The following discussion should be read in conjunction with the Company's
financial statements and related notes. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated due to various factors discussed under
"Cautionary Statement Regarding Forward-Looking Statements" and elsewhere,
including Part II, Item 1A, in this Quarterly Report on Form 10-Q and the "Risk
Factors" described in Part I, Item 1A, of our Annual Report on Form 10-K for the
fiscal year ended December 31, 2021, our Current Reports on Form 8-K and our
other SEC filings.
Company Overview
Insignia Systems, Inc. ("Insignia," "we," "us," "our" and the "Company") was
incorporated in Minnesota in 1990. We are a leading provider of in-store
advertising solutions to brands, retailers, shopper marketing agencies and
brokerages ("clients"). We believe our products and services are attractive to
our clients because of our ability to navigate the complex retail landscape, to
customize our solutions down to store level, to execute with excellence and the
results our solutions deliver. Our leadership and employees have extensive
industry knowledge, including direct experience through former positions at
consumer-packaged goods ("CPG") manufacturers and retailers. We provide
marketing solutions to brands spanning from some of the largest multinationals
to new and emerging brands.
For retailers and brands working in an environment that is tighter, more
competitive, and more complex every day, Insignia positions itself as the
shopper marketing ally that combines best-in-class execution with imagination,
responsiveness, and hunger to help move business forward. We take the
relationships we have with our clients and vendor partnerships very seriously by
having our team stretch the extra mile to ensure flawless execution. We
sincerely approach our projects with the same passion as our clients do. These
relationships are built with our brand-led, retailer centric mindset, our
ability to be nimble and flexible to the ever-changing industry landscape and
our delivery of superior customer service that our clients deserve. Our in-store
solutions are executed in retailers spanning from some of the largest national
retailers to regional US wholesalers and independents who are leaders in their
respective channels and geographies.
Up until 2020, our primary solution had been in-store signage, specifically
Point-Of-Purchase Services (POPS®). The Insignia POPS solution is a national,
account-specific, shelf-edge advertising and promotion tactic. Primarily as a
result of competitive pressures and also due to COVID-19, our in-store signage
business has declined and become less of a focus in our growth. Beginning in
2018 we began developing and offering an expanded portfolio of solutions
including on-pack, merchandising and digital solutions in addition to our core
business. Our expanded portfolio allows us to meet the needs of brands,
retailers and their agents as their business strategies evolve behind an
ever-changing retail landscape. Over the course of 2021 based on client
feedback, business results and expanded team capabilities our primary focus is
now on in-store solutions, resulting in our decision to exit digital solutions
in addition to right-sizing our in-store signage portfolio. With our
diversification of business, we recognized over 75% of our revenue from these
recently developed solutions in 2021 as well as for the six months ended June
30, 2022.
Over the last two years we have significantly reduced operating costs and
retailer commitments. In the last half of 2020 we outsourced most of our
printing and IT operations. In 2021 we relocated our headquarters and
operations, both to smaller, more efficient leased spaces, and also restructured
operations in December 2021. These changes contributed to reduced expenses in
the six months ended June 30, 2022 and are expected to continue to drive savings
for the remainder of 2022 compared to 2021.
Subsequent to the end of the quarter, on July 1, 2022, the Company entered into
a $20 million settlement agreement with News America. The agreement
memorializes the amicable settlement of the Company's outstanding lawsuit
against News America. The agreement is expected to result in net proceeds
before income tax of between $11,500,000 and $12,000,000 for the Company, which
will be recorded as pretax income in the quarter ending September 30, 2022.
We are also continuing to explore strategic options to maximize shareholder
value. Potential strategic alternatives that may be evaluated include, but are
not limited to, an acquisition, merger, business combination, in-licensing, or
other strategic transaction. There can be no assurance that this process will
result in any transaction.
13
Table of Contents
Business Overview
Summary of Financial Results
For the quarter ended June 30, 2022, the Company generated net sales of
$3,254,000, as compared with net sales of $6,096,000 for the quarter ended June
30, 2021. For the six months ended June 30, 2022, the Company generated net
sales of $9,402,000, as compared with net sales of $11,482,000 in the six months
ended June 30, 2021. Net loss for the quarter ended June 30, 2022 was
$1,084,000, as compared to a net loss of $894,000 for the quarter ended June 30,
2021. Net loss for the six months ended June 30, 2022 was $1,022,000, as
compared to a net loss of $1,631,000 for the six months ended June 30, 2021.
For the three months ended June 30, 2022 net sales was significantly impacted
due to two programs from the three months ended June 30, 2021 that were not
repeated in the three months ended June 30, 2022. That, combined with continued
declines in our signage business due to competitive pressures, resulted in
$2,080,000 lower net sales for the six months ended June 30, 2022. During the
first nine months of 2021, litigation expenses increased significantly compared
to prior quarters. Litigation expenses for 2022 decreased in comparison to 2021
culminating with the Litigation Settlement on July 1, 2022. We also recognized
a gain of $1,062,000 on the forgiveness of our Paycheck Protection Program
("PPP") loan during the first quarter of 2021.
During the six months ended June 30, 2022, cash and cash equivalents and
restricted cash decreased by $1,464,000 from $3,851,000 at December 31, 2021, to
$2,387,000 at June 30, 2022. The decrease was primarily driven by the net loss
for the six months ended June 30, 2022. We have no debt other than our lease
obligations at June 30, 2022. Working capital decreased $887,000 from $3,716,000
at December 31, 2021 to $2,829,000 at June 30, 2022.
Primarily as a result of the net proceeds from the Litigation Settlement after
the end of the quarter cash and cash equivalents plus restricted cash at July
31, 2022 were $14.9 million.
Results of Operations
The following table sets forth, for the periods indicated, certain items in our
Condensed Statements of Operations as a percentage of total net sales.
Three Months Ended Six Months Ended
June 30 June 30
2022 2021 2022 2021
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 87.2 80.2 82.0 81.4
Gross profit 12.8 19.8 18.0 18.6
Operating expenses:
Selling 8.9 7.6 6.7 8.5
Marketing 8.6 4.3 5.7 4.3
General and administrative 29.1 21.9 16.5 28.5
Total operating expenses 46.6 33.8 28.9 41.3
Operating loss (33.8 ) (14.0 ) (10.9 ) (22.7 )
Other income (expense) 0.9 (0.5 ) 0.2 8.7
Loss before taxes (32.9 ) (14.5 ) (10.7 ) (14.0 )
Income tax expense 0.4 0.2 0.2 0.2
Net loss (33.3 )% (14.7 )% (10.9 )% (14.2 )%
Three and Six Months Ended June 30, 2022 Compared to Three and Six Months Ended
June 30, 2021
Net Sales. Net sales for the three months ended June 30, 2022 decreased 46.6%
to $3,254,000 compared to $6,096,000 for the three months ended June 30, 2021.
Net sales for the six months ended June 30, 2022 decreased 18.1% to $9,402,000
compared to $11,482,000 for the six months ended June 30, 2021. The decrease was
due to lapping two programs from the three months ending June 30, 2021 that were
not repeated in the three months ending June 30, 2022. As a result, our
non-POPS revenue decreased 36.9% for the three months ended June 30, 2022, in
addition to a 82.5% decrease in POPS solutions revenue for the three months
ended June 30, 2022. For the six months ended June 30, 2022, non-POPS revenue
has increased 2.0%. Due to sales cycles within the retailers that our non-POPS
solutions execute we anticipate seasonality in sales, with those sales being
relatively stronger in the first quarter of the year. Our display business
generally consists of larger contracts versus our historical signage business.
As a result, our revenue may be prone to variances on a year over year basis.
Competitive pressures, including the expiration in April 2021 of our 10-year
selling agreement with News America have resulted in decreased POPS solutions
revenue for three and six months ended June 30, 2022 versus the three and six
months ended June 30, 2021. We expect POPS revenue will continue to decline in
2022 in comparison to 2021 as we have reduced the number of stores in our
network.
14
Table of Contents
Gross Profit. Gross profit for the three months ended June 30, 2022 decreased
65.6% to $416,000 compared to $1,208,000 for the three months ended June 30,
2021. The decrease in gross profit was primarily due to the decline in net
sales. Gross profit as a percentage of total net sales decreased to 12.8% for
the three months ended June 30, 2022 compared to 19.8% for the three months
ended June 30, 2021. The decrease was primarily due to the mix of net sales as
our non-POPS solutions typically have lower margins, as well as the impact fixed
costs have on the gross profit percentage when sales decline.
Gross profit for the six months ended June 30, 2022 decreased 20.6% to
$1,696,000 compared to $2,137,000 for the six months ended June 30, 2021. The
decrease in gross profit was primarily due to the decline in net sales. Gross
profit as a percentage of total net sales decreased to 18.0% for the six months
ended June 30, 2022 compared to 18.6% for the six months ended June 30, 2021.
The decrease was primarily due to mix of net sales as our non-POPS solutions
typically have lower margins due to competitive pressures, as well as the impact
fixed costs have on the gross profit percentage when sales decline. This was
partially offset in the six months ended June 30, 2022 by the Company's decision
in the prior year to make an investment in the execution of a large non-POPS
program in the six months ended June 30, 2021.
Operating Expenses
Selling. Selling expenses for the three months ended June 30, 2022 decreased
37.6% to $290,000 compared to $465,000 for the three months ended June 30, 2021.
Selling expenses for the six months ended June 30, 2022 decreased 35.6% to
$632,000 compared to $981,000 for the six months ended June 30, 2021. The
decreases for both periods were primarily due to decreased staff and staff
related expenses.
Selling expenses as a percentage of total net sales increased to 8.9% for the
three months ended June 30, 2022 compared to 7.6% for the three months ended
June 30, 2021. The increase was primarily due to decreased sales. Selling
expenses as a percentage of net sales decreased to 6.7% for the six months ended
June 30, 2022 compared to 8.5% for the six months ended June 30, 2021. The
decrease was primarily due to decreased staff and staff related expenses,
partially offset by decreased sales.
Marketing. Marketing expenses for the three months ended June 30, 2022
increased 7.3% to $279,000 compared to $260,000 for the three months ended June
30, 2021. Marketing expense for the six months ended June 30, 2022 increased
8.7% to $538,000 compared to $495,000 for the six months ended June 30, 2021.
The increases for both periods were primarily the result of increased staff
related expenses.
Marketing expenses as a percentage of total net sales increased to 8.6% for the
three months ended June 30, 2022 compared to 4.3% for the three months ended
June 30, 2021. Marketing expenses as a percentage of net sales increased to 5.7%
for the six months ended June 30, 2022 compared to 4.3% for the six months ended
June 30, 2021. The increases for both periods were due to increased staff
related expenses, in addition to decreased sales.
General and administrative. General and administrative expenses for the three
months ended June 30, 2022 decreased 29.0% to $948,000 compared to $1,336,000
for the three months ended June 30, 2021. General and administrative expenses
for the six months ended June 30, 2022 decreased 52.5% to $1,554,000 compared to
$3,273,000 for the six months ended June 30, 2021. The decreases for both
periods were primarily due to higher expenses incurred in the prior year period
as a result of the litigation with News America. Following the Litigation
Settlement on July 1, 2022, the Company does not expect to incur further expense
related to the legal proceedings with News America.
General and administrative expenses as a percentage of total net sales increased
to 29.1% for the three months ended June 30, 2022 compared to 21.9% for the
three months ended June 30, 2021 due to decreased sales, partially offset by the
factors described above. General and administrative expenses as a percentage of
net sales decreased to 16.5% for the six months ended June 30, 2022 compared to
28.5% for the six months ended June 30, 2021. The decrease was due to the
factors described above, in addition to decreased sales.
15
Table of Contents
Other Income (Expense). Other income for the three months ended June 30, 2022
was $31,000 compared to other expense of $31,000 for the three months ended June
30, 2021. Other income for the six months ended June 30, 2022 was $28,000
compared to $1,004,000 for the six months ended June 30, 2021. The significantly
higher income in the prior year period reflects the gain on forgiveness of debt
and accrued interest of $1,062,000 from the SBA forgiving the Company's loan
pursuant to the Paycheck Protection Program ("PPP") of the Coronavirus Aid,
Relief and Economic Security ("CARES") Act.
Income Taxes. For the three and six months ended June 30, 2022 the Company
recorded income tax expense of $14,000 and $22,000, respectively, or 1.3% and
2.2% of loss before taxes, respectively. For the three and six months ended June
30, 2021, the Company recorded income tax expense of $10,000 and $23,000,
respectively, or 1.1% and 1.4% of loss before taxes, respectively. The income
tax expense for the three and six months ended June 30, 2022 and 2021 comprises
federal and state income taxes. The primary differences between the Company's
June 30, 2022 and 2021 effective tax rates and the statutory federal rate are
expenses related to stock-based compensation, nondeductible meals and
entertainment, nondeductible penalties and an increase in the Company's
valuation allowance against its deferred tax assets; and for June 30, 2021,
nondeductible penalties and loan forgiveness from the PPP loan.
The Company reassesses its effective tax rate each reporting period and adjusts
the annual effective rate if deemed necessary, based on projected annual taxable
income (loss).
Deferred income taxes are determined based on the estimated future tax effects
of differences between the financial statements and tax basis of assets and
liabilities given the provisions of enacted tax laws. In providing for deferred
taxes, we consider tax regulations of the jurisdictions in which we operate,
estimates of future taxable income and available tax planning strategies. If
tax regulations, operating results or the ability to implement tax-planning
strategies vary, adjustment to the carrying value of deferred tax assets and
liabilities may be required. Valuation allowances are recorded related to
deferred tax assets based on the "more likely than not" criteria.
As a result of the Company's future outlook, management has reviewed its
deferred tax assets and concluded that the uncertainties related to the
realization of its deferred tax assets have become unfavorable. Management has
considered positive and negative evidence for the potential utilization of the
deferred tax assets and has concluded, as of June 30, 2022, that it is more
likely than not that Company will not realize the full amount of its net
deferred tax assets.
As of June 30, 2022, and December 31, 2021, the Company had unrecognized tax
benefits totaling $730,000 and $711,000, respectively, including interest, which
relates to state nexus issues. The amount of the unrecognized tax benefits, if
recognized, that would affect the effective income tax rates of future periods
is $730,000. Due to the current statute of limitations regarding the
unrecognized tax benefits, the Company expects to record a decrease of
approximately $695,000 in unrecognized tax benefits related to state exposures
in the third quarter of 2022, which will reduce accrued income taxes and
increase income tax benefit.
Net Loss. For the reasons stated above, net loss for the three and six months
ended June 30, 2022 was $1,084,000 and $1,022,000, respectively, compared to net
loss of $894,000 and $1,631,000, respectively, for the three and six months
ending June 30, 2021.
Liquidity and Capital Resources
The Company has financed its operations with proceeds from stock sales and sales
of its services and products. At June 30, 2022, working capital was $2,829,000
(defined as current assets less current liabilities) compared to $3,716,000 at
December 31, 2021. During the six months ended June 30, 2022, cash and cash
equivalents and restricted cash decreased $1,464,000 from $3,851,000 at December
31, 2021 to $2,387,000 at June 30, 2022.
Operating Activities. Net cash used by operating activities during the six
months ended June 30, 2022, was $1,475,000. Net loss of $1,022,000, plus
non-cash adjustments of $117,000, less changes in operating assets and
liabilities of $570,000, resulted in the $1,475,000 of cash used in operating
activities. The non-cash adjustments consisted of depreciation expense, changes
in allowance for doubtful accounts and stock-based compensation expense. The
largest components of the change in operating assets and liabilities were
accounts payable which decreased $1,208,000 from December 31, 2021 and accounts
receivable which decreased $1,096,000 from December 31, 2021. These decreases
were the result of decreased sales in the second quarter of 2022. In the normal
course of business, our accounts receivable, accounts payable, accrued
liabilities, deferred revenue and prepaid production costs will fluctuate
depending on the level of revenues and related business activity, as well as
billing arrangements with customers and payment terms with retailers.
16
Table of Contents
Investing Activities. Net cash used in investing activities during the six
months ended June 30, 2022 was $28,000, which related to purchases of property
and equipment.
Financing Activities. Net cash provided by financing activities during the six
months ended June 30, 2022 was $39,000, which related to proceeds received from
issuance of common stock under the employee stock purchase plan and exercised
stock options.
Primarily as a result of the net proceeds from the Litigation Settlement after
the end of the period, cash and cash equivalents plus restricted cash at July
31, 2022 were $14.9 million. The Company believes that based upon current
business conditions and plans, its adjusted cash balance after the net proceeds
from the Litigation Settlement will be sufficient for its cash requirements for
at least the twelve month period subsequent to the filing of this Form 10-Q.
Critical Accounting Estimates
Our discussion of our financial condition and results of operations is based
upon our financial statements, which have been prepared in accordance with GAAP.
During the preparation of these financial statements, we are required to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, net sales, costs and expenses and related disclosures. On an
ongoing basis, we evaluate our estimates and assumptions, including those
related to allowance for doubtful accounts, income taxes, sales tax, and
stock-based compensation expense. We base our estimates on historical experience
and on various other assumptions that we believe are reasonable under the
circumstances. The results of our analysis form the basis for making assumptions
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions, and the impact of such differences
may be material to our financial statements.
Our significant accounting policies and estimates are described in Note 1 to the
annual financial statements included in Part II, Item 8 of our Annual Report
on Form 10-K as of and for the year ended December 31, 2021, filed with the
Securities and Exchange Commission on March 9, 2022. We believe our most
critical accounting estimates include the following:
· allowance for doubtful accounts;
· sales tax;
· income taxes; and
· stock-based compensation.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements made in this Quarterly Report on Form 10-Q, in the Company's
other SEC filings, in press releases and in oral statements to shareholders and
securities analysts that are not statements of historical or current facts are
"forward-looking statements." Such forward-looking statements involve known and
unknown risks, uncertainties and other factors that may cause the actual results
or performance of the Company to be materially different from the results or
performance expressed or implied by such forward-looking statements. The words
"anticipates," "believes," "estimates," "expects," "future," "likely," "may,"
"projects," "seeks," "will" and similar expressions identify forward-looking
statements. Forward-looking statements include statements expressing the intent,
belief or current expectations of the Company and members of our management team
regarding, for instance: (i) our belief that our cash balance and cash generated
by operations will provide adequate liquidity and capital resources for at least
the next twelve months; and (ii) that we expect fluctuations in accounts
receivable and payable, accrued liabilities, revenue deferrals and prepaid
production costs. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date the statement was
made. These statements are subject to the risks and uncertainties that could
cause actual results to differ materially and adversely from the forward-looking
statements. These forward-looking statements are based on current information,
which we have assessed and which by its nature is dynamic and subject to rapid
and even abrupt changes.
17
Table of Contents
Factors that could cause our estimates and assumptions as to future performance,
and our actual results, to differ materially include the following:(i) local,
regional, national, and international economic conditions that have deteriorated
as a result of the COVID-19 pandemic, inflation, and labor shortages, including
the risks of a global recession or a recession in one or more of our key
markets, and the impact they may have on us and our customers and our assessment
of that impact; (ii) management's ability to fully or successfully implement its
business plan to achieve and maintain increased sales and resultant
profitability in the future; (iii) the Company's success in developing and
implementing new product offerings, in a successful manner; (iv) prevailing
market conditions, including pricing and other competitive pressures, in the
in-store advertising industry and, intense competition for agreements with CPG
retailers and manufacturers; (v) potentially incorrect assumptions by management
with respect to the financial effect of current strategic decisions and the
effect of current sales trends on fiscal year 2022 results; (vi) termination of
all or a major portion of, or a significant change in terms and conditions of, a
material agreement with a CPG manufacturer or retailer; (vii) other economic,
business, market, financial, competitive and/or regulatory factors affecting the
Company's business generally; (viii) our ability to successfully manage our IT
operating infrastructure outsourcing arrangement; and (ix) our ability to
attract and retain highly qualified managerial, operational and sales personnel.
Our risks and uncertainties also include, but are not limited to, the risks
presented in our Annual Report on Form 10-K for the year ended December 31,
2021, and any additional risks presented in our Quarterly Reports on Form 10-Q
and our Current Reports on Form 8-K. We undertake no obligation (and expressly
disclaim any such obligation) to update forward-looking statements made in this
Form 10-Q to reflect events or circumstances after the date of this Form 10-Q or
to update reasons why actual results would differ from those anticipated in any
such forward-looking statements, other than as required by law.
© Edgar Online, source Glimpses
LENDWAY, INC. 
