning strategies in making this assessment. A cumulative loss in a particular tax jurisdiction in recent years is a significant piece of evidence with respect to the realizability that is difficult to overcome. Based on the available objective evidence, including recent updates to the taxing jurisdictions generating income, the Company concluded that a valuation allowance should be recorded against all of the Company’s U.S. tax jurisdiction deferred tax assets as of ~~June 30, 2017~~March 31, 2018 and December 31, ~~2016.~~2017.

In December 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was signed into law in the United States. The law includes significant changes to the United States corporate income tax system, including a federal corporate rate reduction and the transition of the United States from a worldwide tax system to a territorial tax system. As part of the transition to a territorial tax system, the 2017 Tax Act requires taxpayers to calculate a one-time transition tax based on the deemed repatriation of undistributed earnings of foreign subsidiaries. The Company is currently analyzing the 2017 Tax Act, and in certain areas, has ~~completed~~made provisional estimates of the ~~examination for Federal purposes for~~effects on our consolidated financial statements and tax disclosures, including the ~~2011 fiscal year with no changes.~~ amount of the repatriation tax and changes to existing deferred tax balances.
The Company is subject to ~~examination~~possible examinations not yet initiated for Federal purposes for fiscal years ~~2013,~~ 2014 ~~2015, and 2016.~~through 2017. In most cases, the Company is subject to possible examinations by state or local jurisdictions based on the particular jurisdiction’s statute of limitations.
~~11.~~12. Stock Compensation

The Company recognizes compensation expense for all stock-based payment awards made to employees and directors based on ~~their~~ estimated grant date fair values. Stock-based compensation expense included in selling and administrative expenses approximated ~~$0.2~~$0.3 million and $0.1 million for the three months ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016, respectively, and $0.3 million and $0.2 million, respectively, for the six months ended June 30, 2017 and 2016,~~ respectively.
~~Equity Compensation Plans~~

The Company’s 2010 Long-Term Incentive Plan (“2010 Plan”) provided the Compensation Committee of the Board of Directors with the discretion to grant stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares, and performance units. Vesting terms varied with each grant and could be subject to vesting upon a “change in control” of the Company.
The Ballantyne Strong, Inc. 2014 Non-Employee Directors’ Restricted Stock Plan (the “2014 Non-Employee Plan”) provided for the award of restricted shares to outside directors. Shares issued under the 2014 Non-Employee Plan vested the day preceding the Company’s Annual Meeting of Stockholders in the year following issuance. The 2010 Plan and the 2014 Non-Employee Plan were replaced during the second quarter of 2017 by the 2017 Omnibus Equity Compensation Plan (“2017 Plan”)~~, and therefore, no additional awards will be granted under the 2010 Plan or the 2014 Non-Employee Plan.~~
~~The 2017 Plan~~ was approved by the Company’s ~~shareholders at the annual meeting on June 15, 2017,~~stockholders and provides the Compensation Committee of the Board of Directors with the discretion to grant stock options, stock appreciation rights, restricted shares, restricted stock units, performance shares, performance units and other ~~share-based~~stock-based awards and cash-based awards. Vesting terms vary with each grant and may be subject to vesting upon a “change in control” of the Company. The total number of shares ~~reserved~~authorized for issuance under the 2017 Plan is 1,371,189 ~~shares.~~shares, with 758,354 shares remaining available for grant at March 31, 2018.
20

Options

The Company granted a total of ~~395,000~~387,500 and ~~100,000~~285,000 options during the ~~six~~three month periods ended ~~June 30,~~March 31, 2018 and 2017, ~~and 2016,~~ respectively. Options to purchase shares of common stock were granted with exercise prices equal to the fair value of the common stock on the date of grant.

The weighted average grant date fair value of stock options granted during the ~~six~~three month periods ended ~~June 30,~~March 31, 2018 and 2017 was $1.82 and ~~2016 was $2.42 and $1.42,~~$2.41, respectively. The fair value of each stock option granted was estimated on the date of grant using a Black-Scholes valuation model with the following weighted average assumptions:

2017 2016 2018 2017
Expected dividend yield at date of grant 0.00 % 0.00 % 0.00 % 0.00 %
Risk-free interest rate 2.01 % 1.35 % 2.49 % 2.04 %
Expected stock price volatility 34.77 % 32.26 % 35.65 % 34.71 %
Expected life of options (in years) 6.0 6.0 6.0 6.0

The risk-free interest rate assumptions were based on the U.S. Treasury yield curve in effect at the time of the grant. ~~During 2017, the expected~~Expected volatility ~~was~~is based on historical daily price changes of the Company’s stock for six years prior to the date of grant. ~~During 2016, the Company used a one year period to calculate volatility, but updated this assumption in the current year to align the expected volatility with the expected life of the options.~~ The expected life of options is the average number of years the Company estimates that options will be outstanding.
The following table summarizes stock option activity for the ~~six~~three months ended ~~June 30, 2017:~~March 31, 2018:

Number of
Options

Weighted
Average
Exercise Price
Per Share
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic Value
(in thousands)
Number of Options Weighted Average Exercise Price Per Share Weighted Average Remaining Contractual Term Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2016 545,300 $ 4.78 9.68 $ 1,757
Outstanding at December 31, 2017 930,300 $ 5.63 8.7 $ 150
Granted 395,000 6.53 387,500 4.70
Exercised (7,000 ) 4.70 - -
Forfeited (10,000 ) 6.87 (32,000 ) 5.59
Outstanding at June 30, 2017 923,300 $ 5.54 9.14 $ 1,124
Exercisable at June 30, 2017 141,300 $ 4.33 8.10 $ 335
Expired (8,000 ) 5.41
Outstanding at March 31, 2018 1,277,800 $ 5.29 8.8 $ 64
Exercisable at March 31, 2018 269,300 $ 4.88 7.9 $ 31

The aggregate intrinsic value in the table above represents the total that would have been received by the option holders if all in-the-money options had been exercised and sold on ~~June 30, 2017.~~the date indicated.

As of ~~June 30, 2017, 782,000~~March 31, 2018, 1,008,500 stock option awards were non-vested. Unrecognized compensation cost related to stock option awards was approximately ~~$1.5~~$1.9 million, which is expected to be recognized over a weighted average period of ~~4.3~~4.0 years.

Restricted Stock

The Company estimates the fair value of restricted stock awards based upon the market price of the underlying common stock on the date of grant. As of ~~June 30, 2017,~~March 31, 2018, the total unrecognized compensation cost related to non-vested restricted stock awards was approximately ~~$0.8~~$1.1 million, which is expected to be recognized over a weighted average period of ~~2.1~~2.4 years.
21

The following table summarizes restricted stock share activity for the ~~six~~three months ended ~~June 30, 2017:~~March 31, 2018:

Number of Restricted
Stock Shares
Weighted Average Grant
Price Fair Value Number of Restricted Stock Shares Weighted Average Grant Price Fair Value
Non-vested at December 31, 2016 58,295 $ 4.77
Non-vested at December 31, 2017 85,000 $ 6.50
Granted 85,000 6.50 - -
Shares vested (43,295 ) 4.92 (28,333 ) 6.50
Shares forfeited — — - -
Non-vested at June 30, 2017 100,000 $ 6.17
Non-vested at March 31, 2018 56,667 $ 6.50

The following table summarizes restricted stock unit activity for the ~~six~~three months ended ~~June 30, 2017:~~March 31, 2018:

Number of Restricted
Stock Units

Weighted Average Grant
Price Fair Value
Number of Restricted Stock Units Weighted Average Grant Price Fair Value
Non-vested at December 31, 2016 13,750 $ 4.24
Non-vested at December 31, 2017 35,835 $ 6.45
Granted 30,835 6.81 147,500 4.70
Shares vested — — - -
Shares forfeited — — - -
Non-vested at June 30, 2017 44,585 $ 6.02
Non-vested at March 31, 2018 183,335 $ 5.04

~~12.~~13. Commitments, Contingencies and Concentrations

Litigation

~~In the ordinary course of business operations, we are~~The Company is involved, from time to time, in certain legal ~~disputes.~~disputes in the ordinary course of business operations. No such disputes, individually or in the aggregate, are expected to have a material effect on ~~our~~the Company’s business or financial condition.

16
Concentrations

The Company’s top ten customers accounted for approximately ~~53.3% and 50.7%~~56% of total consolidated net revenues for the three ~~and six~~ months ended ~~June 30, 2017, respectively.~~March 31, 2018. Trade accounts receivable from these customers represented approximately ~~42.7%~~37% of net consolidated receivables at ~~June 30, 2017.~~March 31, 2018. While the Company believes its relationships with such customers are stable, most arrangements are made by purchase order and are terminable at will by either party. A significant decrease or interruption in business from the Company’s significant customers could have a material adverse effect on the Company’s business, financial condition and results of operations. The Company could also be adversely affected by such factors as changes in foreign currency rates and weak economic and political conditions in each of the countries in which the Company sells its products.

Financial instruments that potentially expose the Company to a concentration of credit risk principally consist of accounts receivable. The Company sells product to a large number of customers in many different geographic regions. To minimize credit ~~concentration~~ risk, the Company performs ongoing credit evaluations of its customers’ financial condition.
Leases
The Company and its subsidiaries lease plant and office facilities, furniture, autos and equipment under operating leases expiring through ~~2021.~~2022. These leases generally contain renewal options and the Company expects to renew or replace certain of these leases in the ordinary course of business.
22

The Company’s future minimum lease payments for leases at ~~June 30, 2017~~March 31, 2018 are as follows:

Capital
Leases Operating
Leases Capital Leases Operating Leases
(In thousands) (in thousands)
Remainder 2017 $ 131 $ 248
2018 246 469
Remainder 2018 $ 185 $ 1,342
2019 132 442 116 1,768
2020 — 264 - 1,543
2021 — 152 - 1,415
2022 - 1,081
Thereafter — — - -
Total minimum lease payments $ 509 $ 1,575 $ 301 $ 7,149
Less: Amount representing interest (25 ) (10 )
Present value of minimum lease payments 484 291
Less: Current maturities (240 ) (226 )
Capital lease obligations, net of current portion $ 244 $ 65

~~13.~~14. Business Segment Information

As of ~~June 30, 2017,~~March 31, 2018, the Company’s operations were conducted principally through two business segments: Cinema and Digital Media. The Cinema ~~operations include~~segment provides a full range of product and service solutions primarily for the ~~sale~~theater exhibition industry, including a wide spectrum of premier audio-visual products and accessories such as digital projectors, state of the art projection ~~equipment,~~ screens, servers, library management systems, menu boards, flat panel displays, and sound ~~systems. Digital Media operations include the delivery of end to end digital signage solutions, video communication solutions, content creation~~systems, as well as network monitoring and ~~management and~~on-site service ~~of digital signage and digital~~for cinema equipment. The ~~Company allocates resources~~Digital Media segment develops and delivers solutions for out-of-home messaging, advertising and communication and provides managed services including monitoring of networked equipment. While there is digital signage equipment sold within this segment, the primary focus of this segment is providing solutions and services to business segments and evaluates the performance of these segments based upon reported segment operating profit. The Company records intersegment sales at cost and has eliminated all significant intersegment sales in consolidation. The results of discontinued operations are excluded from the Cinema segment information below.our customers.

1723

Summary by Business Segments

Three Months Ended
June 30,

Six Months Ended
June 30,

(In thousands) 2017 2016 2017 2016

Net revenue
Cinema $ 9,633 $ 11,288 $ 18,934 $ 21,015
Digital Media 9,777 9,753 18,430 17,499
Total segment net revenue 19,410 21,041 37,364 38,514
Eliminations (10 ) (483 ) (39 ) (842 )
Total net revenue $ 19,400 $ 20,558 $ 37,325 $ 37,672

Operating income (loss)
Cinema $ 2,235 $ 3,066 $ 4,276 $ 6,113
Digital Media (238 ) 831 (712 ) 945
Total segment operating income 1,997 3,897 3,564 7,058
Unallocated general and administrative expenses (2,830 ) (1,934 ) (4,994 ) (3,982 )
Other (expense) income
Interest, net (28) — (16 ) —
Cinema – foreign currency transaction loss (137 ) (154 ) (222 ) (1,039 )
Digital Media – foreign currency transaction (loss) gain 30 (26 ) 118 34
Cinema - excess distribution from joint venture — 502 — 502
Cinema 7 9 10 50
Digital Media — (3 ) — (7 )
Change in value of marketable securities – Corporate asset — 116 — (366 )
Total other (expense) income (128 ) 444 (110 ) (826 )
(Loss) earnings before income taxes and equity method investment (loss) income $ (961 ) $ 2,407 $ (1,540 ) $ 2,250
Three Months Ended March 31,
(In thousands) 2018 2017
Net revenues
Cinema $ 11,449 $ 12,689
Digital Media 4,717 5,345
Other 16 -
Total segment net revenues 16,182 18,034
Eliminations (354 ) (108 )
Total net revenues 15,828 17,926

Gross profit (loss)
Cinema 3,385 3,616
Digital Media (551 ) 823
Other 16 -
Total gross profit 2,850 4,439

Operating income (loss)
Cinema 2,325 2,679
Digital Media (2,496 ) (1,113 )
Other (113 ) (117 )
Total segment operating (loss) income (284 ) 1,449
Unallocated general and administrative expenses (2,800 ) (2,047 )
Loss from operations (3,084 ) (598 )
Other income 7 20
Loss before income taxes and equity method investment (loss) income $ (3,077 ) $ (578 )

(In thousands) June 30, 2017 December 31, 2016 March 31, 2018 December 31, 2017
Identifiable assets, excluding assets held for sale
Identifiable assets
Cinema $ 25,953 $ 29,881 $ 24,845 $ 27,358
Digital Media 23,873 19,272 14,353 13,603
Corporate assets 18,134 13,098
Corporate 17,833 18,053
Total $ 67,960 $ 62,251 $ 57,031 $ 59,014

1824

Summary by Geographical Area

Three Months Ended June 30, Six Months Ended June 30, Three Months Ended March 31,
(In thousands) 2017 2016 2017 2016 2018 2017
Net revenue
United States $ 14,884 $ 16,309 $ 29,218 $ 29,541 $ 12,830 $ 14,393
Canada 1,400 1,220
Mexico 556 356
China 1,431 1,843 2,896 2,798 541 1,466
Latin America 520 593 804 975 270 284
Canada 1,787 1,172 3,007 2,277
Mexico 383 447 739 1,344
Europe 79 119 195 592 158 116
Asia (excluding China) 212 17 278 25 73 72
Other 104 58 188 120 - 19
Total $ 19,400 $ 20,558 $ 37,325 $ 37,672 $ 15,828 $ 17,926

(In thousands) June 30, 2017 December 31, 2016 March 31, 2018 December 31, 2017
Identifiable assets, excluding assets held for sale
Identifiable assets
United States $ 46,003 $ 40,255 $ 38,325 $ 37,230
Canada 21,957 21,996 18,706 21,784
Total $ 67,960 $ 62,251 $ 57,031 $ 59,014

Net revenues by business segment are to unaffiliated customers. Identifiable assets by geographical area are based on location of facilities. Net sales by geographical area are based on destination of sales.
15. Subsequent Event
On April 27, 2018, the Company executed a definitive agreement for a sale-leaseback of its Alpharetta, Georgia office facility. The Company agreed to sell the Alpharetta facility for $7.0 million in cash and enter into a 10-year leaseback of the facility for rent in the amount of $600,000 per year, escalating at the rate of 2% per year. In addition, the Company agreed to issue 100,000 warrants to the buyer or its designee to purchase Company stock, consisting of 25,000 warrants at each of $10, $12, $14 and $16 purchase prices per share. The warrants will have a 10-year maturity. The closing of the transaction is expected to occur within 30 days after the completion of a 60-day due diligence period and satisfaction of customary contingencies. Upon closing of the sale-leaseback transaction, the Company’s term loan and revolving line of credit that are currently secured by the Alpharetta facility will be repaid and the related debt agreement would be terminated. The Company expects to receive net proceeds of approximately $4.0 million on the sale-leaseback after repayment of the loans.
1925
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this report. Management’s discussion and analysis contains not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Statements that are not historical are forward-looking and reflect expectations for future Company performance. For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve a number of risks and uncertainties, including but not limited to those discussed in the “Risk Factors” section contained in Item 1A in our Annual Report on Form ~~10-K/A~~10-K for the fiscal year ended December 31, ~~2016~~2017 and the following risks and uncertainties: the Company’s ability to expand its revenue streams, ~~to compensate for the lower demand for its digital cinema products and installation services,~~ potential interruptions of supplier relationships or higher prices charged by suppliers, the Company’s ability to successfully compete and introduce enhancements and new features that achieve market acceptance and that keep pace with technological developments, the Company’s ability to successfully execute its ~~investment~~capital allocation strategy, the Company’s ability to retain or replace its significant customers, the impact of a challenging global economic environment or a downturn in the markets, economic and political risks of selling products in foreign countries, risks of non-compliance with U.S. and foreign laws and regulations, cybersecurity risks and risks of damage and interruptions of information technology systems, the Company’s ability to retain key members of management and successfully integrate new executives, ~~acquisition-related risks,~~the Company’s ability to complete acquisitions, strategic investments, entry into new lines of business, divestitures, mergers or other transactions on acceptable terms or at all, the Company’s ability to assert its intellectual property rights, the impact of natural disasters and other catastrophic events, the adequacy of insurance and the impact of having a controlling stockholder. Given the risks and uncertainties, readers should not place undue reliance on any forward-looking statement and should recognize that the statements are predictions of future results which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described herein, as well as others not now anticipated. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Except where required by law, the Company assumes no obligation to update forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements.

Overview

Ballantyne Strong, Inc. (“BTN”, “Ballantyne”, “the Company”, “we”, “our”, and “us”) is a holding company with diverse business activities focused on serving the cinema, retail, financial, advertising and government markets. The Company and its subsidiaries design, integrate and install technology solutions for a broad range of applications; develop and deliver out-of-home messaging, advertising and communications; manufacture projection screens; and provide managed services including monitoring of networked equipment to our customers. We add value through our design, engineering, manufacturing excellence and customer service.

We conduct our operations through two primary business segments: Cinema and Digital Media. The Cinema segment provides a full range of product solutions primarily for the theater exhibition industry, including a wide spectrum of premier audio-visual products and accessories such as digital projectors, state of the art projection screens, servers, library management systems, menu boards, flat panel displays and sound systems. The Digital Media segment delivers solutions and services across two primary markets: digital out-of-home and ~~cinema. While there is digital signage and cinema equipment sold within this segment, the primary focus of this segment is providing solutions and services to our customers.~~enterprise video.

Our segments were determined based on the manner in which management organizes segments for making operating decisions and assessing performance. Approximately ~~51%~~71% of our revenues for the ~~six~~three months ended ~~June 30, 2017~~March 31, 2018 were from Cinema and approximately ~~49%~~29% were from Digital Media. Additional information related to our reporting segments can be found in the notes to the condensed consolidated financial statements.

On June 23, 2016, the Company’s Board of Directors approved a plan to pursue a sale of the operations conducted by its subsidiaries SWBTI and SWI (the “China Operations”) which have historically been included in the Cinema segment. The purpose of the plan was to focus the efforts of the Company on the business units that have opportunities for higher return on invested capital. We reflected the results of the China Operations as discontinued operations for all periods presented. The assets and liabilities of the China Operations have been reclassified as assets and liabilities held for sale in the condensed consolidated balance sheets for all periods presented.
26

On November 4, 2016, the Company sold SWBTI to GABO Filter, Inc. for total proceeds of $0.4 million. As a result of this sale the Company recorded a loss on disposal of discontinued operations of approximately $0.6 million in the fourth quarter of 2016, which was included in net income from discontinued operations. The sale of SWI was completed on May 17, 2017 for total proceeds of $0.1 million. We recorded an insignificant gain on the sale of the business.
Results of Operations:

Three Months Ended ~~June 30, 2017~~March 31, 2018 Compared to the Three Months Ended ~~June 30, 2016~~March 31, 2017

Revenues

Net revenues during the ~~three months~~quarter ended ~~June 30, 2017~~March 31, 2018 decreased ~~5.6%~~11.7% to ~~$19.4~~$15.8 million from ~~$20.6~~$17.9 million during the ~~three months~~quarter ended ~~June 30, 2016.~~March 31, 2017.

Three Months Ended
June 30,
Three Months Ended March 31,
2017 2016 2018 2017 $ Change % Change
(In thousands) (dollars in thousands)
Cinema $ 9,633 $ 11,288 $ 11,449 $ 12,689 $ (1,240 ) (9.8 )%
Digital Media 9,777 9,753 4,717 5,345 (628 ) (11.7 )%
Other 16 - 16 N/A
Total segment revenues 19,410 21,041 16,182 18,034 (1,852 ) (10.3 )%
Eliminations (10 ) (483 ) (354 ) (108 ) (246 ) 227.8 %
Total net revenues $ 19,400 $ 20,558 $ 15,828 $ 17,926 $ (2,098 ) (11.7 )%

Cinema

Sales of ~~cinema~~Cinema products and services decreased ~~14.6%~~9.8% to ~~$9.6~~$11.4 million in the ~~second~~first quarter of ~~2017~~2018 from ~~$11.3~~$12.7 million in the ~~second~~first quarter of ~~2016. This~~2017. The decrease was driven ~~by decreased sales of projectors, digital parts, and warranties, partially offset~~primarily by a ~~slight increase~~decrease in ~~screen sales. We expect cinema revenues to further decrease~~lamp sales, as we terminated our distributorship for certain cinema lamp products in July 2017 due to the very low margins earned on these products. ~~The lamp products~~Smaller decreases in sales of screens, screen support systems and projectors were ~~expected to generate approximately $3 million~~offset by increases in ~~revenues during the second half~~sales of ~~2017.~~audio equipment, displays and installation services.

Digital Media

Sales of ~~digital media~~Digital Media products and services ~~were essentially flat at $9.8~~decreased 11.7% to $4.7 million in the ~~second~~first quarter of ~~2017 and 2016. Increases~~2018 from $5.3 million in the first quarter of 2017. Decreased sales of digital signage equipment ~~and~~was partially offset by increases in sales of installation services ~~were offset by decreases in recurring~~and digital signage as a service ~~contract revenue.~~(“DSaaS”).

Export Revenues

Sales outside the United States (primarily from the ~~cinema~~Cinema segment) ~~increased~~decreased to ~~$4.5~~$3.0 million in the ~~second~~first quarter of ~~2017~~2018 from ~~$4.2~~$3.5 million a year ago ~~resulting~~due primarily ~~from~~to decreased sales in China, partially offset by increased sales in Canada ~~partially offset by decreased sales in China.~~and Mexico. Export sales are sensitive to worldwide economic and political conditions that lead to volatility. Certain areas of the world are more cost conscious than the U.S. market and there are instances where our products are priced higher than local manufacturers, making it more difficult to generate sufficient profit to justify selling into these regions. Additionally, foreign exchange rates and excise taxes sometimes make it difficult to market our products overseas at reasonable selling prices.

27
Gross Profit

~~Consolidated~~Gross profit during the quarter ended March 31, 2018 decreased 35.8% to $2.9 million from $4.4 million during the quarter ended March 31, 2017.
Three Months Ended March 31,
2018 2017 $ Change % Change
(dollars in thousands)
Cinema $ 3,385 $ 3,616 $ (231 ) (6.4 )%
Digital Media (551 ) 823 (1,374 ) (167.0 )%
Other 16 - 16 N/A
Total gross profit $ 2,850 $ 4,439 $ (1,589 ) (35.8 )%
Cinema
Gross profit in the Cinema segment was $3.4 million or 29.6% of revenues in the first quarter of 2018 compared to $3.6 million or 28.5% of revenues in the first quarter of 2017. The decrease in gross margin dollars was driven by lower revenues as described above, partially offset by slightly higher margins as a percentage of revenues. Favorable product mix in sales of cinema equipment due to the termination of the low margin cinema lamp distributorship last year was partially offset by unfavorable product mix in screen sales, as sales of lower margin screens made up a larger percentage of total revenues.
Digital Media
Gross loss in the Digital Media segment was $0.6 million in the first quarter of 2018 compared to gross profit ~~was $5.3~~of $0.8 million in the first quarter of 2017. The decrease in gross margin dollars was driven by the fixed costs associated with our new advertising operations that we did not incur in the prior year. During the first quarter of 2018, we signed an agreement to provide advertising services on over 3,500 New York City taxicabs. The advertising will be on a combination of vinyl printed signs and digital signs. We have leased 300 digital signs, which we began installing in February and we expect to complete installations for by the end of the second quarter of ~~2017~~2018. In addition to lease expense for the digital signs, we incur fixed fees payable to our taxicab counterparties for advertising access and ~~$6.1 million in~~maintenance. While we will continue to incur these fixed costs, we expect advertising revenues to gradually increase throughout 2018, absorbing a larger portion of the ~~second quarter of 2016, and as~~fixed costs until the business generates a ~~percent of revenue was 27.2% and 29.9% in the second quarter of 2017 and the second quarter of 2016, respectively. Gross~~positive gross profit in late 2018 or early 2019. Excluding the ~~cinema segment decreased to $3.0 million in~~new costs associated with the ~~second quarter of 2017 from $3.7 million in the second quarter of 2016~~advertising business, Digital Media gross margin dollars and ~~decreased as a percentage of revenue to 31.0% in 2017 from 32.4% in 2016. This decrease in~~ gross margin as a percentage of ~~revenue~~revenues did not change significantly from the same quarter of the prior year.
Operating (Loss) Income
We generated an operating loss of $3.1 million in the first quarter of 2018 compared to an operating loss of $0.6 million in the first quarter of 2017.
Three Months Ended March 31,
2018 2017 $ Change % Change
(dollars in thousands)
Cinema $ 2,325 $ 2,679 $ (354 ) (13.2 )%
Digital Media (2,496 ) (1,113 ) (1,383 ) 124.3 %
Other (113 ) (117 ) 4 (3.4 )%
Total segment operating (loss) income (284 ) 1,449 (1,733 ) (119.6 )%
Unallocated general and administrative expenses (2,800 ) (2,047 ) (753 ) 36.8 %
Total operating loss $ (3,084 ) $ (598 ) $ (2,486 ) 415.7 %
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We generated operating income in the Cinema segment of $2.3 million in the first quarter of 2018 compared to $2.7 million in the first quarter of 2017. The decrease in operating income was driven primarily by lower ~~margins on projectors and digital parts. Gross~~gross profit in the cinema segment is not expected to be significantly impacted by our termination of our cinema lamp product distributorship discussed above, due to the very low margins that we earned on the lamps.as described above.

The ~~gross profit in the digital media~~Digital Media segment ~~decreased to $2.3 million or 23.3% as a percentage~~generated an operating loss of ~~revenues in the second quarter of 2017 from~~ $2.5 million or 25.5% as a percentage of revenues in the second quarter of 2016. The decrease in gross margin as a percentage of revenue was driven by revenue mix, as lower margin digital signage equipment sales and services accounted for a larger percentage of digital media revenues.
~~Selling Expenses~~
~~Selling expenses increased 23.4% to $1.4~~ million in the ~~second~~first quarter of ~~2017~~2018 compared to $1.1 million ~~a year-ago~~in the first quarter of 2017. The decrease was driven primarily by lower gross profit as described above.
Unallocated general and ~~as a percentage of revenues~~administrative expenses increased to ~~7.3% from 5.6% a year-ago. The increase in selling expenses was primarily due to a $0.2 million increase in employee-related costs.~~
~~Administrative Expenses~~
~~Administrative expenses increased 54.4% to $4.7~~$2.8 million in the ~~second~~first quarter of ~~2017 from $3.0~~2018 compared to $2.0 million in the ~~second~~first quarter of ~~2016 and as a percent of total revenue increased to 24.2% in the second quarter of 2017 from 14.8% in the second quarter of 2016. This~~2017. The increase was driven primarily by ~~a $0.4 million increase in consulting~~increased employee compensation and ~~software licensing costs associated with our CRM and ERP systems implementation, $0.4 million in bad debt expense, $0.4 million in~~benefits, stock-based compensation, audit, tax and legal ~~expenses primarily related to the restatement of our 2016 financial statements and our internal control remediation efforts, and $0.3 million in employee-related costs.~~expenses.

Other Financial Items
The second quarter of 2017 includes total other expense of $(0.1) million, primarily consisting of foreign currency transaction losses. The second quarter of 2016 includes total other income of $0.4 million, primarily due to $0.5 million of excess joint venture distributions recognized as income, partially offset by $0.2 million of net losses on foreign currency transactions.

The effective tax rate differs from the statutory rates primarily as a result of the valuation allowance recorded against the Company’s U.S. tax jurisdiction deferred tax assets and differing foreign and U.S. tax rates applied to respective pre-tax earnings by tax jurisdiction. Our income tax expense consists primarily of income tax on foreign earnings.
In December 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”), was signed into law in the United States. The law includes significant changes to the United States corporate income tax system, including a federal corporate rate reduction and the transition of the United States from a worldwide tax system to a territorial tax system. As part of the transition to a territorial tax system, the 2017 Tax Act requires taxpayers to calculate a one-time transition tax based on the deemed repatriation of undistributed earnings of foreign subsidiaries. We currently are analyzing the 2017 Tax Act, and in certain areas, have made provisional estimates of the effects on our consolidated financial statements and tax disclosures, including the amount of the repatriation tax and changes to our existing deferred tax balances.
The first quarter of 2018 includes an overall insignificant equity method net investment loss, consisting of a $0.4 million loss from RELM, partially offset by income of $0.2 million from PIH and $0.1 million from Itasca. Equity method investment income in the first quarter of 2017 amounted to $2.5 million, almost exclusively from Itasca.

As a result of the items outlined above, we generated net losses from continuing operations of approximately ~~$1.9~~$3.8 million and basic and diluted losses per share from continuing operations of ~~$0.14~~$0.26 in the ~~second~~first quarter of ~~2017,~~2018, compared to net earnings from continuing operations of ~~$1.8~~$0.4 million and basic and diluted earnings per share from continuing operations of ~~$0.12 in the second quarter of 2016.~~
~~Results of Discontinued Operations~~
Our discontinued operations generated a negligible after tax loss and negligible basic and diluted loss per share in the second quarter of 2017 compared to an after tax loss of ($0.9) million and basic and diluted loss per share of ($0.06) in the second quarter of 2016.
~~Six Months Ended June 30, 2017 Compared to the Six Months Ended June 30, 2016~~
~~Revenues~~
~~Net revenues during the six months ended June 30, 2017 decreased 0.9% to $37.3 million from $37.7 million during the six months ended June 30, 2016.~~

Six Months Ended
June 30,

2017 2016
(In thousands)
Cinema $ 18,934 $ 21,015
Digital Media 18,430 17,499
Total segment revenues 37,364 38,514
Eliminations (39 ) (842 )
Total net revenues $ 37,325 $ 37,672
~~Cinema~~
~~Sales of cinema products and services decreased 9.9% to $18.9 million~~$0.03 in the first ~~half~~quarter of 2017 from $21.0 million in the first half of 2016. This decrease was driven by lower sales of lamps and digital projectors and parts and lower warranty revenue. A decrease in screen sales was mostly offset by increased screen support sales.
~~Digital Media~~
Sales of digital media products and services increased 5.3% to $18.4 million in the first half of 2017 from $17.5 million in the first half of 2016. This increase was driven by increased digital media equipment sales, digital signage as a service revenues and nonrecurring maintenance revenues, partially offset by decreased recurring maintenance contract revenue.
~~Export Revenues~~
Sales outside the United States (primarily from the cinema segment) were essentially flat at $8.1 million for the first half of both 2017 and 2016. Increased sales in Canada were offset by decreased sales in Mexico and Europe. Certain areas of the world are more cost conscious than the U.S. market and there are instances where our products are priced higher than local manufacturers, making it more difficult to generate sufficient profit to justify selling into these regions. Additionally, foreign exchange rates and excise taxes sometimes make it difficult to market our products overseas at reasonable selling prices.
~~Gross Profit~~
Consolidated gross profit was $9.7 million in the first half of 2017 and $11.4 million in the first half of 2016, and as a percent of revenue was 26.0% and 30.2% in the first half of 2017 and 2016, respectively. Gross profit in the cinema segment decreased to $5.6 million in the first half of 2017 from $7.3 million in the first half of 2016 and decreased as a percentage of revenue to 29.7% in 2017 from 34.5% in 2016. The decrease in gross margin and gross margin as a percentage of revenue from the Cinema segment was driven by lower coverage of fixed operating costs due to lower overall revenues.
The gross profit in the digital media segment was unchanged at $4.1 million, or 22.2% of revenues in the first half of 2017 from $4.1 million or 23.6% of revenues in the first half of 2016. The decreased margin percentage was due to lower margin equipment sales and services accounting for a larger portion of revenues in 2017.

~~Selling Expenses~~
Selling expenses increased 33.7% to $2.9 million in the first half of 2017 compared to $2.2 million a year-ago and as a percentage of revenues increased to 7.8% from 5.8% a year-ago. The increase in selling expenses was primarily due to increased employee-related costs.
~~Administrative Expenses~~
Administrative expenses increased 34.2% to $8.2 million in the first half of 2017 from $6.1 million in the first half of 2017 and as a percent of total revenue increased to 22.1% in the first half of 2017 from 16.3% in the first half of 2016. This increase was driven by a $0.6 million increase in consulting and software licensing costs associated with our CRM and ERP systems implementation, $0.5 million in bad debt expense, $0.6 million in audit and legal expenses primarily related to the restatement of our 2016 financial statements and our internal control remediation efforts, and $0.5 million in employee-related costs.
~~Other Financial Items~~
The first six months of 2017 includes total other expense of $(0.1) million, consisting primarily of foreign currency transaction losses. The first half of 2016 includes total other expense of $0.8 million primarily consisting of $1.0 million of net losses on foreign currency transactions and $0.4 million of decrease in market value of marketable securities, partially offset by $0.5 million of excess joint venture distributions recognized as income.
The effective tax rate differs from the statutory rates primarily as a result of the valuation allowance recorded against the Company’s U.S. tax jurisdiction deferred tax assets and differing foreign and U.S. tax rates applied to respective pre-tax earnings by tax jurisdiction.
As a result of the items outlined above, we generated net losses from continuing operations of approximately $1.5 million and basic and diluted losses per share from continuing operations of $0.11 in the first half of 2017, compared to net earnings from continuing operations of $1.0 million and basic and diluted earnings per share from continuing operations of $0.07 for the first half of 2016.
~~Results of Discontinued Operations~~
Our discontinued operations generated an after tax loss of ($49) thousand and negligible basic and diluted loss per share of in the first half of 2017, compared to an after tax loss of ($0.7) million and basic and diluted loss per share of ($0.05) in the first half of 2016, respectively.
Liquidity and Capital Resources

During the past several years, we have primarily met our working capital and capital resource needs from our operating cash ~~flows.~~flows and credit facilities. During the first quarter of 2018, we signed an agreement to provide advertising services on over 3,500 New York City taxicabs. The advertising will be on a combination of vinyl printed signs and digital signs. We have leased 300 digital signs, which we began installing in February and we expect to complete installations for by the end of the second quarter of 2018. In addition to lease expense for the digital signs, we incur fixed fees payable to our taxicab counterparties for advertising access and maintenance. We expect that the new advertising business will negatively impact our cash flow for the first half of 2018 as we incur costs without collecting significant revenues during the start-up phase. However, we believe that our existing sources of liquidity, including cash and cash equivalents, ~~a revolving line of~~ credit ~~and~~facilities, operating cash flow and anticipated net proceeds from the sale-leaseback of our Alpharetta, Georgia facility as described below, will be sufficient to meet our projected capital needs for the foreseeable future. However, we are also exploring debt financing in the form of term loans and lines of credit. On April 27, 2017, we entered into a debt agreement with a bank consisting of 1) a $2 million five-year term loan secured by a first lien deed of trust on our Alpharetta, GA facility, bearing interest at a fixed rate of 4.5% and payable in equal monthly installments of principal and interest calculated based on a 20-year amortization schedule with a final balloon payment of approximately $1.7 million due on May 10, 2022, and 2) a line of credit of up to $1 million secured by a second lien deed of trust on our Alpharetta, GA facility, bearing interest at the Prime Rate published in the Wall Street Journal plus 0.25% and with a term ending May 10, 2018. Under the debt agreement, we must maintain a ratio of total liabilities to tangible net worth not in excess of 3 to 1 and maintain minimum liquidity of $2 million. At June 30, 2017, there were no borrowings outstanding on our line of credit. At June 30, 2017, we were in compliance with our debt covenants.
We may also enter into leases for certain equipment used in our business. Our short-term debt at June 30, 2017 consists of a $2.5 million progress payment note to facilitate the lessor’s purchase of certain equipment we intend to lease. The lessor made a progress payment of $2.5 million to the seller of the equipment on June 26, 2017, which represents the principal amount under the note. The note bears interest at a rate of 3.25% and will be considered repaid when the lessor pays the remaining balance of the purchase price to the seller of the equipment and we execute a lease for the equipment under a master lease agreement. Any outstanding principal balance on the note not considered repaid on or before August 31, 2017 will become due and payable on demand.
We ended the ~~second~~first quarter of 2018 with total cash and cash equivalents of ~~$2.8~~$3.3 million, compared to ~~$7.6~~$4.9 million at December 31, ~~2016.~~ 2017.
As of ~~June 30, 2017, $1.3~~March 31, 2018, $0.6 million of the ~~$2.8~~$3.3 million in cash and cash equivalents was held by our ~~foreign subsidiary.~~Canadian subsidiary, Strong/MDI. If these funds are ~~needed for~~repatriated to our operations in the U.S., we would be required to pay ~~U.S. income taxes and foreign~~Canadian withholding taxes, ~~on a portion~~which have been fully accrued as of ~~these funds when repatriated back~~March 31, 2018. Strong/MDI also may make intercompany loans to the U.S. parent company, which do not trigger Canadian withholding taxes if they meet certain requirements. As of March 31, 2018, the parent company had outstanding intercompany loans from Strong/MDI of approximately $24.1 million, compared to approximately $19.4 million at December 31, 2017.
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In 2017, we entered into a debt agreement consisting of a $2.0 million five-year term loan and a line of credit of up to $1.0 million, secured by deeds of trust on our Alpharetta, Georgia office facility. The revolving line of credit bears interest at 5.00% as of March 31, 2018. At March 31, 2018, the balance of the term loan, including current maturities, was $1.95 million. We also had outstanding borrowings on our line of credit of $0.5 million as of March 31, 2018 and borrowed an additional $0.5 million in April 2018. At March 31, 2018, we were in compliance with our debt covenants. On April 27, 2018, we executed a definitive agreement for a sale-leaseback of the Alpharetta facility. We agreed to sell the Alpharetta facility for $7.0 million in cash and enter into a 10-year leaseback of the facility for rent in the amount of $600,000 per year, escalating at the rate of 2% per year. The closing of the transaction is expected to occur within 30 days after the completion of a 60-day due diligence period and satisfaction of customary contingencies. Upon closing of the sale-leaseback transaction, the term loan and revolving line of credit will be repaid and the debt agreement would be terminated. We expect to receive net proceeds of approximately $4.0 million on the sale-leaseback after repayment of the loans.
In 2017, our Canadian subsidiary, Strong/MDI, also entered into a demand credit agreement consisting of a revolving line of credit for up CDN$3.5 million subject to a borrowing base requirement, a 20-year installment loan for up to CDN$6.0 million and a 5-year installment loan for up to CDN$500,000. The Strong/MDI credit facilities are secured by a lien on Strong/MDI’s Quebec, Canada facility and substantially all of Strong/MDI’s assets. There were no borrowings outstanding at March 31, 2018 on any of the Strong/MDI credit facilities, as we had not yet drawn on the facilities. On April 24, 2018, we borrowed CDN$3.5 million on the 20-year installment loan. Strong/MDI was in compliance with its debt covenants as of March 31, 2018.

Cash Flows from Operating Activities
The following table provides information that we use in analyzing our cash flows from operating activities of continuing operations (in thousands):
Three Months Ended March 31,
2018 2017
Net cash (used in) provided by operating activities - continuing operations $ (1,591 ) $ 567
Less:
Changes in working capital 993 1,064
Foreign currency transaction gain 104 3
Current income tax expense (636 ) (630 )
Net interest (expense) income (45 ) 12
Other 15 9
Subtotal - reconciling items 431 458
Operating (loss) income, excluding noncash operating expenses (non-GAAP) $ (2,022 ) $ 109
Operating (loss) income, excluding noncash operating expenses, is a non-GAAP financial measure that we use only for the purpose of analyzing net cash provided by (used in) operating activities. It is defined as operating income (loss), adjusted to remove noncash operating expenses consisting of provisions for doubtful accounts, obsolete inventory and warranty, depreciation and amortization, impairment of intangible assets, loss on disposal or transfer of assets, amortization of contract acquisition costs and stock-based compensation expense.

Net cash used in operating activities from continuing operations was ~~$2.2~~$1.6 million in the first ~~half~~quarter of ~~2017, which included~~2018, as operating loss, excluding noncash expenses, of $2.0 million and current income tax expense of $0.6 million were partially offset by favorable net ~~losses~~changes in working capital items of $1.0 million and foreign currency transaction gains of $0.1 million. The favorable net change in working capital was primarily due to a $0.7 million increase in customer deposits and deferred revenue, a $0.7 million increase in accrued expenses and accounts payable and a $0.5 million decrease in inventories, partially offset by a $0.8 million increase in other assets.
30
Net cash provided by operating activities from continuing operations was $0.6 million in the first quarter of ~~$1.5~~2017, as operating income, excluding noncash expenses, of $0.1 million and ~~$2.3~~favorable net changes in working capital items of $1.1 million ~~of equity method investment earnings,~~were partially offset by ~~non-cash charges~~current income tax expense of ~~deferred taxes, share-based compensation, depreciation and amortization and bad debt expense. Changes~~$0.6 million. The favorable net change in working capital ~~decreased cash from operating activities of continuing operations by $1.0 million,~~was primarily due to a $2.5 million increase in accounts payable and accrued liabilities, partially offset by increases in inventories, accounts receivable and other ~~assets~~assets. Accounts payable and ~~decreases in customer deposits/deferred revenue, mostly offset by increases in accounts payable. Accounts payable~~accrued liabilities increased $2.5 million primarily due to ~~the~~ timing of orders and payments to vendors at the end of the quarter.
Net cash used in operating activities from continuing operations was $1.4 million in the first half of 2016, which included net earnings from continuing operations of $1.0 million, offset by non-cash charges (benefits) of deferred tax expense, depreciation and amortization, reserve provisions, change in value of marketable securities and non-cash stock compensation totaling $1.7 million. Changes in working capital decreased cash from operating activities of continuing operations by $4.1 million, primarily due to an increase in accounts receivable and a decrease in current income taxes, partially offset by an increase in accounts payable. Accounts payable increased by $1.4 million primarily due to timing of payments on equipment orders at the end of the quarter. Current income taxes decreased $1.6 million primarily due to payments for Canadian income taxes.
Net cash used in operating activities of discontinued operations was $0.2 million in the first half of 2017 compared to $2.7 million in the first half of 2016, as the significant discontinued operations were divested in the fourth quarter of 2016.

Cash Flows from Investing Activities

Net cash used in investing activities was ~~$4.5~~$0.3 million in the first ~~half~~quarter of 2018, consisting primarily of capital expenditures. Net cash used in investing activities was $3.5 million in the first quarter of 2017, due primarily to $2.5 million in purchases of equity securities and ~~$2.1 million for capital expenditures. Net cash used in investing activities was $4.3~~$1.1 million in ~~the first half of 2016 due to $3.8 million in purchases of equity securities and $0.7 million for~~ capital expenditures.
Cash Flows from Financing Activities

Net cash ~~provided by~~used in financing activities was ~~$1.8~~$0.1 million in the first ~~half~~quarter of ~~2017 due to $2.0 million~~2018, consisting primarily of ~~proceeds from issuance of long-term debt, offset slightly by $0.1 million of treasury stock purchases and $0.1 million of~~payments on capital ~~lease payments.~~
leases. Net cash used in financing activities in the first ~~half~~quarter of ~~2016~~2017 was ~~$0.2~~$0.1 million, ~~and was~~ primarily for the purchase of treasury stock ~~purchases~~ and payments on capital ~~lease payments.~~leases.

The effect of changes in foreign exchange rates ~~from continuing operations~~ increased cash and cash equivalents by ~~$0.1~~$0.5 million and ~~$0.9 million~~$39 thousand in the first ~~half~~quarter of ~~2017~~2018 and ~~2016,~~2017, respectively.

Hedging and Trading Activities

Our primary exposure to foreign currency fluctuations pertains to our subsidiary in Canada. In certain instances, we may enter into a foreign exchange contract to manage a portion of this risk. We do not have any trading activities that include non-exchange traded contracts at fair value.

Off Balance Sheet Arrangements and Contractual Obligations

The future estimated payments as of March 31, 2018 under ~~these arrangements~~contractual obligations are summarized below ~~along with our other contractual obligations:~~(in thousands):

Contractual Obligations Total
Remaining
in 2017
One to Three Years Three to Five Years Thereafter Total 2018 2019-2020 2021-2022 Thereafter

Long-term debt, including current maturities
$ 2,410 $ 76 $ 306 $ 306 $ 1,722 $ 2,296 $ 115 $ 306 $ 1,875 $ -
Short-term debt⁽¹⁾ 2,500 2,500 — — —
Short-term debt 503 503 - - -
Postretirement benefits 128 12 30 30 56 112 11 30 30 41
Capital leases 509 131 378 — — 301 185 116 - -
Operating leases 1,575 248 911 416 — 7,149 1,342 3,311 2,496 -
Contractual cash obligations $ 7,122 $ 2,967 $ 1,625 $ 752 $ 1,778 $ 10,361 $ 2,156 $ 3,763 $ 4,401 $ 41

~~(1)~~ Short-term debt consists of a progress payment note toward the lessor’s purchase of certain equipment that we intend to lease. It will not be settled in cash unless we fail to enter into a lease for the equipment under a master lease agreement.
There were no other material contractual obligations other than inventory and property, plant and equipment purchases in the ordinary course of business.

Seasonality

Generally, our quarterly revenue and earnings fluctuate moderately from quarter to quarter. As we increase our sales in our current markets, and as we expand into new markets in different geographies, it is possible we may experience different seasonality patterns in our business. As a result, the results of operations for the three months ~~and six months~~ ended ~~June 30, 2017~~March 31, 2018 are not necessarily indicative of the results that may be expected for an entire fiscal year.

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Recently Issued Accounting Pronouncements

See Note 3, Summary of Significant Accounting Policies to the condensed consolidated financial statements for a description of recently issued accounting pronouncements.

Critical Accounting Policies and Estimates

In preparing our consolidated financial statements in conformity with U.S. generally accepted accounting principles, management must make a variety of decisions which impact the reported amounts and the related disclosures. These decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In making these decisions, management applies its judgment based on its understanding and analysis of the relevant circumstances and our historical experience.

Our accounting policies and estimates that are most critical to the presentation of our results of operations and financial condition, and which require the greatest use of judgments and estimates by management, are designated as our critical accounting policies. See further discussion of our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations”~~Operations,” in our Annual Report on Form ~~10-K/A~~10-K for our year ended December 31, ~~2016.~~2017. We periodically re-evaluate and adjust our critical accounting policies as circumstances change. ~~There~~Other than policies related to the adoption of ASC 606 as described in Note 4 to the condensed consolidated financial statements, there were no significant changes in our critical accounting policies during the ~~six~~three months ended ~~June 30, 2017.~~March 31, 2018.
Item 3. Quantitative and Qualitative Disclosures About Market Risk

The principal market risks affecting us are exposure to interest rates and foreign currency exchange rates. We market our products throughout the United States and the world. As a result, we could be adversely affected by such factors as changes in foreign currency rates and weak economic conditions. As a majority of our sales are currently denominated in U.S. dollars, a strengthening of the dollar can and sometimes has made our products less competitive in foreign markets.

Interest Rates—Interest rate risks from our interest related accounts such as our postretirement obligations are not deemed significant. We currently have long-term notes ~~receivables~~receivable, recorded at fair value, bearing fixed interest rates of 15% ~~which are recorded at fair value.~~and long-term debt with a fixed interest rate of 4.5%. A change in long-term interest rates for comparable types of instruments would have the effect of us recording changes in fair value of the notes receivable through our statement of operations. As of March 31, 2018, we also have $500,000 borrowed on a revolving line of credit that bears variable interest at the Prime Rate published by the Wall Street Journal plus 0.25%, or 5.00% as of March 31, 2018. Changes in the Prime Rate would increase or decrease our interest expense on outstanding line of credit borrowings.

Foreign Exchange—Exposures to transactions denominated in currencies other than the entity’s functional currency are primarily related to our Canadian subsidiary. Fluctuations in the value of foreign currencies create exposures, which can adversely affect our results of operations. From time to time, as market conditions indicate, we will enter into foreign currency contracts to manage the risks associated with forecasted transactions. A portion of our cash in our Canadian subsidiary is denominated in foreign currencies, where fluctuations in exchange rates will impact our cash balances in U.S. dollar terms. A hypothetical 10% change in the value of the U.S. dollar would not have a material impact on our reported cash balance ~~by approximately $0.1 million.~~as of March 31, 2018.

Equity Price Risk—We are exposed to price risk related to our investments in equity securities. At ~~June 30, 2017,~~March 31, 2018, our carrying value of investments in equity securities aggregated ~~$18.1~~$17.8 million, all of which were accounted for using the equity method. The fair value of these investments was ~~$16.4~~$15.4 million at ~~June 30, 2017.~~March 31, 2018. A change in the equity price of the equity method investments would result in a change in the fair value or economic value of such securities.

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Item 4. Controls and Procedures

The Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Securities Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as of the end of the period covered by this report, the Company’s disclosure controls and procedures ~~were ineffective, due~~are effective at ensuring that information required to ~~the material weaknesses described below.~~
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be ~~prevented or detected on a timely basis.~~
During the fourth quarter of fiscal 2016, we implemented a new integrated Customer Relationship Management (CRM) system and a new enterprise resource planning (ERP) system including inventory management and financial reporting modules that will upgrade and standardize our information systems. We have completed the implementation with respect to some of our subsidiaries and plan to continue to roll out the CRM and ERP system modules over the next year for certain of our other subsidiaries. Therefore, as appropriate, we modified the design and are stilldisclosed in the ~~process of updating certain documentation of internal control processes and procedures to supplement and complement existing internal controls over financial reporting to accommodate~~reports that the ~~system changes. The CRM and ERP resulted in changes that materially affected our system of internal control over financial reporting during~~Company files or submits under the three months ended December 31, 2016. As a result, our controls over system access were not fully aligned with our functional segregation of duties. During the six months ended June 30, 2017, we made progress in aligning our system access with our functional segregation of duties for certain of our subsidiaries. However, our system access was not yet fully aligned with our functional segregation of duties as of June 30, 2017.
~~In the course of our preparations for making management’s report on internal control over financial reporting in our most recent Form 10-K as required by Section 404 of the Sarbanes-Oxley~~Securities Exchange Act of ~~2002, we identified areas in need of improvement~~1934 (as amended) is (1) accumulated and ~~have taken remedial actions~~communicated to strengthen the affected controls as appropriate. One such area was our documentation of business processes, procedures and internal controls for one of our subsidiaries that enters into arrangements with its customers involving multiple deliverables which affects revenue recognition. As of December 31, 2016, we were still in the process of updating our documentation as resource constraints stemming from the aforementioned CRM and ERP implementation have delayed our efforts in making these updates. We evaluated our current documentation over revenue recognition for arrangements with multiple deliverables and concluded it was not sufficient to ensure internal controls over this accounting were effective. We believe this deficiency in aggregate with the aforementioned deficiency stemming from our CRM and ERP system segregation of duties result in a material weakness which may have a material effect on our internal control over financial reporting impacting controls over revenue recognition.
We plan to continue to implement the CRM and other significant modules of the ERP in these and other subsidiaries in the coming years, as we believe these changes will simplify our business processes and system of internal control over financial reporting. In connection with these and future enhancements, the Company will update its internal controls over financial reporting, as necessary, to accommodate any modification to its business processes and procedures.
In addition, during the preparation of its Form 10-Q for the quarter ended March 31, 2017, management of the Company identified two misstatements in the Company’s previously issued consolidated financial statements for the year ended December 31, 2016. The first misstatement related to approximately $477,000 of maintenance service revenue that was pre-billed at a customer’s request, but related to services not completed by December 31, 2016. This revenue was improperly recognized during the year ended December 31, 2016. The second misstatement related to earnings at one of the Company’s Canadian subsidiaries that would be subject to a withholding tax if repatriated to the U.S. The Company improperly excluded earnings to the extent of certain intercompany loans between its Canada and U.S. entities from its provision for deferred income taxes, resulting in an understatement of deferred income tax expense of approximately $238,000.
The Company has restated its Consolidated Balance Sheet as of December 31, 2016, and the related Consolidated Statement of Operations, Consolidated Statement of Comprehensive (Loss) Income, Consolidated Statement of Stockholders’ Equity and Consolidated Statement of Cash Flows for the year then ended to correct the misstatements described above. We determined our controls over cutoff for maintenance service revenues were insufficient, resulting in a material weakness that had a material effect on our internal control over financial reporting impacting revenue recognition.
During the six months ended June 30, 2017, we engaged a consulting firm to assist us in evaluating our internal controls, including controls over cutoff for maintenance service revenues, and updating our documentation, including documentation related to arrangements with customers involving multiple deliverables. This engagement is expected to continue into late 2017. We expect to fully remediate the above-mentioned material weaknesses before the end of the fiscal year ending December 31, 2017.
~~The Company’s~~ management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures and (2) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
On January 1, 2018, we adopted ASC 606 (see Note 4 to the Condensed Consolidated Financial Statements). We implemented internal controls to ensure we adequately evaluated ~~any change~~our contracts with customers and properly assessed the impact of the standard on our financial statements. We also implemented changes to our business processes related to revenue recognition and the control activities within them. The changes included internal training, ongoing contract review and monitoring and gathering of information for disclosures.
There have been no other changes in the Company’s internal control over financial reporting during the fiscal quarter ~~for the period~~ covered by this report ~~and~~that have ~~concluded that, except for changes to system access as described above, there has been no other change that has~~ materially affected, or isare reasonably likely to materially affect, ~~the Company’s~~such internal control over financial reporting.

PART II. Other Information

Item 1. Legal Proceedings

In the ordinary course of business operations, we are involved, from time to time, in certain legal disputes. No such disputes, individually or in the aggregate, are expected to have a material effect on our business or financial condition.

Item 1A. Risk Factors

Item 1A “Risk Factors” in our Annual Report on Form ~~10-K/A~~10-K for the year ended December 31, ~~2016~~2017 includes a detailed discussion of the Company’s risk factors. There have been no material changes to the risk factors as previously disclosed.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On August 20, 2015, we announced that our Board of Directors adopted a stock repurchase program authorizing the repurchase of up to 700,000 shares of our outstanding Common Stock pursuant to a plan adopted under Rule 10b5-1 of the Securities Exchange Act of 1934 (as amended). The repurchase program has no expiration date. ~~Repurchases~~There were no repurchases during the ~~quarter~~three months ended ~~June 30, 2017 are reflected in~~March 31, 2018. As of March 31, 2018, there were 636,931 shares that may yet be purchased under the ~~following table.~~
~~ISSUER PURCHASES OF EQUITY SECURITIES~~stock repurchase program.

Period Total
Number of
Shares
Purchased Average
Price
Paid per
Share Total
Number of
Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs Maximum
Number of
Shares (or
approximate
dollar value)
that May Yet
Be
Purchased
Under the
Plans or
Programs

April 1 — April 30, 2017 3,800 $ 6.21 3,800 639,006
May 1 — May 31, 2017 2,000 $ 6.30 2,000 637,006
June 1 — June 30, 2017 — $ — — 637,006
Total 5,800 5,800
33

Item 6. Exhibits

Incorporated by Reference
Exhibit
Number Document Description Form Exhibit Filing
Date Filed
Herewith

10.1 Ballantyne Strong, Inc. 2017 Omnibus Equity Compensation Plan. S-8 4.12 6-15-17

10.2 Form of Stock Option Agreement under the Ballantyne Strong, Inc. 2017 Omnibus Equity Compensation Plan. S-8 4.13 6-15-17

10.3 Form of Restricted Share Agreement under the Ballantyne Strong, Inc. 2017 Omnibus Equity Compensation Plan. S-8 4.14 6-15-17

10.4 Form of Restricted Stock Unit Agreement under the Ballantyne Strong, Inc. 2017 Omnibus Equity Compensation Plan. S-8 4.15 6-15-17

10.5 Master Lease Agreement between Huntington Technology Finance, Inc. and Convergent Media Systems Corporation. 8-K 10.1 6-27-17

10.6 Progress Payment Note and Reimbursement Agreement between Convergent Media Systems Corporation and Huntington Technology Finance, Inc, effective as of June 22, 2017. 8-K 10.2 6-27-17

10.7 Term Loan Business Loan Agreement, dated April 27, 2017, by and between Convergent Media Systems Corporation, as Borrower, and blueharbor bank, as Lender. 8-K 10.1 5-3-17

10.8 Term Loan Promissory Note, dated April 27, 2017, by and between Convergent Media Systems Corporation, as Borrower, and blueharbor bank, as Lender. 8-K 10.2 5-3-17

10.9 Line of Credit Business Loan Agreement, dated April 27, 2017, by and between Convergent Media Systems Corporation, as Borrower, and blueharbor bank, as Lender. 8-K 10.3 5-3-17

10.10 Credit Agreement, dated April 27, 2017, by and between Convergent Media Systems Corporation, as Borrower, and blueharbor bank, as Lender. 8-K 10.4 5-3-17
~~Incorporated by Reference~~
~~Exhibit~~
~~Number~~ ~~Document Description~~ ~~Form~~ ~~Exhibit~~ ~~Filing~~
~~Date~~ ~~Filed~~
~~Herewith~~
~~31.1~~ ~~Rule 13a-14(a) Certification of Chief Executive Officer.~~ X
~~31.2~~ ~~Rule 13a-14(a) Certification of Chief Financial Officer.~~ X
~~32.1~~ * ~~18 U.S.C. Section 1350 Certification of Chief Executive Officer.~~ X
~~32.2~~ * ~~18 U.S.C. Section 1350 Certification of Chief Financial Officer.~~ X
~~101~~ The following materials from Ballantyne Strong, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive (Loss) Income, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements. X
Incorporated by Reference
Exhibit Number Document Description Form Exhibit Filing
Date Filed
Herewith
10.1 Amendment to the Credit Agreement, dated as of November 14, 2017, between Canadian Imperial Bank of Commerce and Strong/MDI Screen Systems, Inc. 10-K 10.22 3-15-2018

10.2 Note Modification Agreement, dated as of April 18, 2018, by and between Convergent Media Systems Corporation, as Borrower, and blueharbor bank, as Lender. 8-K 10.1 4-24-2018

10.3 Contract of Sale, dated as of April 27, 2018, by and among Convergent Media Systems Corporation, as seller, and Metrolina Alpharetta, LLC, as Buyer. 8-K 10.1 5-1-2018

10.4 Form of Lease Agreement, to be entered into by and between Metrolina Alpharetta, LLC, as Landlord, and Ballantyne Strong, Inc., as Tenant 8-K 10.2 5-1-2018

10.5 Form of Warrant, to be issued by Ballantyne Strong, Inc. 8-K 10.3 5-1-2018

31.1 Rule 13a-14(a) Certification of Chief Executive Officer. X

31.2 Rule 13a-14(a) Certification of Chief Financial Officer. X

32.1* 18 U.S.C. Section 1350 Certification of Chief Executive Officer. X

32.2* 18 U.S.C. Section 1350 Certification of Chief Financial Officer. X

101 The following materials from Ballantyne Strong, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive (Loss) Income, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to the Condensed Consolidated Financial Statements. X

* Furnished herewith.
34
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

BALLANTYNE STRONG, INC.

By:
/s/D. Kyle Cerminara
By:
/s/Lance V. Schulz

D. Kyle Cerminara,
Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)

Lance V. Schulz,
Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Date: ~~August~~May 8, ~~2017~~2018 Date: ~~August~~May 8, ~~2017~~2018
35

	Three Months Ended June 30,					Six Months Ended June 30,
	2017			2016		2017			2016
Net (loss) earnings	$	(1,975	)	$	833	$	(1,589	)	$	220
Currency translation adjustment:
Unrealized net change arising during period		709			33		818			1,625
Unrealized gain on available-for-sale securities of equity method investments, net of tax		181			21		179			21
Total other comprehensive income		890			54		997			1,646
Comprehensive (loss) income	$	(1,085	)	$	887	$	(592	)	$	1,866

	●	Level 1 -– inputs to the valuation techniques are quoted prices in active markets for identical assets or liabilities

	●	Level 2 -– inputs to the valuation techniques are other than quoted prices but are observable for the assets or liabilities, either directly or indirectly

	●	Level 3 -– inputs to the valuation techniques are unobservable for the assets or liabilities

	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	2,800	$	—	$	—	$	2,800	$	3,348	$	-	$	-	$	3,348
Notes receivable		—		—		1,669		1,669		-		-		2,773	$	2,773
Total	$	2,800	$	—	$	1,669	$	4,469	$	3,348	$	-	$	2,773	$	6,121

	●	Identify the contract, or contracts, with a customer
	●	Identify the performance obligations in the contract
	●	Determine the transaction price
	●	Allocate the transaction price to the identified performance obligations
	●	Recognize revenue when, or as, the Company satisfies the performance obligations

Deferred contract acquisition costs as of January 1, 2018	$	76
Costs capitalized		10
Amortization		(14	)
Impairment		-
Deferred contract acquisition costs as of March 31, 2018	$	72

	As reported March 31, 2018		Adjustments			Balances without adoption of ASC 606
Total current assets	$	20,354	$	146		$	20,500
Total noncurrent assets		36,677		(14	)		36,663
Total assets	$	57,031	$	132		$	57,163

Total current liabilities	$	10,702	$	258		$	10,960
Total noncurrent liabilities		6,171		-			6,171
Total liabilities		16,873		258			17,131

Retained earnings		21,861		(126	)		21,735
Other stockholders’ equity		18,297		-			18,297
Total stockholders’ equity		40,158		(126	)		40,032
Total liabilities and stockholders’ equity	$	57,031	$	132		$	57,163

	As reported for the three months ended March 31, 2018			Adjustments			Balances without adoption of ASC 606
Total net revenues	$	15,828		$	(57	)	$	15,771
Total cost of revenues		12,978			(2	)		12,976
Gross profit		2,850			(55	)		2,795
Total selling and administrative expenses		5,934			(5	)		5,929
Loss from operations		(3,084	)		(50	)		(3,134	)
Other income		7			-			7
Loss before income taxes and equity method investment loss		(3,077	)		(50	)		(3,127	)
Income tax expense		698			-			698
Equity method investment loss		(10	)		-			(10	)
Net loss	$	(3,785	)	$	(50	)	$	(3,835	)
Net loss per share of common stock:
Basic	$	(0.26	)		(0.00	)	$	(0.26	)
Diluted	$	(0.26	)		(0.00	)	$	(0.26	)

	Cinema		Digital Media		Other		Eliminations			Total
Screen system sales	$	4,005	$	-	$	-	$	-		$	4,005
Digital equipment sales		3,158		766		-		(216	)		3,708
Field maintenance and monitoring services		2,944		2,114		-		(138	)		4,920
Installation services		328		1,360		-		-			1,688
Extended warranty sales		342		-		-		-			342
Other		672		477		16		-			1,165
Total	$	11,449	$	4,717	$	16	$	(354	)	$	15,828

	June 30, 2017				December 31, 2016
	(dollars in thousands)								March 31, 2018					December 31, 2017
Entity		Carrying Amount	Economic Interest			Carrying Amount	Economic Interest		Carrying Amount		Economic Interest			Carrying Amount		Economic Interest
RELM Wireless Corporation	$	4,328	8.3	%	$	4,382	8.3	%	$	4,102		8.3	%	$	4,473		8.3	%
Itasca Capital, Ltd.		5,870	32.3	%		3,368	32.3	%		5,814		32.3	%		5,870		32.3	%
1347 Property Insurance Holdings, Inc.		7,936	17.4	%		5,348	12.1	%		7,917		17.4	%		7,710		17.4	%
Total	$	18,134			$	13,098			$	17,833				$	18,053

For the six months ended March 31,	2017
For the three months ended December 31,				2017			2016
	(in thousands)				(in thousands)
Revenue	$	—		$	20,576		$	15,358
Gross profit	$	—
Operating loss from continuing operations	$	(114	)	$	(2,034	)	$	2,590
Net income	$	7,207	⁽¹⁾	$	(2,557	)	$	9,351

	Useful life		Gross		Accumulated amortization			Net		Useful life		Gross		Accumulated Amortization			Net
	(Years)		(in thousands)							(Years)
Intangible assets not yet subject to amortization:
Software in development			$	1,273	$	—		$	1,273			$	877	$	-		$	877
Intangible assets subject to amortization:
Software in service		5		2,496		(285	)		2,211		5		3,718		(768	)		2,950
Product formulation		10		470		(313	)		157		10		473		(353	)		120
Total			$	4,239	$	(598	)	$	3,641			$	5,068	$	(1,121	)	$	3,947

	Amount			Amount
		(in thousands)	��
Remainder 2017	$	286
2018		561
Remainder 2018				$	639
2019		550			840
2020		541			831
2021		405			670
2022					86
Thereafter		25			4
Total	$	2,368		$	3,070

Balance as of December 31, 2016	$	889
Foreign currency translation		31
Balance as of June 30, 2017	$	920

Balance as of December 31, 2017	$	952
Foreign currency translation		(26	)
Balance as of March 31, 2018	$	926

Remainder of 2017	$	31
2018		64
2019		68
2020		70
2021		74
Thereafter		1,691
Total	$	1,998

Remainder of 2018	$	48
2019		68
2020		70
2021		74
2022		1,691
Thereafter		-
Total	$	1,951

	Number of Options			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (in thousands)		Number of Options			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2016		545,300		$	4.78		9.68	$	1,757
Outstanding at December 31, 2017											930,300		$	5.63		8.7	$	150
Granted		395,000			6.53						387,500			4.70
Exercised		(7,000	)		4.70						-			-
Forfeited		(10,000	)		6.87						(32,000	)		5.59
Outstanding at June 30, 2017		923,300		$	5.54		9.14	$	1,124
Exercisable at June 30, 2017		141,300		$	4.33		8.10	$	335
Expired											(8,000	)		5.41
Outstanding at March 31, 2018											1,277,800		$	5.29		8.8	$	64
Exercisable at March 31, 2018											269,300		$	4.88		7.9	$	31

	Number of Restricted Stock Shares			Weighted Average Grant Price Fair Value		Number of Restricted Stock Shares			Weighted Average Grant Price Fair Value
Non-vested at December 31, 2016		58,295		$	4.77
Non-vested at December 31, 2017							85,000		$	6.50
Granted		85,000			6.50		-			-
Shares vested		(43,295	)		4.92		(28,333	)		6.50
Shares forfeited		—			—		-			-
Non-vested at June 30, 2017		100,000		$	6.17
Non-vested at March 31, 2018							56,667		$	6.50

	Number of Restricted Stock Units		Weighted Average Grant Price Fair Value		Number of Restricted Stock Units		Weighted Average Grant Price Fair Value
Non-vested at December 31, 2016		13,750	$	4.24
Non-vested at December 31, 2017						35,835	$	6.45
Granted		30,835		6.81		147,500		4.70
Shares vested		—		—		-		-
Shares forfeited		—		—		-		-
Non-vested at June 30, 2017		44,585	$	6.02
Non-vested at March 31, 2018						183,335	$	5.04

	Capital Leases			Operating Leases		Capital Leases			Operating Leases
	(In thousands)					(in thousands)
Remainder 2017	$	131		$	248
2018		246			469
Remainder 2018						$	185		$	1,342
2019		132			442		116			1,768
2020		—			264		-			1,543
2021		—			152		-			1,415
2022							-			1,081
Thereafter		—			—		-			-
Total minimum lease payments	$	509		$	1,575	$	301		$	7,149
Less: Amount representing interest		(25	)				(10	)
Present value of minimum lease payments		484					291
Less: Current maturities		(240	)				(226	)
Capital lease obligations, net of current portion	$	244				$	65

Contractual Obligations	Total		Remaining in 2017		One to Three Years		Three to Five Years		Thereafter		Total		2018		2019-2020		2021-2022		Thereafter

Long-term debt, including current maturities	$	2,410	$	76	$	306	$	306	$	1,722	$	2,296	$	115	$	306	$	1,875	$	-
Short-term debt⁽¹⁾		2,500		2,500		—		—		—
Short-term debt												503		503		-		-		-
Postretirement benefits		128		12		30		30		56		112		11		30		30		41
Capital leases		509		131		378		—		—		301		185		116		-		-
Operating leases		1,575		248		911		416		—		7,149		1,342		3,311		2,496		-
Contractual cash obligations	$	7,122	$	2,967	$	1,625	$	752	$	1,778	$	10,361	$	2,156	$	3,763	$	4,401	$	41

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares (or approximate dollar value) that May Yet Be Purchased Under the Plans or Programs

April 1 — April 30, 2017		3,800	$	6.21		3,800		639,006
May 1 — May 31, 2017		2,000	$	6.30		2,000		637,006
June 1 — June 30, 2017		—	$	—		—		637,006
Total		5,800				5,800

		Incorporated by Reference
Exhibit Number	Document Description	Form	Exhibit	Filing Date	Filed Herewith

10.1	Ballantyne Strong, Inc. 2017 Omnibus Equity Compensation Plan.	S-8	4.12	6-15-17

10.2	Form of Stock Option Agreement under the Ballantyne Strong, Inc. 2017 Omnibus Equity Compensation Plan.	S-8	4.13	6-15-17

10.3	Form of Restricted Share Agreement under the Ballantyne Strong, Inc. 2017 Omnibus Equity Compensation Plan.	S-8	4.14	6-15-17

10.4	Form of Restricted Stock Unit Agreement under the Ballantyne Strong, Inc. 2017 Omnibus Equity Compensation Plan.	S-8	4.15	6-15-17

10.5	Master Lease Agreement between Huntington Technology Finance, Inc. and Convergent Media Systems Corporation.	8-K	10.1	6-27-17

10.6	Progress Payment Note and Reimbursement Agreement between Convergent Media Systems Corporation and Huntington Technology Finance, Inc, effective as of June 22, 2017.	8-K	10.2	6-27-17

10.7	Term Loan Business Loan Agreement, dated April 27, 2017, by and between Convergent Media Systems Corporation, as Borrower, and blueharbor bank, as Lender.	8-K	10.1	5-3-17

10.8	Term Loan Promissory Note, dated April 27, 2017, by and between Convergent Media Systems Corporation, as Borrower, and blueharbor bank, as Lender.	8-K	10.2	5-3-17

10.9	Line of Credit Business Loan Agreement, dated April 27, 2017, by and between Convergent Media Systems Corporation, as Borrower, and blueharbor bank, as Lender.	8-K	10.3	5-3-17

10.10	Credit Agreement, dated April 27, 2017, by and between Convergent Media Systems Corporation, as Borrower, and blueharbor bank, as Lender.	8-K	10.4	5-3-17

			~~Incorporated by Reference~~
~~Exhibit~~ ~~Number~~		~~Document Description~~	~~Form~~	~~Exhibit~~	~~Filing~~ ~~Date~~	~~Filed~~ ~~Herewith~~

~~31.1~~		~~Rule 13a-14(a) Certification of Chief Executive Officer.~~				X

~~31.2~~		~~Rule 13a-14(a) Certification of Chief Financial Officer.~~				X

~~32.1~~	*	~~18 U.S.C. Section 1350 Certification of Chief Executive Officer.~~				X

~~32.2~~	*	~~18 U.S.C. Section 1350 Certification of Chief Financial Officer.~~				X

~~101~~		The following materials from Ballantyne Strong, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive (Loss) Income, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to Condensed Consolidated Financial Statements.				X

		Incorporated by Reference
Exhibit Number	Document Description	Form	Exhibit	Filing Date	Filed Herewith
10.1	Amendment to the Credit Agreement, dated as of November 14, 2017, between Canadian Imperial Bank of Commerce and Strong/MDI Screen Systems, Inc.	10-K	10.22	3-15-2018

10.2	Note Modification Agreement, dated as of April 18, 2018, by and between Convergent Media Systems Corporation, as Borrower, and blueharbor bank, as Lender.	8-K	10.1	4-24-2018

10.3	Contract of Sale, dated as of April 27, 2018, by and among Convergent Media Systems Corporation, as seller, and Metrolina Alpharetta, LLC, as Buyer.	8-K	10.1	5-1-2018

10.4	Form of Lease Agreement, to be entered into by and between Metrolina Alpharetta, LLC, as Landlord, and Ballantyne Strong, Inc., as Tenant	8-K	10.2	5-1-2018

10.5	Form of Warrant, to be issued by Ballantyne Strong, Inc.	8-K	10.3	5-1-2018

31.1	Rule 13a-14(a) Certification of Chief Executive Officer.				X

31.2	Rule 13a-14(a) Certification of Chief Financial Officer.				X

32.1*	18 U.S.C. Section 1350 Certification of Chief Executive Officer.				X

32.2*	18 U.S.C. Section 1350 Certification of Chief Financial Officer.				X

101	The following materials from Ballantyne Strong, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Comprehensive (Loss) Income, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to the Condensed Consolidated Financial Statements.				X

BALLANTYNE STRONG, INC.

By:	/s/D. Kyle Cerminara	By:	/s/Lance V. Schulz
	D. Kyle Cerminara, Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer)		Lance V. Schulz, Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Date:	~~August~~May 8, ~~2017~~2018	Date:	~~August~~May 8, ~~2017~~2018