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Insignia Systems, Inc.
Insignia Systems, Inc.
Taxes collected from customers and remitted to governmental authorities are excluded from revenue on the net basis of accounting.
The majority of the Company’s accounts receivable is due from companies in the consumer-packaged goods industry. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are due within 30-150 days and are stated at amounts due from customers, net of an allowance for doubtful accounts.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account under Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The
following is a description of our performance obligations included in our primary revenue streams and the timing or method of revenue recognition for each:
POPSign Services.In-Store Signage Solution Services. Our primary source of revenue is from marketingexecuting in-store advertising programssolutions and services primarily to consumer-packaged goods (“CPG”) manufacturers. We provide a service of displaying promotional signs in close proximity to the manufacturer’s product in participating stores, which we maintain in two-to-four-week cycle increments. Our in-store marketing programs include POPSigns and freshADS (together referred to herein as “POPSign services”).
Each of the individual activities under our POPSign services, including production activities, are inputs to an integrated sign display service. As such, each POPSign service represents a single performance obligation. Customers receive and consume the benefits from the promotional displays over the duration of the contracted display cycle. Additionally, the display of the signs does not have an alternative use to us and we have an enforceable right to payment for services performed to date. As a result, we recognize the transaction price for our POPSign service performance obligations as revenue over time. Given the nature of our performance obligations is to provide a display service over the duration of a specified period or periods, we recognize revenue on a straight-line basis over the display service period as it best reflects the timing of transfer of our POPSign services.
Other Service Revenues. The Company also supplies CPG manufactures with other miscellaneous retailer approved promotional services and sign solutions. These services are more customized than the POPSignPOPS solutions program, consisting of variable durations and variable specifications. Due to the variable nature of these services, revenue recognition is a mix of over time and point in time recognition.
Products. We also sell custom adhesive and non-adhesive signage materials directly to our customers. Each such product is a distinct performance obligation. Revenue is recognized at a point in time upon shipment, when control of the goods transfers to the customer.
Disaggregation of Revenue
In the following table, revenue is disaggregated by major revenue stream and timing of revenue recognition.
| Three months ended June 30, 2018 | Six months ended June 30, 2018 | |
| | | | | | | Three months ended March 31, 2019 |
| | | | | | | |
Timing of revenue recognition: | | |
Products and servcies transferred over time | $7,868,000 | — | $7,868,000 | $14,894,000 | �� | $14,894,000 | |
Products and services transferred over time | | $3,555,000 | $- | $3,555,000 |
Products and services transferred at a point in time | — | $377,000 | — | $770,000 | 1,084,000 | 501,000
| 1,585,000 |
Total | $7,868,000 | $377,000 | $8,245,000 | $14,894,000 | $770,000 | $15,664,000 | $4,639,000 | $501,000 | $5,140,000 |
| Three months ended March 31, 2018 |
| | | |
Timing of revenue recognition: | | | |
Products and services transferred over time | $7,026,000 | $- | $7,026,000 |
Products and services transferred at a point in time | - | 393,000
| 393,000 |
Total | $7,026,000 | $393,000 | $7,419,000 |
Contract Costs
Sales commissions that are paid to internal or external sales representatives are eligible for capitalization as they are incremental costs that would not have been incurred without entering into a specific sales arrangement and are recoverable through the expected margin on the transaction. The Company is applying the practical expedient in Accounting Standards CodificationASC 340-40-25-4 that allows the incremental costs of obtaining a contract to be recorded as an expense when incurred when the amortization period of the asset that would have otherwise been recognized is one year or less. These costs are included in selling expenses.
Deferred Revenue
Significant changes in deferred revenue during the period are as follows:
Balance at December 31, 20172018 | $372,000302,000 |
Reclassification of beginning deferred revenue to revenue, as a result of performance obligations satisfied | (122,000295,000) |
Cash received in advance andand/or not recognized as revenue | 781,000
|
Cumulative catch-up from a change in the timeframe for recognition of revenue arising from deferred revenue | —795,000
|
Balance at June 30, 2018March 31, 2019 | $1,031,000802,000 |
Transaction Price Allocated to Remaining Performance Obligations
The Company applies the practical expedient in paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less, which reflect the majority of our performance obligations. This practical expedient is being applied to arrangements for certain uncompleted POPSignincomplete services and unshipped custom signage materials. Of those contracts with an expected duration of greater than one year, we estimate that revenue of $11,000$1,511,000 and $3,989,000$1,984,000 related to performance obligations that are unsatisfied (or partially unsatisfied) as of June 30, 2018March 31, 2019 will be recognized during the remainder of fiscal 20182019 and in fiscal 2019 or beyond,2020, respectively.
3.4.
Selling Arrangement. In 2011, the Company paid News America Marketing In-Store, LLC (“News America”)(News America) $4,000,000 in exchange for a 10-year arrangement to sell signs with price into News America’s network of retailers as News America’s exclusive agent. The $4,000,000 is being amortized on a straight-line basis over the 10-year term of the arrangement. Amortization expense which was $150,000 and $100,000 and $200,000 in both of the three and six months ended June 30,March 31,2019 and 2018, and 2017, respectfully, andrespectively. Amortization expense is expected to be $400,000 per year over the next three years$600,000 in 2019, $262,000 in 2020 and $117,000$55,000 in the year ending December 31, 2021, respectively. The acceleration of amortization in 2019 is recorded within costbased on the anticipated recovery period over the remaining term of servicesthe contract due to the loss of a significant retailer which intends to exit our retailer network in the Company’s condensed statementsfirst half of operations.2019. The net carrying amount of the selling arrangement is recorded within other assets on the Company’s condensed balance sheet.
4.5.
Leases.The Companyleases space under a non-cancelable operating lease for our corporate headquarters. This lease has escalating lease terms and also includes a tenant incentive that was recorded at the time the lease was originally entered into. The lease does not contain contingent rent provisions. The Company also has a lease for additional office space under an operating lease. The lease for our corporate headquarters includes both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease components (e.g., common-area or other maintenance costs) which are accounted for as a single lease component as we have elected the practical expedient to group lease and non-lease components for all leases. The lease for our additional office space is non-cancelable with a lease term of less than one year and therefore, we have elected the practical expedient to exclude this short-term lease from our right of use assets and lease liabilities.
Our leases include options to renew. The exercise of lease renewal options is at our sole discretion; therefore, the renewals to extend the lease terms are not included in our right of use assets and lease liabilities as they are not reasonably certain of exercise. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease term.
We use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.
The cost components of our operating leases were as follows for the period ended March 31, 2019:
| | | |
Operating lease cost | $51,000 | $— | $51,000 |
Variable lease cost | 7,000 | — | 7,000 |
Short-term lease cost | — | 10,000 | 10,000 |
Total | $58,000 | $10,000 | $68,000 |
Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for our leased corporate headquarters which are paid based on actual costs incurred by the lessor.
Maturities of our lease liabilities for our corporate headquarters operating lease is as follows as of March 31, 2019:
Maturity of Lease Liabilities | |
2019 | $163,000 |
2020 | 222,000 |
2021 | 57,000 |
Total lease payments | $442,000 |
Less: Interest | 27,000 |
Present value of lease liabilities | $415,000 |
The remaining lease term as of March 31, 2019 is 2.0 years and the discount rate was 6%. The cash outflow for operating leases for the three months ended March 31, 2019 was $54,000.
The following table presents future minimum lease payments for our operating leases at December 31, 2018 under ASC 840 and is being presented for comparative purposes.
2019 | $217,000 | |
2020 | 222,000 | |
2021 | 57,000 | |
Rent expense under this lease was approximately $60,000 for the three months ended March 31, 2018.
6.
Income Taxes. For the three and six months ended June 30,March 31, 2019, the Company recorded income tax benefit of $204,000, or 15.7% of loss before taxes. For the three months ended March 31, 2018, the Company recorded income tax expense of $76,000 and $149,000,$73,000, or 29.2% and 30.0%30.8% of income before taxes, respectively. For the three and six months ended June 30, 2017, the Company recorded antaxes. The income tax benefit of $38,000 and $582,000, or 6.6% and 25.2% of loss before taxes, respectively. The income tax expense or benefit for the three and six months ended June 30,March 31, 2019 and 2018 and 2017 is comprised of federal and state taxes. The primary differences between the Company’s June 30,March 31, 2019 and 2018 and 2017 effective tax rates and the statutory federal rate are expenses related to stock-based compensation and nondeductible meals and entertainment andas well as for the three and six months ended June 30, 2017, aMarch 31, 2019 an increase in the Company’s valuation allowance was recognized as it was determined that it is more likely than not that the Company will not realize the full amount ofagainst its net deferred tax assets. The Company reassesses its effective 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 statementstatements 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. At bothMarch 31, 2019 and December 31, 2017 and June 30, 2018, the Company had a valuation allowance of approximately $108,000$157,000 and $79,000, respectively, as a result of certain capital losses, credits and state net operating losses carried forward which the Company does not believe are more likely than not to be realized.
As of June 30, 2018March 31, 2019, and December 31, 2017,2018, the Company had unrecognized tax benefits totaling $596,000$621,000 and $581,000,$613,000, 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 $596,000.$621,000. Due to the current statute of limitations regarding the unrecognized tax benefits, the unrecognized tax benefits and associated interest is not expected to change significantly in 2018.2019.
5.7.
Concentrations. During the sixthree months ended June 30,March 31, 2019, one customer accounted for 16% of the Company’s total net sales. During the three months ended March 31, 2018, two customers accounted for 25%28% and 24%, respectively, of the Company’s total net sales. During the six months ended June 30, 2017, two customers accounted for 25% and 9% respectively, of the Company’s total net sales. At June 30, 2018, three customers accounted for 32%, 18% and 10%March 31, 2019, one customer represented 14% of the Company’s total accounts receivable, respectively.receivable. At December 31, 2017, three2018, two customers represented 29%, 12%31% and 11%16% of the Company’s total accounts receivable.
Although there are a number of customers that the Company sells to, the loss of a major customer could adversely affect operating results. Additionally, the loss of aan additional major retailer from the Company’s retail network could further adversely affect operating results.
6.8.
Share Repurchases. On April 5, 2018, the Board of Directors authorized the repurchase of up to $3,000,000 of the Company’s common stock on or before March 31, 2020. The plan allows the repurchases to be made in open market or privately negotiated transactions. The plan does not obligate the Company to repurchase any particular number of shares, and may be suspended at any time at the Company’s discretion. During the three months ended June 30, 2018, the Company repurchased and retired approximately 103,000 shares, at a total cost of $187,000. As of June 30, 2018, the approximate dollar value of shares that may yet be purchased by the Company under the planMarch 31, 2019, there was $2,816,000.no share repurchase activity.
7.
Recently Issued Accounting Pronouncements. In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases, under which lessees will recognize most leases on the balance sheet. This will generally increase reported assets and liabilities. For public entities, this ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2018. ASU 2016-02 mandates a modified retrospective transition method for all entities. The Company has performed a review of the requirements of the new guidance and has identified which of its leases will be within the scope of ASU 2016-02. The Company is working through an adoption plan which includes a review of lease contracts, applying the new standard to the lease contracts and comparing the results to our current accounting. As part of this, we are assessing changes that might be necessary to processes, and internal controls to capture new data and address changes in financial reporting. Effective January 1, 2019, the Company will be revising its lease accounting policy and expanding revenue disclosures to reflect the requirements of ASU 2016-02. Because of the nature of the work that remains, at this time the Company is unable to reasonably estimate the impact of adoption on its financial statements.
Itemtem 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 in this Quarterly Report on Form 10-Q and the “Risk Factors” described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2017,2018, our Current Reports on Form 8-K and our other SEC filings.
Company Overview
Insignia Systems, Inc. (referred to in this Quarterly Report on Form 10-Q as “Insignia,” “we,” “us,” “our” or the “Company”) marketsis a leading provider of in-store marketing solutions to our partners and clients which consist of consumer-packaged goods (“CPG”) manufacturers, retailers and marketing agencies and digital. We believe our products and services are attractive to CPG manufacturers because of our speed to market, ability to customize advertising programs at store level and our deep industry knowledge. We have leaders and employees with extensive industry knowledge and direct experience working with CPG manufacturers and retailers. Insignia provides advertising solutions to CPG manufacturers spanning from some of the largest multinationals to new and emerging brands.
Our relationships with retailers are forged through executional excellence, flexible processes and our ability to connect retailer messaging with our CPG manufacturer’s message. Insignia runs in-store advertising products, programs at national and servicesregional US retailers who are leaders in their respective channels.
Our relationships with marketing agencies continue to retailersgrow through our agility, responsiveness, custom production and consumer packaged goods (“CPG”) manufacturers. The Company was incorporated in 1990. Since 1998, the Company has focused on managing a retail network, made up of approximately 21,000 store locations, for the primary purpose of providing turn-key at-shelf market access for CPG manufacturers’ marketing programs. Insignia provides participating retailersexecution capabilities, and our ability to respond to their client’s needs with benefits including incremental revenue, incremental sales opportunities, increased shopper engagement in-store,precision and custom creative development and other in-kind services.efficiency.
Insignia’s primary productsolution has been the Point-Of-Purchase Services (POPS®) in-store marketing program.signage solution. The Insignia POPS® program solution is a national, account-specific, shelf-edge advertising and promotionalpromotion tactic. Internal testing has indicated the program deliverssolution is capable of delivering incremental sales for the featured brand. The programParticipation in the POPS solution allows CPG manufacturers to deliver vital product information to consumers at the point-of-purchase, and to leverage the local retailer brand and store-specific prices to provide a unique “call to action” that draws attention to the featured brand and triggers a purchase decision. CPG customersmanufacturers benefit from Insignia’s nimble operational capabilities, which include short lead
times, in-house graphic design capabilities, post-program analytics, and micro-marketing capabilities such as variable or bilingual messaging.
In October 2017,Over the Company announcedpast several years, we have developed and now offer promotional, merchandising and digital solutions in addition to our core business of in-store signage solutions. Our expanded portfolio of solutions allows us to more completely meet the nationwide launchneeds of freshADSsm,CPG manufacturers, retailers and their agents as their business strategies evolve behind an exclusive advertising vehicle featured in produce, created to inspire shoppers early in their trip and help navigate them to center store.ever-changing retail landscape.
2018 Business Overview
Summary of Financial Results
For the quarter ended June 30, 2018,March 31, 2019, the Company generated net salesrevenues of $8,245,000,$5,140,000, as compared with net salesrevenues of $5,849,000$7,419,000 for the quarter ended June 30, 2017. For the six months ended June 30, 2018, the Company generated net sales of $15,664,000, as compared with net sales of $10,616,000 in the six months ended June 30, 2017.March 31, 2018. Net incomeloss for the quarter ended June 30, 2018March 31, 2019 was $184,000,$1,096,000, as compared to a net lossincome of $534,000$164,000 for the quarter ended June 30, 2017. Net incomeMarch 31, 2018. As indicated previously, competitive pressure caused the changes in our retail and CPG network during 2019, inclusive of the pending exit of a significant retailer in the first half of 2019, and has adversely impacted our results. We expect ongoing competitive pressure to challenge our business results for the six months ended June 30, 2018 was $348,000, as compared toremainder of the year, however we are diligently pursuing a net lossvariety of $1,725,000 for the six months ended June 30, 2017. The net loss for the three-monthefforts around innovation, client acquisition and the six-month periods ended June 30, 2017 are inclusive of a $192,000 tax valuation allowance.retailer expansion.
During the six monthsquarter ended June 30, 2018,March 31, 2019, cash and cash equivalents increased $3,346,000decreased $6,194,000 from $4,695,000$10,160,000 at December 31, 2017,2018, to $8,041,000$3,966,000 at June 30, 2018.March 31, 2019. The decrease was primarily driven by investing in held to maturity investments. Cash and cash equivalents and held to maturity investments total $8,960,000 at March 31, 2019. The Company had no long-term debt other than its lease obligations as of June 30, 2018 and 2017.March 31, 2019.
Results of Operations
The following table sets forth, for the periods indicated, certain items in the Company’sour Condensed Statements of Operations as a percentage of total net sales.
| | | |
| | |
| | | | | |
For the Three Months Ended March 31 | | | |
Net sales | 100.0% | 100.0%
| 100.0% | 100.0% |
Cost of sales | 63.6 | 74.4 | 63.3 | 80.0 | 84.9 | 63.0 |
Gross profit | 36.4 | 25.6 | 36.7 | 20.0 | 15.1 | 37.0 |
Operating expenses: | | |
Selling | 8.7 | 14.2 | 10.3 | 16.2 | 14.4 | 12.2 |
Marketing | 6.9 | 7.3 | 7.5 | 8.0 | 12.9 | 8.1 |
General and administrative | 17.7 | 13.9 | 15.8 | 17.6 | 13.8 | 13.6 |
Total operating expenses | 33.3 | 35.4 | 33.6 | 41.8 | 41.1 | 33.9 |
Operating income (loss) | 3.1 | (9.8) | 3.1 | (21.8) | (26.0) | 3.1 |
Other income | 0.1 | 0.0 | 0.1 | 0.0 | 0.7 | 0.1 |
Income (loss) before taxes | 3.2 | (9.8) | 3.2 | (21.8) | (25.3) | 3.2 |
Income tax expense (benefit) | 1.0 | (0.6) | 1.0 | (5.5) | (4.0) | 1.0 |
Net income (loss) | 2.2% | (9.2)% | 2.2% | (16.3)% | (21.3)% | 2.2% |
Three Months and Six Months Ended June 30, 2018March 31, 2019 Compared to Three Months and Six Months Ended June 30, 2017March 31, 2018
Net Sales. Net sales for the three months ended June 30, 2018 increased 41.0%March 31, 2019 decreased 30.7% to $8,245,000$5,140,000 compared to $5,849,000$7,419,000 for the three months ended June 30, 2017. Net sales for the six months ended June 30, 2018 increased 47.6% to $15,664,000, compared to $10,616,000 for the six months ended June 30, 2017.March 31, 2018.
Service revenues for the three months ended June 30, 2018 increased 42.7%March 31, 2019 decreased 34.0% to $7,868,000$4,639,000 compared to $5,512,000$7,026,000 for the three months ended June 30, 2017. Service revenues for the six months ended June 30, 2018 increased 51.7% to $14,894,000 compared to $9,816,000 for the six months ended June 30, 2017.
2017 service revenues were weak during both the three months ended and six months ended June 30, 2017, down 10.6% from the three months ended June 30, 2016, and down 16.7% from the six months ended June 30, 2016. Accordingly, we do not expect a similar increase in the percentage of service revenues (or in the gross profit as a percentage of net sales) during the remainder of 2018 as compared to the comparable periods in 2017.
March 31, 2018. The increase in sales for the three months ended June 30, 2018decrease was due to increases49.9% decrease in both POPS programsolutions revenue, andpartially offset by a 73.9% increase in innovation initiatives.initiatives revenue. The decrease in POPS programsolutions revenue increasedwas primarily due to a decrease in the number of signs placed from new and existing CPG customers and an increasea decrease in average price per sign, which was due to competitive pressures, the resultloss of a favorable mix ofsignificant CPG, clients and contracts. The increase in sales for the six months ended June 30, 2018 was due to an increase in average price per sign, which was the result loss of a non-recurring favorable mix of CPG clients and contracts, and an increase in the number of signs placed, mostly due to increased signs placed from new and existing CPG customers and also due to innovation initiativescontract.
Product revenues for the three months ended June 30, 2018March 31, 2019 increased 11.9%27.5% to $377,000$501,000 compared to $337,000$393,000 for the three months ended June 30, 2017. Product revenues for the six months ended June 30, 2018 decreased 3.8% to $770,000 compared to $800,000 for the six months ended June 30, 2017.March 31, 2018. The increase in the three month period was primarily due to higher sales of sign card supplies due to sales to new and existing customers. The decrease in the six month period was primarily due to lower sales of sign card supplies due to lowerdriven by higher customer demand.
Gross Profit. Gross profit for the three months ended June 30, 2018 increased 100.6%March 31, 2019 decreased 71.8% to $3,005,000, or 36.4% as a percentage of net sales,$774,000 compared to $1,498,000, or 25.6% as a percentage of net sales,$2,746,000 for the three months ended June 30, 2017.March 31, 2018. Gross profit for the six months ended June 30, 2018 increased 170.4% to $5,751,000, or 36.7% as a percentage of total net sales decreased to 15.1% for the three months ended March 31, 2019, compared to $2,127,000, or 20.0% as a percentage of net sales,37.0% for the sixthree months ended June 30, 2017.March 31, 2018.
Service revenues:revenues. Gross profit from our service revenues for the three months ended June 30, 2018 increased 106.4%March 31, 2019 decreased 74.6% to $2,904,000$665,000 compared to $1,407,000$2,622,000 for the three months ended June 30, 2017.March 31, 2018. The higherdecrease in gross profit was primarily due to a decrease in POPS signs solutions sales as our gross profit is highly dependent on sales levels due to the resultrelatively fixed nature of increased sales and product mixa portion of our payments to retailers, combined with an increasedthe decrease in average price per sign fromdue to the loss of a non-recurring favorable mix of CPG clients, andcontract in place for the three months ended March 31, 2018, partially offset by an increase in revenue and gross profit from innovation initiatives.
The Company incurred costs of approximately $155,000$118,000 associated with the implementation of its new IT operating infrastructure during the three months ended June 30, 2018March 31, 2019 compared to approximately $50,000$115,000 for the three months ended June 30, 2017. ForMarch 31, 2018. The Company expects to implement a portion of the six months ended June 30, 2018, the Company incurred costs of approximately $270,000 associated with the development of its new IT operating infrastructure compared to approximately $150,000 for the six months ended June 30, 2017. The project is expected to be substantially completedsystem in the fourthsecond quarter of 2018,2019 with estimated additional expense of $300,000 in 2018. Gross profit as a percentage of service revenues for$75,000. Additionally, technology investments may be needed to support the six months ended June 30, 2018 increased 192.1% to $5,526,000 compared to $1,892,000 for the six months ended June 30, 2017. The increase was primarily due to the factors described above.
Company’s new solution initiatives. Gross profit as a percentage of service revenues for the three months ended June 30, 2018 increasedMarch 31, 2019 decreased to 36.9%14.3% compared to 25.5%37.3% for the three months ended June 30, 2017.March 31, 2018. The increase was primarily due to the factors described above. Gross profit as a percentage of service revenues for the six months ended June 30, 2018 increased to 37.1% compared to 19.3% for the six months ended June 30, 2017. The increasedecrease was primarily due to the factors described above.
Product revenues:revenues. Gross profit from our product revenues for the three months ended June 30, 2018 increased 11.0%March 31, 2019 decreased 12.1% to $101,000$109,000 compared to $91,000$124,000 for the three months ended June 30, 2017. The increase was primarily due to an increase in sales, partially offset by higher production and tooling costs. Gross profit from our product revenues for the six months ended June 30, 2018 decreased 4.3% to $225,000 compared to $235,000 for the six months ended June 30, 2017.March 31, 2018. The decrease was primarily due to a decrease in sales.
increased production related costs and product mix. Gross profit as a percentage of product revenues was 26.8%decreased to 21.8% for the three months ended June 30, 2018 was relatively flatMarch 31, 2019 compared to 27.0%31.6% for the three months ended June 30, 2017. Gross profit as a percentage of product revenuesMarch 31, 2018. The decrease was 29.2% forprimarily due to the six months ended June 30, 2018 compared to 29.4% for the six months ended June 30, 2017.factors described above.
Operating Expenses
Selling. Selling expenses for the three months ended June 30, 2018March 31, 2019 decreased 13.5%18.3% to $719,000$738,000 compared to $831,000$903,000 for the three months ended June 30, 2017. The decreaseMarch 31, 2018. Decreased selling expense was primarily due tothe result of decreased variable staff related expenses. Selling expenses for the six months ended June 30, 2018 decreased 5.6% to $1,622,000 compared to $1,719,000 for the six months ended June 30, 2017. The decrease was primarily due decreased staff related expenses.
expense. Selling expenses as a percentage of total net sales decreasedincreased to 8.7%14.4% for the three months ended June 30, 2018March 31, 2019 compared to 14.2%12.2% for the three months ended June 30, 2017. The decrease was primarily due to increased net sales, in addition to the factors described above. Selling expenses as a percentage of net sales decreased to 10.3% for the six months ended June 30, 2018 compared to 16.2% for the six months ended June 30, 2017. The decrease was primarily due to increased net sales, in addition to the factors described above.
Marketing. Marketing expense for the three months ended June 30, 2018 increased 32.6% to $566,000 compared to $427,000 for the three months ended June 30, 2017. Increased marketing expenses were primarily due to increased staffing and staff related costs, partially due to the filling of previously open positions, and an increase in new product development activities. Marketing expense for the six months ended June 30, 2018 increased 37.2% to $1,170,000 compared to $853,000 for the six months ended June 30, 2017.March 31, 2018. The increase was primarily due to the factors described above.
Marketing expense as a percentage of net sales decreased to 6.9% for the three months ended June 30, 2018 compared to 7.3% for the three months ended June 30, 2017. The decrease was primarily due to increased sales, partially offset by the factors described above.
Marketing. Marketing expenses for the three months ended March 31, 2019 increased 10.1% to $665,000 compared to $604,000 for the three months ended March 31, 2018. Increased marketing expense was primarily the result of increased consulting expenses, partially offset by decreased staffing and variable staff related expenses.
Marketing expenses as a percentage of total net sales decreasedincreased to 7.5%12.9% for the sixthree months ended June 30, 2018March 31, 2019 compared to 8.0%8.1% for the sixthree months ended June 30, 2017.March 31, 2018. The decreaseincrease was primarily due to increaseddecreased sales, partially offset by the factors described above.
General and administrative. General and administrative expenses for the three months ended June 30, 2018 increased 80.2%March 31, 2019 decreased 29.7% to $1,467,000$708,000 compared to $814,000$1,007,000 for the three months ended June 30, 2017.March 31, 2018. The increase of $653,000 includes $460,000 of expenses related to the negotiation and satisfaction of obligations under the Cooperation Agreement that was announced on May 18, 2018, and is in effect into 2020.
General and administrative expenses for the six months ended June 30, 2018 increased 32.5% to $2,474,000 compared to $1,867,000 for the six months ended June 30, 2017. The increasedecrease was primarily due to the factors described above.variable staff related expenses and lower administrative costs.
General and administrative expenses as a percentage of total net sales increased to 17.7%13.8% for the three months ended June 30, 2018March 31, 2019 compared to 13.9%13.6% for the three months ended June 30, 2017.March 31, 2018. The increase was primarily due to the factors described above. General and administrative expenses as a percentage of net sales decreased to 15.8% for the six months ended June 30, 2018 compared to 17.6% for the six months ended June 30, 2017. The decrease was primarily due increased sales, partially offset by the factors described above.
Other Income. Other income for the three months ended June 30, 2018 was $7,000March 31,2019 increased to $37,000 compared to $2,000$5,000 for the three months ended June 30, 2017. Other income for the six months ended June 30, 2018 was $12,000 compared to $5,000 for the six months ended June 30, 2017.March 31, 2018. The increase was primarilyis due to higher average cash and cash equivalent balances duereturns generated from held to the payment of the special dividend on January 6, 2017. Other income is comprised of interest earned on cash, cash equivalents, and previously for available-for-sale investment balances.maturity investments.
Income Taxes. For the three and six months ended June 30,March 31, 2019, the Company recorded income tax benefit of $204,000, or 15.7% of loss before taxes. For the three months ended March 31, 2018, the Company recorded income tax expense of $76,000 and $149,000,$73,000, or 29.2% and 30.0%30.8% of income before taxes, respectively. For the three and six months ended June 30, 2017, the Company recorded antaxes. The income tax benefit of $38,000 and $582,000, or 6.6% and 25.2% of loss before taxes, respectively. The income tax expense or benefit for the three and six months ended June 30,March 31, 2019 and 2018 and 2017 is comprised of federal and state taxes. The primary differences between the Company’s June 30,March 31, 2019 and 2018 and 2017 effective tax rates and the statutory federal rate are expenses related to stock-based compensation and nondeductible meals and entertainment andas well as for the three and six monthsperiod ended June 30, 2017, aMarch 31, 2019 an increase in the Company’s valuation allowance was recognized in the amount of $192,000 as it was determined that it is more likely than not that the Company will not realize the full amount ofagainst its net deferred tax assets. The Company reassesses its effective 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 statementstatements 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 bothMarch 31, 2019 and December 31, 2017 and June 30, 2018, the Company had a valuation allowance of approximately $108,000$157,000 and $79,000, respectively, as a result of certain capital losses, credits carried forward and state net operating losses carried forward which the Company does not believe are more likely than not to be realized. During the quarter ended March 31,
2019, the Company recorded an increase of approximately $78,000 in its valuation allowance against its deferred tax assets.
Net Income (Loss). For the reasons stated above, net incomeloss for the three and six months ended June 30, 2018March 31, 2019 was $184,000 and $348,000, respectively,$1,096,000, compared to a net lossincome of $534,000 and $1,725,000, respectively,$164,000 for the three and six months ended June 30, 2017.ending March 31, 2018.
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, 2018,March 31, 2019, working capital (currentwas $12,198,000 (defined as current assets less current liabilities) was $12,131,000 compared to $11,833,000$13,351,000 at December 31, 2017.2018. During the sixthree months ended June 30, 2018,March 31, 2019, cash and cash equivalents increased $3,346,000decreased $6,194,000 from $4,695,000$10,160,000 at December 31, 20172018, to $8,041,000$3,966,000 at June 30, 2018.March 31, 2019, with an increase in investments of $4,994,000.
Operating Activities:. Net cash providedused by operating activities during the sixthree months ended June 30, 2018,March 31, 2019, was $4,040,000.$1,086,000. Net incomeloss of $348,000,$1,096,000, plus non-cash adjustments of $683,000 and$243,000, less changes in operating assets and liabilities of $3,009,000$233,000 resulted in the $4,040,000$1,086,000 of cash providedused by operating activities. The largest component of the change in operating assets and liabilities was accounts receivable which decreased $2,296,000,$2,406,000, which was primarily driven by improved daywill fluctuate based on normal business conditions, and partially reflects lower sales outstanding.in the quarter. The non-cash adjustments consisted of depreciation and amortization expense, changes in the allowance for doubtful accounts, deferred income tax benefit, accrued interest on held to maturity investments, 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.
InvestingInvesting Activities:. Net cash used in investing activities during the sixthree months ended June 30, 2018March 31, 2019 was $528,000, which$5,216,000. This was primarily related primarily to the purchase of held to maturity investments of $4,981,000, in addition to investing in the IT operating infrastructure project, andwhich consisted of hardware, purchased software and capitalization of costs for internally developed software.
Financing Activities:. Net cash used inprovided by financing activities during the sixthree months ended June 30, 2018March 31, 2019 was $166,000,$108,000, which was primarily related to proceeds received from issuance of common stock repurchases.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, 2017,2018, included in our Form 10-K filed with the Securities and Exchange Commission on March 15, 2018.7, 2019. Our policy related to the adoption of Topic 606842 on January 1, 2018,2019, the accounting policiespolicy for revenue recognition,leases, is included in Note 21 within this Form 10-Q. We believe our most critical accounting policies and estimates include the following:
●
allowance for doubtful accounts;
●
impairment of long-lived assets;
●
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 whichthat 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,” “expects,” “seeks” 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 deferred revenue; and (iii) plans to repurchase Company stock.revenue deferrals. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of thisthe 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 risk that management may be unable to fully or successfully implement its business plan to achieve and maintain increased sales and resultant profitability in the future; (ii) the risk that the Company will not be able to develop and implement new product offerings, including mobile, digital or other new offerings, in a successful manner; (iii) prevailing market conditions, including pricing and other competitive pressures, in the in-store advertising industry and, intense competition for agreements with retailers and consumer packaged goods manufacturers; (iv) potentially incorrect assumptions by management with respect to the financial effect of current strategic decisions, the effect of current sales trends on fiscal year 20182019 results and the benefit of our relationship with News America; (v) termination of all or a major portion of, or a significant change in terms and conditions of, a material agreement with a consumer packaged goods manufacturer, retailer, or News America; (vi) other economic, business, market, financial, competitive and/or regulatory factors affecting the Company’s business generally; (vii) our ability to successfully implement our new IT operating infrastructure; and (viii) 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, 2017,2018, 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report. Disclosure controls and procedures ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and are designed to ensure that information required to be disclosed by us in these reports is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosures.
(b) Changes in Internal Control Over Financial Reporting
Effective January 1, 2018, we implemented ASU 2014-09 Revenue from Contracts with Customers (Topic 606).Although the adoption of the new revenue standard had no significant impact on our results of operations, cash flows, or financial position, we did implementNo changes to our controls related to revenue. These included the development of new policies based on the five-step model provided in the new revenue standard, enhanced contract review requirements, and other ongoing monitoring activities. These controls were designed to provide assurance at a reasonable level of the fair presentation of our financial statements and related disclosures. There was no other change in ourCompany’s internal control over financial reporting occurred during our most recently completed fiscalthe first quarter of 2019 that hashave materially affected, or isare reasonably likely to materially affect, ourthe Company’s internal control over financial reporting.
PARTPART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
We described the most significant risk factors applicable to the Company in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2017.2018. We believe there have been no material changes from the risk factors disclosed in that Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On April 5, 2018, the Board of Directors authorized the repurchase of up to $3,000,000 of the Company’s common stock on or before March 31, 2020. The plan allows the repurchases to be made in open market or privately negotiated transactions. The plan does not obligate the Company to repurchase any particular number of shares, and may be suspended at any time at the Company’s discretion.
Our share repurchase activity for During the three months ended June 30, 2018,March 31, 2019, there was as follows:
Issuer Purchasesno share repurchase activity. As of Equity Securities
| | | | |
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number (or approximate dollar value) of shars that may yet be purchased under the plans or programs |
April 1–30, 2018 | – | – | – | $3,000,000 |
May 1–31, 2018 | 33,466(a) | $1.84 | 24,576 | $2,954,451 |
June 1–30, 2018 | 78,187 | 1.77 | 102,763 | $2,816,261 |
Total | 111,653 | $1.81 | | |
| | | | |
(a)
Includes 8,890 shares surrendered toMarch 31, 2019, $2,702,000 remained available for repurchase under the Company to satisfy minimum statutory federal, state, and local tax withholding obligations arising from the vesting of a restricted stock award. The shares were forfeit pursuant to the participant’s instructions in accordance with the terms of the applicable award agreement and the 2013 Plan and are not part of any publicly announced stock repurchase program.
existing authorization.
Item 3. Defaults upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Unless otherwise indicated, all documents incorporated herein by reference to a document filed with the SEC pursuant to the Exchange Act are located under SEC file number 001-13471.
| | Description | | Method of Filing |
| | | | |
| | Composite Articles of Incorporation of Registrant, as amended through July 31, 2008 (incorporated by reference to Exhibit 3.1 to annual report on Form 10-K for the year ended December 31, 2015) | | Incorporated by Reference |
| | | | |
| | Composite Bylaws of Registrant, as amended through December 5, 2015 (incorporated by reference to Exhibit 3.2 to annual report on Form 10-K for the year ended December 31, 2015) | Incorporated by Reference
|
|
10.1
| | Incorporated by Reference |
| | | | |
| | First Amendment to Change in Control Agreement with Kristine A. Glancy, dated April 28, 2018 | | Filed Electronically |
| | | | |
| | Certification of Principal Executive Officer | | Filed Electronically |
| | | | |
| | Certification of Principal Financial and Accounting Officer | | Filed Electronically |
| | | | |
| | Section 1350 Certification | | Furnished Electronically |
| | | | |
101 | | The following materials from Insignia Systems, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018,March 31, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets; (ii) Condensed Statements of Operations; (iii) Condensed Statements of Shareholders’ Equity; (iv) Condensed Statements of Cash Flows; and (iv)(v) Notes to Financial Statements. | | Filed Electronically |
*Management contract or compensatory plan or arrangement required to be filed as an exhibit to this quarterly report on Form 10-Q.
SIGNATURES
Pursuant to the requirements 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.
| INSIGNIA SYSTEMS, INC. | |
| (Registrant) | |
| | |
Dated: August 7, 2018May 6, 2019 | /s/ Kristine A. Glancy | |
| Kristine A. Glancy | |
| President and Chief Executive Officer | |
| (on behalf of registrant) | |
| | |
Dated: August 7, 2018May 6, 2019 | /s/ Jeffrey A. Jagerson | |
| Jeffrey A. Jagerson | |
| Chief Financial Officer and Treasurer | |
| (principal financial and accounting officer) | |
EXHIBIT INDEX
| Description | Method of Filing |
| | |
3.1
| | Incorporated by Reference |
|
3.2
| | Incorporated by Reference |
|
10.1
| | Incorporated by Reference |
|
31.1
| | Filed Electronically |
|
31.2
| | Filed Electronically |
|
32
| | Furnished Electronically |
|
101
| The following materials from Insignia Systems, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets; (ii) Condensed Statements of Operations; (iii) Condensed Statements of Cash Flows; and (iv) Notes to Financial Statements. | Filed Electronically |