UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 |
| OR | |
| [ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to . |
Commission File Number: 1-13471
Insignia Systems, Inc.
(Exact name of registrant as specified in its charter)
|
Minnesota
|
41-1656308
|
6470 Sycamore Court North
Maple Grove, MN 55369
(Address of principal executive offices)
(763) 392-6200
(Registrant’s telephone number, including area code)
Not applicable.
(Former name, former address and former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Number of shares outstanding of Common Stock, $.01 par value, as of July 30, 2004, was 12,475,625.
Page 1 of 20
Insignia Systems, Inc.
TABLE OF CONTENTS
Page 2 of 20
Insignia Systems, Inc.
BALANCE SHEETS
(Unaudited)
| June 30, 2004 | December 31, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 4,526,000 | $ | 5,225,000 | ||||
| Accounts receivable, net | 2,269,000 | 3,240,000 | ||||||
| Inventories | 540,000 | 710,000 | ||||||
| Prepaid expenses and other | 576,000 | 476,000 | ||||||
| Total Current Assets | 7,911,000 | 9,651,000 | ||||||
| Property and Equipment: | ||||||||
| Production tooling, machinery and equipment | 1,605,000 | 1,759,000 | ||||||
| Office furniture and fixtures | 258,000 | 258,000 | ||||||
| Computer equipment | 685,000 | 688,000 | ||||||
| Leasehold improvements | 284,000 | 279,000 | ||||||
| 2,832,000 | 2,984,000 | |||||||
| Accumulated depreciation and amortization | (2,210,000 | ) | (2,252,000 | ) | ||||
| Total Property and Equipment | 622,000 | 732,000 | ||||||
| Other Assets: | ||||||||
| Goodwill | — | 960,000 | ||||||
| Other | 167,000 | 333,000 | ||||||
| Total Other Assets | 167,000 | 1,293,000 | ||||||
| Total Assets | $ | 8,700,000 | $ | 11,676,000 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 1,888,000 | $ | 2,092,000 | ||||
| Accrued liabilities | ||||||||
| Compensation | 407,000 | 384,000 | ||||||
| Employee stock purchase plan | 66,000 | 116,000 | ||||||
| Legal | 332,000 | 206,000 | ||||||
| Retailer guarantees | 1,050,000 | 335,000 | ||||||
| Other | 74,000 | 88,000 | ||||||
| Deferred revenue | 536,000 | 633,000 | ||||||
| Total Current Liabilities | 4,353,000 | 3,854,000 | ||||||
| Shareholders’ Equity: | ||||||||
| Common stock, par value $.01; | ||||||||
| Authorized shares — 20,000,000 | ||||||||
| Issued and outstanding shares — 12,476,000 at June 30, 2004 | ||||||||
| and 12,412,000 at December 31, 2003 | 125,000 | 124,000 | ||||||
| Additional paid-in capital | 26,900,000 | 26,775,000 | ||||||
| Accumulated deficit | (22,678,000 | ) | (19,077,000 | ) | ||||
| Total Shareholders’ Equity | 4,347,000 | 7,822,000 | ||||||
| Total Liabilities and Shareholders’ Equity | $ | 8,700,000 | $ | 11,676,000 | ||||
See accompanying notes to financial statements.
Page 3 of 20
Insignia Systems, Inc.
STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | |||||||||
| Services revenues | $ | 4,054,000 | $ | 6,243,000 | $ | 7,713,000 | $ | 11,634,000 | ||||
| Products sold | 1,018,000 | 1,018,000 | 2,065,000 | 2,089,000 | ||||||||
| Total Net Sales | 5,072,000 | 7,261,000 | 9,778,000 | 13,723,000 | ||||||||
| Cost of services | 2,627,000 | 3,358,000 | 5,436,000 | 6,696,000 | ||||||||
| Cost of goods sold | 563,000 | 629,000 | 1,100,000 | 1,179,000 | ||||||||
| Total Cost of Sales | 3,190,000 | 3,987,000 | 6,536,000 | 7,875,000 | ||||||||
| Gross Profit | 1,882,000 | 3,274,000 | 3,242,000 | 5,848,000 | ||||||||
| Operating Expenses: | ||||||||||||
| Selling | 1,501,000 | 2,158,000 | 3,013,000 | 4,470,000 | ||||||||
| Marketing | 272,000 | 354,000 | 540,000 | 740,000 | ||||||||
| General and administrative | 1,262,000 | 756,000 | 2,313,000 | 1,766,000 | ||||||||
| Impairment of goodwill | 960,000 | — | 960,000 | — | ||||||||
| Total Operating Expenses | 3,995,000 | 3,268,000 | 6,826,000 | 6,976,000 | ||||||||
| Operating Income (Loss) | (2,113,000 | ) | 6,000 | (3,584,000 | ) | (1,128,000 | ) | |||||
Other Income (Expense): | ||||||||||||
| Interest income | 14,000 | 19,000 | 28,000 | 43,000 | ||||||||
| Interest expense | — | (2,000 | ) | — | (2,000 | ) | ||||||
| Other income (expense) | (45,000 | ) | 1,000 | (45,000 | ) | (7,000 | ) | |||||
| Total Other Income (Expense) | (31,000 | ) | 18,000 | (17,000 | ) | 34,000 | ||||||
| Net Income (Loss) | $ | (2,144,000 | ) | $ | 24,000 | $ | (3,601,000 | ) | $ | (1,094,000 | ) | |
| Net income (loss) per share: | ||||||||||||
| Basic | $ | (0.17 | ) | $ | 0.00 | $ | (0.29 | ) | $ | (0.09 | ) | |
| Diluted | $ | (0.17 | ) | $ | 0.00 | $ | (0.29 | ) | $ | (0.09 | ) | |
| Shares used in calculation of net income (loss) per share: | ||||||||||||
| Basic | 12,476,000 | 12,273,000 | 12,474,000 | 12,142,000 | ||||||||
| Diluted | 12,476,000 | 12,606,000 | 12,474,000 | 12,142,000 | ||||||||
See accompanying notes to financial statements.
Page 4 of 20
Insignia Systems, Inc.
STATEMENTS OF CASH FLOWS
(Unaudited)
| Six Months Ended June 30 | 2004 | 2003 | ||||||
|---|---|---|---|---|---|---|---|---|
| Operating Activities: | ||||||||
| Net loss | $ | (3,601,000 | ) | $ | (1,094,000 | ) | ||
| Adjustments to reconcile net loss to net cash | ||||||||
| used in operating activities: | ||||||||
| Depreciation and amortization | 129,000 | 147,000 | ||||||
| Provision for bad debt expense | — | 10,000 | ||||||
| Impairment of goodwill | 960,000 | — | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 971,000 | 670,000 | ||||||
| Inventories | 170,000 | 196,000 | ||||||
| Prepaid expenses and other | 66,000 | (890,000 | ) | |||||
| Accounts payable | (204,000 | ) | (863,000 | ) | ||||
| Accrued liabilities | 800,000 | 173,000 | ||||||
| Deferred revenue | (97,000 | ) | (803,000 | ) | ||||
| Net cash used in operating activities | (806,000 | ) | (2,454,000 | ) | ||||
| Investing Activities: | ||||||||
| Purchases of property and equipment | (19,000 | ) | (74,000 | ) | ||||
| Other | — | (49,000 | ) | |||||
| Net cash used in investing activities | (19,000 | ) | (123,000 | ) | ||||
| Financing Activities: | ||||||||
| Proceeds from issuance of common stock, net | 126,000 | 738,000 | ||||||
| Net cash provided by financing activities | 126,000 | 738,000 | ||||||
| Decrease in cash and cash equivalents | (699,000 | ) | (1,839,000 | ) | ||||
| Cash and cash equivalents at beginning of period | 5,225,000 | 6,472,000 | ||||||
| Cash and cash equivalents at end of period | $ | 4,526,000 | $ | 4,633,000 | ||||
See accompanying notes to financial statements.
Page 5 of 20
Insignia Systems, Inc.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
| 1. | Summary of Significant Accounting Policies. |
| Description of Business. Insignia Systems, Inc. (the “Company”) markets in-store advertising products, programs and services to retailers and consumer packaged goods manufacturers. The Company’s products include the Insignia Point-of-Purchase Services (POPS) in-store advertising program, which includes both Insignia POPSign and VALUStix programs, thermal sign card supplies for the Company’s SIGNright and Impulse systems, Stylus software and laser printable cardstock and label supplies. |
| Basis of Presentation. Financial statements for the interim periods included herein are unaudited; however, they contain all adjustments, including normal recurring accruals, which in the opinion of management, are necessary to present fairly the financial position of the Company at June 30, 2004, and its results of operations and cash flows for the three and six months ended June 30, 2004 and 2003. Results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. |
| The financial statements do not include certain footnote disclosures and financial information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America and, therefore, should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. |
| The Summary of Significant Accounting Policies in the Company’s 2003 Annual Report on Form 10-K describes the Company’s accounting policies. |
| Inventories. Inventories are primarily comprised of parts and supplies for Impulse and SIGNright machines, sign cards, and rollstock. Inventory is valued at the lower of cost or market using the first-in, first-out (FIFO) method, net of provision for obsolete inventories, and consist of the following: |
| June 30, 2004 | December 31, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| Raw materials | $ | 176,000 | $ | 192,000 | ||||
| Work-in-process | 6,000 | 70,000 | ||||||
| Finished goods | 358,000 | 448,000 | ||||||
| $ | 540,000 | $ | 710,000 | |||||
| Stock-Based Compensation. The Company has stock-based employee compensation plans, which are described more fully in the notes included in the Company’s 2003 Annual Report on Form 10-K. The Company applied Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plans. Under this method, compensation expense is recognized for the amount by which the market price of the common stock on the date of grant exceeds the exercise price of an option. No compensation costs related to stock option grants have been recognized in the Statements of Operations. The following table illustrates the effect on the Company’s net loss if the Company had applied the fair value recognition provisions of Financial Accounting Standards Board (FASB) Statement 123, Accounting for Stock-Based Compensation, to its stock-based employee plans. |
Page 6 of 20
| Six Months Ended June 30 | 2004 | 2003 | ||||||
|---|---|---|---|---|---|---|---|---|
| Net loss, as reported | $ | (3,601,000 | ) | $ | (1,094,000 | ) | ||
| Deduct: Total stock-based employee compensation | ||||||||
| expense determined under fair value based | ||||||||
| methods for all awards, net of tax | 655,000 | 802,000 | ||||||
| Pro forma net loss | $ | (4,256,000 | ) | $ | (1,896,000 | ) | ||
| Basic and diluted net loss per share: | ||||||||
| As reported | $ | (0.29 | ) | $ | (0.09 | ) | ||
| Pro forma | $ | (0.34 | ) | $ | (0.16 | ) | ||
| Net Income (Loss) Per Share. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average shares outstanding and excludes any dilutive effects of options, warrants and convertible securities. Diluted net income per share gives effect to all diluted potential common shares outstanding during the period. Options and warrants to purchase approximately 1,719,000 and 1,309,000 shares of common stock with weighted average exercise prices of $5.62 and $8.91 were outstanding at June 30, 2004 and 2003 and were not included in the computation of common stock equivalents for the three months ended June 30, 2004 and 2003 because their exercise prices were higher than the average fair market value of the common shares during the reporting period. Options and warrants to purchase approximately 1,625,000 and 1,043,000 shares of common stock with weighted average exercise prices of $5.87 and $9.70 were outstanding at June 30, 2004 and 2003 and were not included in the computation of common stock equivalents for the six months ended June 30, 2004 and 2003 because their exercise prices were higher than the average fair market value of the common shares during the reporting periods. For the three months ended June 30, 2004 and the six months ended June 30, 2004 and 2003, the effect of options and warrants was anti-dilutive due to the net losses incurred during the periods. Had net income been achieved, approximately 43,000, 56,000 and 181,000 of common stock equivalents would have been included in the computation of diluted net income per share. |
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | |||||||||||
| Denominator for basic net income (loss) | ||||||||||||||
| per share – weighted averages shares | 12,476,000 | 12,273,000 | 12,474,000 | 12,142,000 | ||||||||||
Effect of dilutive securities: | ||||||||||||||
| Stock options and warrants | — | 333,000 | — | — | ||||||||||
| Denominator for diluted net income (loss) per | ||||||||||||||
| share – adjusted weighted average shares | 12,476,000 | 12,606,000 | 12,474,000 | 12,142,000 | ||||||||||
| 2. | Impairment of Goodwill. The Company historically has performed its annual test for impairment of goodwill as of the end of the fourth quarter of the fiscal year, which coincided with the completion of its annual forecasting process. During the six months ended June 30, 2004 the Company has not been successful in accomplishing its 2004 plan for VALUStix based on a number of factors and thus the Company has made a decision to de-emphasize that business. As a result, management has determined that an impairment indicator has occurred and that an additional impairment test was required as of June 30, 2004. The Company’s goodwill impairment test utilized discounted cash flows to determine the fair value of the VALUStix business. The Company determined that the carrying amount of goodwill exceeded the fair value of the VALUStix business and recorded an impairment charge of $960,000 during the second quarter of fiscal 2004. The primary factor leading to the impairment was substantially lower cash flow |
Page 7 of 20
| forecasts due to the inability to integrate the VALUStix business into the POPS program. The revised cash flow forecasts did not support the value of the recorded goodwill. |
| The following table reflects the changes in the carrying amount of goodwill: |
| Balance at December 31, 2003 | $ | 960,000 | |||
| Impairment of goodwill | (960,000 | ) | |||
| Balance at June 30, 2004 | $ | — | |||
| 3. | Commitments and Contingencies. |
| Legal. In August 2000, News America Marketing In-Store, Inc. (News America), brought suit against the Company in U.S. District Court in New York, New York. The case was settled in November 2002. The terms of the settlement agreement are confidential. The settlement did not impact the Company’s operating results. |
| In October 2003, News America brought suit against the Company in U.S. District Court in New York, New York. In this action, News America has alleged that the Company has engaged in deceptive acts and practices, has interfered with existing business relationships with certain retailers and prospective economic advantage, and has engaged in unfair competition. The suit seeks unspecified damages and injunctive relief. The Company filed a Motion to Dismiss in February 2004 and is awaiting decision by the Court. Management believes the allegations are without merit and that the Company will prevail. |
| The Company is subject to various legal proceedings in the normal course of business. Management believes the outcome of these proceedings will not have a material adverse effect on the Company’s financial position or results of operations. During the six months ended June 30, 2004 the Company incurred legal fees of $1,068,000 related to the litigation. |
| Retailer Agreements. The Company has contracts in the normal course of business with various retailers, some of which provide for minimum annual program levels. If those minimum levels are not met, the Company is obligated to pay the contractual difference to the retailers on a quarterly or annual basis. The Company calculates these estimated minimum payments based on actual activity to date. Due to the annual nature of these contracts, increased activity with these retailers in subsequent fiscal quarters could decrease the estimated payment amounts recorded in the current period. During the six months ended June 30, 2004 and 2003 the Company incurred approximately $1,463,000 and $420,000 of costs related to these minimums. The amounts were recorded in Cost of Services in the Statements of Operations. |
| 4. | Private Placement. On May 20, 2004, the Company executed a definitive agreement with certain Investors for the sale of 2,000,000 shares of the Company’s common stock for an aggregate purchase price of $2,500,000 in a private placement. The agreement also includes a mutual put and call option for an additional 1,785,800 shares of common stock for $1.40 per share, or $2,500,120, exercisable in certain circumstances within the 15 month period after the first closing. |
| The proposed transaction has been approved by the Company’s Board of Directors and is subject to certain standard conditions. Also, the transaction is subject to approval by the Company’s shareholders at a special meeting, expected to be held in September 2004. The first closing is expected to occur immediately after the shareholders’meeting. A proxy statement has been filed with the Securities and Exchange Commission and mailed to shareholders to seek shareholder approval for the financing. |
| In connection with this financing, the Company also entered into an agreement with a Placement Agent that provides for the Agent to receive a cash fee plus a warrant to purchase shares of common stock equal |
Page 8 of 20
| to 5% of the shares sold, with an exercise price of 115% of the price paid for the shares. The warrants will be exercisable for five years. |
| In accordance with the terms of the Registration Rights Agreement to be entered into by the Company and the Investors in connection with this financing, the Company has agreed to register, within a prescribed timeframe, the shares issuable to the Investors and the Placement Agent for resale under the Securities Act of 1933. |
| 5. | Concentrations. During the six months ended June 30, 2004 three customers accounted for 16%, 12% and 11% of the Company’s total net sales. At June 30, 2004 these customers represented 34% of the Company’s total accounts receivable. During the six months ended June 30, 2003 one customer accounted for 21% of the Company’s total net sales. |
| Although there are a number of customers that the Company sells to, the loss of a major customer could cause a delay in and possible loss of sales, which would adversely affect operating results. |
Insignia Systems, Inc. markets in-store advertising products, programs and services to retailers and consumer packaged goods manufacturers. The Company’s products include the Insignia Point-of-Purchase Services (POPS) in-store advertising program, which includes both Insignia POPSign and VALUStix programs, thermal sign card supplies for the Company’s SIGNright and Impulse systems, Stylus software and laser printable cardstock and label supplies.
The Company experienced a significant decrease in net sales in the second quarter of 2004 compared to the second quarter of 2003 due to the following reasons:
The Company experienced a significant loss during the second quarter of 2004 due to the following reasons:
Page 9 of 20
The following table sets forth, for the periods indicated, certain items in the Company’s Statements of Operations as a percentage of total net sales.
| Three Months Ended June 30 | Six Months Ended June 30 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2004 | 2003 | 2004 | 2003 | ||||||
| Net sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |
| Cost of sales | 62.9 | 54.9 | 66.8 | 57.4 | |||||
| Gross profit | 37.1 | 45.1 | 33.2 | 42.6 | |||||
| Operating expenses: | |||||||||
| Selling | 29.6 | 29.7 | 30.8 | 32.5 | |||||
| Marketing | 5.4 | 4.9 | |||||||