BALLANTYNE STRONG, INC. (Form: 10-Q, Received: 08/08/2018 17:05:25)

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, 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)

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	[X]	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 July 31, 2018
Common Stock, $.01, par value		14,443,924 shares

TABLE OF CONTENTS

		Page No.

	PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	3

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

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

	Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2018 and 2017	5

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017	6

	Notes to the Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	36

Item 4.	Controls and Procedures	36

	PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37

Item 6.	Exhibits	38

	Signatures	39

PART I. Financial Information

Item 1. Financial Statements

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except par values)

	June 30, 2018			December 31, 2017
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	6,847		$	4,870
Accounts receivable (net of allowance for doubtful accounts of $1,986 and $1,877, respectively)		10,751			10,766
Inventories:
Raw materials and components, net		1,059			1,376
Work in process		456			362
Finished goods, net		2,136			3,083
Total inventories, net		3,651			4,821
Recoverable income taxes		607			495
Other current assets		1,595			1,290
Total current assets		23,451			22,242
Property, plant and equipment (net of accumulated depreciation of $9,151 and $8,780 respectively)		11,926			10,826
Equity method investments		16,811			18,053
Intangible assets, net		2,673			3,972
Goodwill		907			952
Notes receivable		2,965			2,815
Other assets		481			154
Total assets	$	59,214		$	59,014
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	4,049		$	3,425
Accrued expenses		3,709			3,071
Short-term debt		2,620			500
Current portion of long-term debt		508			65
Deferred revenue and customer deposits		2,781			1,619
Income tax payable		152			-
Total current liabilities		13,819			8,680
Long-term debt, net of current portion and debt issuance costs		7,993			1,870
Deferred revenue and customer deposits, net of current portion		1,181			1,207
Deferred income taxes		2,790			2,816
Other accrued expenses, net of current portion		207			319
Total liabilities		25,990			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 17,241 and 17,216 shares at June 30, 2018 and December 31, 2017, respectively; outstanding 14,446 and 14,422 shares at June 30, 2018 and December 31, 2017, respectively		169			169
Additional paid-in capital		41,121			40,565
Accumulated other comprehensive loss:
Foreign currency translation		(4,878	)		(4,048	)
Postretirement benefit obligations		108			99
Unrealized gain on available-for-sale securities of equity method investments		183			353
Retained earnings		15,107			25,570
		51,810			62,708
Less 2,794 of common shares in treasury, at cost		(18,586	)		(18,586	)
Total stockholders’ equity		33,224			44,122
Total liabilities and stockholders’ equity	$	59,214		$	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, 2018 and 2017

(In thousands, except per share data)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Net product sales	$	7,450		$	12,917		$	16,089		$	25,493
Net service revenues		6,728			6,483			13,916			11,832
Total net revenues		14,178			19,400			30,005			37,325
Cost of products sold		5,420			10,429			11,232			20,817
Cost of services		7,466			3,697			14,632			6,795
Total cost of revenues		12,886			14,126			25,864			27,612
Gross profit		1,292			5,274			4,141			9,713
Selling and administrative expenses:
Selling		1,274			1,419			2,500			2,909
Administrative		4,208			4,688			8,917			8,234
Total selling and administrative expenses		5,482			6,107			11,417			11,143
Loss on disposal of assets		(1,331	)		-			(1,331	)		-
Loss from operations		(5,521	)		(833	)		(8,607	)		(1,430	)
Other income (expense):
Interest income		-			-			-			22
Interest expense		(42	)		(28	)		(87	)		(38	)
Foreign currency transaction gain (loss)		3			(107	)		107			(104	)
Fair value adjustment to notes receivable		192			-			150			-
Other (expense) income, net		(5	)		7			(11	)		10
Total other income (expense)		148			(128	)		159			(110	)
Loss before income taxes and equity method investment (loss) income		(5,373	)		(961	)		(8,448	)		(1,540	)
Income tax expense		642			776			1,339			2,269
Equity method investment (loss) income		(740	)		(212	)		(751	)		2,269
Net loss from continuing operations		(6,755	)		(1,949	)		(10,538	)		(1,540	)
Net loss from discontinued operations, net of tax		-			(26	)		-			(49	)
Net loss	$	(6,755	)	$	(1,975	)	$	(10,538	)	$	(1,589	)
Net loss per share - basic
Net loss from continuing operations	$	(0.47	)	$	(0.14	)	$	(0.73	)	$	(0.11	)
Net loss from discontinued operations		-			(0.00	)		-			(0.00	)
Net loss		(0.47	)		(0.14	)		(0.73	)		(0.11	)
Net loss per share - diluted
Net loss from continuing operations	$	(0.47	)	$	(0.14	)	$	(0.73	)	$	(0.11	)
Net loss from discontinued operations		-			(0.00	)		-			(0.00	)
Net loss		(0.47	)		(0.14	)		(0.73	)		(0.11	)

See accompanying notes to condensed consolidated financial statements.

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Loss

Three and Six Months Ended June 30, 2018 and 2017

(In thousands)

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Net loss	$	(6,755	)	$	(1,975	)	$	(10,538	)	$	(1,589	)
Adjustment to postretirement benefits		-			-			9			-
Currency translation adjustment:
Unrealized net change arising during period		(363	)		709			(830	)		818
Unrealized (loss) gain on available-for-sale securities of equity method investments, net of tax		(118	)		181			(170	)		179
Total other comprehensive (loss) income		(481	)		890			(991	)		997
Comprehensive loss	$	(7,236	)	$	(1,085	)	$	(11,529	)	$	(592	)

See accompanying notes to condensed consolidated financial statements.

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2018 and 2017

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2018			2017
Cash flows from operating activities:
Net loss	$	(10,538	)	$	(1,589	)
Net loss from discontinued operations, net of tax		-			(49	)
Net loss from continuing operations		(10,538	)		(1,540	)
Adjustments to reconcile net loss from continuing operations to net cash used in operating activities:
Provision for doubtful accounts		143			418
Provision for obsolete inventory		535			(175	)
Provision for warranty		58			171
Depreciation and amortization		1,140			1,004
Equity method investment loss (income)		751			(2,269	)
Fair value adjustment to notes receivable		(150	)		-
Deferred income taxes		18			913
Amortization of contract acquisition costs		29			-
Stock-based compensation expense		482			330
Impairment of operating lease		74			-
Loss on disposal of assets		1,331			-
Changes in operating assets and liabilities:
Accounts receivable		(297	)		(935	)
Inventories		557			(170	)
Other current assets		(1	)		(247	)
Accounts payable		582			2,497
Accrued expenses		533			(438	)
Deferred revenue and customer deposits		1,156			(1,023	)
Current income taxes		22			(247	)
Other assets		(590	)		(474	)
Net cash flows used in operating activities - continuing operations		(4,165	)		(2,185	)
Net cash flows used in operating activities - discontinued operations		-			(146	)
Net cash used in operating activities		(4,165	)		(2,331	)

(Continued on following page)

See accompanying notes to condensed consolidated financial statements.

Ballantyne Strong, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows - Continued

Six Months Ended June 30, 2018 and 2017

(In thousands)

(Unaudited)

	Six Months Ended June 30,
	2018			2017
Cash flows from investing activities:
Purchase of equity securities	$	-		$	(2,525	)
Dividends received from investee in excess of cumulative earnings		46			103
Capital expenditures		(887	)		(2,103	)
Proceeds from sale of business		-			60
Net cash used in investing activities		(841	)		(4,465	)

Cash flows from financing activities:
Proceeds from sale-leaseback financing		7,000			-
Proceeds from issuance of short-term debt		3,234			-
Proceeds from issuance of long-term debt		-			2,000
Principal payments on long-term debt		(1,974	)		(2	)
Principal payments on short-term debt		(1,039	)		-
Payment of debt issuance costs		(17	)		(36	)
Payments on capital lease obligations		(96	)		(134	)
Purchase of treasury stock		-			(102	)
Proceeds from exercise of stock options		-			33
Other		(8	)		-
Net cash provided by financing activities		7,100			1,759
Effect of exchange rate changes on cash and cash equivalents		(117	)		66
Net increase (decrease) in cash and cash equivalents		1,977			(4,971	)
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		-			-
Cash and cash equivalents at beginning of period		4,870			7,596
Cash and cash equivalents at end of period	$	6,847		$	2,800
Supplemental disclosure of non-cash investing and financing activities:
Term loan borrowings to finance equipment purchases	$	1,608		$	-
Issuance of short-term progress payment note payable	$	-		$	2,500

See accompanying notes to condensed consolidated financial statements.

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 Media Systems Corporation (“Convergent”) 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.

2. Discontinued Operations

In May 2017, the Company sold the operational assets of Strong Westrex, Inc. for total proceeds of $60 thousand. The summary financial results of discontinued operations for the three and six months ended June 30, 2017 were as follows (in thousands):

	Three Months Ended June 30, 2017			Six Months Ended June 30, 2017
Total net revenues	$	12		$	24
Total cost of revenues		22			48
Total selling and administrative expenses		43			53
Loss from operations of discontinued operations		(53	)		(77	)
Loss before income taxes		(26	)		(49	)
Income tax expense		-			-
Net loss from discontinued operations, net of tax	$	(26	)	$	(49	)

There was no depreciation and amortization related to discontinued operations recorded for the three and six month periods ended June 30, 2017. There were no capital expenditures related to discontinued operations during the three and six month periods ended June 30, 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. 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 for the fiscal year ended December 31, 2017.

The condensed consolidated balance sheet as of December 31, 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.

Use of Management Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles 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 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.

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) 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 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 recorded an other-than-temporary impairment charge related to its investments of $0.7 million in equity method investment loss on its condensed consolidated statements of operations during the three and six month periods ended June 30, 2018. The Company did not record any impairments related to its investments during the three and six month periods ended June 30, 2017. Note 6 contains additional information on our equity method investments.

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

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 are classified, as of June 30, 2018 and December 31, 2017.

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

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	6,847	$	-	$	-	$	6,847
Notes receivable		-		-		2,965		2,965
Total	$	6,847	$	-	$	2,965	$	9,812

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

	Level 1		Level 2		Level 3		Total
Cash and cash equivalents	$	4,870	$	-	$	-	$	4,870
Notes receivable		-		-		2,815		2,815
Total	$	4,870	$	-	$	2,815	$	7,685

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

Fair value at 6/30/18

(in thousands)

Valuation technique

Unobservable input

Range

Notes receivable

2,965

Discounted cash flow

Default percentage

Discount rate

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, the Company reviews the financial position and estimated cash flows of the debtor of the notes receivable on a quarterly basis. During 2018, the Company updated its estimated future cash flow assumptions. This resulted in an increase to the fair value of the notes receivable of $150 thousand recorded in earnings during the six months ended June 30, 2018. There was no adjustment to the estimated fair value of the notes receivable during the six months ended June 30, 2017.

The significant unobservable inputs used in the fair value measurement of the Company’s notes receivable are discount rate and percentage of default. Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value measurement.

The Company’s short-term and long-term debt is recorded at historical cost. As of June 30, 2018, the carrying value of the Company’s long-term debt, including current maturities, of $8.5 million approximated its fair value due to the recency of the debt issuances.

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 include non-financial long-lived assets, are measured at fair value in certain circumstances (for example, when there is evidence of impairment). During the three and six months ended June 30, 2018, the Company recorded an impairment charge of $1.3 million related to the abandonment of an internally developed software intangible asset as a loss on disposal of assets in the condensed consolidated statement of operations. Other than the intangible asset impairment, the Company did not have any significant non-recurring measurements of non-financial assets or liabilities during the three and six months ended June 30, 2018 and 2017.

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. generally accepted accounting principles (also referred to as “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 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 June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial 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 January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill 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 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 its adoption will significantly impact the Company’s results of operations or financial position.

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 is used when observable prices are 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.

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 six months ended June 30, 2018 (in thousands):

Deferred contract acquisition costs as of January 1, 2018	$	76
Costs capitalized		12
Amortization		(29	)
Impairment		-
Deferred contract acquisition costs as of June 30, 2018	$	59

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 June 30, 2018		Adjustments			Balances without adoption of ASC 606
Total current assets	$	23,451	$	77		$	23,528
Total noncurrent assets		35,763		-			35,763
Total assets	$	59,214	$	77		$	59,291

Total current liabilities	$	13,819	$	173		$	13,992
Total noncurrent liabilities		12,171		-			12,171
Total liabilities		25,990		173			26,163

Retained earnings		15,107		(96	)		15,011
Other stockholders’ equity		18,117		-			18,117
Total stockholders’ equity		33,224		(96	)		33,128
Total liabilities and stockholders’ equity	$	59,214	$	77		$	59,291

Condensed Consolidated Statements of Operations:

	As reported for the three months ended June 30, 2018			Adjustments			Balances without adoption of ASC 606
Total net revenues	$	14,178		$	142		$	14,320
Total cost of revenues		12,886			124			13,010
Gross profit		1,292			18			1,310
Total selling and administrative expenses		5,482			(13	)		5,469
Loss on disposal of assets		(1,331	)		-			(1,331	)
Loss from operations		(5,521	)		31			(5,490	)
Other income		148			-			148
Loss before income taxes and equity method investment loss		(5,373	)		31			(5,342	)
Income tax expense		642			-			642
Equity method investment loss		(740	)		-			(740	)
Net loss	$	(6,755	)	$	31		$	(6,724	)
Net loss per share of common stock:
Basic	$	(0.47	)		0.00		$	(0.47	)
Diluted	$	(0.47	)		0.00		$	(0.47	)

	As reported for the six months ended June 30, 2018			Adjustments			Balances without adoption of ASC 606
Total net revenues	$	30,005		$	85		$	30,090
Total cost of revenues		25,864			123			25,987
Gross profit		4,141			(38	)		4,103
Total selling and administrative expenses		11,417			(18	)		11,399
Loss on disposal of assets		(1,331	)		-			(1,331	)
Loss from operations		(8,607	)		(20	)		(8,627	)
Other income		159			-			159
Loss before income taxes and equity method investment loss		(8,448	)		(20	)		(8,468	)
Income tax expense		1,339			-			1,339
Equity method investment loss		(751	)		-			(751	)
Net loss	$	(10,538	)	$	(20	)	$	(10,558	)
Net loss per share of common stock:
Basic	$	(0.73	)		(0.00	)	$	(0.73	)
Diluted	$	(0.73	)		(0.00	)	$	(0.73	)

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 June 30, 2018 (in thousands):

	Cinema		Digital Media		Other		Eliminations			Total
Screen system sales	$	4,236	$	-	$	-	$	-		$	4,236
Digital equipment sales		1,922		558		-		(19	)		2,461
Field maintenance and monitoring services		3,101		1,773		-		(74	)		4,800
Installation services		379		628		-		-			1,007
Extended warranty sales		249		-		-		-			249
Advertising		-		460		-		-			460
Other		541		408		16		-			965
Total	$	10,428	$	3,827	$	16	$	(93	)	$	14,178

The following table disaggregates the Company’s revenue by major source for the six months ended June 30, 2018 (in thousands):

	Cinema		Digital Media		Other		Eliminations			Total
Screen system sales	$	8,235	$	-	$	-	$	-		$	8,235
Digital equipment sales		5,088		1,389		-		(234	)		6,243
Field maintenance and monitoring services		6,046		3,820		-		(214	)		9,652
Installation services		708		1,988		-		-			2,696
Extended warranty sales		591		-		-		-			591
Advertising		-		468		-		-			468
Other		1,210		878		32		-			2,120
Total	$	21,878	$	8,543	$	32	$	(448	)	$	30,005

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.

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 six months ended June 30, 2018, $0.7 million of this balance was earned and recognized as revenue. At June 30, 2018, the unearned revenue amount was $0.8 million. The Company expects to recognize $0.5 million of unearned revenue amounts throughout the rest of 2018, $0.2 million in 2019 and immaterial amounts each year from 2020 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 June 30, 2018 (in thousands):

	Cinema		Digital Media		Other		Eliminations			Total
Point in time	$	8,688	$	2,008	$	-	$	(93	)	$	10,603
Over time		1,740		1,819		16		-			3,575
Total	$	10,428	$	3,827	$	16	$	(93	)	$	14,178

The following table disaggregates the Company’s revenue by the timing of transfer of goods or services to the customer for the six months ended June 30, 2018 (in thousands):

	Cinema		Digital Media		Other		Eliminations			Total
Point in time	$	18,287	$	4,536	$	-	$	(448	)	$	22,375
Over time		3,591		4,007		32		-			7,630
Total	$	21,878	$	8,543	$	32	$	(448	)	$	30,005

5. Loss Per Common Share

Basic loss per share has been computed on the basis of the weighted average number of shares of common stock outstanding. Diluted loss 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 and restricted stock units. The following table summarizes the average shares used to compute basic and diluted loss per share:

	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
Weighted average shares outstanding (in thousands):
Basic weighted average shares outstanding		14,364		14,263		14,352		14,264
Dilutive effect of stock options and certain non-vested shares of restricted stock		-		-		-		-
Diluted weighted average shares outstanding		14,364		14,263		14,352		14,264

For the three and six month periods ended June 30, 2018, options to purchase 410,000 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 each period. An additional 134,402 and 120,352 common stock equivalents related to options and restricted stock awards were excluded for the three and six months ended June 30, 2018, respectively, as their inclusion would be anti-dilutive, thereby decreasing the net losses per share. For the three and six month periods ended June 30, 2017, options to purchase 445,000 shares of common stock 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 156,606 and 176,479 common stock equivalents related to options and restricted stock awards were excluded for the three and six months ended June 30, 2017, respectively, as their inclusion would be anti-dilutive, thereby decreasing the net losses per share.

6. Equity Method Investments

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

	June 30, 2018					December 31, 2017
Entity	Carrying Amount		Economic Interest			Carrying Amount		Economic Interest
BK Technologies, Inc.	$	4,020		8.3	%	$	4,473		8.3	%
Itasca Capital, Ltd.		4,654		32.3	%		5,870		32.3	%
1347 Property Insurance Holdings, Inc.		8,137		17.4	%		7,710		17.4	%
Total	$	16,811				$	18,053

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

	Three months ended June 30,						Six months ended June 30,
Entity	2018			2017			2018			2017
BK Technologies, Inc.	$	(37	)	$	(105	)	$	(391	)	$	(97	)
Itasca Capital, Ltd.		(1,042	)		(150	)		(939	)		2,311
1347 Property Insurance Holdings, Inc.		339			43			579			55
Total	$	(740	)	$	(212	)	$	(751	)	$	2,269

BK Technologies, Inc. (formerly known as RELM Wireless Corporation) (“BKTI”) 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 BKTI, and controls entities that, when combined with the Company’s ownership in BKTI, own greater than 20% of BKTI, providing the Company with significant influence over BKTI, but not controlling interest. The Company received dividends of $23 thousand and $0.1 million during the three month periods ended June 30, 2018 and 2017, respectively, and received dividends of $46 thousand and $0.2 million during the six month periods ended June 30, 2018 and 2017, respectively. Based on quoted market prices, the market value of the Company’s ownership in BKTI was $4.2 million at June 30, 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 chairman 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 or six month periods ended June 30, 2018 or 2017. Based on quoted market prices, the market value of the Company’s ownership in Itasca was $3.5 million at June 30, 2018. A $0.7 million other-than-temporary impairment charge for Itasca is included in equity method investment loss on the condensed consolidated statements of operations for the three and six month periods ended June 30, 2018.

1347 Property Insurance Holdings, Inc. (“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 is chairman of the board of directors of PIH, and controls entities that, when combined with the Company’s ownership in PIH, own greater than 20% of PIH, providing the Company with significant influence over PIH, but not controlling interest. The Company did not receive dividends from PIH during the three or six month periods ended June 30, 2018 and 2017. Based on quoted market prices, the market value of the Company’s ownership in PIH was $7.3 million at June 30, 2018.

As of June 30, 2018, the Company’s retained earnings included undistributed earnings from our equity method investees of $1.4 million.

The summarized financial information presented below reflects the financial information of the Company’s equity method investees for the six months ended March 31, 2018 and 2017, consistent with the Company’s recognition of the results of its equity method investments on a one-quarter lag.

For the six months ended March 31,	2018			2017
	(in thousands)
Revenue	$	45,862		$	30,910
Operating income from continuing operations	$	987		$	1,710
Net (loss) income	$	(2,268	)	$	7,869

7. Intangible Assets

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

	Useful life	Gross		Accumulated Amortization			Net
	(Years)
Intangible assets not yet subject to amortization:
Software in development		$	948	$	-		$	948
Intangible assets subject to amortization:
Software in service	5		1,976		(358	)		1,618
Product formulation	10		462		(355	)		107
Total		$	3,386	$	(713	)	$	2,673

Intangible assets consisted of the following at December 31, 2017 (dollars in thousands):

	Useful life	Gross		Accumulated Amortization			Net
	(Years)
Intangible assets not yet subject to amortization:
Software in development		$	1,243	$	-		$	1,243
Intangible assets subject to amortization:
Software in service	5		3,191		(597	)		2,594
Product formulation	10		486		(351	)		135
Total		$	4,920	$	(948	)	$	3,972

Amortization expense relating to intangible assets was $0.4 million and $0.2 million for the six months ended June 30, 2018 and 2017, respectively. During the three and six months ended June 30, 2018, the Company also recorded an impairment charge of $1.3 million related to abandoned software in service in the Digital Media segment as a loss on disposal of assets in the condensed consolidated statement of operations.

The following table shows the Company’s estimated future amortization expense related to intangible assets currently subject to amortization for the next five years (in thousands):

	Amount
Remainder 2018	$	226
2019		440
2020		431
2021		389
2022		193
Thereafter		46
Total	$	1,725

8. Goodwill

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

Balance as of December 31, 2017	$	952
Foreign currency translation		(45	)
Balance as of June 30, 2018	$	907

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. 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, 2018 and 2017 (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Warranty accrual at beginning of period	$	564		$	462		$	521		$	645
Charged to (reversed from) expense		(19	)		128			65			175
Claims paid, net of recoveries		(87	)		(142	)		(117	)		(373	)
Foreign currency adjustment		(9	)		9			(20	)		10
Warranty accrual at end of period	$	449		$	457		$	449		$	457

10. Debt

The Company’s debt consists of the following (in thousands):

	June 30, 2018			December 31, 2017
Short-term debt:
Strong/MDI installment loan	$	2,620		$	-
Revolving line of credit		-			500
Current portion of long-term debt		508			65
Total short-term debt		3,128			565
Long-term debt:
Sale-leaseback financing		6,919			-
Equipment term loans		1,599			-
$2 million term loan		-			1,968
Total principal balance of long-term debt		8,518			1,968
Less: current portion		(508	)		(65	)
Less: unamortized debt issuance costs		(17	)		(33	)
Total long-term debt		7,993			1,870
Total short-term and long-term debt	$	11,121		$	2,435

On May 22, 2018, the Company’s subsidiary, Convergent, entered into an installment payment agreement with an equipment financing company in order to purchase media players and related equipment in an aggregate amount of up to approximately $4.4 million. Installment payments under each contract for purchase of the equipment are due monthly for a period of 60 months. The financing provided in the agreement is secured by the equipment. The borrowings under the agreement are recorded as long-term debt on the Company’s condensed consolidated balance sheet and bear interest at a fixed rate based on the three-year U.S. Treasury Note yield plus a spread at the time of funding. The obligations under the agreement are guaranteed by the Company. At June 30, 2018, the Company had $1.6 million of outstanding borrowings under the agreement, which bear interest at a weighted-average fixed rate of 5.7%.

On June 29, 2018, the Company and Convergent completed a sale-leaseback of Convergent’s Alpharetta, Georgia office facility. Convergent sold the Alpharetta facility for $7.0 million in cash and the Company simultaneously entered 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. Due to the Company’s continuing involvement in the building, the transaction was accounted for as a financing rather than a normal leaseback. The net proceeds from the transaction were recorded as a financing liability in long-term debt on the Company’s condensed consolidated balance sheet. Upon closing, the Company’s term loan and revolving line of credit that previously were secured by the Alpharetta facility were repaid, and the related debt agreement was terminated. In addition, the Company issued warrants to the buyer to purchase up to 100,000 shares of Company stock, consisting of warrants to purchase 25,000 shares at each of $10, $12, $14, and $16 purchase prices per share. The warrants have a 10-year maturity. The Company recorded the aggregate $81 thousand fair value of the warrants as additional paid-in capital. The fair value of the warrants was calculated based on a Black-Scholes valuation model using the following assumptions:

Expected dividend yield at date of grant	0.00	%
Risk-free interest rate	2.81	%
Expected stock price volatility	37.01	%
Expected life of warrants (in years)	7.0

The risk-free interest rate assumption was based on the U.S. Treasury yield curve in effect at the warrant issuance date. The expected volatility was based on historical daily price changes of the Company’s stock for the seven years prior to the warrant issuance date. The expected life of the warrants is the Company’s estimate of the number of years the warrants will be outstanding.

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 lender’s 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. On April 24, 2018, the Company borrowed CDN$3.5 million on the 20-year installment loan. There was CDN$3.45 million of principal outstanding on the 20-year installment loan as of June 30, 2018, which bears variable interest at 3.95%. Strong/MDI was in compliance with its debt covenants as of June 30, 2018.

Scheduled repayments are as follows for the Company’s long-term debt outstanding as of June 30, 2018 (in thousands):

Remainder of 2018	$	309
2019		543
2020		586
2021		632
2022		681
Thereafter		5,767
Total	$	8,518

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, 2018 and December 31, 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 made provisional estimates of the effects on our consolidated financial statements and tax disclosures, including the amount of the repatriation tax and changes to existing deferred tax balances.

The Company is subject to possible examinations not yet initiated for Federal purposes for fiscal years 2014 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.

12. Stock Compensation

The Company recognizes compensation expense for all stock-based payment awards made to employees and directors based on estimated grant date fair values. Stock-based compensation expense included in selling and administrative expenses approximated $0.2 million for each of the three month periods ended June 30, 2018 and 2017, and $0.5 million and $0.3 million for the six month periods ended June 30, 2018 and 2017, respectively.

The Company’s 2017 Omnibus Equity Compensation Plan (“2017 Plan”) was approved by the Company’s 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 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 authorized for issuance under the 2017 Plan is 1,371,189 shares, with 975,021 shares remaining available for grant at June 30, 2018.

Options

The Company granted a total of 387,500 and 395,000 options during the six month periods ended June 30, 2018 and 2017, 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 month periods ended June 30, 2018 and 2017 was $1.82 and $2.42, 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:

	2018	2017
Expected dividend yield at date of grant	0.00%	0.00%
Risk-free interest rate	2.49%	2.01%
Expected stock price volatility	35.65%	34.77%
Expected life of options (in years)	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. Expected volatility is based on historical daily price changes of the Company’s stock for six years prior to the date of grant. 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 months ended June 30, 2018:

	Number of Options			Weighted Average Exercise Price Per Share		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2017		930,300		$	5.63		8.7	$	150
Granted		387,500			4.70
Exercised		-			-
Forfeited		(155,000	)		5.58
Expired		(95,000	)		4.70
Outstanding at June 30, 2018		1,067,800		$	5.31		8.7	$	216
Exercisable at June 30, 2018		206,300		$	5.16		7.8	$	72

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 the date indicated.

As of June 30, 2018, 861,500 stock option awards were non-vested. Unrecognized compensation cost related to stock option awards was approximately $1.5 million, which is expected to be recognized over a weighted average period of 3.9 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, 2018, the total unrecognized compensation cost related to non-vested restricted stock awards was approximately $0.9 million, which is expected to be recognized over a weighted average period of 2.3 years.

The following table summarizes restricted stock share activity for the six months ended June 30, 2018:

	Number of Restricted Stock Shares			Weighted Average Grant Date Fair Value
Non-vested at December 31, 2017		85,000		$	6.50
Granted		-			-
Shares vested		(28,333	)		6.50
Shares forfeited		(6,667	)		6.50
Non-vested at June 30, 2018		50,000		$	6.50

The following table summarizes restricted stock unit activity for the six months ended June 30, 2018:

	Number of Restricted Stock Units			Weighted Average Grant Date Fair Value
Non-vested at December 31, 2017		35,835		$	6.45
Granted		147,500			4.70
Shares vested		(30,835	)		6.81
Shares forfeited		-			-
Non-vested at June 30, 2018		152,500		$	4.69

13. Commitments, Contingencies and Concentrations

Litigation

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

Concentrations

The Company’s top ten customers accounted for approximately 47% of total consolidated net revenues for the three and six months ended June 30, 2018. Trade accounts receivable from these customers represented approximately 43% of net consolidated receivables at June 30, 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 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 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.

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

	Capital Leases			Operating Leases
	(in thousands)
Remainder 2018	$	123		$	899
2019		116			1,769
2020		-			1,545
2021		-			1,416
2022		-			1,081
Thereafter		-			-
Total minimum lease payments	$	239		$	6,710
Less: Amount representing interest		(10	)
Present value of minimum lease payments		229
Less: Current maturities		(226	)
Capital lease obligations, net of current portion	$	3

14. Business Segment Information

As of June 30, 2018, the Company’s operations were conducted principally through two business segments: Cinema and Digital Media. The Cinema segment provides a full range of product and service 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, as well as network monitoring and on-site service for cinema equipment. The 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 our customers.

Summary by Business Segments

	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2018			2017			2018			2017
Net revenues
Cinema	$	10,428		$	13,173		$	21,878		$	25,863
Digital Media		3,827			6,337			8,543			11,682
Other		16			9			32			9
Total segment net revenues		14,271			19,519			30,453			37,554
Eliminations		(93	)		(119	)		(448	)		(229	)
Total net revenues		14,178			19,400			30,005			37,325

Gross profit (loss)
Cinema		3,215			4,015			6,600			7,631
Digital Media		(1,939	)		1,250			(2,491	)		2,073
Other		16			9			32			9
Total gross profit		1,292			5,274			4,141			9,713

Operating (loss) income
Cinema		1,973			2,886			4,298			5,565
Digital Media		(4,983	)		(898	)		(7,479	)		(2,011	)
Other		(85	)		(74	)		(198	)		(191	)
Total segment operating (loss) income		(3,095	)		1,914			(3,379	)		3,363
Unallocated general and administrative expenses		(2,426	)		(2,747	)		(5,228	)		(4,793	)
Loss from operations		(5,521	)		(833	)		(8,607	)		(1,430	)
Other income (expense)		148			(128	)		159			(110	)
Loss before income taxes and equity method investment (loss) income	$	(5,373	)	$	(961	)	$	(8,448	)	$	(1,540	)

(In thousands)	June 30, 2018		December 31, 2017
Identifiable assets
Cinema	$	25,206	$	27,358
Digital Media		13,131		13,603
Corporate		20,877		18,053
Total	$	59,214	$	59,014

Summary by Geographical Area

	Three Months Ended June 30,				Six Months Ended June 30,
(In thousands)	2018		2017		2018		2017
Net revenue
United States	$	10,872	$	14,884	$	23,701	$	29,218
Canada		1,514		1,787		2,914		3,007
Mexico		531		383		1,087		739
China		745		1,431		1,286		2,896
Latin America		133		520		403		804
Europe		195		79		353		195
Asia (excluding China)		104		212		177		278
Other		84		104		84		188
Total	$	14,178	$	19,400	$	30,005	$	37,325

(In thousands)	June 30, 2018		December 31, 2017
Identifiable assets
United States	$	41,207	$	37,230
Canada		18,007		21,784
Total	$	59,214	$	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.

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 for the fiscal year ended December 31, 2017 and the following risks and uncertainties: the Company’s ability to expand its revenue streams, 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 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, 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 and service 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 enterprise video.

Our segments were determined based on the manner in which management organizes segments for making operating decisions and assessing performance. Approximately 72% of our revenues for the six months ended June 30, 2018 were from Cinema and approximately 28% were from Digital Media. Additional information related to our reporting segments can be found in the notes to the condensed consolidated financial statements.

Results of Operations:

Three Months Ended June 30, 2018 Compared to the Three Months Ended June 30, 2017

Revenues

Net revenues during the quarter ended June 30, 2018 decreased 26.9% to $14.2 million from $19.4 million during the quarter ended June 30, 2017.

	Three Months Ended June 30,
	2018			2017			$ Change			% Change
	(dollars in thousands)
Cinema	$	10,428		$	13,173		$	(2,745	)		(20.8	)%
Digital Media		3,827			6,337			(2,510	)		(39.6	)%
Other		16			9			7			77.8	%
Total segment revenues		14,271			19,519			(5,248	)		(26.9	)%
Eliminations		(93	)		(119	)		26			(21.8	)%
Total net revenues	$	14,178		$	19,400		$	(5,222	)		(26.9	)%

Cinema

Sales of Cinema products and services decreased 20.8% to $10.4 million in the second quarter of 2018 from $13.2 million in the second quarter of 2017. The decrease was driven by a decrease in 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, and decreased sales of screens and projectors.

Digital Media

Sales of Digital Media products and services decreased 39.6% to $3.8 million in the second quarter of 2018 from $6.3 million in the second quarter of 2017. The decrease was driven primarily by lower revenue from non-recurring installation services. Smaller decreases in sales of contract maintenance services, digital signage equipment and non-recurring maintenance services were partially offset by increased digital signage as a service (“DSaaS”) revenues and revenue in the current year from our taxicab advertising business that did not exist in the prior year. We expect DSaaS revenues to continue to increase during the second half of the year as we implement DSaaS for a new customer during the third quarter, which we expect to generate over $1.0 million of DSaaS revenues per quarter when fully implemented. We also expect taxicab advertising revenues to gradually increase during the second half of the year.

Export Revenues

Sales outside the United States (primarily from the Cinema segment) decreased to $3.3 million in the second quarter of 2018 from $4.5 million for the same quarter of last year due primarily to decreased sales in China, Latin America (excluding Mexico) and Canada, partially offset by increased sales in Mexico and Europe. 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.

Gross Profit

Gross profit during the quarter ended June 30, 2018 decreased 75.5% to $1.3 million from $5.3 million during the quarter ended June 30, 2017.

	Three Months Ended June 30,
	2018			2017		$ Change			% Change
	(dollars in thousands)
Cinema	$	3,215		$	4,015	$	(800	)		(19.9	)%
Digital Media		(1,939	)		1,250		(3,189	)		(255.1	)%
Other		16			9		7			77.8	%
Total gross profit	$	1,292		$	5,274	$	(3,982	)		(75.5	)%

Cinema

Gross profit in the Cinema segment was $3.2 million or 30.8% of revenues in the second quarter of 2018 compared to $4.0 million or 30.5% of revenues in the second quarter of 2017. The decrease in gross profit dollars was driven primarily by decreased revenues as described above.

Digital Media

Gross loss in the Digital Media segment was $1.9 million in the second quarter of 2018 compared to gross profit of $1.3 million in the second quarter of 2017. The decrease in gross margin dollars was driven primarily 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 is on a combination of vinyl printed signs and digital signs. We have leased 300 digital signs, which were installed throughout the first half 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. While we will continue to incur these fixed costs, we expect advertising revenues to gradually increase throughout 2018, absorbing a larger portion of the fixed costs until the business generates a positive gross profit in late 2018 or early 2019. Excluding the new costs associated with the advertising business, the gross profit in the Digital Media segment was approximately breakeven during the second quarter of 2018, or a decrease of approximately $1.3 million compared to the second quarter of 2017. This decrease was driven primarily by lower revenues as described above.

Operating (Loss) Income

We generated an operating loss of $5.5 million in the second quarter of 2018 compared to $0.8 million in the second quarter of 2017.

	Three Months Ended June 30,
	2018			2017			$ Change			% Change
	(dollars in thousands)
Cinema	$	1,973		$	2,886		$	(913	)		(31.6	)%
Digital Media		(4,983	)		(898	)		(4,085	)		454.9	%
Other		(85	)		(74	)		(11	)		14.9	%
Total segment operating (loss) income		(3,095	)		1,914			(5,009	)		(261.7	)%
Unallocated general and administrative expenses		(2,426	)		(2,747	)		321			(11.7	)%
Total operating loss	$	(5,521	)	$	(833	)	$	(4,688	)		562.8	%

We generated operating income in the Cinema segment of $2.0 million in the second quarter of 2018 compared to $2.9 million in the second quarter of 2017. The decrease in operating income was driven primarily by lower revenues and gross profit as described above.

The Digital Media segment generated an operating loss of $5.0 million in the second quarter of 2018 compared to $0.9 million in the second quarter of 2017. The increase in the operating loss was driven primarily by lower gross profit as described above, along with a $1.3 million loss on abandonment of an internally-developed software intangible asset.

Unallocated general and administrative expenses decreased to $2.4 million in the second quarter of 2018 compared to $2.7 million in the second quarter of 2017. The decrease was driven primarily by lower consulting, audit and tax expenses.

Other Financial Items

For the second quarter of 2018, total other income of $148 thousand primarily consisted of a $192 thousand fair value adjustment to our notes receivable, partially offset by $42 thousand of interest expense. For the second quarter of 2017, total other expense of $128 thousand primarily consisted of $107 thousand of foreign currency transaction losses and $28 thousand of interest expense. The increase in interest expense was due to higher average debt outstanding in 2018 compared to 2017.

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 second quarter of 2018 includes an equity method investment loss of $0.7 million, primarily consisting of an other-than-temporary impairment charge of $0.7 million and equity method investment loss of $0.3 million from Itasca, partially offset by equity method investment income of $0.3 million from PIH. Equity method investment loss in the second quarter of 2017 amounted to $0.2 million, consisting of losses from Itasca of $0.2 million and BKTI of $0.1 million, partially offset by income from PIH of $43 thousand.

As a result of the items outlined above, we generated net losses from continuing operations of approximately $6.8 million and basic and diluted losses per share from continuing operations of $0.47 in the second quarter of 2018, compared to net losses from continuing operations of $1.9 million and basic and diluted losses per share from continuing operations of $0.14 in the second quarter of 2017.

Six Months Ended June 30, 2018 Compared to the Six Months Ended June 30, 2017

Revenues

Net revenues during the six months ended June 30, 2018 decreased 19.6% to $30.0 million from $37.3 million during the six months ended June 30, 2017.

	Six Months Ended June 30,
	2018			2017			$ Change			% Change
	(dollars in thousands)
Cinema	$	21,878		$	25,863		$	(3,985	)		(15.4	)%
Digital Media		8,543			11,682			(3,139	)		(26.9	)%
Other		32			9			23			255.6	%
Total segment revenues		30,453			37,554			(7,101	)		(18.9	)%
Eliminations		(448	)		(229	)		(219	)		95.6	%
Total net revenues	$	30,005		$	37,325		$	(7,320	)		(19.6	)%

Cinema

Sales of Cinema products and services decreased 15.4% to $21.9 million in the first half of 2018 from $25.9 million in the first half of 2017. The decrease was driven by a decrease in 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, along with decreased sales of premium HGA screens and projectors, partially offset by increased sales of audio equipment and non-recurring installation services.

Digital Media

Sales of Digital Media products and services decreased 26.9% to $8.5 million in the first half of 2018 from $11.7 million in the first half of 2017. The decrease was driven primarily by lower revenue from non-recurring installation and maintenance services, sales of digital signage equipment and contract maintenance services, partially offset by revenue in the current year from our taxicab advertising business that did not exist in the prior year and increased DSaaS revenues.

Export Revenues

Sales outside the United States (primarily from the Cinema segment) decreased to $6.3 million in the first half of 2018 from $8.1 million for the same period of last year due primarily to decreased sales in China and Latin America (excluding Mexico), partially offset by increased sales in Mexico and Europe.

Gross Profit

Gross profit during the first half of 2018 decreased 57.4% to $4.1 million from $9.7 million during the first half of 2017.

	Six Months Ended June 30,
	2018			2017		$ Change			% Change
	(dollars in thousands)
Cinema	$	6,600		$	7,631	$	(1,031	)		(13.5	)%
Digital Media		(2,491	)		2,073		(4,564	)		(220.2	)%
Other		32			9		23			255.6	%
Total gross profit	$	4,141		$	9,713	$	(5,572	)		(57.4	)%

Cinema

Gross profit in the Cinema segment was $6.6 million or 30.2% of revenues in the first half of 2018 compared to $7.6 million or 29.5% of revenues in the first half of 2017. The decrease in gross profit dollars was driven primarily by decreased revenues as described above.

Digital Media

Gross loss in the Digital Media segment was $2.5 million in the first half of 2018 compared to gross profit of $2.1 million in the first half of 2017. The decrease in gross profit dollars was driven primarily by the fixed costs associated with our new taxicab advertising operations that we did not incur in the prior year. While we will continue to incur these fixed costs, we expect advertising revenues to gradually increase throughout 2018, absorbing a larger portion of the fixed costs until the business generates a positive gross profit in late 2018 or early 2019. Excluding the new costs associated with the advertising business, the gross profit in the Digital Media segment amounted to approximately $0.7 million during the first half of 2018, or a decrease of approximately $1.3 million compared to the first half of 2017. This decrease was driven primarily by lower revenues as described above and higher inventory obsolescence charges.

Operating (Loss) Income

We generated an operating loss of $8.6 million in the first half of 2018 compared to $1.4 million in the first half of 2017.

	Six Months Ended June 30,
	2018			2017			$ Change			% Change
	(dollars in thousands)
Cinema	$	4,298		$	5,565		$	(1,267	)		(22.8	)%
Digital Media		(7,479	)		(2,011	)		(5,468	)		271.9	%
Other		(198	)		(191	)		(7	)		3.7	%
Total segment operating (loss) income		(3,379	)		3,363			(6,742	)		(200.5	)%
Unallocated general and administrative expenses		(5,228	)		(4,793	)		(435	)		9.1	%
Total operating loss	$	(8,607	)	$	(1,430	)	$	(7,177	)		501.9	%

We generated operating income in the Cinema segment of $4.3 million in the first half of 2018 compared to $5.6 million in the first half of 2017. The decrease in operating income was driven primarily by lower revenues and gross profit as described above.

The Digital Media segment generated an operating loss of $7.5 million in the first half of 2018 compared to $2.0 million in the first half of 2017. The decrease was driven primarily by lower gross profit as described above, along with a $1.3 million loss on abandonment of an internally-developed software intangible asset.

Unallocated general and administrative expenses increased to $5.2 million in the first half of 2018 compared to $4.8 million in the first half of 2017. The increase was driven primarily by increased compensation and benefits, stock-based compensation, audit, tax and legal expenses, partially offset by lower consulting costs.

Other Financial Items

For the first half of 2018, total other income of $159 thousand primarily consisted of a $150 thousand fair value adjustment to our notes receivable and $107 thousand of foreign currency transaction gains, partially offset by $87 thousand of interest expense. For the first half of 2017, total other expense of $110 thousand primarily consisted of $104 thousand of foreign currency transaction losses and $38 thousand of interest expense. The increase in interest expense was due to higher average debt outstanding in 2018 compared to 2017.

The first half of 2018 includes an equity method investment loss of $0.8 million, consisting of an other-than-temporary impairment charge of $0.7 million and equity method investment loss of $0.2 million from Itasca and an equity method investment loss of $0.4 million from BKTI, partially offset by equity method investment income of $0.6 million from PIH. Equity method investment income in the first half of 2017 amounted to $2.3 million, primarily consisting of $2.3 million of income from Itasca.

As a result of the items outlined above, we generated net losses from continuing operations of approximately $10.5 million and basic and diluted losses per share from continuing operations of $0.73 in the first half of 2018, compared to net losses from continuing operations of $1.5 million and basic and diluted losses per share from continuing operations of $0.11 in the first half of 2017.

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 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 is on a combination of vinyl printed signs and digital signs. We have leased 300 digital signs, which were installed throughout the first and second quarters 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 continue to negatively impact our cash flow into the second 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, credit facilities and operating cash flow will be sufficient to meet our projected capital needs for the foreseeable future. We ended the second quarter of 2018 with total cash and cash equivalents of $6.8 million, compared to $4.9 million at December 31, 2017.

As of June 30, 2018, $1.3 million of the $6.8 million in cash and cash equivalents was held by our Canadian subsidiary, Strong/MDI. If these funds are repatriated to our operations in the U.S., we would be required to pay Canadian withholding taxes, which have been fully accrued as of June 30, 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 June 30, 2018, the parent company had outstanding intercompany loans from Strong/MDI of approximately $26.8 million, compared to approximately $19.4 million at December 31, 2017.

On May 22, 2018, our subsidiary, Convergent, entered into an installment payment agreement with an equipment financing company in order to purchase media players and related equipment in an aggregate amount of up to approximately $4.4 million. Installment payments under each contract for purchase of the equipment are due monthly for a period of 60 months. The financing provided in the agreement is secured by the equipment. The borrowings under the agreement bear interest at a fixed rate based on the three-year U.S. Treasury Note yield plus a spread at the time of funding. At June 30, 2018, we had $1.6 million of outstanding borrowings under the agreement, which bear interest at a weighted-average fixed rate of 5.7%.

On June 29, 2018, Convergent completed a sale-leaseback of its Alpharetta, Georgia office facility. Convergent sold the Alpharetta facility for $7.0 million in cash and we entered 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. Due to our continuing involvement in the building, the transaction was accounted for as a financing rather than a normal leaseback. Upon closing, Convergent’s term loan and revolving line of credit that previously were secured by the Alpharetta facility were repaid, and the related debt agreement was terminated.

In 2017, our Canadian subsidiary, Strong/MDI, 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. On April 24, 2018, the Company borrowed CDN$3.5 million on the 20-year installment loan. There was CDN$3.45 million of principal outstanding on the 20-year installment loan as of June 30, 2018. The outstanding principal bears variable interest based on the lender’s prime rate plus 0.5%, which equaled 3.95% on June 30, 2018. Strong/MDI was in compliance with its debt covenants as of June 30, 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):

	Six Months Ended June 30,
	2018			2017
Net cash used in operating activities - continuing operations	$	(4,165	)	$	(2,185	)
Less:
Changes in working capital		1,962			(1,037	)
Foreign currency transaction gain (loss)		107			(104	)
Current income tax expense		(1,323	)		(1,358	)
Net interest expense		(87	)		(16	)
Other		(9	)		12
Subtotal - reconciling items		650			(2,503	)
Operating (loss) income, excluding noncash operating expenses (non-GAAP)	$	(4,815	)	$	318

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 $4.2 million in the first half of 2018, as operating loss, excluding noncash expenses, of $4.8 million, current income tax expense of $1.3 million and net interest expense of $0.1 million were partially offset by favorable net changes in working capital items of $2.0 million and foreign currency transaction gains of $0.1 million. The favorable net change in working capital was primarily due to a $1.2 million increase in deferred revenue and customer deposits, a $1.1 million increase in accounts payable and accrued expenses and a $0.6 million decrease in inventory, partially offset by a $0.6 million increase in other assets and a $0.3 million increase in accounts receivable.

Net cash used in operating activities from continuing operations was $2.2 million in the first half of 2017, as operating income, excluding noncash expenses, of $0.3 million was offset by unfavorable changes in working capital of $1.0 million and current income tax expense of $1.4 million. The unfavorable net change in working capital was primarily due to a $1.0 million decrease in deferred revenue and customer deposits, a $0.9 million increase in accounts receivable, a $0.7 million increase in other current and non-current assets and a $0.2 million increase in current income taxes payable, partially offset by a $2.1 million increase in accounts payable and accrued expenses. The increase in accounts payable and accrued expenses was primarily due to timing of orders and payments to vendors at the end of the quarter.

Cash Flows from Investing Activities

Net cash used in investing activities was $0.8 million in the first half of 2018, consisting primarily of capital expenditures. Net cash used in investing activities was $4.5 million in the first half of 2017, due primarily to $2.5 million in purchases of equity securities and $2.1 million in capital expenditures.

Cash Flows from Financing Activities

Net cash provided by financing activities was $7.1 million in the first half of 2018, consisting primarily of $7.0 million of proceeds from the sale-leaseback of our Alpharetta, GA office facility and $3.2 million of proceeds from issuance of short-term debt. As a result of the sale-leaseback transaction, approximately $3.0 million of short-term and long-term debt previously secured by the facility was repaid. Net cash provided by financing activities in the first half of 2017 was $1.8 million, consisting primarily of proceeds from issuance of long-term debt of $2.0 million, partially offset by payments on capital lease obligations and purchases of treasury stock of $0.1 million each.

The effect of changes in foreign exchange rates decreased cash and cash equivalents by $0.1 million in the first half of 2018 and increased cash and cash equivalents by $0.1 million in the first half of 2017.

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 June 30, 2018 under contractual obligations are summarized below (in thousands):

Contractual Obligations	Total		2018		2019-2020		2021-2022		Thereafter
Long-term debt, including current maturities	$	11,554	$	484	$	1,961	$	2,011	$	7,098
Short-term debt		2,620		2,620		-		-		-
Postretirement benefits		108		7		30		30		41
Capital leases		239		123		116		-		-
Operating leases		6,710		899		3,314		2,497		-
Purchase obligations		21,358		4,005		16,018		1,335		-
Contractual cash obligations	$	42,589	$	8,138	$	21,439	$	5,873	$	7,139

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 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 six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for an entire fiscal year.

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,” in our Annual Report on Form 10-K for our year ended December 31, 2017. We periodically re-evaluate and adjust our critical accounting policies as circumstances change. 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 months ended June 30, 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 receivable, recorded at fair value, bearing fixed interest rates of 15% and long-term equipment term loans with weighted-average fixed interest rates of approximately 5.7%. 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 statements of operations. As of June 30, 2018, we also have $2.6 million borrowed on an installment loan that bears variable interest at the lender’s prime rate plus 0.5%, or 3.95% as of June 30, 2018. Changes in the lender’s prime rate would increase or decrease our interest expense on outstanding variable rate 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 may 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 as of June 30, 2018.

Equity Price Risk—We are exposed to price risk related to our investments in equity securities. At June 30, 2018, our carrying value of investments in equity securities aggregated $16.8 million, all of which were accounted for using the equity method. The fair value of these investments was $15.0 million at June 30, 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.

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 are effective at ensuring that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 (as amended) is (1) accumulated and communicated to 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. There have been no changes in the Company’s internal control over financial reporting during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, 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 for the year ended December 31, 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. There were no repurchases during the three months ended June 30, 2018. As of June 30, 2018, there were 636,931 shares that may yet be purchased under the stock repurchase program.

Item 6. Exhibits

		Incorporated by Reference
Exhibit Number	Document Description	Form	Exhibit	Filing Date	Filed Herewith
10.1	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	4-24-18

10.2	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	5-1-18

10.3	Lease Agreement, between Metrolina Alpharetta, LLC, as Landlord, and Ballantyne Strong, Inc., as Tenant.				X

10.4	Form of Warrant, to be issued by Ballantyne Strong, Inc.	8-K	10.3	5-1-18

10.5	Master Installment Payment Agreement, dated as of May 22, 2018, by and between Convergent Media Systems Corporation, as Borrower, and NEC Financial Services, as Lender.	8-K	10.1	5-29-18

10.6	Credit Agreement, dated as of May 16, 2018, between Canadian Imperial Bank of Commerce and Strong/MDI Screen Systems, Inc.				X

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, 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, (iv) the Condensed Consolidated Statements of Cash Flows and (v) the Notes to the Condensed Consolidated Financial Statements.				X

*	Furnished herewith.

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 8, 2018	Date:	August 8, 2018

Execution Copy

LEASE AGREEMENT

by and between

Metrolina Alpharetta, LLC

a North Carolina limited liability company

(as Landlord)

and

Ballantyne Strong, Inc. ,

a Delaware corporation,

(as Tenant)

LEASE AGREEMENT

THIS LEASE AGREEMENT (this “ Lease ”) made and entered into as of the 29th day of June, 2018 (the “ Lease Date ”), by and between:

METROLINA ALPHARETTA, LLC, a North Carolina limited liability company, hereinafter called “ Landlord ”; and

BALLANTYNE STRONG, INC., a Delaware corporation, hereinafter called “ Tenant ”:

W I T N E S S E T H :

In consideration of the mutual covenants and agreements contained herein, the parties hereto agree for themselves, their successors and assigns, as follows:

1. DESCRIPTION OF PREMISES . Landlord hereby leases to Tenant, and Tenant hereby accepts and rents from Landlord, that certain parcel of real property located in Forsyth County, Alpharetta, Georgia more particularly described on Exhibit A attached hereto (the “ Land ”) with that certain office building (the “ Building ”) containing approximately 43,524 square feet located on the Land and having an address of 190 Bluegrass Valley Parkway, Alpharetta, Georgia, together with all parking areas, driveways, sidewalks and other improvements facilities and personal property as more fully set forth herein located on said Land (said Building, together with said Land and other improvements and facilities being hereafter referred to as the “ Premises ”).

2. TERM .

(a) Unless another date is specified for occupancy on an exhibit attached hereto, the term of this Lease (herein, the “ Term ”) shall commence on the Lease Date as set forth hereinabove (the “ Commencement Date ”) and shall end at midnight on the date (the “ Expiration Date ”) which is ten (10) years from the Rent Commencement Date (as defined herein). As used herein, the term “ Lease Year ” shall mean each consecutive twelve-month period of the Term, beginning with the Rent Commencement Date (as defined herein) or any anniversary thereof.

3. RENTAL . During the full Term of this Lease, Tenant shall pay to Landlord, without notice, demand, reduction, setoff or any defense, a total rental (the “ Annual Rental ”) consisting of the sum total of the following:

(a) Minimum Rental . Starting on the Commencement Date (also being defined as the “ Rent Commencement Date ”) and continuing through the expiration of the Term of this Lease or the earlier termination of this Lease, Tenant shall pay the annual minimum rental (the “ Minimum Rental ”) which is payable in equal monthly installments, each in advance on or before the first day of each month. If the Rent Commencement Date is a date other than the first day of a calendar month, the Minimum Rental shall be prorated daily from such date to the first day of the next calendar month and paid on the Rent Commencement Date. The amount of Minimum Rental to be paid by Tenant during the Term shall be as follows:

Months		Minimum Rental		Monthly Payment
	1 - 12	$	600,000.00	$	50,000.00
	13 – 24	$	612,000.00	$	51,000.00
	25 – 36	$	624,240.00	$	52,020.00
	37 – 48	$	636,724.00	$	53,060.40
	49 – 60	$	649,458.50	$	54,121.54
	61 – 72	$	662,447.67	$	55,204.00
	73 – 84	$	675,696.62	$	56,308.05
	85 – 96	$	689,210.55	$	57,434.21
	97 – 108	$	702,994.76	$	58,582.90
	109 – 120	$	717,054.65	$	59,754.55

(b) Tenant’s Payment of Taxes . Tenant shall pay directly to the taxing authority, before delinquent, any and all ad valorem taxes (or any tax hereafter imposed in lieu thereof) (collectively, the “ Taxes ”) with respect to the Premises for the year 2018 and any period included in the Term. Any increase in ad valorem taxes on the Premises as a result of alterations, additions or improvements made by, for or on account of Tenant shall be paid by Tenant directly to the taxing authority, before delinquent.

(c) Tenant’s Payment of Insurance Premiums . Tenant shall pay directly any and all premiums charged for fire and extended coverage and liability insurance with all endorsements in the amounts and limits as set forth herein on the Premises.

(d) Proof of Tenant’s Payment of Taxes and Insurance Premiums . Tenant shall provide Landlord, within thirty (30) days of the date such payment is due, with evidence of the full payment of all Taxes and insurance premiums as set forth hereinabove. In the event Tenant fails to provide Landlord with such proof or if Landlord receives a statement showing that any installment of taxes or insurance premiums have not been paid when due, Landlord may, but shall not be obligated to, pay such installment of taxes and/or insurance premium. Tenant shall reimburse Landlord for any payments of taxes and/or insurance plus an administrative fee in the amount of seven and one-half percent (7.5%) of such payment, within ten (10) days of notice thereof. Any such amounts owed by Tenant hereunder shall be considered Additional Rent (as defined below).

(e) Tenant’s Share of Mechanical Maintenance and Inspection Costs . Pursuant to Paragraph 10 herein, Tenant shall be responsible, at its sole cost and expense, for the maintenance, repair and replacement of, and the provision of routine mechanical maintenance and inspection services to, the heating, ventilation and air conditioning (“ HVAC ”) equipment supplying the Premises.

(f) Documentary Tax . If any documentary stamp tax, sales tax or any other tax or similar charge (exclusive of any income tax payable by Landlord as a result hereof) levied on the rental, leasing or letting of the Premises, whether local, state or federal, is required to be paid due to the execution hereof or otherwise with respect to this Lease or the payments due hereunder, then the cost thereof shall be borne by Tenant and shall be paid promptly and prior to same becoming past due. Tenant shall provide Landlord with copies of all paid receipts respecting such tax or charge promptly after payment of same.

(g) Late Payment . If any monthly installment of Annual Rental, Minimum Rental, Additional Rent (if any) or any other sum due and payable pursuant to this Lease remains due and unpaid ten (10) days after said amount becomes due, Tenant shall pay as Additional Rent hereunder a late payment charge of a sum equal to five percent (5%) of the unpaid rent or other payment. All unpaid rent and other sums of whatever nature owed by Tenant to Landlord under this Lease shall bear interest from the tenth (10th) day after the due date thereof until paid at the lesser of eight percent (8%) per annum or the maximum interest rate per annum allowed by law. Acceptance by Landlord of any payment from Tenant hereunder in an amount less than that which is currently due shall in no way affect Landlord’s rights under this Lease and shall in no way constitute an accord and satisfaction or waiver.

(h) Other Sums . Any and all other sums that are or may become due and payable by Tenant hereunder (collectively referred to as “ Additional Rent ”).

4. DELIVERY OF POSSESSION .

(a) Landlord will deliver the Premises to Tenant on or before the Commencement Date, and, upon such delivery, Tenant shall be deemed to have accepted the Premises, “AS IS, WHERE IS AND WITH ALL FAULTS.”

(b) The parties acknowledge that this Lease is entered into in connection with a sale leaseback transaction whereby Tenant has sold and conveyed the Premises to Landlord of even date herewith. The parties further acknowledge and agree that Tenant remains the owner of all trade fixtures, furniture, other furnishings, artwork, and all other personal property contained within the Premises with the exception of the following items of personal property which shall remain the property of Landlord and shall be surrendered to Landlord at the expiration or termination of this Lease: the large format space photographs displayed on the walls of the Premises and the small conference room table that is designed in a “Star Wars” theme (collectively, “ Tenant’s FF&E ”). Accordingly, Tenant shall have the ongoing right to use all of Tenant’s FF&E within the Premises. During the Term, Tenant shall be solely responsible at its cost and expense for the insurance, maintenance, repair and replacement (if deemed necessary by Tenant) of Tenant’s FF&E.

5. ALTERATIONS AND IMPROVEMENTS BY TENANT .

(a) Tenant shall make no structural changes respecting the Building without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed. Any interior or exterior nonstructural changes or other alterations, additions, or improvements to the Premises or the Building shall be made by or on behalf of Tenant only with the prior written consent of Landlord, which consent Landlord shall not unreasonably withhold, condition, or delay. Prior to any such consent by Landlord, Tenant shall submit to Landlord reasonably detailed plans and specifications covering the proposed work. If Landlord notifies Tenant of any objections to the proposed alterations, Tenant must (i) revise the plans and specifications to the extent reasonably necessary to secure the Landlord’s approval and (ii) submit such revised plans and specifications for Landlord’s approval. Prior to commencement of any alterations or improvements on the Premises, Tenant shall provide Landlord with evidence of insurance reasonably satisfactory to landlord. Tenant shall thereafter have the alterations performed in accordance with the approved plans and specifications.

(b) Tenant agrees that any damage to the Premises caused by Tenant’s construction work shall be repaired at Tenant’s sole cost and expense. No later than thirty (30) days after completion of any construction work by Tenant hereunder, Tenant shall provide to Landlord (i) an affidavit from the general contractor performing the work that same has been substantially completed in accordance with the approved plans and specifications and that all mechanics and materialmen engaged by the general contractor in connection therewith have been paid in full; (ii) a waiver of liens with respect to such construction work executed by the general contractor and any other contractor with whom Tenant has directly contracted, except as to any contractor for which Tenant has obtained a bond to pay any claims by such persons; and (iii) a certificate of occupancy for the Premises from the applicable governmental authorities.

(c) Landlord shall notify Tenant at the time Tenant obtains Landlord’s approval for any alterations, additions or improvements, including without limitation any partitions, walls, railings, carpeting, floor and wall coverings and other fixtures (excluding, however, Tenant’s trade fixtures as described in Paragraph 11 herein) to be made by, for, or at the direction of Tenant whether Landlord shall require Tenant to remove the same at the expiration or earlier termination of this Lease. All alterations, additional or improvements that Landlord does not require to be removed at the expiration or earlier termination of this Lease shall, when made, become the property of Landlord and shall remain upon the Premises at the expiration or earlier termination of this Lease.

(d) Tenant shall make the following items of repair/maintenance to the Premises within six (6) months of the Lease Date: (i) repair or replace the areas of the carpet that are wrinkled, bubbled up or overlapping; (ii) repair the outside concrete stairs that are worn, cracked or damaged; (iii) repair or replace floor tiles in the IT room that are lifting, worn, cracked or in need of replacement; and (iv) remove or replace the electrical panel box in the electrical room that is blown or has black marks on exterior. Tenant shall provide Landlord with evidence that the above items have been repaired or replaced within the time period set forth above. In the event Tenant fails to provide such evidence, then Landlord may, but shall not be obligated to, perform such repairs and/or replacements and charge the cost thereof, plus an administrative fee in the amount of fifteen percent (15%) of the cost thereof, to Tenant as additional Rent, which amount shall be due and payable to Landlord with the next installment of Rent due hereunder.

6. USE OF PREMISES .

(a) Tenant shall use the Premises only for general office, warehouse, shipping and all related and ancillary purposes and for no other purposes. Tenant shall comply with all laws, ordinances, orders, regulations or zoning classifications of any lawful governmental authority, agency or other public or private regulatory authority having jurisdiction over the Premises. Without limiting the generality of the foregoing, if Premises or the Building must be modified or any other action relating to the Premises or the Building must be undertaken in the future to comply with the Americans With Disabilities Act (the “ ADA ”) or any similar federal, state or local statute, law or ordinance, then Tenant shall be solely responsible for such modification or action (including the payment of all costs incurred in connection therewith). Tenant shall not do any act or follow any practice relating to the Premises which shall constitute a nuisance or detract in any way from the reputation of the Building. Tenant’s duties in this regard shall include allowing no noxious or offensive odors, fumes, gases, smoke, dust, steam or vapors, or any loud or disturbing noise or vibrations to originate in or emit from the Premises, provided that any of the foregoing related to the normal and customary operation of the Premises for the use permitted above shall not be deemed to violate this Paragraph 6(a) .

(b) Without limiting the generality of Paragraph 6(a) above, and excepting only office supplies, commercial supplies and cleaning materials used by Tenant in its ordinary day to day business operations (but not held for sale, storage or distribution) customarily used in office buildings, and then only to the extent same are used, stored (but not any bulk storage), transported, and disposed of strictly in accordance with all applicable laws, regulations and manufacturer’s recommendations, the Premises shall not be used for the treatment, storage, transportation to or from, use or disposal of toxic or hazardous wastes, petroleum products, materials, or substances, or any other substance that is prohibited, limited or regulated by any governmental or quasi-governmental authority or that, even if not so regulated, could or does pose a hazard to health and safety of the occupants of the Building or surrounding property.

(c) Tenant hereby represents and warrants to Landlord that, to the best of Tenant’s knowledge, as of the date of delivery of the Premises, the Premises shall be in compliance with all applicable environmental laws, regulations, statutes and other legal requirements.

(d) Tenant has previously been furnished with a copy of any applicable restrictive covenants relating to the Premises, and Tenant shall abide by these restrictions in connection with its use of the Premises.

(e) Tenant shall exercise due care in its use and occupancy of the Premises and shall not commit or allow waste to be committed on any portion of the Premises; and at the expiration or earlier termination of this Lease, Tenant shall deliver the Premises to Landlord in substantially the same condition in which the Premises existed on the Commencement Date, ordinary wear and tear, fire or other casualty, and acts of God alone excepted.

(f) The construction, operation, design, appearance, location, installation, and any other matters related to Tenant’s signage for the Premises shall be subject to Landlord’s approval, which shall not be unreasonably withheld, conditioned or delayed.

(g) Tenant shall, continuously and uninterruptedly from and after its initial opening for business, (i) operate and conduct within the Premises the business that Tenant is permitted to operate and conduct under the provisions of this Lease, except while the Premises are untenantable by reason of fire or other casualty or for other reasons beyond the reasonable control of Tenant and (ii) keep the Premises in a neat, clean and orderly condition.

(h) Tenant shall save Landlord harmless from any claims, liabilities, penalties, fines, costs, expenses or damages resulting from the failure of Tenant to comply with the provisions of this Paragraph 6 . This indemnification shall survive the termination or expiration of this Lease.

7. TAXES .

(a) Tenant shall pay any taxes, documentary stamps or assessments of any nature imposed or assessed upon this Lease, Tenant’s occupancy of the Premises or Tenant’s trade fixtures, equipment, machinery, inventory, merchandise or other personal property located on the Premises and owned by or in the custody of Tenant, including, without limitation, Tenant’s FF&E, as promptly as all such taxes or assessments may become due and payable without any delinquency. Tenant shall provide Landlord with copies of all paid receipts respecting such tax or charge upon request by Landlord.

8. TENANT’S INSURANCE . Tenant shall at all times during the Term maintain in full force and effect, at Tenant’s sole cost and expense, the following insurance covering the Premises.

(a) Commercial general liability insurance for any occurrence resulting in bodily or personal injury to or the death of any person or more than one person, or for damage to property, and consequential damages arising therefrom, in the amount of at least Three Million and 00/100 Dollars ($3,000,000.00) combined single limit per occurrence/aggregate (and which specifically provides for an extension of coverage for liquor or “dram shop” liability, if Tenant sells or serves alcoholic beverages in the Premises). Said insurance shall be written on an “occurrence” basis and not on a “claims made” basis. Landlord shall have the right, exercisable by giving written notice thereof to Tenant, to require Tenant to increase such limit if, in Landlord’s reasonable judgment, the amount thereof is insufficient to protect Landlord from judgments which might result from such claims, demands or actions. Tenant shall use its good faith efforts to cause its liability insurer to insure Landlord, Landlord’s agents, employees, partners, officers, and directors and any mortgagee (“ Landlord’s Protected Parties ”) as “additional insureds.” Tenant shall cause its liability insurance to include contractual liability coverage fully covering the indemnity provisions set forth herein. Notwithstanding the above, such liability insurance may be in the amount of One Million and 00/100 Dollars ($1,000,000.00) combined single limit per occurrence, and Two Million and 00/100 Dollars ($2,000,000.00) annual aggregate, for any policy year that Tenant carries umbrella insurance coverage of at least $3,000,000, as evidenced to Landlord, provided (i) such umbrella policy contains a “per location aggregate” endorsement, and (ii) the requirements set forth in this Section are otherwise satisfied.

(b) Workers’ Compensation Insurance with Employers’ Liability limits of $100,000.00 Each Accident, $100,000.00 Disease-Each Employee, and $500,000.00 Disease-Policy Limit, or such higher limits as may be required by applicable Governmental Regulations.

(c) Insurance covering work done by Tenant, if any, and any alterations or modifications to the Premises performed by Tenant after the Commencement Date, and all trade fixtures, signs, plate glass, floor covering, decorative items, furniture, furnishings, machinery, equipment and merchandise in the Premises, to the extent of one hundred percent (100%) of the replacement cost thereof, under a policy covering “all risks” of direct physical loss as insured against under Special Form (“all risk” coverage) with endorsement for business interruption with extended indemnity for twelve (12) months, and coverage for sprinkler leakage liability.

(d) Insurance covering the Premises, excluding work done by Tenant, if any, and any alterations or modifications to the Premises performed by Tenant after the Commencement Date, and further excluding foundations, to the extent of not less than one hundred percent (100%) of the replacement cost of such building and improvements located thereon, with an agreed amount endorsement, against all casualties provided by the Standard Fire and Extended Coverage Policy and covering all other risks of direct physical loss as insured against under Special Form (“all risks” coverage) with endorsement for rental income insurance for twelve (12) months, with an extended period of indemnity as deemed commercially reasonable by Landlord. Landlord shall be named as the insured and all proceeds of insurance shall be payable to Landlord.

(e) All of the aforesaid insurance shall be in responsible companies reasonably acceptable to Landlord. The insurer and the form, substance and amount (where not stated above) shall be satisfactory from time to time to Landlord and any mortgagee of Landlord, shall specifically show that the required liquor liability coverage is included, if applicable, and shall unconditionally provide that it is not subject to cancellation or non-renewal, except after at least thirty (30) days’ prior written notice to Landlord and any mortgagee of Landlord. Originals of Tenant’s insurance policies (or certificates thereof satisfactory to Landlord, together with satisfactory evidence of payment of the premiums thereon), shall be deposited with Landlord prior to Tenant’s possession of the Premises and renewals thereof not less than thirty (30) days prior to the end of the terms of such coverage. All insurance, property damage or other casualty policies shall be written as primary policies, not contributory with or secondary to coverage that Landlord may carry.

(f) If at any time during the Term of this Lease, Tenant owns or rents more than one location, the policy shall contain an endorsement to the effect that the aggregate limit in the policy shall apply separately to each location owned or rented by Tenant.

(g) Notwithstanding anything to the contrary contained in this Lease, Landlord and Tenant hereby waive any rights each may have against the other on account of any loss or damage occasioned to Landlord or Tenant, as the case may be, their respective property, the Premises, its contents or to the other portions of the Premises, arising from any risk covered by “Special Form” fire and extended coverage insurance of the type and amount required to be carried hereunder. Landlord and Tenant hereby grant to each other on behalf of any insurer providing the insurance to either of them described herein, a waiver of any right of subrogation which any such insurer may acquire against the other or against the officers, directors, employees, agents, partners and representatives of the other by virtue of payment of any loss under such insurance. Any insurance policy carried by Tenant pursuant to the terms hereof shall contain an endorsement waiving the insurer’s right of subrogation against Landlord. Notwithstanding any provisions in this Lease to the contrary, Landlord shall never be liable to Tenant or any Tenant party to the extent such liability is covered or would be covered by a policy of insurance actually maintained, or required by the terms of this Lease to be maintained, by Tenant.

9. LANDLORD’S COVENANT TO REPAIR AND REPLACE

(a) This is an absolute net lease. Landlord shall have no duty or obligation for any repairs, maintenance or replacement of any part of the Premises or any of the systems or components located thereon or therein.

(b) Landlord shall not incur any liability to Tenant by reason of any injury to or interference with Tenant’s business arising from the making of any repairs, replacements, alterations or improvements to any portion of the Building or the Premises, or to fixtures, appurtenances and equipment therein.

10. TENANT’S COVENANT TO REPAIR, REPLACE, AND MAINTAIN .

(a) Tenant shall be responsible for the repair, replacement and maintenance in good order and condition of all parts and components of the Premises, including, without limitation, the structural components, roof, building systems, exterior parking lot and parking lot and exterior lighting, access drives and landscaping improvements (including turf areas) on the Premises, the plumbing, wiring, electrical systems, HVAC system, glass and plate glass, exterior operating and maintenance costs, and the equipment and machinery constituting fixtures and all other items of the Premises.

(b) Tenant shall contract for the regular removal of trash from the Premises and the cleaning of any grease traps serving the Premises.

(c) Tenant’s duty to maintain the HVAC system shall specifically include the duty to enter into and maintain at Tenant’s sole expense during the entire Term of this Lease a contract(s) for the routine and periodic maintenance and regular inspection of such HVAC system, the replacement of filters as recommended and the performance of other recommended periodic servicing in accordance with applicable manufacturer’s standards and recommendations. Such contract (i) shall be with a reputable contractor reasonably satisfactory to Landlord; (ii) shall satisfy the requirements for routine and periodic maintenance, if any, necessary to keep all applicable manufacturer’s warranties in full force and effect; and (iii) shall provide that if this Lease expires or is earlier terminated for any reason whatsoever, then said contract may be immediately terminable by Landlord or Tenant without any cost, expense or other liability on the part of Landlord.

(d) If Tenant fails to commence performance of any maintenance or repair work required of Tenant hereunder to any improvements or other portions of the Premises which are visible from the exterior of the Building within thirty (30) days after written notice of the need for such maintenance or repair from Landlord, or in any case where Tenant has commenced such work but failed to complete the same within sixty (60) days thereafter (or such longer period as may be reasonably required), then Landlord may enter upon the Premises and perform such maintenance and repair work or complete the same, as the case may be, whereupon all expenses reasonably incurred by Landlord in performing such work, together with a ten percent (10%) overhead and management fee, shall be paid by Tenant upon written demand therefor by Landlord.

11. TRADE FIXTURES AND EQUIPMENT . Tenant’s FF&E shall remain Tenant’s personal property and Tenant shall have the right at any time during the Term of this Lease to remove any or all of Tenant’s FF&E. Upon removal of Tenant’s FF&E, Tenant shall immediately restore the Premises to substantially the same condition as they were when received by Tenant, ordinary wear and tear, fire or other casualty, and acts of God excepted. Any trade fixtures or equipment not removed by Tenant at the expiration or an earlier termination of the Lease shall become, at Landlord’s sole election, either (i) the property of Landlord, in which event Landlord shall be entitled to handle and dispose of same in any manner Landlord deems fit without any liability or obligation to Tenant or any other third party with respect thereto, or (ii) subject to Landlord’s removing such property from the Premises and storing same, all at Tenant’s expense and without any recourse against Landlord with respect thereto. Without limiting the generality of the foregoing, the following property shall in no event be deemed to be “trade fixtures” and Tenant shall not remove any such property from the Premises under any circumstances, regardless of whether installed by Landlord or Tenant: (a) any air conditioning, air ventilating or heating fixtures or equipment used to service the Building; (b) any dock levelers; (c) any carpeting or other permanent floor coverings; (d) any paneling or other wall coverings; (e) plumbing fixtures and equipment; or (f) permanent shelving.

12. UTILITIES . Tenant shall pay for all utilities or services related to its use of the Premises, including, without limitation, electricity, gas, heat, water, sewer, telephone and janitorial services. Landlord shall not be responsible for the stoppage or interruption of utilities services other than as required by its limited covenant to repair and replace set forth above, and Landlord not be liable for any damages caused by or from the plumbing and sewer systems serving the Premises.

13. DAMAGE OR DESTRUCTION OF PREMISES .

(a) If the Premises are totally destroyed by storm, fire, lightning, earthquake or other casualty, Landlord shall have the right to terminate this Lease on written notice to Tenant within thirty (30) days after such destruction and this Lease shall terminate as of the date of such destruction and rental shall be accounted for as between Landlord and Tenant as of the date of destruction.

(b) If the Premises are damaged but not wholly destroyed by and such casualties or if the Landlord does not elect to terminate the Lease under Paragraph 13(a) above, Landlord shall commence or cause to be commenced reconstruction of the Premises within one hundred twenty (120) days after such occurrence and prosecute the same diligently to completion, not to exceed two hundred seventy (270) days from the date of the occurrence. In the event Landlord shall fail to substantially complete reconstruction of the Premises within said two hundred seventy (270) day period, Tenant shall have the right, as its sole remedy, to terminate this Lease.

(c) In the event of any casualty at the Premises during the last year of the Term, including during the last year of any extension Term, Landlord and Tenant each shall have the option to terminate this Lease on written notice to the other of exercise thereof within sixty (60) days after such occurrence.

(d) In the event of reconstruction of the Premises, Tenant shall continue the operation of its business in the Premises during any such period to the extent reasonably practicable from the standpoint of prudent business management and the obligation of Tenant to pay rent and any other sums due under this Lease shall remain in full force and effect during the period of reconstruction. The Minimum Rental shall be abated proportionately with the degree to which Tenant’s use of the Premises is impaired, commencing from the date of destruction and continuing during the period of such reconstruction. Tenant shall not be entitled to any compensation or damages from landlord for loss of use of the whole or any part of the Premises, Tenant’s personal property, or any inconvenience or annoyance occasioned by such damage, reconstruction or replacement.

(e) In the event of the termination of this Lease under any provisions of this Paragraph 13 , both Landlord and Tenant shall be released from any liability or obligation under this Lease arising after the date of termination, except for such liability or obligation for which this Lease expressly provides shall survive the termination thereof.

14. MUTUAL WAIVER OF SUBROGATION . For the purpose of waiver of subrogation, the parties (for themselves and their insurers) mutually release and waive unto the other all rights to claim damages, costs or expenses for any injury to property caused by a casualty of any type whatsoever in, on or about the Premises if the amount of such damage, cost or expense has been paid to such damaged party under the terms of any policy of insurance, as such is more specifically set forth herein above.

15. INDEMNIFICATION .

(a) Tenant shall indemnify and save Landlord harmless against any and all claims, suits, demands, actions, fines, damages, and liabilities, and all costs and expenses thereof (including without limitation reasonable attorneys’ fees) arising out of injury to persons (including death) or property occurring in, on or about the Premises by any cause whatsoever, except if exclusively caused by the grossly negligent act(s) or omission(s) on the part of Landlord, its agent(s) or employee(s). Tenant shall give Landlord immediate notice of any such happening causing injury to persons or property.

(b) Landlord shall indemnify and save Tenant harmless against any and all claims, suits, demands, actions, fines, damages, and liabilities, and all costs and expenses thereof (including without limitation reasonable attorneys’ fees) arising out of injury to persons (including death) or property occurring in, on or about the Premises if caused or occasioned by any grossly negligent act(s) or omission(s) of Landlord, its agent(s) or employee(s), except if caused by any act(s) or omission(s) on the part of Tenant, its agent(s), contractor(s), employee(s), invitee(s), licensee(s), servant(s), subcontractor(s) or subtenant(s).

16. LANDLORD’S RIGHT OF ENTRY . Landlord, and those persons authorized by it, shall have the right to enter the Premises at all reasonable times and upon reasonable notice for the purposes of making repairs, making connections, installing utilities, providing services to the Premises, making inspections or showing the same to prospective purchasers and/or lenders, as well as at any time in the event of emergency involving possible injury to property or persons in or around the Premises. Further, during the last twelve (12) months of the Term, Landlord and those persons authorized by it shall have the right at reasonable times and upon reasonable notice to show the Premises to prospective tenants. Landlord shall use reasonable efforts to minimize interference with Tenant’s business operations on the Premises during the period of any such entry, including without limitation making it clear in any signage or showings that the property may be for sale or lease, but not the business of Tenant.

17. EMINENT DOMAIN . If any substantial portion, consisting of twenty five percent (25%) or more of the square footage of the Building, of the Premises is taken under the power of eminent domain (including any conveyance made in lieu thereof) and such taking shall materially impair the normal operation of Tenant’s business, then either party shall have the right to terminate this Lease by giving written notice of such termination within thirty (30) days after notice of such taking. If neither party elects to terminate this Lease, Landlord, to the extent of such award received by Landlord, shall repair and restore the Premises (to the extent possible) to substantially the same condition as the Premises existed immediately prior to such taking and the Annual Rental and any other sums due hereunder shall be reduced in proportion to any reduction in the square footage of the Building as a result of such taking. All compensation awarded for any taking (or the proceeds of a private sale in lieu thereof) shall be the property of Landlord and Tenant hereby assigns all of its interest in any such award to Landlord; provided, however, Landlord shall not have any interest in any separate award made to Tenant for loss of business, moving expense or the taking of Tenant’s property, trade fixtures or equipment if a separate award for such items is made to Tenant and if such separate award does not reduce the award to Landlord.

18. EVENTS OF DEFAULT AND REMEDIES .

(a) In addition to the other provisions of this Lease and not in limitation thereof, the occurrence of any of the following shall constitute an “Event of Default” hereunder.

(i) Failure of Tenant to pay Annual Rental, Minimum Rental, Additional Rent, or any other charges due under this Lease and such failure continues for three (3) days after Tenant’s receipt of written notice of such failure from Landlord (provided, if Tenant fails to pay any such charges when due two times within any Lease Year, and Landlord has given Tenant such 3-day notice for Tenant’s two failures, it shall be a default under the Lease for Tenant thereafter in such Lease Year to fail to pay when due, and Landlord shall not be required to give any notice of such failure).

(ii) Failure of Tenant to observe and perform any other obligation in this Lease and continued failure for thirty (30) days after Landlord gives written notice of such failure, or if the nature of such failure is such that it is capable of being cured but cannot be cured within thirty (30) days, within such additional period of time reasonably required by Tenant to cure the same, provided that Tenant commences the cure of such default within such thirty (30) day period and diligently pursues such cure to completion.

(iii) Abandonment or vacation of the Premises by Tenant.

(iv) Failure to carry and maintain any policy of insurance required herein.

(v) Filing of a petition by Tenant for adjudication as a bankrupt debtor or insolvent, or for its reorganization or for the appointment of a receiver or trustee of Tenant’s property; an assignment by Tenant for the benefit of creditors; or the taking possession of Tenant’s property by any governmental office or agency pursuant to statutory authority for the dissolution or liquidation of Tenant. If any involuntary proceeding of any type referred to in this Section is instituted against Tenant and is not dismissed within sixty (60) days thereafter the same shall be considered an Event of Default.

(b) At any time following the occurrence of an Event of Default as hereinabove set forth, without limiting Landlord in the exercise of any other remedy contained elsewhere in this Lease, at law, in equity, or otherwise, and without any demand or notice whatsoever:

(i) Landlord may terminate this Lease by giving Tenant notice of termination, in which event this Lease shall expire and terminate on the date specified in such notice of termination with the same force and effect as though the date so specified were the date herein originally fixed as the termination date of the Term, and all rights of Tenant under this Lease and in and to the Premises shall expire and terminate and Tenant shall remain liable for all obligations under this Lease arising up to the date of such termination (and for those obligations of Tenant which are to survive any such termination by their express terms), and Tenant shall surrender the Premises, including any and all improvements, to Landlord on the date specified in such notice, and if Tenant fails to so surrender Landlord shall have the right, without notice, to enter upon and take possession of the Premises and to expel or remove Tenant and its effects without being liable for prosecution or any claim for damages therefor.

(ii) Landlord may terminate this Lease and recover from Tenant all damages Landlord may incur by reason of Tenant’s default, including, without limitation, a sum which, at the date of such termination represents the then value of the excess, if any, of the whole Annual Rental, Minimum Rental, and all other sums and charges which would have been payable hereunder as Additional Rent by Tenant for the period commencing with the day following the date of such termination and ending with the expiration date of the Term, over the aggregate reasonable rental value of the Premises for the same period, plus the sum of the following: (A) the costs of recovering the Premises and all other expenses incurred by Landlord due to Tenant’s default, including, without limitation, reasonable attorneys’ fees, (B) the unpaid rent earned as of the date of termination plus interest at the rate of eight percent (8%) or the highest rate allowed by law, whichever is greater, (C) other sums of money and damages owing on the date of termination by Tenant to Landlord under this Lease or in connection with the Premises, and (D) that amount of money equal to twenty four (24) monthly installments of the Annual Rental, Minimum Rental and all other sums, payable on the date of such termination, all of which shall be deemed immediately due and payable. The payment of the amount calculated in this Section shall not be deemed a penalty but shall merely constitute payment of liquidated damages, it being understood and acknowledged by Landlord and Tenant that actual damages to Landlord are extremely difficult, if not impossible, to ascertain. In determining the fair market rental value of the Premises as provided herein, the parties hereby agree that, at the time Landlord seeks to enforce this remedy, all relevant factors should be considered, including, but not limited to, (1) the length of time remaining in the Term, (2) the then current market conditions in the general area in which the Premises is located, (3) the likelihood of reletting the Premises for a period of time equal to the remainder of the Term, (4) the net effective rental rates then being obtained by landlords for similar type space of similar size in similar type buildings in the general area in which the Premises is located, (5) the vacancy levels in the general area in which the Premises is located, (6) current levels of new construction that will be completed during the remaining Term and how this construction will likely affect vacancy rates and rental rates, and (7) inflation.

(iii) Without terminating this Lease, Landlord may declare immediately due and payable the present value (using a discount rate of the lower of eight percent (8%) or the rate of interest then payable on currently-issued United States Treasury Bills or Notes having a maturity date, at the time of the default, closest to the scheduled expiration date of the Term) of the whole Rental and all other sums and charges which would have been payable hereunder as Additional Rent by Tenant for the period commencing with the day following the date of such termination and ending with the expiration date of the Term, together with the cost of recovering the Premises and all other expenses incurred by Landlord in connection with Tenant’s default, plus the unpaid rent earned as of the date of termination, plus interest at the rate of eight percent (8%) or the highest rate allowed by law, whichever is greater, plus all other sums of money and damages owing by Tenant to Landlord under this Lease or in connection with the Premises; provided, however, that such payments shall not be deemed a penalty or liquidated damages, but shall merely constitute payment in advance of all Rental and Additional Rent payable hereunder throughout the Term. Upon making such payment, Tenant shall be entitled to receive from Landlord all rents received by Landlord from other assignees, tenants, and subtenants on account of said Premises during the stated Term of this Lease provided that the monies to which Tenant shall so become entitled shall in no event exceed the entire amount actually paid by Tenant to Landlord pursuant to the preceding sentence less all costs, expenses and reasonable attorneys’ fees of Landlord incurred in connection with the reletting of the Premises. Such sum shall, at the option of Landlord, be immediately due and payable upon notice to Tenant as if by the terms of this Lease they were payable in advance; and Landlord may immediately proceed to distrain, collect, or bring action for the amount due hereunder or such part thereof as being in arrears, or may file a proof of claim in any bankruptcy or insolvency proceedings whether similar to the foregoing or not, to enforce payment thereof.

(iv) Without terminating this Lease, and with or without notice to Tenant, Landlord may in its own name or as agent for Tenant enter into and upon and take possession of the Premises or any part thereof, and, at Landlord’s option, remove persons and property therefrom and such property, if any, may be removed and stored in a warehouse or elsewhere at the cost of, and for the account of Tenant, all without being deemed guilty of trespass or becoming liable for any loss or damage which may be occasioned thereby, and Landlord may rent the Premises or any portion thereof as the agent of Tenant, with or without advertisement, by private negotiations and for any term upon such terms and conditions as Landlord may deem necessary or desirable, in Landlord’s sole discretion. Landlord shall in no way be responsible or liable for any failure to rent the Premises or any part thereof, or for any failure to collect any rent due upon such reletting. Upon each such reletting, all rentals received by Landlord from such reletting shall be applied: first, to the payment of any indebtedness (other than any rent due hereunder) from Tenant to Landlord; second, to the payment of any costs and expenses of such reletting, including, without limitation, brokerage fees and reasonable and actual attorneys’ fees and costs of alterations and repair; third, to the payment of rent and other charges then due and unpaid hereunder; and the residue, if any, shall be held by Landlord to the extent of and for application in payment of future rent, if any becomes owing, as the same may become due and payable hereunder. In reletting the Premises as aforesaid, Landlord may grant rent concessions and Tenant shall not be credited therefor. If such rentals received from such reletting shall at any time or from time to time be less than sufficient to pay to Landlord the entire sums then due from Tenant hereunder. Tenant shall pay any such deficiency to Landlord. Such deficiency shall, at Landlord’s option, be calculated and paid monthly. Notwithstanding any such reletting without termination, Landlord may at any time thereafter elect to terminate this Lease for any such previous default.

(v) Without terminating this Lease, and with or without notice to Tenant, Landlord may enter into and upon the Premises and without being liable for prosecution or any claim for damages therefor, maintain the Premises and repair or replace any damage thereto or do anything for which Tenant is responsible hereunder. Tenant shall reimburse Landlord immediately upon demand for any expenses which Landlord incurs in thus effecting Tenant’s compliance under this Lease, and Landlord shall not be liable to Tenant for any damages with respect thereto.

(vi) Without liability to Tenant or any other party and without constituting a constructive or actual eviction, Landlord may suspend or discontinue furnishing or rendering to Tenant any property, material, labor, utilities or other service, wherever Landlord is obligated to furnish or render the same, so long as Tenant is in default under this Lease.

(vii) Landlord may allow the Premises to remain unoccupied and collect rent from Tenant as it comes due.

(viii) Landlord may foreclose any security interest in the property of Tenant which Landlord may have under the laws of the State of Georgia or under this Lease, including the immediate taking of possession of all property on or in the Premises.

(i) Tenant agrees to reimburse Landlord for all of Landlord’s expenses, including but not limited to reasonable attorneys’ fees in enforcing or attempting to enforce any of Tenant’s obligations in this Lease and if Landlord shall notify Tenant of Tenant’s default under this Lease more than two (2) times in any Lease Year, Tenant shall be assessed a default fee of One Thousand and 00/100 Dollars ($1,000.00) to cover the administrative costs associated with giving such notices.

(ii) Tender of rent or other charges due after legal action has been commenced against Tenant for nonpayment of rent shall not be a defense to such action, and Tenant hereby waives its rights under O.C.G.A. § 44-7-52 to the contrary.

(iii) TO THE EXTENT PERMITTED BY APPLICABLE LAW, LANDLORD AND TENANT (AND ANY PARTY CLAIMING BY, THROUGH OR UNDER TENANT) HEREBY MUTUALLY WAIVE ANY AND ALL RIGHTS WHICH EITHER MAY HAVE TO REQUEST A JURY TRIAL IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF THIS LEASE OR TENANT’S OCCUPANCY OF OR RIGHT TO OCCUPY THE PREMISES.

(iv) Tenant further agrees that in the event Landlord commences any summary proceeding for nonpayment of rent or possession of the Premises, Tenant will not interpose and hereby waives all right to interpose any counterclaim of whatever nature in any such proceeding. Tenant further waives any right to remove said summary proceeding to any other court or to consolidate said summary proceeding with any other action, whether brought prior or subsequent to the summary proceeding.

(v) No reference to any specific right or remedy in this Lease shall preclude Landlord from exercising any other right or from having any other remedy or from maintaining any action or proceeding to which it may otherwise be entitled at law or in equity or both. The rights and remedies given to Landlord in this Lease are distinct, separate and cumulative remedies, and none of them, whether or not exercised by Landlord, shall be deemed to be in exclusion of any of the others. Tenant recognizes in the event of a breach or threatened breach by Tenant of any of the agreements, conditions, covenants, or terms hereof, that Landlord may suffer irreparable damages which are not capable of being definitely ascertained, therefore Landlord shall have the right of injunction to enjoin the same and the right to invoke any other remedy allowed by law or in equity (or both) whether or not other remedies are herein provided.

(d) Upon the occurrence of a default on the part of Landlord in any of its duties and/or obligations as set forth under this Lease, and such default continuing for a period of thirty (30) days after written notice thereof from Tenant to Landlord (or if the nature of such default is such that it is capable of being cured but cannot be cured in thirty (30) days, within such additional period of time reasonably required by Landlord to cure the same, provided that Landlord commences the cure of such default within such 30-day period and diligently pursues such cure to completion), Tenant, as its sole and exclusive remedy, shall have the right to perform the obligations of Landlord and charge Landlord for the reasonable cost of such obligations.

19. SUBORDINATION . This Lease is subject and subordinate to any and all mortgages or deeds of trust now or hereafter placed on the property of which the Premises are a part, and this clause shall be self-operative without any further instrument necessary to effect such subordination; however, if requested by Landlord, Tenant shall promptly execute and deliver to Landlord any such certificate(s) as Landlord may reasonably request evidencing subordination of this Lease to or the assignment of this Lease as additional security for such mortgages or deeds of trust. Notwithstanding anything to the contrary in this Lease, in no event shall Tenant be subordinate or subject to the lien of any mortgage, nor shall Tenant be obligated to attorn to any holder thereof, unless and until such holder shall have agreed in writing, and shall be bound thereby, to honor all of Tenant’s rights under this Lease, including Tenant’s rights of quiet and exclusive use and enjoyment of the Premises, so long as Tenant is not in default hereunder. Landlord will cause to be furnished to Tenant, on the Lease Date, a subordination, nondisturbance and attornment agreement from any lender holding a mortgage, deed of trust or deed to secure debt on the Premises as of the Lease Date, in form reasonably acceptable to Tenant, which shall be filed of record in the local land records of Forsyth County, Georgia. Tenant shall continue its obligations under this Lease in full force and effect notwithstanding any such default proceedings under a mortgage or deed of trust and shall attorn to the mortgagee, trustee or beneficiary of such mortgage or deed of trust, and their successors or assigns, and to the transferee under any foreclosure or default proceedings. Tenant will, upon request by Landlord, execute and deliver to Landlord or to any other person designated by Landlord, any instrument or instruments required to give effect to the provisions of this paragraph.

20. ASSIGNMENT AND SUBLETTING .

(a) Tenant shall not assign, mortgage, pledge or encumber this Lease, the Premises, or any interest in the whole or in any portion thereof, directly or indirectly, without the prior written consent of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed; provided, however, and notwithstanding anything to the contrary contained herein, Tenant shall be permitted to assign this Lease, without the consent of Landlord, (i) to a corporation into which Tenant may merge, which Tenant may acquire, or which Tenant may consolidate with, (ii) to any parent, subsidiary or affiliate of Tenant, or (iii) to a purchaser of substantially all of Tenant’s assets or a controlling interest in the outstanding voting stock of Tenant. If Tenant makes any such assignment, mortgage, pledge or encumbrance with Landlord’s written consent or as otherwise allowed herein, Tenant will still remain primarily liable for the performance of all terms of this Lease, unless otherwise agreed by Landlord and Tenant. Landlord’s consent to one assignment will not waive the requirement of its consent to any subsequent assignment as required herein.

(b) Tenant shall have the right to sublease any portion of the Premises without Landlord’s consent provided that: (i) the Tenant shall remain liable for each and every obligation of Tenant set forth in this Lease; (ii) Tenant shall be responsible for any breaches or actions or inactions of each and every subtenant; and (iii) the insurance policies required herein shall remain applicable to the entire Premises, including any subleased portions thereof. Tenant shall furnish to Landlord, from time to time, a copy of any subleases affecting the Premises after the same are executed and delivered, so that Landlord is apprised of the occupants of the Premises at all times.

21. TRANSFER OF LANDLORD’S INTEREST . If Landlord shall sell, assign or transfer its interest in the Premises or in this Lease to a successor in interest which expressly assumes the obligations of Landlord hereunder, then Landlord shall thereupon be released or discharged from all covenants and obligations hereunder, except those obligations that have accrued prior to such sale, and Tenant shall look solely to such successor in interest for performance of all of Landlord’s obligations. Tenant’s obligations under this Lease shall in no manner be affected by Landlord’s sale, assignment, or transfer and Tenant shall thereafter attorn and look solely to such successor in interest as the Landlord hereunder.

22. COVENANT OF QUIET ENJOYMENT . Landlord represents that it has full right and authority to lease the Premises and Tenant shall peacefully and quietly hold and enjoy the Premises for the full Term hereof so long as Tenant does not default in the performance of any of the terms hereof.

23. ESTOPPEL CERTIFICATES . Within ten (10) days after a written request by Landlord, Tenant shall deliver a written estoppel certificate, in form supplied by or acceptable to Landlord, certifying any facts that are then true with respect to this Lease, including without limitation that this Lease is in full force and effect, that no default exists on the part of Landlord or Tenant, that Tenant is in possession, that Tenant has commenced the payment of rent, and that Tenant claims no defenses or offsets with respect to payment of rentals under this Lease. Likewise, within ten (10) days after a request by Tenant, Landlord shall deliver to Tenant a similar estoppel certificate covering such matters as are reasonably required by Tenant.

24. PROTECTION AGAINST LIENS . Tenant shall do all things necessary to prevent the filing of any mechanics’, materialmen’s or other types of liens whatsoever, against all or any part of the Premises by reason of any claims made by, against, through or under Tenant. If any such lien is filed against the Premises, Tenant shall either cause the same to be discharged of record within thirty (30) days after filing or, if Tenant in its discretion and in good faith determines that such lien should be contested, it shall furnish such security as may be necessary to prevent any foreclosure proceedings against the Premises during the pendency of such contest. If Tenant shall fail to discharge such lien within said time period or fail to furnish such security, then Landlord may at its election, in addition to any other right or remedy available to it, discharge the lien by paying the amount claimed to be due or by procuring the discharge by giving security or in such other manner as may be allowed by law. If Landlord acts to discharge or secure the lien then Tenant shall immediately reimburse Landlord for all sums paid and all costs and expenses (including reasonable attorneys’ fees) incurred by Landlord involving such lien, together with interest on the total expenses and costs at the rate of eight percent (8%) per annum.

25. MEMORANDUM OF LEASE . If requested by Tenant, Landlord shall execute a recordable memorandum of this Lease, prepared and recorded at Tenant’s expense, specifying the exact Term of this Lease and such other terms as the parties shall mutually determine.

26. FORCE MAJEURE . If Landlord or Tenant shall be delayed, hindered or prevented from the performance of any act required hereunder, by reason of governmental restrictions, scarcity of labor or materials, strikes, fire, or any other reasons beyond its reasonable control, then the performance of such act shall be excused for the period of delay, and the period for performance of any such act shall be extended as necessary to complete performance after the delay period. However, the provisions of this paragraph shall in no way be applicable to Tenant’s obligations to pay Annual Rental or any other sums, monies, costs, charges or expenses required by this Lease.

27. REMEDIES CUMULATIVE — NONWAIVER . No reference to any specific right or remedy in this Lease shall preclude Landlord from exercising any other right or from having any other remedy or from maintaining any action or proceeding to which it may otherwise be entitled at law or in equity or both. The rights and remedies given to Landlord in this Lease are distinct, separate and cumulative remedies, and none of them, whether or not exercised by Landlord, shall be deemed to be in exclusion of any of the others. Tenant recognizes in the event of a breach or threatened breach by Tenant of any of the agreements, conditions, covenants, or terms hereof, that Landlord may suffer irreparable damages which are not capable of being definitely ascertained, therefore Landlord shall have the right of injunction to enjoin the same and the right to invoke any other remedy allowed by law or in equity (or both) whether or not other remedies are herein provided.

Landlord’s failure to insist upon a strict performance of any covenant of this Lease or to exercise any option or right herein contained shall not be a waiver or relinquishment for the future of such covenant, right or option, or of the continuance of the failure of Tenant, but the same shall remain in full force and effect. The receipt by Landlord of any rental or other charge due hereunder with knowledge of the breach of any provision of this Lease shall not be deemed a waiver of such breach. No provision of this Lease shall be deemed to have been waived unless waived in writing and signed by Landlord. No payment by Tenant or receipt by Landlord of a lesser amount than the monthly payment of Annual Rental, Additional Rent or other charges due under this Lease shall be deemed to be other than on account of the oldest rental then unpaid, and any endorsement or statement on any check or any letter accompanying any check of payment of rental shall not be deemed an accord and satisfaction, and Landlord may accept such check or payment without prejudice to Landlord’s right to recover the balance of unpaid amounts or pursue any other remedy in this Lease.

28. HOLDING OVER . If Tenant remains in possession of the Premises or any part thereof after the expiration of the Term of this Lease, whether with or without Landlord’s acquiescence, Tenant shall be deemed only a tenant at will and there shall be no renewal of this Lease without a written agreement signed by both parties specifying such renewal. The “monthly” rental payable by Tenant during any such tenancy at will period shall be one hundred fifty percent (150%) of the monthly installments of Annual Rental payable during the final year immediately preceding such expiration.

29. NOTICES . Any notice allowed or required by this Lease shall be deemed to have been sufficiently served if the same shall be in writing and hand delivered or placed in the United States mail, via certified mail or registered mail, return receipt requested, with proper postage prepaid or by courier delivery service or overnight delivery and addressed as follows:

	AS TO LANDLORD:	Metrolina Alpharetta, LLC
		108 Gateway Boulevard, Suite 104
		Mooresville, North Carolina 28117
		Attn: R. Joseph Jackson

	AS TO TENANT:	Ballantyne Strong, Inc.
		11422 Miracle Hills Drive, Suite 300
		Omaha, Nebraska 68154
		Attn: Kyle Cerminara

	with a copy to:	Thompson Hine LLP
		3900 Key Center, 127 Public Square
		Cleveland, Ohio 44114
		Attn: Thomas Coyne, Esq.

The addresses of Landlord and Tenant and the party, if any, to whose attention a notice or copy of same shall be directed may be changed or added from time to time by either party giving notice to the other in the prescribed manner.

30. LEASING COMMISSION . Landlord and Tenant represent and warrant each to the other that they have not dealt with any broker(s) or any other person claiming any entitlement to any commission in connection with this transaction. Landlord and Tenant agree to indemnify and save each other harmless from and against any and all claims, suits, liabilities, costs, judgments and expenses, including reasonable attorneys’ fees, for any leasing commissions or other commissions, fees, charges or payments resulting from or arising out of their respective actions in connection with this Lease.

31. MISCELLANEOUS .

(a) Rules and Regulations . Landlord shall have the right from time to time to prescribe commercially reasonable rules and regulations (the “ Rules and Regulations ”) for Tenant’s use of the Premises and the Building; provided that (i) such Rules and Regulations shall not unreasonably interfere with Tenant’s beneficial use and enjoyment of the Premises, and (ii) to the extent any such rules or regulations conflict with the terms and conditions contained in this Lease, the terms and conditions contained in this Lease shall govern and prevail. A copy of Landlord’s current Rules and Regulations respecting the Premises and the Building is attached hereto as Exhibit B . Landlord shall provide reasonable notice of any changes to the Rules and Regulations. Tenant shall abide by and actively enforce on all its employees, agents, invitees and licensees such regulations including without limitation rules governing parking of vehicles in designated portions of the Premises.

(b) Evidence of Authority . If requested by Landlord, Tenant shall furnish appropriate legal documentation evidencing the valid existence and good standing of Tenant and the authority of any parties signing this Lease to act for Tenant.

(c) Limitation of Landlord’s Liability . If Landlord shall fail to perform any covenant, term or condition of this Lease upon Landlord’s part to be performed, and, as a consequence of such default, Tenant shall recover a money judgment against Landlord, such judgment shall be satisfied solely out of the proceeds of sale received upon execution of such judgment levied thereon against the right, title and interest of Landlord in the Premises as the same may then be encumbered; and neither Landlord nor, if Landlord be a partnership, any of the partners comprising Landlord shall have any personal liability for any deficiency. It is understood and agreed that in no event shall Tenant or any person claiming by or through Tenant have the right to levy execution against any property of Landlord other than its interest in the Premises as hereinbefore expressly provided.

(d) Nature and Extent of Agreement . This Lease and the exhibits, rider and addenda (if any) attached hereto, contain all covenants and agreements between Landlord and Tenant relating in any manner to the rental, use, and occupancy of the Premises and the other matters set forth in this Lease. No prior agreement or understanding pertaining to the same shall be valid or of any force or effect; and, the covenants and agreements of this Lease cannot be altered, changed, modified or added to except in writing signed by Landlord and Tenant. No representation, inducement, understanding or anything of any nature whatsoever made, stated or represented on Landlord’s behalf, either orally or in writing (except as specifically contained in this Lease), has induced Tenant to enter into this Lease. The submission of this document for examination does not constitute an offer to lease and this Lease becomes effective only upon execution and delivery thereof by Landlord and Tenant. This Lease creates only the relationship of landlord and tenant between the parties, and nothing herein shall impose upon either party any powers, obligations or restrictions not expressed herein. This Lease shall be construed and governed by the laws of the state in which the Premises are located.

(e) Binding Effect . This Lease shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, successors and assigns. This Lease shall not be binding on either party until executed by an authorized representative of both parties and delivered to the both parties. No amendment or modification to this Lease shall be binding upon either party unless same is in writing and executed by an authorized representative of both parties.

(f) Captions and Headings . The captions and headings in this Lease are for convenience and reference only, and they shall in no way be held to explain, modify, or construe the meaning of the terms of this Lease.

(g) Lease Review . The submission of this Lease to Tenant for review does not constitute a reservation of or option for the Premises, and this Lease shall become effective as a contract only upon execution and delivery by Landlord and Tenant. It is agreed that in the construction and interpretation of the terms of this Lease the rule of construction that a document is to be construed most strictly against the party who prepared the same shall not be applied, it being agreed that both parties hereto have participated in the preparation of the final form of this Lease. This Lease shall be construed in accordance with and governed by the substantive laws of the State of Georgia. If more than one person or entity shall sign this Lease as “Tenant”, then each such person or entity shall be jointly and severally liable for the obligations of Tenant hereunder.

(h) Attorneys’ Fees . If either Landlord or Tenant institutes any action or proceeding against the other relating to the provisions of this Lease or any default hereunder, the non-prevailing party in such action or proceeding shall reimburse the prevailing party for the reasonable expenses of attorneys’ fees and all costs and disbursements incurred therein by the prevailing party, including, without limitation, any such fees, costs or disbursements incurred on any appeal from such action or proceeding. The prevailing party shall recover all such fees, costs or disbursements as costs taxable by the court in the action or proceeding itself without the necessity for a cross-action by the prevailing party.

32. SEVERABILITY . If any term or provision of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease, or the application of such term or provision to persons or circumstances other than those as to which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Lease shall be valid and enforced to the fullest extent permitted by law notwithstanding the invalidity of any other term or provision hereof.

33. REVIEW OF DOCUMENTS . If, following the execution of this Lease, either party hereto requests that the other party execute any document or instrument that is other than (a) a document or instrument the form of which is attached hereto as an exhibit, or (b) a document that solely sets forth facts or circumstances that are then existing and reasonably ascertainable by the requested party with respect to this Lease ( e.g. , an estoppel certificate), then the party making such request shall be responsible for paying the reasonable out-of-pocket costs and expenses, including without limitation, the attorneys’ fees, incurred by the requested party in connection with the review (and, if applicable, the negotiations) related to such document(s) or instrument(s), regardless of whether such document(s) or instrument(s) is (are) ever executed by the requested party. If the requesting party is Tenant, then all such costs and expenses incurred by Landlord in connection with its review and negotiation of any such document(s) or instrument(s) shall be deemed to be Additional Rent due hereunder and shall be payable by Tenant promptly upon demand.

34. FINANCIAL INFORMATION . Tenant shall at any time and from time to time at reasonable intervals during the Lease Term, within fifteen (15) days of written request by Landlord, deliver to Landlord such financial information concerning Tenant and Tenant’s business operations as may be reasonably requested by Landlord or any Mortgagee or prospective Mortgagee or purchaser of the Premises or any portion thereof. Such statement shall be prepared in accordance with generally accepted accounting principles and, if such is the normal practice of Tenant, shall be audited by an independent certified public accountant.

[SIGNATURES APPEAR ON THE FOLLOWING PAGE]

IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed as of the Lease Date.

	LANDLORD:

	METROLINA ALPHARETTA, LLC, a North Carolina limited liability company

	By:	/s/ Robert J. Jackson
	Title:	Manager
	Name:	Robert J. Jackson

	TENANT:

	BALLANTYNE STRONG, INC.,
	a Delaware corporation

	By:	/s/ D. Kyle Cerminara
	Title:	Chairman and CEO
	Name:	D. Kyle Cerminara

EXHIBIT A

Legal Description of the Land

All that tract or parcel of land lying and being in Land Lots 839, 890 & 891, 2nd District, 1st Section, Forsyth County, Georgia, and being more particularly described as follows:

To find the point of beginning, commence at the southwest corner of Land Lot 890; thence along the westerly line of Land Lot 890, N 01°09’49” E a distance of 552.21 feet to a point; thence S 65°57’30” W a distance of 160.11 feet to an iron pin found and the POINT OF BEGINNING; thence S 80°42’55” W a distance of 299.38 feet to an iron pin found on the northeasterly right of way of Bluegrass Valley Parkway (right of way varies); thence along said right of way along a curve to the left, following the curvature thereof for an arc distance of 114.81 feet, said curve having a radius of 66.00 feet and being subtended by a chord of N 39°13’57” W 100.87 feet to an iron pin found; thence leaving said right of way N 00°45’13” E a distance of 682.90 feet to an iron pin found; thence S 74°34’10” E a distance of 387.04 feet to a 1 inch open top pipe found; thence N 53°07’57” E a distance of 230.56 feet to an iron pin found; thence S 61°56’45M E a distance of 68.84 feet to an iron pin found; thence N 69°36’55” E a distance of 236.28 feet to an iron pin found; thence S 03°04’24” E a distance of 135.87 feet to an iron pin found; thence S 14°17’50” W a distance of 292.83 feet to an iron pin found; thence S 03°26’58” W a distance of 194.77 feet to an iron pin found; thence S 80°30’22” W a distance of 0.14 feet to a point; thence S 65°57’30” W a distance of 291.71 feet to the POINT OF BEGINNING. Said tract contains 11.933 acres.

A- 1

EXHIBIT B

Rules and Regulations

Tenant covenants with and for the benefit of:

1. To give to Landlord prompt written notice of any significant accident, fire or damage occurring on or to the Premises.

2. To use reasonable efforts to schedule deliveries of goods at reasonable business hours, and to load and unload goods only in such areas and through such entrances as may be designated for such purposes by Landlord and to prohibit all trucks and trailers which have moved upon the Premises on account of Tenant’s conduct of business from remaining overnight in any portion of the Premises.

3. To keep the Premises sufficiently heated to prevent freezing of water in pipes and fixtures.

4. Not to burn, place or permit any rubbish or merchandise in the outside areas adjoining the Premises, except as provided herein. Tenant shall deposit its trash only in designated trash receptacles and shall participate in and comply with any procedures established for the collection, sorting, separation and recycling of waste products, garbage, refuse and trash.

5. To keep the Premises clean, sanitary and free from offensive odors and from insects, vermin and other pests.

6. To park Tenant’s vehicles and to require Tenant’s employees, contractors, subcontractors, and concessionaires to park their vehicles only in those portions of the parking area designated for that purpose.

7. To keep its exterior and interior signs and lights continuously well lighted at a minimum from 11:00 a.m. to 10:00 p.m.

8. To conduct its business in the Premises in a diligent and dignified manner, to refrain from using any sales promotion device or practice that would tend to mislead or deceive the public or detract from the reputation of the Premises and keep the Premises in first class condition in accordance with the highest standards of operation of similar businesses.

9. To comply with any and all reasonable rules and regulations of Landlord in connection with the Premises which are in effect at the time of the execution of the Lease or which may be from time to time, upon reasonable notice, promulgated by Landlord in its reasonable discretion, provided such rules and regulations are in writing and are not in conflict with the terms and conditions of the Lease.

10. To install such fire extinguisher and other safety equipment as applicable law may require.

11. Except as may otherwise be provided in the Lease, Tenant shall not place, affix or maintain any signs, advertising placards, names, insignia, trademarks, descriptive material or any other similar item or items outside or on the Premises, the glass panes and supports of the Premises windows, or any window, door, roof or exterior boundary of the Premises, except such signs as Landlord shall approve in writing.

12. Tenant shall not display, paint or place, or cause to be displayed, painted or placed, any handbills, bumper stickers or other advertising devices on any vehicle parked in the parking area of the Premises.

13. Tenant shall not display or sell merchandise, or place portable signs, devices or any other objects in the common areas of the Premises and Tenant shall not solicit or distribute materials in any manner in the common areas of the Premises, without Landlord’s prior written approval, which may be granted or withheld in Landlord’s sole discretion.

14. Tenant shall not erect an aerial or antenna on the roof or exterior walls of the Premises without Landlord’s prior approval.

C- 1

Version June 2017

Canadian Imperial Bank of Commerce

1006-2540 Daniel-Johnson Blvd.

Laval, Quebec, Canada

H7T 2S3

Office; (450) 687-6048

Fax; (450) 687-0484

May 15, 2018

Les Systèmes d’Écran Strong/MDI Inc.

Strong/MDI Screen Systems Inc.

1440 rue Raoul-Charette

Joliette, Quebec

Canada

J6E 8S7

Attention:

Mr. D. Kyle Cerminara, Chairman and Chief Executive Officer

Mr. Ray F. Boegner, President

Mr. Lance V. Schulz, Senior Vice-President, Chief Financial Officer & Treasurer

Mr. Ryan Turner, Vice-President of Strategic Investments, Ballantyne Strong Inc.

Dear Sirs :

We are pleased to establish the following credit facilities. Each credit offered is referred to as a “Facility”.

A - Revolving Line of Credit Facility

Credit Limit:	CDN $3,500,000.

Purpose:	This revolving line of credit is to be used for: Day to day operating requirements under Business Operating Account # 01081 / 88-03218.

Description:	A revolving demand credit. Principal that is borrowed and repaid may be re-borrowed up to the above Credit Limit.

Rate:	Prime Rate plus 0.00 % per annum.

Repayment:	On demand.

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May 15, 2018

Borrowing Base Requirement:

The total amount available under this Facility shall be calculated as the lesser of:

The Credit Limit noted above; and

The sum of:

	i.	80% of Eligible Account Receivable Value which includes all Account Receivable domestic and foreign, plus,

	ii.	50% of Eligible Inventory Value (Raw materials and Finished goods) subject to an inventory cap of 1,000,000 $, less,

	iii.	Prior Ranking Claims.

B - Instalment Loan Facility

Loan Amount: (rounded to the nearest dollar)	CDN $ 6,000,000

Purpose :	This Facility is to be used for: Loan # 01081/8581053 required to finance building located at 1440 rue Raoul-Charette, Joliette, Quebec, Canada. First disbursement of $3,500,000 done on April 24, 2018. $3,000,000 left to disburse as per client request.

Description	A non-revolving Demand Instalment Loan. Principal that is repaid is not available to be re-borrowed.

Rate:	Prime Rate plus 0.50% per annum.

Last Regular Scheduled Payment Date:	April 24, 2038 if the loan is disbursed in full.

Repayment:	On demand. Until demand, this Facility is repayable as follows:

	240 regular monthly payments of CDN $25,000.00 each, plus accrued interest payable monthly.

	The first / next regular instalment payment is due on May 24, 2018 and the last regular instalment payment plus any outstanding principal and interest and any other amount due but unpaid with respect to this Facility are due on the Last Regular Scheduled Payment Date.

	You may only prepay this Facility in accordance with Schedule A.

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Les Systèmes d’Écran Strong/MDI Inc. / Strong/MDI Screen Systems Inc.

May 15, 2018

C - Instalment Loan Facility

Loan Amount: (rounded to the nearest dollar)	CDN$ 500,000.

Purpose :	This Facility is to be used for: Loan # 01081/8581150 required to finance equipment. $500,000 left to disburse as per client request.

Description	A non-revolving Demand Instalment Loan. Principal that is repaid is not available to be re-borrowed.

Rate:	Prime Rate plus 0.50 % per annum.

Last Regular Scheduled Payment Date:	60 months from the date of the first regular payment date.

Repayment:	On demand. Until demand, this Facility is repayable as follows:

	60 regular monthly payments of CDN$ 8,333.33 each, plus accrued interest payable monthly commencing 30 days after the date of advance (or the final date of advance, in the case of multiple draws under this Facility) of this Demand Instalment Loan, and until such time, accrued interest is payable monthly.

	You may only prepay this Facility in accordance with Schedule A.

D - Business Credit Card Facility

Credit Limit:	CDN$ 50,000

Purpose:	Purchase and payment of goods and services.

Repayment:	On demand in accordance with the CIBC Business Credit Card Agreement (Business Liability)

Documentation:	CIBC Business Credit Card Agreement (Business Liability)

Security

The following security is required:

Movable Hypothec-Enterprise:	First ranking movable hypothec for a principal amount of CDN$ 6,000,000:

(a)

On all your present and future movable property, including all claims, inventory, equipment, incorporeal rights (including intellectual property) and securities.

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Les Systèmes d’Écran Strong/MDI Inc. / Strong/MDI Screen Systems Inc.

May 15, 2018

Immovable Hypothec —

Commercial :

First ranking immovable hypothec in the principal amount of CDN $6,000,000 over the immovable property situated at 1440 rue Raoul-Charette, Joliette, Quebec, Canada with supporting resolution, plus appropriate confirmation of hypothec of fire and other perils insurance, with loss payable to CIBC as first payee.

Other Security:

●

An acknowledged hypothec and assignment of adequate fire and other perils insurance on equipment and inventory of the Borrower that are subject to CIBC’s security, with loss payable to CIBC as first payee.

Financial Covenants

You will maintain and respect the following ratios and other covenants:

Total Liabilities to Effective Equity Ratio:	2.00 to 1.0 or less. This will be monitored on a quarterly basis.

Current Ratio:	1.50 to 1.0 or more. This will be monitored on a quarterly basis.

Minimum Effective Equity:	CDN $8,000,000 or more. This will be monitored on a quarterly basis.

Conditions:	The covenants above are to be calculated as follows:

●

On an unconsolidated basis

Reporting Requirements

The following reporting is required to be provided to us.

	(a)	Review Engagement annual financial statements signed by your officer, within 120 days after the end of each fiscal year, on an unconsolidated basis.

	(b)	Audited annual financial statements signed by your officer for Ballantyne Strong Inc., within 120 days after the end of each fiscal year, on a consolidated basis.

	(c)	Monthly certificate signed by your officer, including an aged Accounts Receivable Listing, an Inventory Declaration, an aged Payable Listing along with a list of any advances or priority payables within 20 day(s) of the end of each month.

	(d)	An annual budget for your next fiscal year, including quarterly projected income statement within 120 days after the end of each fiscal year end, on an unconsolidated basis.

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May 15, 2018

	(e)	Internally Generated quarterly interim financial statements signed by your officer, within 30 days after the end of each fiscal quarter-end for Strong/MDI Screens Systems Inc, on an unconsolidated basis.

	(f)	Confirmation of insurance in a form satisfactory to us, as required under your Facilities, from the insurance broker of Les Systèmes d’Écran Strong/MDI Inc. prior to any advance under a Facility if required, and thereafter, within 120 days after the renewal of each insurance policy.

Fees

These fees are in addition to fees, costs or expenses described in Schedule A Standard Credit Terms.

Loan Administration Fee:	CDN $125 per month payable in arrears. This fee will be charged for each month the Facility is available, even if you do not use, or maintain a balance in, the Facility.

Annual Fee:	CDN $7,500.

Amendment Fee:	CDN $500 payable on the date you sign such amendment.

Other Provisions

Currency and Interest Rate Risk Management:	You may, from time to time, enter into derivative transactions with CIBC to manage currency or interest rate risk associated with Credits under this letter agreement. Derivative transactions shall be governed by separate documentation entered into with CIBC which may include, without limitation, an International Swaps and Derivatives Association (“ISDA”) master agreement. Notwithstanding the agreed-upon terms of the derivative transactions, you agree and acknowledge that the terms of the Credits are independent of the terms of the derivative transactions. CIBC reserves the right to review and amend the terms and conditions of the related loan or Facility, including without limitation amending interest spreads on Prime Rate or US Base Rate at any time and from time to time in accordance with the terms of this Letter. You further agree and acknowledge that security provided under the terms of this Letter that secures all of your present and future indebtedness and liabilities shall secure your indebtedness owing to each of CIBC and CIBC’s affiliates under any Facility-related derivative transactions, in addition to any security required under ISDA or other documentation.

Schedule A:	The attached Schedule A, which contains certain additional provisions applicable to the Facilities other than the Business Credit Card Facility and certain definitions, forms part of this Letter.

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May 15, 2018

Schedule B :	The attached Schedule B, which contains certain additional provisions applicable to the Business Credit Card Facility and certain definitions, forms part of this Letter.

Repayment:	All amounts under any Facility are repayable immediately on demand by us unless otherwise indicated. We may terminate any Facility in whole or in part at any time.

Replacements:	This Letter supersedes and replaces all prior discussions, letters and agreements (if any) describing the terms and conditions of Facilities contained in this Letter. This Letter does not however operate as a novation of any Facility previously granted. CIBC retains all of its rights in respect of any Security that has been granted to secure your obligations with respect to the Facilities.

English Language:	The parties confirm their express wish that this Letter and all documents related thereto be drawn up in English. Les parties confirment leur volonté expresse de voir le présent contrat et tous les documents s’y rattachant être rédigés en anglais.

Please indicate that you have read and accept the foregoing terms and conditions (including the terms and conditions in any Schedule attached to this Letter) by signing the enclosed duplicate copy of this Letter.

If we have not received a duly executed copy of this Letter and you have not fulfilled all the conditions required for us to advance funds under the Facilities indicated in this Letter by June 30, 2017, we may in our sole discretion and without notice to you, cancel all of the Facilities listed in this Letter and we will be under no further obligation to advance any funds to you under this Letter.

We would like to take this opportunity to thank you for choosing CIBC. We look forward to assisting you and your business with any future financial needs you may have.

	Yours truly,

	CANADIAN IMPERIAL BANK OF COMMERCE

	/s/ Denis Lemire
	Signature
	Name:	Denis Lemire
	Title:	Senior Manager & Team Leader, Commercial Banking

	/s/ Marco Folini
	Signature
	Name:	Marco Folini
	Title:	Senior Manager & Team Leader, Commercial Banking

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Les Systèmes d’Écran Strong/MDI Inc. / Strong/MDI Screen Systems Inc.

May 15, 2018

Accepted this 22 ^nd day of May 2018.

	Les Systèmes d’Écran Strong/MDI Inc. Strong/MDI Screen Systems Inc.

	/s/ Francois Barrette
	Signature
	Name:	François Barrette
	Title:	General Manager

	/s/ Francois Lachambre
	Signature
	Name:	François Lachambre
	Title:	Controller

Acknowledged this 22 ^nd day of May 2018.

	Ballantyne Strong Inc.

	/s/ D. Kyle Cerminara
	Signature
	Name:	D. Kyle Cerminara
	Title:	Chairman & Chief Executive Officer

	/s/ Lance V. Schulz
	Signature
	Name:	Lance V. Schulz
	Title:	Senior Vice-President, Chief Financial Officer & Treasurer

Page 7 of 7

Les Systèmes d’Écran Strong/MDI Inc. / Strong/MDI Screen Systems Inc.

May 15, 2018

Exhibit 31.1

CERTIFICATION

I, D. Kyle Cerminara, certify that:

1.	I have reviewed this quarterly report on Form 10-Q for the quarter ended June 30, 2018 of Ballantyne Strong, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	By:	/s/ D. KYLE CERMINARA
		D. Kyle Cerminara
		Chairman and Chief Executive Officer

August 8, 2018

Exhibit 31.2

CERTIFICATION

I, Lance V. Schulz, certify that:

1.	I have reviewed this quarterly report on Form 10-Q for the quarter ended June 30, 2018 of Ballantyne Strong, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.	The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

	a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

	b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

	c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

	d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

	a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

	b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

	By:	/s/ LANCE V. SCHULZ
		Lance V. Schulz
		Chief Financial Officer

August 8, 2018

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned, D. Kyle Cerminara, Chief Executive Officer of Ballantyne Strong, Inc. (the “Company”), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2018 (the “Report”).

The undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to his knowledge that:

	1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

IN WITNESS WHEREOF, the undersigned has executed this certification as of the 8th day of August, 2018.

/s/ D. KYLE CERMINARA
D. Kyle Cerminara
Chairman and Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to Ballantyne Strong, Inc. and will be retained by Ballantyne Strong, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER
Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The undersigned, Lance V. Schulz, Chief Financial Officer of Ballantyne Strong, Inc. (the “Company”), has executed this certification in connection with the filing with the Securities and Exchange Commission of the Company’s Quarterly Report on Form 10-Q for the three months ended June 30, 2018 (the “Report”).

The undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to his knowledge that:

	1.	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

	2.	The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

IN WITNESS WHEREOF, the undersigned has executed this certification as of the 8th day of August, 2018.

/s/ LANCE V. SCHULZ
Lance V. Schulz
Chief Financial Officer