Item 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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, 2020, our
Current Reports on Form 8-K and our other SEC filings.
Restatement
The
accompanying Management’s Discussion and Analysis
(“MD&A”) gives effect to certain adjustments made
to the previously reported financial statements for the three
months ended March 31, 2021 and 2020. Due to the restatement of the
unaudited financial statements for these periods, the data set
forth in the accompanying MD&A may not be comparable to
discussions and data in our Original Report.
Refer
to “Explanatory Note” immediately preceding Item 1 of
this Amendment No. 1 to the Quarterly Report on Form 10-Q/A and
Note 2, “Restatement of Previously Issued Financial
Statements” in the accompanying financial statements for
further details related to the restatement and impact on our
financial statements.
Company Overview
Insignia
Systems, Inc. (“Insignia,” “we,”
“us,” “our” and the “Company”)
is a leading provider of in-store and digital advertising solutions
to consumer-packaged goods
(“CPG”) manufacturers,
retailers, shopper marketing agencies and brokerages
(“clients”). We believe our products and services are
attractive to our clients because of our speed to market, ability
to customize our solutions down to store level and the results our
solutions deliver. Our leadership and employees have extensive
industry knowledge, including direct experience through former
positions at CPG manufacturers and retailers. We provide marketing
solutions to CPG manufacturers spanning from some of the largest
multinationals to new and emerging brands.
For retailers and CPG manufacturers 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 focus on relationships
with our clients and installation and print production vendors
(“execution partners”) as we believe they are our
future. 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 by delivering superior
customer service that our clients deserve. Our in-store solutions
execute 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.
We have
faced increasingly intense competition for the marketing
expenditures of CPG manufacturers for in-store signage. We have
observed increased competition in growing and maintaining our
network of retailers into which we are authorized to sell solutions
as competitors continue to purchase new or extend exclusive
arrangements with retailers for that purpose. New product
investments by large and emerging CPG manufacturers give us
optimism that our product portfolio is relevant to our
clients.
Over
the past several years, we have diversified our portfolio through a
significant expansion of our offered solutions and development of a
portfolio designed to more holistically meet the needs of our
clients and execution partners. This diversification has resulted
in non-POPS solutions revenue growing 99% for the three months
ended March 31, 2021 compared to the three months ended March 31,
2020. Our non-POPS revenue has grown year over year since we began
the expansion of our offered solutions in 2017. We remain committed
to further refining and enhancing our solutions and broadening our
retailer relationships.
Impacts and Potential Future Impacts of COVID-19 on Our
Business
The
COVID-19 pandemic has adversely impacted our operations and the
operations of our CPG customers and retailers as a result of
quarantines, illnesses, and travel and logistics restrictions and
it may continue to adversely affect our business indefinitely.
While we have continued to operate and maintain our continuity with
our clients by working remotely, the retail landscape in which CPG
manufacturers and retailers operate has changed substantially, as
has our ability to execute programs due to both limited access to
our retailers and reduced levels of staffing with our execution
partners. The financial impact of COVID-19 for the three months
ended March 31, 2021 was not as significant as it had been in 2020
which is reflected in the increased revenue for the quarter ended
March 31, 2021 compared to the quarter ended March 31, 2020. Our
future bookings may be negatively impacted due to ongoing changes
in the retail landscape and evolution of shoppers’ behavior
in response to COVID-19. The permanence of these changes is
unknown. Factors deriving from the COVID-19 response that have
impacted or we believe are likely to negatively impact sales and
operating results in the future include, but are not limited to:
reduced levels of CPG spending; reduced levels of staffing with our
execution partners; limitations on the ability of our employees to
perform their work due to illness caused by the pandemic or local,
state, or federal orders requiring employees to remain at home; and
limitations on the ability of our customers to pay us on a timely
basis. Even after the COVID-19 pandemic has subsided, we may
continue to experience adverse impacts on our business as a result
of any economic recession or depression that has occurred or may
occur in the future. Therefore, we cannot reasonably estimate the
full extent of the impact on our results of operation and financial
condition, but it could be material and last for an extended period
of time. We continue to monitor our liquidity, including frequent
cost and spending assessments and reductions across our
organization.
We will
continue to actively monitor the situation and may take further
actions that alter our business operations as may be required by
federal, state or local authorities or that we determine are in the
best interests of our employees, customers, suppliers and
shareholders. While we are unable to determine or predict the
nature, duration or scope of the overall impact the COVID-19
pandemic will have on our business, results of operations,
liquidity or capital resources. However, we believe that it is
important to share where our company stands today, how our response
to COVID-19 is progressing and how our operations and financial
condition may change as the fight against COVID-19
progresses.
Business Overview
Summary of Financial Results
For the
quarter ended March 31, 2021, the Company generated revenues of
$5,386,000, as compared with revenues of $4,646,000 for the quarter
ended March 31, 2020. Net loss for the quarter ended March 31, 2021
was $737,000, as compared to a net loss of $925,000 for the quarter
ended March 31, 2020, while the operating loss was $1,759,000 for
the quarter ended March 31, 2021 compared to $1,156,000 for the
comparable quarter in the prior year. Revenue from our non-POPS
solutions has increased significantly for the three months ended
March 31, 2021 compared to the three months ended March 31, 2020,
partially offset by continued declines in our signage business due
to competitive pressure. We continue to pursue a variety of efforts
designed to drive innovation, client acquisitions and retailer
expansions. During the first quarter of 2021, litigation expenses
increased significantly compared to prior quarters. We also
recognized a gain of $1,062,000 on the forgiveness of our PPP loan
during the first quarter.
During
the quarter ended March 31, 2021, cash and cash equivalents
decreased $290,000 from $7,128,000 at December 31, 2020 to
$6,838,000 at March 31, 2021. The decrease was primarily driven by
the net loss for the quarter ended March 31, 2021. We have no debt
other than our lease obligations at March 31, 2021.
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.
|
|
For theThree Months Ended March 31
|
|
|
Net
sales
|
100.0%
|
100.0%
|
Cost
of sales
|
82.8
|
79.9
|
Gross
profit
|
17.2
|
20.1
|
Operating
expenses:
|
|
|
Selling
|
9.6
|
15.5
|
Marketing
|
4.4
|
7.9
|
General
and administrative
|
35.9
|
21.6
|
Total
operating expenses
|
49.9
|
45.0
|
Operating
loss
|
(32.7)
|
(24.9)
|
Other
income
|
19.2
|
0.2
|
Loss
before taxes
|
(13.5)
|
(24.7)
|
Income
tax benefit
|
0.2
|
(4.8)
|
Net
loss
|
(13.7) %
|
(19.9) %
|
Three Months Ended March 31, 2021 Compared to
Three Months Ended March 31, 2020
Net Sales. Net sales for the three months ended March 31,
2021 increased 15.9% to $5,386,000 compared to $4,646,000 for the
three months ended March 31, 2020.
Service
revenues. Service
revenues for the three months ended March 31, 2021 increased 22.4%
to $5,386,000 compared to $4,400,000 for the three months ended
March 31, 2020. The
increase was due to 98.7% increase in non-POPS revenue, partially
offset by a 40.7% decrease in POPS solutions revenue. For the three
months ended March 31, 2021, non-POPS revenue has increased due to
both sales to new CPGs and an increase in sales to existing CPGs.
Competitive pressures have resulted in decreased POPS solutions
revenue for three months ended March 31, 2021 versus the three
months ended March 31, 2020. We will continue to have increased
pressure on our POPS business in 2021, including the expiration in
April 2021 of our 10-year selling agreement with News America
Marketing In-Store (“News America”). While the negative
impact from COVID-19 has lessened compared to 2020, future impacts
are unknown as CPG manufacturers and retailers react to changes in
shoppers’ behavior.
Product revenues.
Due to the August 2020 sale of the custom print business, there
were no product sales for the three months ended March 31, 2021
compared to $246,000 for the three months ended March 31,
2020.
Gross Profit. Gross profit for the three months
ended March 31, 2021 decreased 0.4% to $929,000 compared to
$933,000, inclusive of a $159,000 impairment charge for the three
months ended March 31, 2020. Gross profit as a percentage of total
net sales decreased to 17.2% for the three months ended March 31,
2021, compared to 20.1% for the three months ended March 31,
2020.
Service revenues.
Gross profit from our service revenues for the three months ended
March 31, 2021 decreased 8.7% to $929,000 compared to $1,018,000
for the three months ended March 31, 2020. The decrease in gross
profit was primarily due to the decrease in POPS solution sales in
addition to the Company’s decision to make an investment in
the execution of a large non-POPS program.
Gross
profit as a percentage of service revenues for the three months
ended March 31, 2021 decreased to 17.2% compared to 23.1% for the
three months ended March 31, 2020. The decrease was primarily due
to mix of revenue as our non-POPS solutions typically have lower
margins due to competitive pressures, partially offset by increased
gross profit rates from our POPS solutions as the Company reduced
guaranteed payment obligations by renegotiating several fixed or
store-based retail payment contracts to sign placement-based
payment contracts during 2020.
Product revenues.
Due to the August 2020 sale of the custom print business, there was
no gross profit for the three months ended March 31, 2021 compared
to $74,000 for the three months ended March 31, 2020. Gross profit
as a percentage of product revenues for the three months ended
March 31, 2020 was 30.1%.
Impairment Loss.
Impairment loss for the three months ended March 31, 2020 was
$159,000 as a result of the impairment during the first quarter of
the Company’s selling agreement with News America, a
long-lived asset. The impairment charge is described further in
Note 3 of our accompanying unaudited financial statements. There
was no impairment loss during the three months ended March 31,
2021.
Operating Expenses
Selling. Selling expenses for the three months ended March
31, 2021 decreased 28.3% to $516,000 compared to $720,000 for the
three months ended March 31, 2020. Decreased selling expense was
primarily the result of decreased staff related expenses in
addition to a software investment in the three months ended March
31, 2020. Selling expenses as a percentage of total net sales
decreased to 9.6% for the three months ended March 31, 2021
compared to 15.5% for the three months ended March 31, 2020. The
decrease was primarily due to the factors described above, in
addition to increased sales.
Marketing. Marketing expenses for the three months ended
March 31, 2021 decreased 35.6% to $235,000 compared to $365,000 for
the three months ended March 31, 2020. Decreased marketing expense
was primarily the result of decreased consulting and staffing
expenses. Marketing expenses as a percentage of total net sales
decreased to 4.4% for the three months ended March 31, 2021
compared to 7.9% for the three months ended March 31, 2020. The
decrease was primarily due to the factors described above, in
addition to increased sales.
General and administrative. General and administrative
expenses for the three months ended March 31, 2021 increased 92.9%
to $1,937,000 compared to $1,004,000 for the three months ended
March 31, 2020. The increase was primarily due to expenses incurred
as a result of the litigation with News America. General and
administrative expenses as a percentage of total net sales
increased to 36.0% for the three months ended March 31, 2021
compared to 21.6% for the three months ended March 31, 2020. The
increase was primarily due to the factors described above,
partially offset by increased sales.
Other Income. Other income for the three months ended March
31, 2021 was $1,035,000 compared to $9,000 for the three months
ended March 31, 2020. The increase was due to the gain on debt
extinguishment of $1,062,000 from the SBA forgiving the Company of
its Note entered into pursuant to the PPP of the Coronavirus Aid,
Relief and Economic Security (“CARES”)
Act.
Income Taxes. For
the three months ended March 31, 2021, the Company recorded income
tax expense of $13,000, or (1.8%) of loss before taxes. For the
three months ended March 31, 2020, the Company recorded income tax
benefit of $222,000, or 19.4% of loss before taxes. The income tax
expense (benefit) for the three months ended March 31, 2021 and
2020 is comprised of federal and state taxes. The primary
differences between the Company’s March 31, 2021 and 2020
effective tax rates and the statutory federal rate are
nondeductible stock-based compensation, nondeductible meals and
entertainment as well as an increase in the Company’s
valuation allowance against its deferred tax assets. In addition,
for the three months ended March 31, 2020, the Company recognized a
decrease in its valuation allowance against certain net operating
losses (NOLs) carried forward for federal income tax purposes,
which the Company was able to carry back to prior years and request
a refund of federal taxes paid.
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 that it is more likely than not that
Company will not realize the full amount of its net deferred tax
assets. At March 31, 2021 and December 31, 2020, the Company had a
valuation allowance of approximately $2,116,000 and $1,946,000,
respectively, against its entire deferred tax asset because the
Company does not believe it is more likely than not that it will
realize its deferred tax asset.
In March 2020, Congress passed the Coronavirus Aid, Relief and
Economic Security (“CARES”) Act. The CARES Act, among
other provisions, allows for companies to carry back federal NOLs
generated in 2018, 2019 and 2020 for up to five years for refunds
of federal taxes paid. This provision created an opportunity for
the Company to utilize NOLs not previously expected to be utilized.
Thus, the Company has reversed approximately $215,000 of its
valuation allowance against the NOLs in its deferred tax assets
which the Company carried back to claim a refund of
federal taxes paid. As the Company expects to receive the tax
refund from the ability to carry back the NOLs within the next 12
months, this discrete benefit has been recorded within income taxes
receivable on the balance sheet. In addition to the $215,000
recognized, $17,000 was included as a discrete tax benefit for the
year and included in income taxes receivable related to the NOL
carry back due to differences in the federal tax rate utilized for
the deferred tax asset compared to the rates in effect for the
years in which the NOL is being carried back.
Net Loss. For the reasons stated above, net loss for the
three months ended March 31, 2021 was $737,000, compared to a net
loss of $925,000 for the three months ending March 31,
2020.
Liquidity and Capital Resources
The
Company has financed its operations with proceeds from stock sales
and sales of its services and products. At March 31, 2021, working
capital was $6,478,000 (defined as current assets less current
liabilities) compared to $7,668,000 at December 31, 2020. During
the three months ended March 31, 2021, cash and cash equivalents
decreased $290,000 from $7,128,000 at December 31, 2020 to
$6,838,000 at March 31, 2021.
Operating
Activities. Net cash used in operating activities during the
three months ended March 31, 2021 was $303,000. Net loss of
$737,000, less non-cash adjustments of $968,000, plus changes in
operating assets and liabilities of $1,402,000 resulted in the
$303,000 of cash used in operating activities. The largest
component of the change in operating assets and liabilities was
accounts receivable, which decreased $758,000 from December 31,
2020, as a result of normal fluctuations based on business and
market conditions. The non-cash adjustments consisted of
depreciation and amortization expense, gain on sale of property and
equipment, changes in allowance for doubtful accounts, gain on
forgiveness of PPP loan and accrued interest and stock-based
compensation expense. In the normal course of business, our
accounts receivable, accounts payable, accrued liabilities and
deferred revenue will fluctuate depending on the level of revenues
and related business activity, as well as billing arrangements with
customers and payment terms with retailers.
Investing
Activities. Net cash used in investing activities during the
three months ended March 31, 2021 was $13,000. This was related to
purchases of property and equipment, partially offset by proceeds
from the sale of property and equipment.
Financing
Activities. Net cash provided by financing activities during
the three months ended March 31, 2021 was $26,000, which related to
proceeds received from issuance of common stock under the employee
stock purchase plan.
The
Company believes that based upon current business conditions and
plans, its existing cash balance and future cash generated from
operations will be sufficient for its cash requirements for at
least the next twelve months.
Critical Accounting Policies
The
discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been
prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these
financial statements requires us to make estimates and judgments
that affect the reported amounts of assets and liabilities,
revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of our financial statements. Actual
results may differ from these estimates under different assumptions
or conditions.
Our
significant accounting policies are described in Note 1 to the
annual financial statements as of and for the year ended December
31, 2020, included in our Form 10-K/A filed with the Securities and
Exchange Commission on August 23, 2021. We believe our most
critical accounting policies and estimates include the
following:
●
allowance for
doubtful accounts;
●
stock-based
compensation.
Cautionary Statement Regarding Forward-Looking
Statements
Certain
statements made in this Amendment No,1 to the Quarterly Report on
Form 10-Q/A, 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, and revenue deferrals.
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.
Factors
that could cause our estimates and assumptions as to future
performance, and our actual results, to differ materially include
the following: (i) the impacts of the COVID-19 pandemic including
the duration, spread, severity, and any recurrence of the COVID-19
pandemic, the duration and scope of related government orders and
restrictions, the impact on our employees, and the extent of the
impact of the COVID-19 pandemic on overall demand for our products
and services; (ii) local, regional, national, and
international economic conditions that have deteriorated as a
result of the COVID-19 pandemic 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; (iii) management’s ability to fully or
successfully implement its business plan to achieve and maintain
increased sales and resultant profitability in the future; (iv) the
Company’s success in developing and implementing new product
offerings, including mobile, digital or other new offerings, in a
successful manner; (v) 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; (vi) 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 2021 results; (vii) 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, ; (viii)
other economic, business, market, financial, competitive and/or
regulatory factors affecting the Company’s business
generally; (ix) our ability to successfully manage our new IT
operating infrastructure outsourcing arrangement; (x) our ability
to attract and retain highly qualified managerial, operational and
sales personnel; and (xi) the final outcome of our litigation
with News America. 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, 2020, our
Amendment No. 1 to the Annual Report on Form 10-K/A for the year
ended December 31, 2020, and this Amendment No. 1 to
the Quarterly Report on Form 10-Q/A,
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/A to reflect
events or circumstances after the date of this Form 10-Q/A or to
update reasons why actual results would differ from those
anticipated in any such forward-looking statements, other than as
required by law.