Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d)
OF THE
SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31, 2020
|
Commission
File Number 1-13471
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INSIGNIA SYSTEMS, INC.
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(Exact
name of registrant as specified in its charter)
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Minnesota
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41-1656308
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(State
or other jurisdiction of incorporation or
organization)
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(IRS
Employer Identification No.)
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8799
Brooklyn Blvd., Minneapolis, MN 55445
|
(Address
of principal executive offices; zip code)
|
(763)
392-6200
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(Registrant’s
telephone number, including area code)
|
Securities
Registered Pursuant to Section 12(b) of the Act:
Title of each class
|
|
Trading Symbol
|
|
Name of each exchange on which registered
|
Common
Stock, $0.01 par value
|
|
ISIG
|
|
The
Nasdaq Stock Market LLC
|
Securities
Registered Pursuant to Section 12(g) of the Act: None
_____________________________________________________________________
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes ☐ No
☑
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ☐ No
☑
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
☑ No ☐
Indicate by check
mark whether the registrant has submitted electronically every
Interactive Data File required to be submitted pursuant to Rule 405
of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes
☑ No ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company, or emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
Large
accelerated filer ☐ Accelerated filer ☐ Non-accelerated
filer ☑ Smaller reporting company ☑ Emerging growth
company ☐
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check
mark whether the registrant has filed a report on and attestation
to its management’s assessment of the effectiveness of its
internal control over financial reporting under Section 404(b) of
the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public
accounting firm that prepared or issued its audit report.
☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ☐ No ☑
The
aggregate market value of the voting and non-voting common equity
held by non-affiliates of the registrant as of the last business
day of the registrant’s most recently completed second fiscal
quarter (June 30, 2020) was approximately $3,965,000 based upon the
price of the registrant’s Common Stock on such
date.
Number
of shares outstanding of Common Stock, $.01 par value, as of March
8, 2021 was 1,754,030.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions
of the registrant’s definitive proxy for its 2021 Annual
Meeting of Shareholders are incorporated by reference into Part
III.
EXPLANATORY NOTE
Insignia Systems, Inc. (“we”, “us”,
“our” and the “Company”) is filing this
Amendment No. 1 on Form 10-K/A (the “Amendment”) to
amend its Annual Report on Form 10-K for the fiscal year ended
December 31, 2020, originally filed with the U.S. Securities and
Exchange Commission (the “SEC”) on March 11, 2021 (the
“Original Report”). In filing this amendment, the
Company is restating its previously issued audited financial
statements for the years ended December 31, 2020 and 2019 to
account for misstatements related to sales taxes. Those previously
issued financial statements should no longer be relied upon. Except
as described below, all other information in, and the exhibits to,
the Original Report remain unchanged. Accordingly, this Amendment
should be read in conjunction with the Original Report and with our
filings with the SEC made after the Original Report. This
Amendment speaks as of the date of the Original Report and the
Company has not updated the Original Report to reflect events
occurring subsequent to the date of the Original
Report.
Background and Effects of the Restatement
As
disclosed in a current report on Form 8-K filed with the SEC on
August 13, 2021, commencing in the second quarter of 2021,
management conducted a review of the Company’s sales tax
positions and related accounting, with the assistance of outside
consultants. As a result of the review, it was determined that
certain non-POPs services/products sales were subject to sales tax
and that the Company had not assessed sales tax on sales of those
services/products to customers. Company management then undertook a
process to obtain documentation from significant customers to
determine if each was exempt from sales tax assessments during the
applicable periods. Based on responses received from these
customers, the Company determined that it did not properly accrue
sales tax and accrued the estimated sales tax incurred. The Company
has identified the misstatements described below, and this
Amendment restates the previously issued financial statements of
the Company (the “Restated Financial Statements”) and
certain other related disclosure, that were included in the
Original Report.
The
misstatements that appeared in the previously issued financial
statements of the Company were material. For sales to the
Company’s customers that were not exempt, the Company
recorded a sales tax accrual, plus related estimated interest and
penalties. The Company also determined on which past sales the
Company would bill for sales tax and seek to collect from customers
that were not tax exempt. The Company recorded accounts receivable
deemed probable of collection. A summary of the impact of the
misstatements is as follows:
|
December 31, 2020
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December 31, 2019
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||
Year Ended
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As previously reported
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Restated
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As previously reported
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Restated
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Total
Net Sales
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$17,669,000
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$17,482,000
|
$21,954,000
|
$21,528,000
|
Operating
Loss
|
(4,601,000)
|
(4,839,000)
|
(5,629,000)
|
(6,106,000)
|
Net
Loss
|
(4,300,000)
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(4,615,000)
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(5,021,000)
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(5,577,000)
|
|
|
|
|
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December 31, 2020
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December 31, 2019
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||
As of
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As previously reported
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Restated
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As previously reported
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Restated
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Shareholders'
equity
|
$7,694,000
|
$6,668,000
|
$11,794,000
|
$11,083,000
|
Internal Control Over Financial Reporting
Management
has reassessed its evaluation of the effectiveness of its internal
control over financial reporting as of December 31, 2020 as further
described in item 9A of this Amendment, and concluded that a
material weakness existed and that disclosure controls and
procedures were not effective. Management’s previous annual
report on internal control over financial reporting should no
longer be relied upon. A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial
reporting, such that there is a reasonable possibility that a
material misstatement of a company’s annual or interim
financial reports will not be prevented or detected on a timely
basis. The existence of one or more material weaknesses precludes a
conclusion by management that a company’s disclosure controls
and procedures and internal control over financial reporting are
effective. Management has taken, and is taking additional steps, as
described under “Remediation Plan and Status” in Item
9A of this Amendment, to remediate the material weakness in our
internal control over financial reporting. For more information
regarding the restatement and its impact on our financial
statements, refer to Note 2, Restatement
of Previously Issued Financial Statements of the Notes
to the Financial Statements included within this
Amendment.
i
Items Amended in this Filing
This
Amendment amends and restates the following Items 1 and 1A
appearing in Part I, Items 7, 8 and 9A appearing in Part II, and
Item 15 appearing in Part IV. In accordance with applicable SEC
rules, this Amendment includes certifications as required by Rule
12b-15 under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”) from the Company’s Principal
Executive Officer and Principal Financial Officer dated as of the
date of this Amendment.
TABLE OF CONTENTS
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17
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52
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55
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ii
PART I.
Item 1. Business
General
Insignia
Systems, Inc. was incorporated in Minnesota in 1990. We are 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. During 2020, our
in-store solutions were executed in retailers spanning from some of
the largest national retailers to regional US wholesalers and
independents who are leaders in their respective channels and
geographies.
Our relationships with shopper marketing agencies and brokerages
continue to grow through our agility, responsiveness, custom
production and execution capabilities, and our overall customer
service in responding to their needs.
Historically,
our primary solution has been in-store signage, specifically
Point-Of-Purchase Services (POPS®). The Insignia
POPS solution is a national, account-specific, shelf-edge
advertising and promotion tactic. External and internal testing has
validated the solution can deliver incremental sales for the
featured brand. Participation 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 an innovative “call to
action” that draws attention to the featured brand and
triggers a purchase decision. CPG manufactures benefit from our
nimble executional capabilities, which include short lead times,
in-house graphic design capabilities and post-program
analytics.
Over the past several years, we developed and now offer an expanded
portfolio of solutions including on-pack, merchandising and digital
solutions in addition to our core business. Our expanded portfolio
allows us to meet the needs of CPG manufacturers, retailers and
their agents as their business strategies evolve behind an
ever-changing retail landscape. With our diversification of
business, we now recognize over 50% of our revenue from these
recently created solutions.
We continue to enhance our ability to be nimble and flexible by
focusing and streamlining our operations. In the last half of 2020,
we sold our custom print business and outsourced most of our
printing and IT operations. In the first half of 2021, we will
relocate our headquarters and operations to much smaller, more
efficient leased spaces.
Effective December 31, 2020, we implemented a seven-for-one reverse
stock split. As a result of the reverse stock split, at 5:00 p.m.
Central Time on the effective date, every seven shares of common
stock then issued and outstanding automatically were combined into
one share of common stock, with no change in par value per share.
No fractional shares were outstanding following the reverse stock
split and any fractional shares resulting from the reverse stock
split were aggregated and sold by our transfer agent. The total
number of shares we are authorized to issue was reduced to
5,714,285 in proportion to the reverse stock split. All references
to share and per share amounts included in this annual report on
Form 10-K have been retroactively restated to reflect the reverse
split.
The
Company’s internet address is
www.insigniasystems.com. The
Company makes all the reports it files with the Securities and
Exchange Commission (SEC) available free of charge on its website.
The Company’s website is not incorporated by reference into
this Annual Report on Form 10-K. Copies of reports can also be
obtained free of charge by requesting them from Insignia Systems,
Inc. Our mailing address effective March 22, 2021 will be 7308
Aspen Lane North, Suite 153, Minneapolis, Minnesota 55428;
telephone 763-392-6200.
1
Industry and Market Background
Our
industry continues to rapidly evolve in several ways:
1.
Brand loyalty:
consumer brand loyalty is shifting from established CPG
manufacturers to emerging brands, who often have distribution
outside our traditional syndicated in-store network and are looking
for solutions to help them be discovered.
2.
Retailer
fragmentation: consumer habits are driving retailer fragmentation,
including the growth of e-commerce and surrogate shoppers, as a
result CPG manufacturers are diversifying their marketing dollars
across an omnichannel environment.
3.
Financial
justification: CPG manufacturers are increasingly focused on top
and bottom-line financial metrics, which drives increased pressure
to generate positive advertising return on investments and by
working with companies that can execute programs.
4.
Competition shift:
Digital advertising spend is reducing spend on traditional media,
including in-store advertising, driving increased competition from
direct competitors, retailer led marketing programs, and digital
media companies.
Despite
rapid growth in e-commerce, both retailers and CPG manufacturers
are actively seeking to grow their brands in physical stores.
During 2020, we executed programs for several brands who started as
direct-to-consumer (DTC) brands and are launching in physical
stores. On the retail side, many of the top US retailers have
either opened new stores, introduced new formats, or invested
heavily in major store renovations. As a result, retailers are
actively seeking solutions that can help drive traffic into the
store and build loyalty with their shoppers. Retailers are seeking
companies with our capabilities and experience to help build
in-store solutions that inspire, educate and ultimately convert
active shoppers while they are shopping. Retailers are continuing
to seek ways to connect their online strategies with their in-store
strategies to build shopper loyalty and to develop solutions to
enhance the shopper’s in-store experience. CPG manufacturers
are increasingly looking for opportunities to reinforce their brand
equity as close as possible to the point of purchase or to expand
the number of locations where they are offered in store to ensure
they are selected over competition. We believe emerging brands are
looking for ways to get discovered and tell shoppers their story.
These trends along with new developments in shopper analytics are
opening opportunities for innovative companies to develop new
products and new ways of helping retailers and brands connect with
shoppers. We are usually engaged as
part of an overall, mixed-media, brand marketing
campaign.
Product Solutions
Since
the Company’s inception in 1990, we have worked closely with
CPG manufacturers and retailers to understand their evolving needs
and introduce solutions that help them achieve their business
strategies. Over most of the past decade, our core product has been
in-store signage solutions, namely the Insignia Point-of Purchase
Services (POPS®). Over the past several years, our net sales
from sign solutions have declined due to competitive pressures
while our non-POPS solutions have significantly expanded as we have
developed our portfolio to more holistically meet the needs of our
clients and execution partners. For example, our in-store signage
solutions represented approximately 57% of our total net sales for
2020, compared to 83% of our total net sales in 2018.
1.
Our In-Store Signage Solutions, which
include POPS signs, help brands achieve a variety of objectives
that include awareness and sales lift. The in-store signage
solutions are placed perpendicular to the shelf and are designed to
attract the attention of the shopper even before they arrive in
front of the shelf to consider the purchase of a product. Our POPS
signs offer engaging creative along with our unique ability to
include retailer logo and price helps convert the shopper from
considering a product into purchasing the product.
●
Our customers have
typically averaged a 3:1 return on investment with our in-store
POPS signage solution driven by the power of retailer endorsement
and price inclusion on the signs.
●
CPG manufacturers
pay marketing program rates based upon the directed number of
cycles and retailer/store count. We collect and organize data from
the CPG manufacturers and participating retailers, design and have
the signage printed, and deliver signage to specified retailers.
Depending on the agreement with the retailer, either a third-party
professional installer or store personnel use placement
instructions to install the signage at the shelf.
2
2.
Our Merchandising Solutions are designed to
help brands get discovered, build awareness and drive impulse
purchases via a secondary or often permanent placement of their
products. Our merchandising solutions include a variety of creative
corrugate displays, side caps, free standing shippers and full
customized end-cap solutions that brands leverage to grow their
sales.
3.
Our On-Pack Solutions appear on the
individual product package and are designed to drive awareness,
impulse purchases and capture market share within a very short
period. On-pack solutions include BoxTalkTM, coupons, recipes,
and cross-promotions.
4.
Our Digital Solutions consist of mobile
programmatic advertising. Most CPG manufacturers are relying on
digital advertising for promoting their products to consumers. We
have invested in our proprietary targeting process, that brings
product, store and shopper data together to identify consumers with
the strongest propensity to buy. Our innovative targeting approach
allows brands to cast a wider net in identifying potential buyers
of their product by focusing on relevant attributes for a specific
brand. As part of an integrated marketing plan, we can develop and
execute digital advertising and in-store marketing in cadence with
brand plans and expectations.
Marketing and Sales
Our
highly skilled direct sales and marketing teams are a major asset
for the organization with their deep knowledge of CPG manufacturers
and retailers. Our sales organization is split into two separate
groups:
1.
Sales to CPG manufacturers. This group
is dedicated to understanding the challenges faced by both large
established brands and small emerging brands and developing
solutions that address their needs.
2.
Sales to retailers. This group is
responsible for understanding each retailer’s unique needs
and to build solutions to address them.
Our
marketing is focused on the following:
●
Increasing
awareness of our corporate brand;
●
Analyzing the
effectiveness of executed offerings; and
●
Developing and
commercializing new and existing solutions.
Our
in-store signage solutions are available for sale into a network of
retailers that is managed and maintained through direct
relationships, or can be sold to certain retailers in the Mass
Merchant Channel.
During
each of the last two most recently completed fiscal years, foreign
sales accounted for less than 1% of total net sales each year. We
expect sales to foreign distributors will remain less than 1% of
total net sales in 2021.
Competition
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. We are party to an
agreement with News America that entitles us to opportunities to
sell signs with price in specific parts of News America’s
retail network through April 2021, but we have experienced limited
success gaining additional access to News America’s retail
network. We are currently party to legal proceedings involving News
Corporation, News America Marketing FSI L.L.C., and News America
Marketing In-Store Services L.L.C. (collectively, “News
America”). The lawsuit is described further in Item 3 of Part
I of this report.
Our
solutions are also subject to increasing pressures from
alternatives to traditional in-store signage, including digital and
merchandising solutions offered by competitors including Vestcom,
Menasha, West Rock, Valassis Digital and Quotient.
3
We
believe our primary competitive strengths include:
●
Best-in-class
execution across our portfolio product solutions;
●
Broad client-base
of CPG manufacturers inclusive of large Fortune 500 companies, and
emerging start-ups;
●
Managing and
providing turn-key access to a national network of
retailers;
●
Imagination,
responsiveness and hunger to help move our clients’ business
forward; and
●
Our speed to market
on program execution.
Intellectual Property: Patents and Trademarks
The
Company has developed and uses a number of trademarks, service
marks, slogans, logos and other commercial symbols to advertise and
sell its products. The Company owns U.S. registered trademarks for
Insignia®, Insignia
POPS®, Insignia
POPSign®, Insignia
ShelfPOPS®,
Stylus®,
freshADS®,
DuraSign®,
I-Care®,
BannerPOPS®,
BrandPOPS®,
EquityPOPS®,
ShapePOPS®, and
BoxtalkTM.
Certain employees are required to enter into nondisclosure and
invention assignment agreements. Customers, vendors and other third
parties also must agree to nondisclosure restrictions to prevent
unauthorized disclosure of the Company’s trade secrets or
other confidential or proprietary information.
Service and Solution Development
New
services, solutions and enhancements to existing offerings are
developed either internally or externally and may include
proprietary data management, operations systems, and design
guidance. Over the past several years, we have significantly
expanded our offered solutions and have developed a portfolio
designed to more holistically meet the needs of our clients and
execution partners.
Business Plan
Our
strategic plan, seeks to differentiate Insignia from our
competition, situate Insignia for growth within our industry and
better insulate Insignia to competitive response through our
overall portfolio diversification. The strategic plan consists
of:
1.
Optimize our Core. Streamline and
simplify day-to-day operations and execution. In the second half of
2020, we outsourced most of our printing and information technology
operations.
2.
Accelerate Innovation. Double down on
our non-POPS solutions and invest in our growth.
3.
Amplify Digital. Expand existing
capabilities to capture a greater share of the market.
4.
Deliver Corporate Rebrand. Launch new
corporate branding and positioning to grow overall awareness and
appeal.
5.
Invest in our Future. Continue to
recruit and retain top talent, invest in training and development
and strengthening our capabilities.
Our
strategic plan acknowledges the challenges and opportunities we
face within our industry and given the rapid change in retail in
the current environment, we continue to be faced with risk of
short-to-intermediate term volatility in our operating and
financial performance.
We are
a leading provider of in-store and digital advertising solutions to
our clients. These solutions
help our clients connect, engage and build better relationships
with their consumers to increase awareness, trial, sales and
loyalty. Many of these CPG manufacturers are fast moving brands
with products that would be found in grocery, mass and drug
channels.
4
During
2020, one CPG manufacturer accounted for 14% of our total net
sales. During 2019, two CPG manufacturers accounted for 13% and
12%, respectively, of our total net sales. At December 31,
2020, two CPG manufacturers represented 17% and 10% of the
Company’s total accounts receivable, respectively. At
December 31, 2019, four CPG manufacturers represented 17%,
12%, 12% and 10% of the Company’s total accounts receivable,
respectively.
Our
sales historically have fluctuated from period to period, primarily
because of:
●
CPG manufacturer
determinations to purchase solutions from us versus competitor
solutions;
●
Promotional timing
and new product launches by CPG manufacturers;
●
CPG manufacturer
budget fluctuations and amounts allocated to in-store or digital
tactics vs. other tactics;
●
Quantity and
quality of retailer locations into which we are authorized to
execute our in-store solutions;
●
New solution
acceptance by CPG manufacturers and retailers; and
●
Changes in the
salability and breadth of our retailer network.
Environmental Matters
We
believe our operations are in compliance with all applicable
environmental regulations within the jurisdictions in which we
operate. The costs and effects of compliance with these regulations
have not been, and are not expected to become
material.
Human Capital Resources and Management
We had 40 employees, of which 39 were full-time employees, as of
March 8, 2021. We believe relationships are our focus and our
future, and that begins with our own team. We believe in creating
an environment where our employees have opportunities to grow and
develop professionally and a work environment that employees are
proud to be a part of.
●
Employee
Engagement. We believe in
regular engagement with our full team, whether that is starting off
our week together in our Monday Huddle meetings, celebrating
nominated employees for quarterly recognition or enjoying events
our Employee Engagement committee plans. We also take to heart our
employees’ feedback and concerns and leverage this to help
enhance our employee experience promoting retention and overall
success of our organization.
●
Talent
Development. We have all
our employees participate in annual development plans where we
focus on both employee strengths and opportunities. 22% of our
employees in 2020 advanced their careers with earned promotions
based on their development and performance. Based on our employee
needs we can provide them a wide range of development opportunities
both formal and informal. As an example, in 2020, we had three of
our Senior Directors complete their Six Sigma Training to help
improve our production and execution processes.
●
Focus on
Safety. The safety of our
employees is a priority. In response to the COVID-19 pandemic, we
implemented significant changes that we determined were in the best
interest of our employees, that included giving the majority of our
employees the flexibility to work from home.
●
Diversity, Equity and
Inclusion. We recognize
that our best performance comes when we have a team built off of
diversity, equity and inclusion. In 2020, we reemphasized our focus
when we were recognized from Minnesota Census of Women in Corporate
Leadership for our diversity both in our boardroom and our
executive leadership team. In addition, we have added
Juneteenth as a recognized paid holiday for employees after
the events of George Floyd and provided resources to our employees
to educate themselves on racial prejudices.
●
Compensation and
Benefits. We provide
robust compensation and benefits. In addition to salaries, these
programs, can include annual bonuses, stock-based compensation
awards, a 401(k) plan with employee matching opportunities,
healthcare and insurance benefits, health savings and flexible
spending accounts, paid time off, family leave, family care
resources, flexible work schedules, adoption and surrogacy
assistance, employee assistance programs, and on-site
services.
Segment Reporting
The
Company operates in a single reportable segment.
5
Item 1A. Risk Factors
Our
business is subject to many risks. The
following are significant factors known to us that could materially
adversely affect our business, reputation, operating results,
industry, financial position, or future financial
performance.
COMPETITIVE AND REPUTATIONAL RISKS
We Face Significant Competition
We face
significant competition from News America, the primary provider of
at-shelf advertising and promotional signage for a significant
majority of retailers. We continue to compete for advertising
dollars with News America’s at-shelf advertising and
promotional signage offerings. News America has significantly
greater market presence and financial resources that can be used to
market their products and purchase exclusive access to retailers
and CPG manufacturers. Should our competition succeed in obtaining
more of the at-shelf advertising business from our current CPG
manufacturers, develop or extend exclusive relationships with our
current retailers, our revenues and related operations would be
adversely affected.
We also
compete against other providers of advertising, marketing and
merchandising products and services, and providers of
point-of-purchase and other in-store solutions, as well as other
marketing products and services. Competition is based on, among
other things, rates, availability of markets, quality of products
and services provided and their effectiveness, store coverage and
other factors. The increasing popularity of digital media among
consumers is driving a corresponding shift in advertising from
traditional in-store tactics to digital. The development of new
devices and technologies, as well as higher consumer engagement
with other forms of digital media such as online and mobile social
networking, are increasing the number of media choices and formats
available to audiences, resulting in audience fragmentation and
increased competition for advertising. The range of advertising
choices across digital products and platforms and the large
inventory of available digital advertising space have historically
resulted in significantly lower rates for digital advertising than
for in-store advertising. As a result, increasing consumer reliance
on mobile devices may add additional pricing pressure, which
would have an adverse effect on sales
and our financial results.
Our Results May Be Dependent on Our CPG Manufacturers’
Continued Use of Our POPS Solution
Since
late 2018, we have seen changes in the CPG manufacturers who
participate in our solutions that have adversely impacted POPS
sales, through CPG manufacturers both forgoing new contracts and
reducing forward participation. We also have seen increased
competitive activities that are expected to lead to further
decreases in POPS sales. In addition, volatility in CPG
manufacturer spend has resulted from shrinking advertising budgets,
expanded product solutions, and increased competition.
While
our dependence on POPS sales has declined over the last several
years, POPS sales were still 44% of our total net sales in 2020.
Further declines in our POPS sales would cause our business and
results of operations to be adversely affected.
The Viability of Our POPS Solution and Our Results Are Dependent on
Our Ongoing Business Relationships with Retailers
To execute our POPS solution, we have entered into arrangements
with retailers that provide us with access to place signs on
shelves in their stores for our CPG manufacturing customers. We
have also accessed a portion of our retailer relationships through
third parties. During 2020, our top three retailer relationships
provided distribution for 16% of our total net sales.
A
significant retailer exited our retailer network in the first half
of 2019. The impacts of the loss of this retailer is reflected in
our results for 2019 and 2020. Our ability to sell our in-store
solutions is substantially dependent on the quantity and quality of
the retailer locations in our network.
Our retailer contracts generally have terms of one to three years
and we are negotiating the renewal of these contracts on an ongoing
basis. The future renewal of these contracts on profitable terms is
not free from doubt. Some of our retailer contracts require us to
guarantee minimum payments and we may be unable to profitably
perform under these fixed cost contracts, or to offer a guarantee
at the level required by a retailer during renewal negotiations.
Further decreases in the size or quality of our retail distribution
network, would have an adverse effect on sales of our in-store
signage solutions and our
financial results.
6
We Have Been, and Are, Party to Significant Litigation
We monitor the competitive practices of those in our industry for
fairness which may lead to disputes that could have adverse effects
on our Company or its business. We were involved in
significant litigation with News America between 2003 and 2011. In
2011, we and News America entered into a Settlement Agreement to
resolve the antitrust and false advertising lawsuit that had been
outstanding for several years.
In July
2019, we brought suit against News America in the U.S. District
Court in Minnesota, alleging violations of federal and state
antitrust and tortious interference laws by News America. The
complaint alleges that News America has monopolized the relevant
market through various wrongful acts designed to harm the Company,
its last significant competitor, in the third-party in-store
advertising and promotion products and services market. The suit
seeks, among other relief, an injunction sufficient to prevent
further antitrust injury and an award of treble damages to be
determined at trial for the harm caused to our Company. For further
description of our legal proceedings, see Item 3 in Part I of this
report.
We
cannot be assured that we will succeed in asserting our claims or,
if we are successful, that our recovery (if any) will be adequate
to cover the damages incurred and our costs of recovery. It is also
possible that we may be unsuccessful in defending against any
counterclaims, that a judgement will not be entered against us or
that reserves (if any) we may set aside will be adequate to cover
any such judgments. In addition, we have incurred significant
expenses during the litigation and expect to incur significant
expenses in the future, while recovery is uncertain or
pending.
STRATEGIC RISKS
Our Growth Is Dependent on Our Ability to Successfully Develop and
Introduce New Solution Offerings that Meet Client
Demands
Our
ability to retain, increase and engage our customers and to
increase our revenues will depend partially on our ability to
create successful new products and the ability to secure and
maintain access to retailer locations that are appealing to CPG
manufacturers. We may modify our existing products or develop and
introduce new and unproven products, including acquired products.
If new or enhanced products fail to engage consumers, we may fail
to attract or retain customers or to generate sufficient revenues,
margins, or other value to justify our investments and our business
may be adversely affected. In the future, we may invest in new
products and initiatives to generate revenue, but there is no
guarantee these approaches will be successful or have the necessary
scale to be profitable.
RISKS RELATED TO ECONOMY AND MARKET CONDITIONS
CPG Manufacturers and Retailers May Be Disproportionately Impacted
by Changes in Economic Conditions
Our
revenues are affected by CPG manufacturers’ and
retailers’ marketing and advertising spending and our
revenues and results of operations may be subject to fluctuations
based upon general economic conditions inclusive of the dynamic
global trade environment. Another economic downturn, whether as a
result of the COVID-19 pandemic or otherwise, may reduce demand for
our products and services or depress pricing of those products and
services and have an adverse effect on our results of operations.
Retailers may be impacted by changes in consumer spending as well,
which may adversely impact our ability to renew contracts with our
existing retailers as well as contract with new retailers on terms
that are acceptable to us. In addition, if we are unable to
successfully anticipate changing economic conditions, we may be
unable to effectively plan for and respond to those changes, and
our business could be negatively affected.
Current and Future Pandemics Are Likely to Impact Our
Business
The
COVID-19 pandemic has significantly and 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 is likely to continue to adversely affect our
business indefinitely. Our future bookings may be negatively
impacted until the COVID-19 pandemic moderates. 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 or delayed 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.
7
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. 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. Because 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, the financial impact to
our operating results cannot be reasonably estimated, but it could
be material and last for an extended period of time.
OPERATIONAL RISKS
Our Ability to Attract and Retain Key Employees Is Critical to Our
Success
Given
the unique business we operate and the importance of customer
relationships to our business, our future success is dependent, in
large part, upon our ability to attract and retain highly qualified
managerial, operational and sales personnel. Competition for
talented personnel is intense, and we cannot be certain that we can
retain our managerial, operational and sales personnel or that we
can attract, assimilate or retain such personnel in the future. Our
inability to attract and retain such personnel could have an
adverse effect on our business, results of operations and financial
condition.
We Have Identified a Material Weakness in Our Internal Control Over
Financial Reporting. If This Material Weakness Persists or If We
Fail to Establish and Maintain Effective Internal Control over
Financial Reporting, We May Not Be Able to Accurately or Timely
Report Our Financial Condition or Results of Operations, Which May
Adversely Affect Our Business and the Market Price of Our Common
Stock.
The Sarbanes-Oxley Act of 2002 requires that we maintain effective
internal control over financial reporting and disclosure controls
and procedures. We are required, pursuant to Section 404 of the
Sarbanes-Oxley Act, to furnish a report by management on, among
other things, the effectiveness of our internal control over
financial reporting. This assessment includes disclosure of any
material weaknesses identified by our management in our internal
control over financial reporting, such as the material weaknesses
as described below.
Our compliance with Section 404 necessitates that we incur
substantial accounting expense and expend significant management
efforts. We will continue to dedicate internal resources, engage
outside consultants and adopt a detailed work plan to assess and
document the adequacy of internal control over financial reporting,
continue steps to improve control processes as appropriate,
including the remediation of the material weakness described below,
validate through testing that controls are functioning as
documented and implement a continuous reporting and improvement
process for internal control over financial reporting and to
compile the system and process documentation necessary to perform
the evaluation needed to comply with Section 404. We may not be
able to remediate the material weakness described below, or any
future material weaknesses that may be identified, or to complete
our evaluation, testing and remediation in a timely fashion.
Maintaining effective internal control over financial reporting is
necessary for us to produce reliable financial
statements.
The Company had a material weakness at December 31, 2019 related to
impairment testing that we performed in accordance with ASC
360, Property, Plant, and
Equipment. This material
weakness was remediated as of December 31,
2020.
We have concluded that a material weakness in our internal control
over financial reporting existed as of December 31, 2020, and
consequently our Board of Directors determined that
management’s report on internal control over financial
reporting as of December 31, 2020, included in our Annual Report on
Form 10-K for the year then ended, should no longer be relied
upon. In connection with the material weakness identified in
Item 9A, Controls and
Procedures, we have restated our financial statements for
the years ended December 31, 2020 and 2019 as described in the
Explanatory Paragraph and in Note 2 to our annual financial
statements. This material weakness is
discussed further within Item 9A, Controls and
Procedures, of this Annual
Report on Form 10-K/A. The existence of one or more material
weaknesses precludes a conclusion by management that a
corporation’s internal control over financial reporting is
effective.
In response to the identified material weakness, our management,
with the oversight of the Audit Committee of our Board of
Directors, has dedicated significant resources, including the
involvement of outside advisors, and efforts to improve our
internal control over financial reporting and has taken immediate
action to remediate the material weakness identified. Certain
remedial actions have been completed including ongoing involvement
of outside advisors, review of taxability of new products/services
and obtaining of appropriate documentation of exempt status from
customers. The Company will further enhance these controls over the
remainder of 2021. If we fail to remediate this material weakness
or fail to otherwise maintain effective control over financial
reporting in the future, it could result in a material misstatement
of our financial statements that would not be prevented or detected
on a timely basis.
8
We cannot assure you that the measures we have taken to date, and
actions we may take in the future, will be sufficient to remediate
the control deficiencies that led to the material weakness in our
internal control over financial reporting or that they will prevent
or avoid potential future material weaknesses. If we are unable to
successfully remediate the material weaknesses in our internal
control over financial reporting, the accuracy and timing of our
financial reporting may be adversely affected, investors could lose
confidence in the accuracy and completeness of our financial
reports, the market price of our common stock could decline, we
could be subject to sanctions or investigations by the Nasdaq Stock
Market, the SEC or other regulatory authorities, and our ability to
access the capital markets could be limited.
Our Outsourcing Arrangements May Not Yield the Desired Efficiencies
Within Our Planned Timeline, If At All
We have recently entered into arrangements with third parties for
them to operate certain software applications and significant
portions of our information technology infrastructure, as well as
most of our printing operations that are necessary to conduct our
in-store signage business. We take steps to monitor and regulate
the performance of these third parties, but we may not be
successful in managing these relationships to achieve the desired
outcomes.
These outsourcing arrangements make us reliant on third parties to
conduct our operations and to satisfy commitments to customers. We
are vulnerable to third party failures to satisfy their obligations
to us for any reason, including as a result of their
nonperformance, performance at standards that are not acceptable to
us or our customers, changes in their methods of operation or
financial condition, and other matters outside of our control.
Further, we may not fully realize on a timely basis the anticipated
economic and other benefits of the outsourcing projects or other
relationships we entered into with these third parties, which could
result in substantial costs or other operational or financial
problems for the Company.
RISKS RELATED TO OUR COMMON STOCK
Our Results of Operations Have Been and May Be Subject to
Significant Fluctuations
Our
quarterly and annual operating results have fluctuated in the past
and may vary in the future due to a wide variety of factors
including:
● the
addition or loss of contracts with retailers;
● the
addition or loss of customers or changes in timing and amount of
our customers’ spending with us;
● the
timing of seasonal events for customers;
● the
timing of new retail stores being added or removed;
● costs
of evaluating and developing new products, and customers accepting
new products;
● the
timing of additional selling, marketing and general and
administrative expenses; and
● competitive
conditions in our industry.
Due to
these factors, our quarterly and annual net sales, expenses and
results of operations could vary significantly in the future and
this could adversely affect the market price of our common
stock.
Investment in Our Stock Could Result in Fluctuating
Returns
During
2020, the sale prices of our common stock as reported by The Nasdaq
Stock Market ranged from a low of $3.78 to a high of $12.25. We
believe factors such as the fluctuations in our quarterly and
annual operating results described above, the market’s
acceptance of our services and products, the performance of our
business relative to market expectations, as well as limited daily
trading volume of our stock and general volatility in the
securities markets, could cause the market price of our common
stock to fluctuate substantially. In addition, the stock markets
have experienced price and volume fluctuations, resulting in
changes in the market prices of the stock of many companies, which
may not have been directly related to the operating performance of
those companies.
9
TECHNOLOGY AND CYBERSECURITY RISKS
We May be Impacted if Our Information Systems Are
Attacked
We rely
upon information technology systems and networks, both internal and
outsourced, in connection with a variety of business activities,
some of which are managed by third parties. Additionally, we
collect and store data that is sensitive to Insignia and its
employees, customers, retailer network and suppliers. The secure
operation of these information technology systems and networks, and
the processing and maintenance of this data, is critical to our
business operations and strategy. Information technology security
threats—from user error to attacks designed to gain
unauthorized access to our systems, networks and data—are
increasing in frequency and sophistication. Attacks may range from
random attempts to coordinated and targeted attacks, including
sophisticated computer crime and advanced persistent threats. These
threats pose a risk to the security of our systems, networks and
products and the confidentiality, availability and integrity of the
data we process and maintain. Establishing systems and processes to
address these threats and changes in legal requirements relating to
data collection and storage may increase our costs. Should such an
attack succeed, it could expose us and our employees, customers,
retailer network and suppliers to misuse of information or systems,
the compromising of confidential information, theft of assets,
manipulation and destruction of data, defective products,
production downtimes and operations disruptions, and breach of
privacy, which may require notification under data privacy and
other applicable laws. The occurrence of any of these events could
have a material adverse effect on our reputation, business,
financial condition, results of operations and cash flows. In
addition, such breaches in security could result in litigation,
regulatory action and potential liability and the costs and
operational consequences of implementing further data protection
measures.
PART II.
Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations (“MD&A”)
The
following discussion should be read in conjunction with the
financial statements and the related notes included in this Annual
Report on Form 10-K/A. This report contains forward-looking
statements that involve risks and uncertainties. Our actual results
could differ materially from those in such forward-looking
statements as a result of many factors, including those discussed
in “Forward-Looking Statements” and elsewhere in this
report.
Restatement
The
accompanying MD&A gives effect to certain adjustments made to
the previously reported financial statements for the years ended
December 31, 2020 and 2019. Due to the restatement of 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 Annual Report on 10-K/A and Note 2, “Restatement of
Financial Statements” in the accompanying financial
statements for further details related to the restatement and
impact on our financial statements.
Overview
We are
a leading provider of in-store and digital advertising solutions to
CPG manufacturers, retailers, shopper
marketing agencies and brokerages. 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.
We face
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 significantly expanded our offered
solutions and have developed a portfolio designed to more
holistically meet the needs of our clients and execution partners
which has diversified our portfolio. Our focus on portfolio
diversification resulted in our 2020 non-POPS solutions revenue
growing 15% versus 2019. We remain committed to further refining
and enhancing our solutions and broadening our retailer
relationships.
10
Sale of our Custom Print Business
In August 2020, we sold our custom print business to an existing
strategic partner. This divestiture has allowed us to focus on our
core business, selling product solutions to CPGs. The custom print
business was not material to our operations as a whole and did not
represent a strategic shift and therefore is not presented as a
discontinued operation. The sale price was $300,000 resulting in a
gain on the sale of $195,000. We received $200,000 of cash and
recorded a short-term receivable of $75,000 and a long-term
receivable of $25,000. In addition to the initial sale price, we
are eligible to receive up to $100,000 in additional payments to
the extent net sales by the custom print business during the first
year after closing exceeds a threshold amount. Due to the
contingent nature of the earn-out, no gain has been recognized as
part of the recorded gain.
Impacts and Potential Future Impacts of COVID-19 on Our
Business
The
COVID-19 pandemic has significantly and 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 is likely to 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 2020 was significant. A significant number of programs
originally slated for execution in the second quarter were
cancelled. Our future bookings may be negatively impacted until the
COVID-19 pandemic moderates. 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 or delayed 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, 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.
11
Results of Operations
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.
|
As Restated
|
|
For the Years Ended December 31
|
2020
|
2019
|
Net
sales
|
100.0%
|
100.0%
|
Cost
of sales
|
83.7
|
79.9
|
Gross
profit
|
16.3
|
20.1
|
Operating
expenses:
|
|
|
Selling
|
16.5
|
12.3
|
Marketing
|
5.8
|
11.1
|
General
and administrative
|
22.8
|
15.7
|
Gain
on sale
|
(1.1)
|
-
|
Impairment
loss
|
-
|
9.4
|
Total
operating expenses
|
44.0
|
48.5
|
Operating
loss
|
(27.7)
|
(28.4)
|
Other
income
|
0.2
|
0.5
|
Loss
before taxes
|
(27.5)
|
(27.9)
|
Income
tax benefit
|
(1.1)
|
(2.0)
|
Net
loss
|
(26.4)%
|
(25.9)%
|
Year Ended December 31, 2020 Compared to Year Ended December 31,
2019
Net Sales. Net sales for the year ended December 31, 2020
decreased 18.8% to $17,482,000, compared to $21,528,000 for the
year ended December 31, 2019.
Service revenues.
Service revenues for
the year ended December 31, 2020 decreased 14.6% to $16,904,000,
compared to $19,803,000 for the year ended December 31, 2019. The
decrease was primarily due to a $4,065,000, or 34.5%, decrease in
POPS revenue, partially offset by a $1,165,000, or 14.6%, increase
in non-POPS revenue. For the year ended December 31, 2020, the POPS
revenue was significantly lower due to decreases in the number of
signs placed and average price per sign due to existing competitive
pressures and the absence of a significant retailer for the full
year. We believe the COVID-19 pandemic also significantly impacted
both POPS and non-POPS revenue. COVID-19 has resulted in both
reduced and delayed spending on our programs by CPG manufacturers.
We will continue to have increased pressure on our POPS business
heading into 2021, including the expiration in April 2021 of our
10-year selling agreement with News America Marketing.
Product revenues.
Product revenues for the year ended December 31, 2020 decreased
66.5% to $578,000, compared to $1,725,000 for the year ended
December 31, 2019. The decrease was primarily due to the August
2020 sale of the custom print business. We do not
expect product revenues will be significant in future
periods.
Gross Profit. Gross profit for the year ended
December 31, 2020 decreased 34.1% to $2,856,000, compared to
$4,335,000 for the year ended December 31, 2019. Gross profit as a
percentage of total net sales decreased to 16.3% for the year ended
December 31, 2020, compared to 20.1% for the year ended December
31, 2019.
Service revenues.
Gross profit from service revenues for the year ended December 31,
2020 decreased 30.5% to $2,811,000, compared to $4,047,000 for the
year ended December 31, 2019. The decrease in gross profit was
primarily due to a decrease in POPS solution sales as gross profit
is highly dependent on sales levels due to the relatively fixed
nature of a portion of payments to retailers, combined with the
decrease in average price per sign.
Gross
profit as a percentage of service revenues decreased to 16.6% for
the year ended December 31, 2020, compared to 20.4% for the year
ended December 31, 2019. The decrease was primarily due to the
factors described above.
Product revenues.
Gross profit from product sales for the year ended December 31,
2020 decreased 84.4% to $45,000, compared to $288,000 for the year
ended December 31, 2019. The decrease was primarily due to the
August 2020 sale of the custom print business, which represented
the bulk of this business.
12
Gross
profit as a percentage of product sales decreased to 7.8% for 2020,
compared to 16.7% for 2019. The decrease was primarily due to
decreased sales volume and changes in the mix of customers and
products sold.
Impairment Loss -
Services. Gross profit for the year ended December 31, 2020
was also negatively impacted as a result of an impairment loss
resulting from the impairment charge of $159,000 on the value of
the Company’s selling agreement with News America, a
long-lived asset. The impairment charge is described further in
Item 8, footnote 1. There was no impairment loss impacting gross
profit during the year ended December 31, 2019.
Operating Expenses
Selling. Selling expenses for the year ended December 31,
2020 increased 8.2% to $2,877,000, compared to $2,658,000 for the
year ended December 31, 2019, primarily due to increased staff
related expenses. Selling expenses as a percentage of total net
sales increased to 16.5% in 2020, compared to 12.3% in 2019,
primarily due to decreased sales, in addition to the increases in
costs and expenses described above.
Marketing. Marketing expenses for the year ended December
31, 2020 decreased 57.6% to $1,015,000, compared to $2,394,000 for
the year ended December 31, 2019. The decrease was primarily the
result of decreased staffing and variable staff related expenses
and due to decreased consulting expenses. Marketing expenses as a
percentage of total net sales decreased to 5.8% in 2020, compared
to 11.1% in 2019, primarily due to the factors described above,
partially offset by decreased sales.
General and Administrative. General and administrative
expenses for the year ended December 31, 2020 increased 18.5% to
$3,998,000, compared to $3,375,000 for the year ended December 31,
2019. The increase was primarily due to expenses relating to the
litigation with News America, partially offset by decreased
staffing and reduced stock-based compensation. General and
administrative expenses as a percentage of total net sales
increased to 22.8% in 2020, compared to 15.7% in 2019, primarily
due to decreased sales, in addition to the increases in expense
described above.
Gain on sale. Gain on sale for the year ended December 31,
2020 was $195,000 as a result of the sale of our custom print
business. There was no gain on sale during the year ended December
31, 2019.
Impairment Loss. There was no impairment loss included in
operating expenses during the year ended December 31, 2020. The
impairment loss of $2,014,000 for the year ended December 31, 2019
was driven by a long-lived asset impairment charge which is
described further in Item 8, footnote 1.
Other Income. Other income for the year ended December 31,
2020 decreased to $33,000, compared to $105,000 for the year ended
December 31, 2019. The decrease was due to increased interest
expense related to sales tax accrued.
Income Taxes. During the year ended December 31, 2020, the
Company recorded an income tax benefit of $191,000, compared to an
income tax benefit of $424,000 for the year ended December 31,
2019. The effective tax rate was 4.0% and 7.1% for the years ended
December 31, 2020 and 2019, respectively. The primary differences
between the Company’s December 31, 2020 and 2019 effective
tax rates and the statutory federal rates are expenses related to
stock-based compensation in the amounts of $152,000 and $172,000,
respectively, nondeductible meals and entertainment of $8,000 and
$32,000, respectively, nondeductible penalties of $52,000 and
$50,000, respectively, and a change in the Company’s
valuation allowance against its deferred assets of $943,000 and
$924,000, respectively. The effective tax rate fluctuates between
periods based on the level of permanent differences and other
discrete items relative to the level of pre-tax loss for the
period.
Net Loss. For the reasons stated above, the net loss for the
year ended December 31, 2020 was $4,615,000 compared to a net loss
of $5,577,000 for the year ended December 31, 2019.
Liquidity and Capital Resources
The
Company has financed its operations with proceeds from stock sales
and sales of its services and products. At December 31, 2020,
working capital (current assets less current liabilities) was
$7,668,000 compared to $10,684,000 at December 31, 2019. During the
year ended December 31, 2020, cash and cash equivalents decreased
$382,000 from $7,510,000 at December 31, 2019, to $7,128,000 at
December 31, 2020.
13
Operating Activities: Net cash used in operating activities
during the year ended December 31, 2020 was $1,580,000. Net loss of
$4,615,000, plus non-cash adjustments of $851,000, plus changes in
operating assets and liabilities of $2,184,000 resulted in the
$1,580,000 of cash used in operating activities. The non-cash
adjustments included of depreciation and amortization expense,
impairment loss, gain on sale of business, changes in allowance for
doubtful accounts, and stock-based compensation expense. The
largest component of the change in operating assets and liabilities
was accounts receivable, which decreased $1,679,000 from December
31, 2019, as a result of lower sales in the third and fourth
quarters of 2020 compared to 2019, as well as expected fluctuations
based on business and market conditions. 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 provided by investing
activities during the year ended December 31, 2020 was $139,000.
The Company sold its custom print
business for $300,000 resulting in a gain on the sale of $195,000.
The Company received $200,000 of cash and recorded a short-term
receivable of $75,000 and a long-term receivable of $25,000.
Purchases of property and equipment of $61,000 in 2020 decreased in
comparison to 2019 due to completion of a technology system project
in the first half of 2019. With the commencement of outsourcing of
most information technology and printing operations, the Company
anticipates minimal purchases of property and equipment for that
purpose in 2021. The Company does not anticipate significant cash
outlays for leasehold improvements in connection with new facility
leases anticipated in the first part of 2021.The monthly payments
under the new leases are anticipated to be significantly less than
the monthly payments under expiring leases. During December 2020,
in connection with the outsourcing of most printing operations, the
Company sold property and equipment with a net book value of
$230,000, for $195,000, resulting in a loss on sale of $35,000. The
proceeds were in the form of receivables due in four equal amounts
due in June and December 2021 and June and December
2022.
Financing Activities: Net cash provided by financing
activities during the year ended December 31, 2020 was $1,059,000,
which primarily related to proceeds received from our PPP
loan.
On
April 22, 2020, Company entered into the PPP Loan in the principal
amount of $1,054,000, which was disbursed by Alerus Financial, N.A.
(“Lender”). In accordance with the requirements of the
CARES Act, the Company used the proceeds from the loan exclusively
for qualified expenses under the PPP, including payroll costs, rent
and utility costs. Subsequent to the end of the fiscal year, on
January 29, 2021, the SBA approved our application for forgiveness
of the full amount due, including accrued interest. Accordingly,
for the quarter ending March 31, 2021, the principal amount plus
accrued interest, which was $1,061,000 at December 31, 2020, will
be eliminated with a gain on debt extinguishment included in other
income.
We
believe that based upon current business conditions and plans, our
existing cash balance and future cash generated from operations
will be sufficient for our cash requirements for at least the next
twelve months.
Critical Accounting Policies and Estimates
Our
discussion of our financial condition and results of operations is
based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the
United States of America. During the preparation of these financial
statements, we are required to make estimates and assumptions that
affect the reported amounts of assets, liabilities, net sales,
costs and expenses and related disclosures. On an ongoing basis, we
evaluate our estimates and assumptions, including those related to
revenue recognition, allowance for doubtful accounts, impairment of
long-lived assets, income taxes, and stock-based compensation
expense. We base our estimates on historical experience and on
various other assumptions that we believe are reasonable under the
circumstances. The results of our analysis form the basis for
making assumptions about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions, and the impact of such differences may
be material to our financial statements.
We
believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our
financial statements:
Revenue Recognition. The Company recognizes revenue from
Insignia In-Store Signage Solutions ratably over the period of
service, which is typically a two-to-four-week display cycle.
Revenue from non-POPS solutions is
recognized with a mix of over-time and point in time recognition
dependent on type of service performed. Revenue that has
been billed and not yet recognized is reflected as deferred revenue
on the Company’s balance sheet.
14
Allowance for Doubtful Accounts. An allowance is established for
estimated uncollectible accounts receivable. The Company determines
its allowance by considering a number of factors, including the
length of time trade accounts receivable are past due, the
Company’s previous loss history, the customer’s current
ability to pay its obligation to the Company, the condition of the
general economy and the industry as a whole and other relevant
facts and circumstances. Unexpected changes in the aforementioned
factors could result in materially different amounts.
Impairment of Long-Lived Assets. The Company periodically evaluates the carrying
value of its long-lived assets for impairment indicators. If
indicators of impairment are present, we evaluate the carrying
value of the assets in relation to the future undiscounted cash
flows of the underlying assets to assess recoverability of the
assets. The estimates of these future cash flows are based on
assumptions and projections believed by management to be reasonable
and supportable. They require management’s subjective
judgments and take into account assumptions about revenue and
expense growth rates. Impaired assets are then recorded at their
estimated fair market value.
In
2011, we paid News America Marketing In-Store, L.L.C. (“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
was being amortized over the 10-year term of the arrangement. In
2019, we accelerated the amortization based on the anticipated
recovery period over the remaining term of the contract due to the
loss of a significant retailer. During the three months ended March
31, 2020, the impact of COVID-19 was determined to be a triggering
event requiring an impairment review of long-lived assets. As of
March 31, 2020, the Company determined the asset was impaired based
upon continued revenue declines driven by changes in market
conditions due to COVID-19 within the stores covered by the
agreement. As a result, an impairment of $159,000 was recognized as
of March 31, 2020. We also shortened the remaining useful life of
the underlying asset from March 31, 2021 to December 31, 2020 and
recorded remaining amortization expense on a straight-line basis
over the remainder of 2020. Amortization expense without the
impairment was $158,000 for the year ended December 31, 2020. The
net carrying amount of the selling arrangement was recorded within
other assets on the Company’s balance sheet as of December
31, 2019.
In
2019, the Company identified indicators of impairment due to the
2019 operating loss, cash flows used in operations and the excess
of the book value of the Company compared to its market
capitalization, which became a significant difference during the
last two months of 2019. Due to these indicators of impairment, the
Company completed an impairment analysis on its long-lived assets
by first reviewing the expected undiscounted cash flows compared to
the carrying value over the primary asset’s remaining useful
life to determine if further impairment testing was required. The
Company prepared an undiscounted cash flow analysis related to its
selling agreement which is a separate asset group and as the
undiscounted cash flows exceeded the carrying value, no further
impairment testing was required. For the property and equipment
asset group, the undiscounted cash flows were less than carrying
value and therefore, a fair value assessment was required to
determine the amount of the impairment. Due to the nature of the
primary asset (internally developed software), the most readily
available fair market value related to the asset is the market
capitalization of the Company which is considered a level 1
measurement (quoted market price). After allocating the
Company’s market capitalization to its working capital, there
was no remaining value to allocate to long-lived assets which
included the internally developed software recently placed in
service. The Company utilized other level 3 inputs to determine the
fair value of other tangible long-lived assets, including appraised
values of production tooling, machinery and equipment. As a result,
the Company recorded a long-lived asset impairment charge totaling
$2,014,000 during the 4th quarter of
2019.
At
December 31, 2020, the remaining balance of long-lived assets on
the Company’s balance sheet was $75,000.
Sales Taxes. Sales
taxes are based on determination of which of the Company’s
products/services are subject to sales tax, and in which of various
states and other jurisdictions the tax applies. Further, the
Company must determine which of our customers are exempt from the
Company charging sales tax because the customer is a reseller or
self-assesses and direct pays to states and other jurisdictions on
purchases the customer makes from the Company. These determinations
contain estimates and are subject to judgment and interpretation by
taxing authorities in various states and other jurisdictions, which
could result in recognizing materially different amounts in future
periods.
Income Taxes. Deferred income
taxes are determined based on the estimated future tax effects of
differences between the financial statement and tax basis of assets
and liabilities given the provisions of enacted tax laws. Deferred
income tax provisions and benefits are based on changes to the
assets or liabilities from year to year. In providing for deferred
taxes, the Company considers tax regulations of the jurisdictions
in which it operates, estimates of future taxable income, and
available tax planning strategies. If tax regulations, operating
results or the ability to implement tax-planning strategies vary,
adjustments 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.
15
The Company recognizes the financial statement benefit of a tax
position only after determining that the relevant tax authority
would more likely than not sustain the position following an audit.
For tax positions meeting the more-likely-than-not threshold, the
amount recognized in the financial statements is the largest
benefit that has a greater than 50 percent likelihood of being
realized upon ultimate settlement with the relevant tax
authority.
Stock-Based Compensation Expense. The Company measures and recognizes
compensation expense for all stock-based payments at fair value.
Restricted stock awards and restricted stock units are valued at
the closing market price of the Company’s stock on the date
of the grant. The Company uses the Black-Scholes option pricing
model to determine the weighted average fair value of options and
employee stock purchase plan rights. The determination of fair
value of share-based payment awards on the date of grant using an
option-pricing model is affected by our stock price as well as by
assumptions regarding a number of complex and subjective variables.
These variables include, but are not limited to, the expected stock
price volatility over the term of the awards, and actual and
projected employee stock option exercise behaviors. The expected terms of the options and employee
stock purchase plan rights are based on evaluations of historical
and expected future employee exercise behavior. The risk-free
interest rate is based on the U.S. Treasury rates at the date of
grant with maturity dates approximately equal to the expected life
at grant date. Volatility is based on historical volatility
of the Company’s stock. The Company has not historically
issued any dividends beyond the one-time dividends declared in 2011
and 2016 and does not expect to in the future. Forfeitures are
estimated at the time of the grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from
estimates.
If
factors change and the Company employs different assumptions in the
valuation of grants in future periods, the compensation expense
that the Company records may differ significantly from what it has
recorded in the current period.
New Accounting Pronouncements
There
are no new accounting pronouncement that were effective for the
year ended December 31, 2020 that had a significant impact on the
Company and there are no new accounting pronouncements effective in
the future that are expected to have a material impact in future
years.
Off-Balance Sheet Transactions
None.
Forward-Looking Statements
Statements
in this report that are not statements of historical or current
facts are considered forward-looking statements within the meaning
of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995, as amended. The words
“anticipates,” “believes,”
“estimates,” “expects,”
“future,” “likely,” “may,”
“projects,” “seeks,” “will,”
and similar expressions may identify forward-looking statements.
Readers are cautioned not to place undue reliance on these or any
forward-looking statements, which speak only as of the date of this
report. Statements made in this report regarding, for instance,
changes in composition of retailer and CPG manufacturer networks,
innovation and transformation of the Company’s business, cost
savings from restructuring activities, the nature or impact of
pending legal proceedings, benefits of outsourcing arrangements,
are 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. As such, actual results may differ materially from the
results or performance expressed or implied by such forward-looking
statements. Forward-looking statements involve known and unknown
risks, uncertainties and other factors, including those set forth
in this report and additional risks, if any, identified in our
Quarterly Reports on Form 10-Q and our Current Reports on Forms 8-K
filed with the SEC. Such forward-looking statements should be read
in conjunction with the Company's filings with the SEC. Insignia
assumes no responsibility to update the forward-looking statements
contained in this report or the reasons why actual results would
differ from those anticipated in any such forward-looking
statement, other than as required by law.
16
Item 8. Financial Statements and
Supplementary Data
Index to Financial Statements
The
following are included on the pages indicated:
Report
of Independent Registered Public Accounting Firm
|
18
|
|
|
Balance
Sheets as of December 31, 2020 and 2019
|
20
|
|
|
Statements
of Operations for the years ended December 31, 2020 and
2019
|
21
|
|
|
Statements
of Shareholders’ Equity for the years ended December 31, 2020
and 2019
|
22
|
|
|
Statements
of Cash Flows for the years ended December 31, 2020 and
2019
|
23
|
|
|
Notes
to Financial Statements
|
24
|
17
Report of Independent Registered Public Accounting
Firm
To the
shareholders and the board of directors of Insignia Systems,
Inc.:
Opinion on the Financial Statements
We have
audited the accompanying balance sheets of Insignia Systems, Inc.
(the "Company") as of December 31, 2020 and 2019, the related
statements of operations, shareholders’ equity, and cash
flows, for each of the two years in the period ended December 31,
2020, and the related notes (collectively referred to as the
"financial statements"). In our opinion, the financial statements
present fairly, in all material respects, the financial position of
the Company as of December 31, 2020 and 2019, and the results of
its operations and its cash flows for each of the two years in the
period ended December 31, 2020, in conformity with accounting
principles generally accepted in the United States of
America.
Restatement of Previously Issued Financial Statements
As
discussed in Note 2 to the financial statements, the Company has
restated its 2020 and 2019 financial statements to correct errors
related to accounting for sales taxes.
See
also the “Accounting for sales taxes” critical audit
matter.
Basis for Opinion
These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting
Oversight Board (United States) ("PCAOB") and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express
no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising
from the current period audit of the financial statements that was
communicated or required to be communicated to the audit committee
and that: (1) relates to accounts or disclosures that are material
to the financial statements and (2) involved our especially
challenging, subjective, or complex judgments. The communication of
critical audit matters does not alter in any way our opinion on the
financial statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing separate
opinions on the critical audit matter or on the accounts or
disclosures to which it relates.
18
Accounting for sales taxes
Critical Audit Matter Description
As described in Note 2 to the financial statements, the Company
restated its financial statements for the years ended 2020 and 2019
as a result of incorrect accounting for sales taxes. See also the
“Restatement of Previously Issued Financial Statements”
section of our report. During the second quarter of 2021, the
Company conducted a review of its sales tax positions and related
accounting, with the assistance of outside consultants. As a result
of the review, it was determined that certain services and products
sales were subject to sales tax and that the Company had not
assessed sales tax on sales of those services and products to
customers. The Company then undertook a process to obtain
documentation from significant customers to determine if any was
exempt from sales tax assessments during the applicable periods.
Based on the responses received from these customers, the Company
determined that it did not properly accrue sales tax. The Company
accrued the estimated sales taxes due in the amounts of $1,011,000
and $594,000, and interest and penalties of $244,000 and $117,000,
as of December 31, 2020 and 2019, respectively. For certain
customers, the Company expects to bill and collect the related
sales taxes that are due. The Company has estimated such amounts to
be $229,000 as of December 31, 2020. The Company was required to
apply judgment regarding the determination of the tax status of the
customers that did not respond to managements’ inquiries, as
well as in the estimation of sales tax rates, interest and
penalties accruals, and of the sales tax amounts expected to be
billed and collected.
The accounting for sales taxes is complex as each state has
specific rules and regulations regarding the taxability of products
and services. The Company’s evaluation of the estimated sales
taxes accrual required the use of a complex model and the
assistance of outside professionals that are experienced in
accounting for sales taxes. There is significant judgment involved
in determining the specific strategy to apply for estimating the
accrual for sales taxes, including the judgment of taxability of
customers who did not respond to the Company’s requests for
documentation of the customers’ taxability, sales tax rates
in each jurisdiction, and estimated interest and penalties.
Judgment is also required to determine the Company’s ability
to bill and collect from certain customers past sales taxes that
are due.
How We Addressed the Matter in Our Audit
The primary procedures we performed to address this critical audit
matter included:
●
Testing
the accuracy and completeness of the products and services sales
transactions that were included in the sales tax
analysis.
●
Testing
a sample of customer responses received by the Company to validate
the completeness of the accrual.
●
Evaluating
the process management used to estimate the sales tax liability for
customers who did not respond to management’s inquiries
regarding taxability.
●
Involving
internal sales tax professionals to assist in assessing each type
of product and service to determine whether or not it is taxable,
as well as the sales tax rates utilized and related interest and
penalty calculations.
●
Evaluating
the process that management used to estimate the sales tax
liability and the estimate regarding the collectability related to
proposed billings to customers of sales tax by reviewing underlying
documentation analyzed by the Company to support its
estimates.
●
Testing
the mathematical accuracy of the model used by management to
calculate estimated sales tax, interest and penalties.
/s/ Baker Tilly US,
LLP
(formerly
known as Baker Tilly Virchow Krause, LLP)
We have
served as the Company's auditor since 2011.
Minneapolis,
Minnesota
March
11, 2021, except for the effects of the restatement in Notes 1, 2,
4, 9, 11 to the financial statements, and the critical audit matter
related to the accounting for sales taxes, as to which the date is
August 23, 2021
19
Insignia Systems, Inc.
|
||
BALANCE SHEETS
|
||
|
As Restated
|
As Restated
|
As of December 31
|
2020
|
2019
|
ASSETS
|
|
|
Current Assets:
|
|
|
Cash
and cash equivalents
|
$7,128,000
|
$7,510,000
|
Accounts
receivable, net
|
5,857,000
|
7,559,000
|
Inventories
|
85,000
|
322,000
|
Income
tax receivable
|
241,000
|
126,000
|
Prepaid
expenses and other
|
711,000
|
375,000
|
Total
Current Assets
|
14,022,000
|
15,892,000
|
|
|
|
Other Assets:
|
|
|
Property
and equipment, net
|
75,000
|
549,000
|
Operating
lease right-of-use assets
|
37,000
|
177,000
|
Other,
net
|
155,000
|
372,000
|
|
|
|
Total Assets
|
$14,289,000
|
$16,990,000
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
Current Liabilities:
|
|
|
Accounts
payable
|
3,148,000
|
3,036,000
|
Accrued
liabilities:
|
|
|
Compensation
|
424,000
|
539,000
|
Sales
tax
|
1,011,000
|
594,000
|
Other
|
1,071,000
|
687,000
|
Current
portion of long-term debt
|
464,000
|
—
|
Current
portion of operating lease liabilities
|
56,000
|
212,000
|
Deferred
revenue
|
180,000
|
140,000
|
Total
Current Liabilities
|
6,354,000
|
5,208,000
|
|
|
|
Long-Term Liabilities:
|
|
|
Accrued
income taxes
|
677,000
|
643,000
|
Long-term
debt, net of current portion
|
590,000
|
—
|
Operating
lease liabilities
|
—
|
56,000
|
Total
Long-Term Liabilities
|
1,267,000
|
699,000
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
Shareholders' Equity:
|
|
|
Common
stock, par value $.01:
|
|
|
Authorized
shares - 5,714,000
|
|
|
Issued
and outstanding shares - 1,748,000 in 2020 and 1,725,000 in
2019
|
122,000
|
121,000
|
Additional
paid-in capital
|
16,133,000
|
15,934,000
|
Accumulated
deficit
|
(9,587,000)
|
(4,972,000)
|
Total
Shareholders' Equity
|
6,668,000
|
11,083,000
|
|
|
|
Total Liabilities and Shareholders' Equity
|
$14,289,000
|
$16,990,000
|
|
|
|
See accompanying notes to financial statements.
|
|
|
20
Insignia Systems, Inc.
|
||
STATEMENTS OF OPERATIONS
|
||
|
|
|
|
As Restated
|
As Restated
|
Year Ended December 31
|
2020
|
2019
|
Services
revenues
|
$16,904,000
|
$19,803,000
|
Products
revenues
|
578,000
|
1,725,000
|
Total
Net Sales
|
17,482,000
|
21,528,000
|
|
|
|
Cost
of services
|
13,934,000
|
15,756,000
|
Cost
of goods sold
|
533,000
|
1,437,000
|
Impairment
loss - services
|
159,000
|
—
|
Total
Cost of Sales
|
14,626,000
|
17,193,000
|
Gross
Profit
|
2,856,000
|
4,335,000
|
|
|
|
Operating Expenses:
|
|
|
Selling
|
2,877,000
|
2,658,000
|
Marketing
|
1,015,000
|
2,394,000
|
General
and administrative
|
3,998,000
|
3,375,000
|
Gain
on sale of custom print business
|
(195,000)
|
—
|
Impairment
loss
|
—
|
2,014,000
|
Total
Operating Expenses
|
7,695,000
|
10,441,000
|
Operating
Loss
|
(4,839,000)
|
(6,106,000)
|
|
|
|
Other
income
|
33,000
|
105,000
|
Loss
Before Taxes
|
(4,806,000)
|
(6,001,000)
|
|
|
|
Income
tax benefit
|
(191,000)
|
(424,000)
|
Net
Loss
|
$(4,615,000)
|
$(5,577,000)
|
|
|
|
Net
loss per share:
|
|
|
Basic
|
$(2.66)
|
$(3.27)
|
Diluted
|
$(2.66)
|
$(3.27)
|
|
|
|
Shares
used in calculation of net
loss
per share:
|
|
|
Basic
|
1,734,000
|
1,706,000
|
Diluted
|
1,734,000
|
1,706,000
|
|
|
|
See accompanying notes to financial statements.
|
|
|
21
Insignia Systems, Inc.
|
|||||
STATEMENTS OF SHAREHOLDERS' EQUITY
|
|||||
|
|
|
|
|
|
|
Common Stock
|
Additional Paid-In
|
Retained Earnings
|
|
|
|
Shares
|
Amount
|
Capital
|
(Accumulated Deficit)
|
Total
|
Balance at January 1, 2019, as previously
reported
|
1,692,000
|
$118,000
|
$15,442,000
|
$760,000
|
$16,320,000
|
Cumulative
restatement adjustments
|
-
|
-
|
-
|
(155,000)
|
(155,000)
|
Issuance of
common stock, net
|
15,000
|
1,000
|
107,000
|
-
|
108,000
|
Vesting of
restricted stock units offset by repurchase of common stock upon
vesting of restricted stock units and awards
|
(3,000)
|
2,000
|
(37,000)
|
-
|
(35,000)
|
Value of
stock-based compensation
|
-
|
-
|
422,000
|
-
|
422,000
|
Restricted
stock award issuance
|
21,000
|
-
|
-
|
-
|
-
|
Net
loss
|
-
|
-
|
-
|
(5,577,000)
|
(5,577,000)
|
|
|
|
|
|
|
Balance at December 31, 2019, as restated
|
1,725,000
|
121,000
|
15,934,000
|
(4,972,000)
|
11,083,000
|
Issuance of
common stock, net
|
5,000
|
-
|
20,000
|
-
|
20,000
|
Vesting of
restricted stock units offset by repurchase of common stock upon
vesting of restricted stock units and awards
|
16,000
|
1,000
|
(2,000)
|
-
|
(1,000)
|
Value of
stock-based compensation
|
-
|
-
|
172,000
|
-
|
172,000
|
Common stock
issued for accrued liabilities
|
-
|
|
9,000
|
-
|
9,000
|
Restricted
stock award issuance
|
2,000
|
-
|
-
|
-
|
-
|
Net
loss
|
-
|
-
|
-
|
(4,615,000)
|
(4,615,000)
|
Balance at December 31, 2020, as restated
|
1,748,000
|
$122,000
|
$16,133,000
|
$(9,587,000)
|
$6,668,000
|
|
|
|
|
|
|
See accompanying notes to financial statements.
|
|
|
|
|
|
22
Insignia Systems, Inc.
|
||
STATEMENTS OF CASH FLOWS
|
||
|
|
|
|
As Restated
|
As Restated
|
Year Ended December 31
|
2020
|
2019
|
Operating activities:
|
|
|
Net
loss
|
$(4,615,000)
|
$(5,577,000)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
Depreciation
and amortization
|
477,000
|
1,647,000
|
Impairment
loss
|
159,000
|
2,014,000
|
Gain
on sale of custom print business
|
(195,000)
|
—
|
Loss
on sale of property and equipment
|
35,000
|
—
|
Changes
in allowance for doubtful accounts
|
203,000
|
43,000
|
Deferred
income tax benefit
|
—
|
(462,000)
|
Stock-based
compensation expense
|
172,000
|
422,000
|
Changes
in operating assets and liabilities:
|
|
|
Accounts
receivable
|
1,679,000
|
1,161,000
|
Inventories
|
135,000
|
31,000
|
Income
tax receivable
|
(115,000)
|
1,000
|
Prepaid
expenses and other
|
(327,000)
|
(69,000)
|
Accounts
payable
|
115,000
|
(224,000)
|
Accrued
liabilities
|
623,000
|
(1,166,000)
|
Accrued
income taxes
|
34,000
|
30,000
|
Deferred
revenue
|
40,000
|
(162,000)
|
Net
cash used in operating activities
|
(1,580,000)
|
(2,311,000)
|
|
|
|
Investing activities:
|
|
|
Purchases
of property and equipment
|
(61,000)
|
(398,000)
|
Purchases
of held to maturity investments
|
—
|
(4,981,000)
|
Proceeds
from sale of custom print business
|
200,000
|
—
|
Proceeds
from sale of held to maturity investments
|
—
|
4,981,000
|
Net
cash provided by (used in) investing activities
|
139,000
|
(398,000)
|
|
|
|
Financing activities:
|
|
|
Cash
dividends paid ($4.90 per share)
|
(14,000)
|
(14,000)
|
Proceeds
from issuance of common stock, net
|
20,000
|
108,000
|
Repurchase
of common stock upon vesting of restricted stock awards and vesting
of restricted stock units
|
(1,000)
|
(35,000)
|
Proceeds
from PPP Loan
|
1,054,000
|
—
|
Net
cash provided by financing activities
|
1,059,000
|
59,000
|
|
|
|
Decrease
in cash and cash equivalents
|
(382,000)
|
(2,650,000)
|
|
|
|
Cash
and cash equivalents at beginning of year
|
7,510,000
|
10,160,000
|
Cash
and cash equivalents at end of year
|
$7,128,000
|
$7,510,000
|
|
|
|
Supplemental disclosures for cash flow information:
|
|
|
Cash
paid (refunded) during the year for income taxes
|
$(112,000)
|
$8,000
|
|
|
|
Non-cash investing and financing activities:
|
|
|
Purchases
of property and equipment included in accounts payable
|
$11,000
|
$-
|
Cash
dividends declared included in accounts payable
|
$-
|
$28,000
|
Receivables
recorded from sale of custom print business
|
$100,000
|
$-
|
Receivables
recorded from sale of property and equipment
|
$195,000
|
$-
|
Common
stock issued for accrued liabilities
|
$9,000
|
$-
|
|
|
|
See accompanying notes to financial statements.
|
|
|
23
Insignia Systems, Inc.
Notes to Financial Statements
1.
Summary of Significant Accounting
Policies.
Description of Business and
Basis of Presentation. Insignia (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. The Company operates in a single
reportable segment. The Company’s leadership and employees
have extensive industry knowledge with direct experience in both
CPG manufacturers and retailers. The Company provides marketing
solutions to CPG manufacturers spanning from some of the largest
multinationals to new and emerging brands.
As
described in Note 2, “Restatement of Previously Issued
Financial Statements”, the financial statements for the years
ended December 31, 2020 and 2019, have been restated to reflect the
correction of misstatements to the financial statements. We have
also restated all amounts impacted within the notes to the
financial statements.
Reverse
Stock Split. Effective December
31, 2020, the Company implemented a seven-for-one reverse stock
split. All share and per share information, including for stock
options and restricted stock units, in the financial statements
gives retroactive effect to the reverse stock split for all periods
presented.
Sale of
Custom Print Business. In
August 2020, the Company sold its custom print business to an
existing strategic partner. This divestiture has allowed the
Company to focus on its core business, selling product solutions to
CPGs. The custom print business was not material to operations as a
whole and did not represent a strategic shift and therefore is not
presented as a discontinued operation. The sale price was $300,000
resulting in a gain on the sale of $195,000. The Company received
$200,000 of cash and recorded a short-term receivable of $75,000
and a long-term receivable of $25,000. In addition to the initial
sale price, the Company is eligible to receive up to $100,000 in
additional payments to the extent net sales by the custom print
business during the first year after closing exceed a threshold
amount. Due to the contingent nature of the earn-out, no additional
gain has been recognized as part of the recorded
gain.
Revenue
Recognition. The
Company recognizes revenue from Insignia In-Store Signage Solutions
ratably over the period of service, which is typically a
two-to-four-week display cycle. The Company recognized revenue
related to custom print solutions and sign card sales at the time
the products are shipped to customers. Revenue from non-POPS
solutions is recognized with a mix of
over-time and point in time recognition dependent on type of
service performed. Revenue that has been billed and not yet
recognized is reflected as deferred revenue on the Company’s
balance sheet.
Cash and Cash
Equivalents. The Company considers all highly liquid
investments with an original maturity date of three months or less
to be cash equivalents. Cash equivalents are stated at cost, which
approximates fair value. At December 31, 2020 and 2019, $7,135,000
and $7,333,000 was invested in an insured sweep account and money
market account, respectively. The balances in cash accounts, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on cash and cash
equivalents. Amounts held in checking accounts and in insured cash
sweep accounts during the years ended December 31, 2020 and 2019
were fully insured under the Federal Deposit Insurance
Corporation.
Fair Value of Financial
Measurements. Fair
value is defined as the exit price, or the amount that would be
received to sell an asset, or paid to transfer a liability, in an
orderly transaction between market participants as of the
measurement date. Accounting Standards Codification
(“ASC”) 820-10 also establishes a hierarchy for inputs
used in measuring fair value that maximizes the use of observable
inputs and minimizes the use of unobservable inputs by requiring
that the most observable inputs be used when
available. Observable inputs are inputs market participants
would use in valuing the asset or liability, developed based on
market data obtained from sources independent of the
Company. Unobservable inputs are inputs that reflect
management’s assumptions about the factors market
participants would use in valuing the asset or liability developed
based upon the best information available in the
circumstances.
24
The
hierarchy is divided into three levels. Level 1 inputs are
quoted prices (unadjusted) in active markets for identical assets
or liabilities. Level 2 inputs include quoted prices for
similar assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not
active and inputs (other than quoted prices) that are observable
for the asset or liability, either directly or
indirectly. Level 3 inputs are unobservable inputs for the
asset or liability. Categorization within the valuation hierarchy
is based upon the lowest level of input that is significant to the
fair value measurement.
The
Company records certain financial assets and liabilities at their
carrying amounts that approximate fair value, based on their
short-term nature. These financial assets and liabilities
included cash and cash equivalents, accounts receivable3accounts
payable. The carrying value of long-term debt approximates fair
value, as the loan is repayable over the next 16 months at an
interest rate prescribed by a government agency (see Note
12).
Accounts
Receivable. 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. Accounts receivable
outstanding longer than the contractual payment terms are
considered past due. The Company determines its allowance by
considering a number of factors, including the length of time trade
accounts receivable are past due, the Company’s previous loss
history, the customer’s current ability to pay its obligation
to the Company, and the condition of the general economy and the
industry as a whole. The Company writes-off accounts receivable
when they become uncollectible, and payments subsequently received
on such receivables are credited to the allowance for doubtful
accounts.
Changes
in the Company’s allowance for doubtful accounts are as
follows:
|
As Restated
|
|
December 31
|
2020
|
2019
|
Beginning
balance
|
$65,000
|
$22,000
|
Bad
debt provision
|
203,000
|
47,000
|
Accounts
written-off
|
-
|
(4,000)
|
Ending
balance
|
$268,000
|
$65,000
|
Inventories.
Inventories are primarily comprised of sign cards and hardware.
Inventory is valued at the lower of cost or net realizable value
using the first-in, first-out (FIFO) method, and consists of the
following:
December 31
|
2020
|
2019
|
Raw
materials
|
$32,000
|
$47,000
|
Work-in-process
|
2,000
|
16,000
|
Finished
goods
|
51,000
|
259,000
|
|
$85,000
|
$322,000
|
25
Property and
Equipment. Property and equipment is recorded at cost.
Significant additions or improvements extending asset lives are
capitalized, while repairs and maintenance are charged to expense
when incurred. Internally developed software is capitalized upon
completion of preliminary project stage and when it is probable the
project will be completed. Expenditures are capitalized for all
development activities, while expenditures related to planning,
training, and maintenance are expensed. Depreciation is provided in
amounts sufficient to relate the cost of assets to operations over
their estimated useful lives. The straight-line method of
depreciation is used for financial reporting purposes and
accelerated methods are used for tax purposes. Estimated useful
lives of the assets are as follows:
Production
tooling, machinery and equipment
|
1 - 6
years
|
Office
furniture and fixtures
|
1 - 3
years
|
Computer
equipment and software
|
3 - 5
years
|
During
December 2020, in connection with the outsourcing of certain
printing operations, the Company sold property and equipment with a
net book value of $230,000, for $195,000, resulting in a loss on
sale of $35,000. The proceeds were in the form of receivables due
in four equal amounts due in June and December 2021 and June and
December 2022.
Impairment of Long-Lived
Assets. The Company records impairment losses on long-lived
assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those
assets are less than the assets’ carrying amount. Impaired
assets are then recorded at their estimated fair
value.
A
hierarchy for inputs used in measuring fair value is in place that
distinguishes market data between observable independent market
inputs and unobservable market assumptions by the reporting entity.
The hierarchy is intended to maximize the use of observable inputs
and minimize the use of unobservable inputs by requiring that the
most observable inputs be used when
available.
At
March 31, 2020, the impact of COVID-19 was determined to be a
triggering event requiring an impairment review of long-lived
assets. In 2011, the Company paid News America Marketing In-Store,
L.L.C. (“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 was being amortized over the
10-year term of the arrangement. In 2019, the Company accelerated
the amortization based on the anticipated recovery period over the
remaining term of the contract due to the loss of a significant
retailer that exited the Company’s retailer network in the
first half of 2019 as a result of competitive pressures. As a
result of the accelerated amortization, amortization expense for
the year ended December 31, 2019 was $600,000. At March 31, 2020,
the Company determined the asset was impaired based upon continued
revenue declines driven by changes in market conditions due to
COVID-19 within the stores that this agreement affords the Company
access to. As a result, an impairment of $159,000 was recognized as
of March 31, 2020. The Company also shortened the useful life of
the underlying asset from March 31, 2021 to December 31, 2020 and
recorded remaining amortization expense on a straight-line basis
over the remainder of 2020. Amortization expense without the
impairment was $158,000 for the year ended December 31, 2020. The
net carrying amount of the selling arrangement was recorded within
other assets on the Company’s balance sheet. A summary of the
carrying amount of this selling arrangement is as follows as of
December 31:
|
2020
|
2019
|
Gross
cost
|
$4,000,000
|
$4,000,000
|
Accumulated
amortization
|
(4,000,000)
|
(3,683,000)
|
Net
carrying amount
|
$-
|
$317,000
|
26
In
2019, the Company identified indicators of impairment due to the
2019 operating loss, cash flows used in operations and the excess
of the book value of the Company compared to its market
capitalization, which became a significant difference during the
last two months of 2019. Due to these indicators of impairment, the
Company completed an impairment analysis on its long-lived assets
by first reviewing the expected undiscounted cash flows compared to
the carrying value over the primary asset’s remaining useful
life to determine if further impairment testing was required. The
Company prepared an undiscounted cash flow analysis related to its
selling agreement, described above, which is a separate asset group
and as the undiscounted cash flows exceeded the carrying value, no
further impairment testing was required. For the property and
equipment asset group, the undiscounted cash flows were less than
carrying value and therefore, a fair value assessment was required
to determine the amount of the impairment. Due to the nature of the
primary asset (internally developed software), the most readily
available fair market value related to the asset is the market
capitalization of the Company which is considered a level 1
measurement (quoted market price). After allocating the
Company’s market capitalization to its working capital, there
was no remaining value to allocate to long-lived assets which
included the internally developed software recently placed in
service. The Company utilized other level 3 inputs to determine the
fair value of other tangible long-lived assets, including appraised
values of production tooling, machinery and equipment. As a result,
the Company recorded a long-lived asset impairment charge totaling
$2,014,000 during the fourth quarter of 2019.
As
of December 31, 2019
|
|
Property and Equipment, net:
|
|
Balance
prior to impairment
|
$2,563,000
|
Impairment
charge
|
(2,014,000)
|
Ending
balance
|
$549,000
|
Income Taxes. Income
taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between the financial
reporting and tax basis of assets and liabilities. Deferred taxes
are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or the
entire deferred tax asset will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of the enactment. It is the Company’s
policy to provide for uncertain tax positions and the related
interest and penalties based upon management’s assessment of
whether a tax benefit is more likely than not to be sustained upon
examination by tax authorities. The Company recognizes interest and
penalties accrued on any unrecognized tax benefits as a component
of income tax expense (benefit).
Stock-Based
Compensation. The
Company measures and recognizes compensation expense for all
stock-based awards at fair value. Restricted stock units and awards
are valued at the closing market price of the Company’s stock
on the date of the grant. The Company uses the Black-Scholes option
pricing model to determine the weighted average fair value of
options and employee stock purchase plan rights. The determination
of fair value of share-based payment awards on the date of grant
using an option-pricing model is affected by our stock price as
well as by assumptions regarding a number of complex and subjective
variables. These variables include, but are not limited to, the
expected stock price volatility over the term of the awards, and
actual and projected employee stock option exercise
behaviors.
The expected lives of the options and employee
stock purchase plan rights are based on evaluations of historical
and expected future employee exercise behavior. The risk-free
interest rate is based on the U.S. Treasury rates at the date of
grant with maturity dates approximately equal to the expected term
at grant date. Volatility is based on historical and
expected future volatility of the Company’s stock. The
Company has not historically issued any dividends beyond one-time
dividends declared in 2011 and 2016 and does not expect to in the
future. Forfeitures are estimated at the time of the grant and
revised, if necessary, in subsequent periods if actual forfeitures
differ from estimates.
27
Advertising Costs.
Advertising costs are charged to operations as incurred.
Advertising expenses were approximately $69,000 and $133,000 during
the years ended December 31, 2020 and 2019,
respectively.
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 stock options and
restricted stock units and awards. Diluted net income (loss) per
share gives effect to all diluted potential common shares
outstanding during the year.
Weighted average
common shares outstanding for the years ended December 31, 2020 and
2019 were as follows:
Year ended December 31
|
2020
|
2019
|
Denominator
for basic net loss per share - weighted average shares
|
1,734,000
|
1,706,000
|
Effect
of dilutive securities:
|
|
|
Stock
options, restricted stock units and restricted stock
awards
|
-
|
-
|
Denominator
for diluted net loss per share - weighted average
shares
|
1,734,000
|
1,706,000
|
Due to
the net loss incurred during the years ended December 31, 2020 and
2019, all stock awards were anti-dilutive for the
period.
Use of Estimates.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these
estimates.
2.
Restatement of Previously Issued Financial
Statements. The financial statements for the years ended
December 31, 2020 and 2019 have been restated to reflect the
correction of misstatements. The Company also restated all amounts
impacted within the notes to the financial statements. A
description of the adjustments and their impact on the previously
issued financial statements are included below.
Description of Restatement
Adjustments. Commencing in the second quarter of 2021, the
Company conducted a review of its sales tax positions, and related
accounting, with the assistance of outside consultants. As a result
of the review, it was determined that certain non-POPs
services/products sales were subject to sales tax and that the
Company had not assessed sales tax on sales of those
services/products to customers. Company management then undertook a
process to obtain documentation from significant customers to
determine if each was exempt from sales tax assessments during the
applicable periods. Based on responses received from these
customers, the Company determined that it did not properly accrue
sales tax and accrued the estimated sales tax. The misstatements in
the previously issued financial statements are considered material
and are described below.
In
light of the foregoing, the Company in accordance with ASC 250,
Accounting Changes and Error
Corrections is restating the previously issued financial
statements for the years ended December 31, 2020 and 2019 to
reflect the effects of misstatements, and to make certain
corresponding disclosures. The balance sheets, statements of
operations, shareholders’ equity and cash flows, and Notes 1,
4, 9 and 11, were updated to reflect the restatement.
28
A
summary of the impact of the misstatements is as
follows:
|
December 31, 2020
|
December 31, 2019
|
||
Year Ended
|
As previously reported
|
Restated
|
As previously reported
|
Restated
|
Net
Sales
|
$17,669,000
|
$17,482,000
|
$21,954,000
|
$21,528,000
|
Operating
Loss
|
(4,601,000)
|
(4,839,000)
|
(5,629,000)
|
(6,106,000)
|
Net
Loss
|
(4,300,000)
|
(4,615,000)
|
(5,021,000)
|
(5,577,000)
|
|
December 31, 2020
|
December 31, 2019
|
||
As of
|
As previously reported
|
Restated
|
As previously reported
|
Restated
|
Shareholders'
equity
|
$7,694,000
|
$6,668,000
|
$11,794,000
|
$11,083,000
|
The
restated interim financial information for the relevant unaudited
interim financial statements for the quarterly periods ended
September 30, 2020 and 2019, June 30, 2020 and 2019, and March 31,
2020 and 2019, is also included below.
The
categories of restatement adjustments and their impact on
previously reported financial statements are described
below:
(a)
Sales Tax and Related
Misstatements –
Sales tax on sales to customers who were subject to sales tax that
was not previously accrued by the Company is corrected by an
increase to accrued liabilities on the balance sheets and a
reduction of net sales on the statements of operations. The Company
also determined on which past sales the Company would bill for
sales tax and corrected by increasing accounts receivable, net of
an allowance for doubtful collectability, on the balance sheets and
increasing net sales on the statements of operations. Estimated
penalties on the related sales tax are corrected by an increase to
accrued liabilities on the balance sheets and an increase to
general and administrative expenses on the statements of
operations. Estimated interest on the related sales tax is
corrected by an increase to accrued liabilities on the balance
sheets and an increase to interest expense within other income on
the statements of operations.
(b)
Related Income Tax
Impact - Any impact on income
tax benefit from the impact on loss before taxes due to the
correction in (a) above is reflected as a change in deferred tax
asset or liability on the balance sheet and a change in income tax
benefit on the statements of operations.
The
following is a summary of the impact of the correction of the sales
tax error for the periods previously reported during the years
ended December 31, 2020 and 2019, and during the quarters in the
years ended December 31, 2020 and 2019.
Annual Financial Statements
The
following table sets forth the corrections in each of the
individual line items affected in the statements of
operations:
|
December 31,
|
December 31,
|
Year Ended
|
2020
|
2019
|
Reduction
of net sales
|
$187,000
|
$426,000
|
Increase
in general and administrative expense for penalities
|
51,000
|
51,000
|
Decrease
in other income for interest expense
|
77,000
|
37,000
|
Decrease
in income tax benefit
|
-
|
42,000
|
Total
increase in net loss due to restatement items
|
$315,000
|
$556,000
|
29
|
December 31, 2020
|
December 31, 2019
|
||
Year Ended
|
As previously reported
|
Restated
|
As previously reported
|
Restated
|
Services
revenues
|
$17,091,000
|
$16,904,000
|
$20,229,000
|
$19,803,000
|
Products
revenues
|
578,000
|
578,000
|
1,725,000
|
1,725,000
|
Total
Net Sales
|
17,669,000
|
17,482,000
|
21,954,000
|
21,528,000
|
|
|
|
|
|
Cost
of services
|
13,934,000
|
13,934,000
|
15,756,000
|
15,756,000
|
Cost
of goods sold
|
533,000
|
533,000
|
1,437,000
|
1,437,000
|
Impairment
loss
|
159,000
|
159,000
|
—
|
—
|
Total
Cost of Sales
|
14,626,000
|
14,626,000
|
17,193,000
|
17,193,000
|
Gross
Profit
|
3,043,000
|
2,856,000
|
4,761,000
|
4,335,000
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
Selling
|
2,877,000
|
2,877,000
|
2,658,000
|
2,658,000
|
Marketing
|
1,015,000
|
1,015,000
|
2,394,000
|
2,394,000
|
General
and administrative
|
3,947,000
|
3,998,000
|
3,324,000
|
3,375,000
|
Gain
on sale of business
|
(195,000)
|
(195,000)
|
—
|
—
|
Impairment
loss
|
—
|
—
|
2,014,000
|
2,014,000
|
Total
Operating Expenses
|
7,644,000
|
7,695,000
|
10,390,000
|
10,441,000
|
Operating
Loss
|
(4,601,000)
|
(4,839,000)
|
(5,629,000)
|
(6,106,000)
|
|
|
|
|
|
Other
income
|
110,000
|
33,000
|
142,000
|
105,000
|
Loss
Before Taxes
|
(4,491,000)
|
(4,806,000)
|
(5,487,000)
|
(6,001,000)
|
|
|
|
|
|
Income
tax benefit
|
(191,000)
|
(191,000)
|
(466,000)
|
(424,000)
|
Net
Loss
|
$(4,300,000)
|
$(4,615,000)
|
$(5,021,000)
|
$(5,577,000)
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
Basic
|
$(2.48)
|
$(2.66)
|
$(2.94)
|
$(3.27)
|
Diluted
|
$(2.48)
|
$(2.66)
|
$(2.94)
|
$(3.27)
|
|
|
|
|
|
Shares used in calculation of net loss per share:
|
|
|
|
|
Basic
|
1,734,000
|
1,734,000
|
1,706,000
|
1,706,000
|
Diluted
|
1,734,000
|
1,734,000
|
1,706,000
|
1,706,000
|
The
following table sets forth the corrections in each of the
individual line items affected in the balance sheets:
|
December 31, 2020
|
December 31, 2019
|
||||
|
As previously reported
|
Error correction
|
Restated
|
As previously reported
|
Error correction
|
Restated
|
Accounts
receivable, net
|
$5,628,000
|
$229,000
|
$5,857,000
|
$7,559,000
|
$-
|
$7,559,000
|
Accrued
liabilities - sales tax
|
$-
|
$1,011,000
|
$1,011,000
|
$-
|
$594,000
|
$594,000
|
Accrued
liabilities - other
|
$827,000
|
$244,000
|
$1,071,000
|
$570,000
|
$117,000
|
$687,000
|
Accumulated
deficit
|
$8,561,000
|
$1,026,000
|
$9,587,000
|
$4,261,000
|
$711,000
|
$4,972,000
|
30
The
following table sets forth the corrections to retained earnings
(accumulated deficit) and total shareholders’ equity in the
statements of shareholders’ equity.
SHAREHOLDERS' EQUITY
|
||
|
|
|
|
Retained Earnings (Accumulated Deficit)
|
Total Shareholders' Equity
|
January
1, 2019
|
|
|
As
reported
|
$760,000
|
$16,320,000
|
Adjustment
due to error correction prior to 2019
|
(155,000)
|
(155,000)
|
As
restated
|
$605,000
|
$16,165,000
|
|
|
|
December
31, 2019
|
|
|
As
reported
|
$(4,261,000)
|
$11,794,000
|
Adjustment
due to cumulative error correction
|
(711,000)
|
(711,000)
|
As
restated
|
$(4,972,000)
|
$11,083,000
|
|
|
|
December
31, 2020
|
|
|
As
reported
|
$(8,561,000)
|
$7,694,000
|
Adjustment
due to cumulative error correction
|
(1,026,000)
|
(1,026,000)
|
As
restated
|
$(9,587,000)
|
$6,668,000
|
Quarterly Financial Statements (Unaudited)
The
following table sets forth the corrections in each of the
individual line items affected in the statements of
operations:
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
Three Months Ended
|
2020
|
2020
|
2020
|
2020
|
Reduction
of net sales
|
$36,000
|
$41,000
|
$56,000
|
$54,000
|
Increase
in general and administrative expense for penalities
|
11,000
|
12,000
|
15,000
|
13,000
|
Decrease
in other income for interest expense
|
15,000
|
18,000
|
21,000
|
23,000
|
Change
in income tax benefit
|
-
|
-
|
-
|
-
|
Total
increase in net loss due to restatement items
|
$62,000
|
$71,000
|
$92,000
|
$90,000
|
31
|
March 31, 2020
|
June 30, 2020
|
||
Three Months Ended
|
As previously reported
|
Restated
|
As previously reported
|
Restated
|
Services
revenues
|
$4,436,000
|
$4,400,000
|
$3,174,000
|
$3,133,000
|
Products
revenues
|
246,000
|
246,000
|
214,000
|
214,000
|
Total
Net Sales
|
4,682,000
|
4,646,000
|
3,388,000
|
3,347,000
|
|
|
|
|
|
Cost
of services
|
3,382,000
|
3,382,000
|
2,807,000
|
2,807,000
|
Cost
of goods sold
|
172,000
|
172,000
|
208,000
|
208,000
|
Impairment
loss
|
159,000
|
159,000
|
—
|
—
|
Total
Cost of Sales
|
3,713,000
|
3,713,000
|
3,015,000
|
3,015,000
|
Gross
Profit
|
969,000
|
933,000
|
373,000
|
332,000
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
Selling
|
720,000
|
720,000
|
927,000
|
927,000
|
Marketing
|
365,000
|
365,000
|
243,000
|
243,000
|
General
and administrative
|
993,000
|
1,004,000
|
980,000
|
992,000
|
Gain
on sale of business
|
—
|
—
|
—
|
—
|
Total
Operating Expenses
|
2,078,000
|
2,089,000
|
2,150,000
|
2,162,000
|
Operating
Loss
|
(1,109,000)
|
(1,156,000)
|
(1,777,000)
|
(1,830,000)
|
|
|
|
|
|
Other
income (expense)
|
24,000
|
9,000
|
16,000
|
(2,000)
|
Loss
Before Taxes
|
(1,085,000)
|
(1,147,000)
|
(1,761,000)
|
(1,832,000)
|
|
|
|
|
|
Income
tax expense (benefit)
|
(222,000)
|
(222,000)
|
11,000
|
11,000
|
Net
Loss
|
$(863,000)
|
$(925,000)
|
$(1,772,000)
|
$(1,843,000)
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
Basic
|
$(0.50)
|
$(0.53)
|
$(1.03)
|
$(1.07)
|
Diluted
|
$(0.50)
|
$(0.53)
|
$(1.03)
|
$(1.07)
|
|
|
|
|
|
Shares used in calculation of net loss per share:
|
|
|
|
|
Basic
|
1,724,000
|
1,724,000
|
1,725,000
|
1,725,000
|
Diluted
|
1,724,000
|
1,724,000
|
1,725,000
|
1,725,000
|
32
|
September 30, 2020
|
December 31, 2020
|
||
Three Months Ended
|
As previously reported
|
Restated
|
As previously reported
|
Restated
|
Services
revenues
|
$4,373,000
|
$4,317,000
|
$5,108,000
|
$5,054,000
|
Products
revenues
|
118,000
|
118,000
|
—
|
—
|
Total
Net Sales
|
4,491,000
|
4,435,000
|
5,108,000
|
5,054,000
|
|
|
|
|
|
Cost
of services
|
3,764,000
|
3,764,000
|
3,981,000
|
3,981,000
|
Cost
of goods sold
|
112,000
|
112,000
|
41,000
|
41,000
|
Impairment
loss
|
—
|
—
|
—
|
—
|
Total
Cost of Sales
|
3,876,000
|
3,876,000
|
4,022,000
|
4,022,000
|
Gross
Profit
|
615,000
|
559,000
|
1,086,000
|
1,032,000
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
Selling
|
585,000
|
585,000
|
645,000
|
645,000
|
Marketing
|
192,000
|
192,000
|
215,000
|
215,000
|
General
and administrative
|
825,000
|
840,000
|
1,149,000
|
1,162,000
|
Gain
on sale of business
|
(195,000)
|
(195,000)
|
—
|
—
|
Total
Operating Expenses
|
1,407,000
|
1,422,000
|
2,009,000
|
2,022,000
|
Operating
Loss
|
(792,000)
|
(863,000)
|
(923,000)
|
(990,000)
|
|
|
|
|
|
Other
income (expense)
|
6,000
|
(15,000)
|
64,000
|
41,000
|
Loss
Before Taxes
|
(786,000)
|
(878,000)
|
(859,000)
|
(949,000)
|
|
|
|
|
|
Income
tax expense
|
8,000
|
8,000
|
12,000
|
12,000
|
Net
Loss
|
$(794,000)
|
$(886,000)
|
$(871,000)
|
$(961,000)
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
Basic
|
$(0.46)
|
$(0.51)
|
$(0.49)
|
$(0.55)
|
Diluted
|
$(0.46)
|
$(0.51)
|
$(0.49)
|
$(0.55)
|
|
|
|
|
|
Shares used in calculation of net loss per share:
|
|
|
|
|
Basic
|
1,740,000
|
1,740,000
|
1,745,000
|
1,745,000
|
Diluted
|
1,740,000
|
1,740,000
|
1,745,000
|
1,745,000
|
33
|
March 31,
|
June 30,
|
September 30,
|
December 31,
|
Three Months Ended
|
2019
|
2019
|
2019
|
2019
|
Reduction
of net sales
|
$63,000
|
$115,000
|
$105,000
|
$143,000
|
Increase
in general and administrative expense for penalities
|
8,000
|
14,000
|
13,000
|
16,000
|
Decrease
in other income (expense) for interest expense
|
5,000
|
8,000
|
10,000
|
14,000
|
Reduction
(increase) in income tax benefit
|
44,000
|
34,000
|
(9,000)
|
(27,000)
|
Total
increase in net loss due to restatement items
|
$120,000
|
$171,000
|
$119,000
|
$146,000
|
|
March 31, 2019
|
June 30, 2019
|
||
Three Months Ended
|
As previously reported
|
Restated
|
As previously reported
|
Restated
|
Services
revenues
|
$4,639,000
|
$4,576,000
|
$5,435,000
|
$5,320,000
|
Products
revenues
|
501,000
|
501,000
|
407,000
|
407,000
|
Total
Net Sales
|
5,140,000
|
5,077,000
|
5,842,000
|
5,727,000
|
|
|
|
|
|
Cost
of services
|
3,974,000
|
3,974,000
|
4,044,000
|
4,044,000
|
Cost
of goods sold
|
392,000
|
392,000
|
333,000
|
333,000
|
Total
Cost of Sales
|
4,366,000
|
4,366,000
|
4,377,000
|
4,377,000
|
Gross
Profit
|
774,000
|
711,000
|
1,465,000
|
1,350,000
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
Selling
|
738,000
|
738,000
|
693,000
|
693,000
|
Marketing
|
665,000
|
665,000
|
585,000
|
585,000
|
General
and administrative
|
708,000
|
716,000
|
870,000
|
884,000
|
Impairment
loss
|
—
|
—
|
—
|
—
|
Total
Operating Expenses
|
2,111,000
|
2,119,000
|
2,148,000
|
2,162,000
|
Operating
Loss
|
(1,337,000)
|
(1,408,000)
|
(683,000)
|
(812,000)
|
|
|
|
|
|
Other
income
|
37,000
|
32,000
|
30,000
|
22,000
|
Loss
Before Taxes
|
(1,300,000)
|
(1,376,000)
|
(653,000)
|
(790,000)
|
|
|
|
|
|
Income
tax benefit
|
(204,000)
|
(160,000)
|
(165,000)
|
(131,000)
|
Net
Loss
|
$(1,096,000)
|
$(1,216,000)
|
$(488,000)
|
$(659,000)
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
Basic
|
$(0.65)
|
$(0.72)
|
$(0.29)
|
$(0.39)
|
Diluted
|
$(0.65)
|
$(0.72)
|
$(0.29)
|
$(0.39)
|
|
|
|
|
|
Shares used in calculation of net loss per share:
|
|
|
|
|
Basic
|
1,694,000
|
1,694,000
|
1,698,000
|
1,698,000
|
Diluted
|
1,694,000
|
1,694,000
|
1,698,000
|
1,698,000
|
34
|
September 30, 2019
|
December 31, 2019
|
||
Three Months Ended
|
As previously reported
|
Restated
|
As previously reported
|
Restated
|
Services
revenues
|
$4,400,000
|
$4,295,000
|
$5,755,000
|
$5,612,000
|
Products
revenues
|
254,000
|
254,000
|
563,000
|
563,000
|
Total
Net Sales
|
4,654,000
|
4,549,000
|
6,318,000
|
6,175,000
|
|
|
|
|
|
Cost
of services
|
3,514,000
|
3,514,000
|
4,224,000
|
4,224,000
|
Cost
of goods sold
|
214,000
|
214,000
|
498,000
|
498,000
|
Total
Cost of Sales
|
3,728,000
|
3,728,000
|
4,722,000
|
4,722,000
|
Gross
Profit
|
926,000
|
821,000
|
1,596,000
|
1,453,000
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
Selling
|
573,000
|
573,000
|
654,000
|
654,000
|
Marketing
|
559,000
|
559,000
|
585,000
|
585,000
|
General
and administrative
|
865,000
|
878,000
|
881,000
|
897,000
|
Impairment
loss
|
—
|
—
|
2,014,000
|
2,014,000
|
Total
Operating Expenses
|
1,997,000
|
2,010,000
|
4,134,000
|
4,150,000
|
Operating
Loss
|
(1,071,000)
|
(1,189,000)
|
(2,538,000)
|
(2,697,000)
|
|
|
|
|
|
Other
income
|
46,000
|
36,000
|
29,000
|
15,000
|
Loss
Before Taxes
|
(1,025,000)
|
(1,153,000)
|
(2,509,000)
|
(2,682,000)
|
|
|
|
|
|
Income
tax benefit
|
(47,000)
|
(56,000)
|
(50,000)
|
(77,000)
|
Net
Loss
|
$(978,000)
|
$(1,097,000)
|
$(2,459,000)
|
$(2,605,000)
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
Basic
|
$(0.57)
|
$(0.64)
|
$(1.43)
|
$(1.52)
|
Diluted
|
$(0.57)
|
$(0.64)
|
$(1.43)
|
$(1.52)
|
|
|
|
|
|
Shares used in calculation of net loss per share:
|
|
|
|
|
Basic
|
1,712,000
|
1,712,000
|
1,720,000
|
1,720,000
|
Diluted
|
1,712,000
|
1,712,000
|
1,720,000
|
1,720,000
|
35
|
September 30, 2019
|
December 31, 2019
|
||
Three Months Ended
|
As previously reported
|
Restated
|
As previously reported
|
Restated
|
Services
revenues
|
$4,400,000
|
$4,295,000
|
$5,755,000
|
$5,612,000
|
Products
revenues
|
254,000
|
254,000
|
563,000
|
563,000
|
Total
Net Sales
|
4,654,000
|
4,549,000
|
6,318,000
|
6,175,000
|
|
|
|
|
|
Cost
of services
|
3,514,000
|
3,514,000
|
4,224,000
|
4,224,000
|
Cost
of goods sold
|
214,000
|
214,000
|
498,000
|
498,000
|
Total
Cost of Sales
|
3,728,000
|
3,728,000
|
4,722,000
|
4,722,000
|
Gross
Profit
|
926,000
|
821,000
|
1,596,000
|
1,453,000
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
Selling
|
573,000
|
573,000
|
654,000
|
654,000
|
Marketing
|
559,000
|
559,000
|
585,000
|
585,000
|
General
and administrative
|
865,000
|
878,000
|
881,000
|
897,000
|
Impairment
loss
|
—
|
—
|
2,014,000
|
2,014,000
|
Total
Operating Expenses
|
1,997,000
|
2,010,000
|
4,134,000
|
4,150,000
|
Operating
Loss
|
(1,071,000)
|
(1,189,000)
|
(2,538,000)
|
(2,697,000)
|
|
|
|
|
|
Other
income
|
46,000
|
36,000
|
29,000
|
15,000
|
Loss
Before Taxes
|
(1,025,000)
|
(1,153,000)
|
(2,509,000)
|
(2,682,000)
|
|
|
|
|
|
Income
tax benefit
|
(47,000)
|
(56,000)
|
(50,000)
|
(77,000)
|
Net
Loss
|
$(978,000)
|
$(1,097,000)
|
$(2,459,000)
|
$(2,605,000)
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
Basic
|
$(0.57)
|
$(0.64)
|
$(1.43)
|
$(1.52)
|
Diluted
|
$(0.57)
|
$(0.64)
|
$(1.43)
|
$(1.52)
|
|
|
|
|
|
Shares used in calculation of net loss per share:
|
|
|
|
|
Basic
|
1,712,000
|
1,712,000
|
1,720,000
|
1,720,000
|
Diluted
|
1,712,000
|
1,712,000
|
1,720,000
|
1,720,000
|
36
The
following table sets forth the corrections in each of the
individual line items affected in the balance sheets:
|
March 31, 2019
|
June 30, 2019
|
||||
|
As previously reported
|
Error correction
|
Restated
|
As previously reported
|
Error correction
|
Restated
|
Accounts
receivable, net
|
$6,360,000
|
$-
|
$6,360,000
|
$6,248,000
|
$-
|
$6,248,000
|
Accrued
liabilities - sales tax
|
$-
|
$232,000
|
$232,000
|
$-
|
$347,000
|
$347,000
|
Accrued
liabilities - other
|
$462,000
|
$41,000
|
$503,000
|
$374,000
|
$63,000
|
$437,000
|
Deferred
tax liabilities
|
$290,000
|
$2,000
|
$292,000
|
$116,000
|
$36,000
|
$152,000
|
Accumulated
deficit
|
$336,000
|
$275,000
|
$611,000
|
$824,000
|
$446,000
|
$1,270,000
|
|
September 30, 2019
|
March 31, 2020
|
||||
|
As previously reported
|
Error correction
|
Restated
|
As previously reported
|
Error correction
|
Restated
|
Accounts
receivable, net
|
$6,438,000
|
$-
|
$6,438,000
|
$6,199,000
|
$50,000
|
$6,249,000
|
Accrued
liabilities - sales tax
|
$-
|
$452,000
|
$452,000
|
$-
|
$681,000
|
$681,000
|
Accrued
liabilities - other
|
$413,000
|
$86,000
|
$499,000
|
$261,000
|
$142,000
|
$403,000
|
Deferred
tax liabilities
|
$61,000
|
$27,000
|
$88,000
|
$-
|
$-
|
$-
|
Accumulated
deficit
|
$1,802,000
|
$565,000
|
$2,367,000
|
$5,124,000
|
$773,000
|
$5,897,000
|
|
June 30, 2020
|
September 30, 2020
|
||||
|
As previously reported
|
Error correction
|
Restated
|
As previously reported
|
Error correction
|
Restated
|
Accounts
receivable, net
|
$5,319,000
|
$102,000
|
$5,421,000
|
$5,538,000
|
$174,000
|
$5,712,000
|
Accrued
liabilities - sales tax
|
$-
|
$773,000
|
$773,000
|
$-
|
$902,000
|
$902,000
|
Accrued
liabilities - other
|
$597,000
|
$172,000
|
$769,000
|
$664,000
|
$208,000
|
$872,000
|
Accumulated
deficit
|
$6,896,000
|
$844,000
|
$7,740,000
|
$7,690,000
|
$936,000
|
$8,626,000
|
37
The
following table sets forth the corrections to the retained earnings
(accumulated deficits) and total shareholders’ equity in the
statements of shareholders’ equity.
SHAREHOLDERS' EQUITY
|
||
|
|
|
|
Accumulated Deficit
|
Total Shareholders' Equity
|
March
31, 2019
|
|
|
As
reported
|
$(336,000)
|
$15,470,000
|
Adjustment
due to cumulative error correction of net loss to first quarter
2019
|
(275,000)
|
(275,000)
|
As
restated
|
$(611,000)
|
$15,195,000
|
|
|
|
June
30, 2019
|
|
|
As
reported
|
$(824,000)
|
$15,112,000
|
Adjustment
due to cumulative error correction of net loss in second quarter
2019
|
(446,000)
|
(446,000)
|
As
restated
|
$(1,270,000)
|
$14,666,000
|
|
|
|
September
30, 2019
|
|
|
As
reported
|
$(1,802,000)
|
$14,209,000
|
Adjustment
due to cumulative error correction of net loss in third quarter
2019
|
(565,000)
|
(565,000)
|
As
restated
|
$(2,367,000)
|
$13,644,000
|
SHAREHOLDERS' EQUITY
|
||
|
|
|
|
Accumulated Deficit
|
Total Shareholders' Equity
|
March
31, 2020
|
|
|
As
reported
|
$(5,124,000)
|
$11,000,000
|
Adjustment
due to cumulative error correction of net loss to first quarter
2020
|
(773,000)
|
(773,000)
|
As
restated
|
$(5,897,000)
|
$10,227,000
|
|
|
|
June
30, 2020
|
|
|
As
reported
|
$(6,896,000)
|
$9,287,000
|
Adjustment
due to cumulative error correction of net loss in second quarter
2020
|
(843,000)
|
(843,000)
|
As
restated
|
$(7,739,000)
|
$8,444,000
|
|
|
|
September
30, 2020
|
|
|
As
reported
|
$(7,690,000)
|
$8,538,000
|
Adjustment
due to cumulative error correction of net loss in third quarter
2020
|
(936,000)
|
(936,000)
|
As
restated
|
$(8,626,000)
|
$7,602,000
|
The
Company did not present tables for adjustments within the statement
of cash flows, since all of the foregoing adjustments were within
the operating activities section of the cash flows. These
adjustments did not affect total cash flows from operating
activities, financing activities or investing activities for any
period presented.
38
3.
Investments. During 2020 and as of
December 31, 2019, the Company did not have any investments. Prior
to December 31, 2019, the Company had invested its excess cash in
debt securities, with an average maturity of approximately six
months, and which were classified as held to maturity within
current assets.
4.
Revenue Recognition. Under ASU 2014-09
Revenue from Contracts with
Customers (“Topic 606”), revenue is measured based on consideration
specified in the contract with a customer, adjusted for any
applicable estimates of variable consideration and other factors
affecting the transaction price, including noncash consideration,
consideration paid or payable to a customer and significant
financing components. Revenue from all customers is recognized when
a performance obligation is satisfied by transferring control of a
distinct good or service to a customer, as further described below
under “Performance
Obligations.”
Taxes
collected from customers and remitted to governmental authorities
are excluded from revenue on the net basis of
accounting.
The
Company includes shipping and handling fees in revenues. Shipping
and handling costs associated with outbound freight after control
over a product has transferred to a customer are accounted for as a
fulfillment cost and are included in cost of goods
sold.
Performance Obligations
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
the Company’s performance
obligations included in its primary revenue streams and the timing
or method of revenue recognition for each:
In-Store
Signage Solution Services. The Company provides a service of displaying promotional signs
in close proximity to the CPG manufacturer’s product in
participating stores, which the Company maintains in two-to-four-week cycle
increments.
Each of the individual activities under the
Company’s services, including
production activities, are inputs to an integrated sign display
service. 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 the Company and the Company has an enforceable right to payment for services
performed to date. As a result, the Company recognizes the transaction price for service
performance obligations as revenue over time. Given the nature
of the Company’s performance obligations is to provide a display
service over the duration of a specified period or periods,
the Company recognizes revenue on a
straight-line basis over the display service period as it best
reflects the timing of transfer of its sign
solutions.
Non-POPS
Solutions. The Company also
supplies CPG manufacturers with other retailer approved promotional
services, such as signage, on-pack, merchandising and digital
solutions. These services are more customized than POPS, 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.
Prior to the August 2020 sale of the
Company’s custom print business, the Company
also sold custom print solutions
directly to its customers. Each such product was a distinct
performance obligation. Revenue was recognized at a point in time
upon shipment, when control of the goods transferred to the
customer.
39
Disaggregation of Revenue
In the
following table, revenue is disaggregated by major revenue stream
and timing of revenue recognition.
|
As Restated
|
||
|
Year ended
December 31, 2020
|
||
|
Services
Revenues
|
Products
Revenue
|
Total
Revenue
|
Timing of revenue recognition:
|
|
|
|
Products
and services transferred over time
|
$10,670,000
|
$-
|
$10,670,000
|
Products
and services transferred at a point in time
|
6,234,000
|
578,000
|
6,812,000
|
Total
|
$16,904,000
|
$578,000
|
$17,482,000
|
|
|
|
|
|
As Restated
|
||
|
Year ended
December 31, 2019
|
||
|
Services
Revenues
|
Products
Revenue
|
Total
Revenue
|
Timing of revenue recognition:
|
|
|
|
Products
and services transferred over time
|
$15,029,000
|
$-
|
$15,029,000
|
Products
and services transferred at a point in time
|
4,774,000
|
1,725,000
|
6,499,000
|
Total
|
$19,803,000
|
$1,725,000
|
$21,528,000
|
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
Codification 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, 2019
|
$140,000
|
Reclassification
of beginning deferred revenue to revenue, as a result of
performance obligations satisfied
|
(140,000)
|
Cash
received in advance and not recognized as revenue
|
180,000
|
Balance
at December 31, 2020
|
$180,000
|
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 its performance obligations.
This practical expedient is being applied to arrangements for
certain incomplete services and unshipped custom signage materials.
At December 31, 2020, there were no contracts with an expected
duration of greater than one year.
40
5. Property and Equipment. Property and
equipment consists of the following at December 31:
Year ended December 31
|
2020
|
2019
|
Property and Equipment:
|
|
|
Production
tooling, machinery and equipment
|
$2,349,000
|
$3,685,000
|
Office
furniture and fixtures
|
425,000
|
393,000
|
Computer
equipment and software
|
1,447,000
|
1,426,000
|
Leasehold
improvements
|
-
|
-
|
Construction
in-progress
|
17,000
|
-
|
|
4,238,000
|
5,504,000
|
Accumulated
depreciation and amortization
|
(4,163,000)
|
(4,955,000)
|
Net
Property and Equipment
|
$75,000
|
$549,000
|
Depreciation
expense for the years ended December 31, 2020 and 2019 was $314,000
and $1,044,000, respectively. During December 2020, in connection
with the outsourcing of most printing operations, the Company sold
property and equipment with a net book value of $230,000, for
$195,000, resulting in a loss on sale of $35,000. The proceeds were
in the form of receivables due in four equal amounts due in June
and December 2021 and June and December 2022.
6.
Leases.
The
Company leases space under a
non-cancelable operating lease for its 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 the
Company’s corporate headquarters
includes both lease (e.g., fixed payments including rent, taxes,
and insurance costs) and non-lease components (e.g., fixed
common-area or other maintenance costs) which are accounted for as
a single lease component as the Company elected the practical
expedient to group lease and non-lease components for all leases.
The lease for the Company’s additional office space is non-cancelable with a
lease term of less than one year and therefore, the
Company elected the practical expedient to exclude this short-term
lease from the Company’s right-of-use assets and lease
liabilities.
The Company’s incremental borrowing rate used in determining the
present value of the lease payments was based on information
available at the lease commencement date.
41
The cost components of the Company’s
operating leases were as follows for
the years ended December 31, 2020 and 2019:
|
Year ended
December 31, 2020
|
||
|
Corporate
|
Additional
|
Operating
|
|
Headquarters
|
Office
Space
|
Leases
|
Operating
lease cost
|
$150,000
|
$-
|
$150,000
|
Variable
lease cost
|
104,000
|
-
|
104,000
|
Short-term
lease cost
|
-
|
40,000
|
40,000
|
Total
|
$254,000
|
$40,000
|
$294,000
|
|
Year ended
December 31, 2019
|
||
|
Corporate
|
Additional
|
Operating
|
|
Headquarters
|
Office
Space
|
Leases
|
Operating
lease cost
|
$150,000
|
$-
|
$150,000
|
Variable
lease cost
|
106,000
|
-
|
106,000
|
Short-term
lease cost
|
-
|
38,000
|
38,000
|
Total
|
$256,000
|
$38,000
|
$294,000
|
Variable lease costs consist primarily of taxes,
insurance, and common area or other maintenance costs for
the Company’s leased
corporate headquarters which are paid based on actual costs
incurred by the lessor.
Maturities of the Company’s
lease liabilities for its corporate
headquarters operating lease were as follows as of December 31,
2020:
2021
|
$57,000
|
Less:
Interest
|
1,000
|
Present
value of lease liabilities
|
$56,000
|
The
remaining lease term as of December 31, 2020 and 2019, was 0.25
years and 1.25 years, respectively. The discount rate as of both
December 31, 2020 and 2019 was 6%. The cash outflow for operating
leases for the years ended December 31, 2020 and December 31, 2019
was $222,000 and $217,000, respectively.
The
Company plans to enter into a lease for a new operations center in
suburban Minneapolis for a two-year term commencing in March 2021.
The Company also plans to enter into a lease by April 2021 for new
headquarters near downtown Minneapolis.
7.
Commitments
and Contingencies.
Retailer
Agreements. The Company has
contracts in the normal course of business with various retailers,
some of which provide for fixed or store-based payments rather than
sign placement-based payments resulting in minimum commitments each
year in order to maintain the agreements. During the years ended
December 31, 2020 and 2019, the Company incurred $2,765,000 and
$3,356,000 of costs related to fixed and store-based payments,
respectively. The amounts are recorded in cost of services in the
Company’s statements of operations.
42
Aggregate
commitment amounts under agreements with retailers are
approximately as follows for the years ending December
31:
2021
|
$418,000
|
2022
|
708,000
|
2023
|
354,000
|
During
2020, the Company renegotiated several fixed or store-based retail
payment contracts to sign placement-based payment contracts, in
each case with the general effect of reducing guaranteed payment
obligations. On an ongoing basis the Company negotiates renewals of
various agreements with retailers, retailer contracts generally have terms of one to
three years.
Legal. The Company is
subject to various legal matters in the normal course of
business.
In July
2019, the Company brought suit against News America in the U.S.
District Court in Minnesota, alleging violations of federal and
state antitrust and tort laws by News America. The complaint
alleges that News America has monopolized the national market for
third-party in-store advertising and promotion products and
services through various wrongful acts designed to harm the
Company, its last significant competitor. The suit seeks, among
other relief, an injunction sufficient to prevent further antitrust
injury and an award of treble damages to be determined at trial for
the harm caused to our Company.
In
August 2019, News America filed an answer and
counterclaim. In October 2019, News America moved for a
judgment on the pleadings. Management believes that the
counterclaim is without merit, and the Company filed a response
brief on November 11, 2019. The Company also moved to dismiss the
counterclaim against it. The court heard oral arguments from both
parties on January 14, 2020, and subsequently denied both motions.
On July 10, 2020 the parties cross-moved for summary judgment on
the counterclaim. On December 7, 2020, the Court granted News
America’s motion for summary judgment on the counterclaim in
part, requiring Insignia to strike certain allegations from its
Complaint and finding News America’s request for
attorneys’ fees and costs premature.
Discovery is
underway and trial has been scheduled for December 2021. At this
stage of the proceedings, the Company is unable to determine the
likelihood of an unfavorable outcome or estimate any potential
resulting liability at this time.
8.
Shareholders’ Equity.
Stock-Based
Compensation. The Company’s stock-based compensation
plans are administered by the Compensation Committee of the Board
of Directors, which, subject to approval by the Board of Directors,
selects persons to receive awards and determines the number of
shares subject to each award and the terms, conditions, performance
measures and other provisions of the award.
The
following table summarizes the stock-based compensation expense
that was recognized in the Company’s statements of operations
for the years ended December 31, 2020 and 2019:
Year ended December 31
|
2020
|
2019
|
Cost
of sales
|
$5,000
|
$14,000
|
Selling
|
38,000
|
121,000
|
Marketing
|
(1,000)
|
12,000
|
General
and administrative
|
130,000
|
275,000
|
|
$172,000
|
$422,000
|
43
The
Company uses the Black-Scholes option pricing model to estimate
fair value of stock-based awards with the following weighted
average assumptions:
|
2020
|
2019
|
Stock Purchase Plan Options:
|
|
|
Expected
life (years)
|
1.0
|
1.0
|
Expected
volatility
|
59%
|
57%
|
Dividend
yield
|
0%
|
0%
|
Risk-free
interest rate
|
1.6%
|
2.6%
|
The
Company uses the graded attribution method to recognize expense for
unvested stock-based awards. The amount of stock-based compensation
recognized during a period is based on the value of the awards that
are ultimately expected to vest. Forfeitures are estimated at the
time of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. The Company
re-evaluates the forfeiture rate annually and adjusts it as
necessary.
Stock Options, Restricted
Stock, Restricted Stock Units, and Other Stock-Based Compensation
Awards. The Company maintains the 2003 Incentive Stock
Option Plan (the “2003 Plan”), the 2013 Omnibus Stock
and Incentive Plan (the “2013 Plan”) and the 2018
Equity Incentive Plan (the “2018 Plan”). The 2018 Plan
replaced the 2013 Plan upon its ratification by shareholders in
July 2018. No further awards may be granted under the 2013 Plan or
the 2003 Plan. Awards granted under the 2003 Plan and 2013 Plan
will remain in effect until they are exercised or expire according
to their terms.
Under
the terms of the 2018 Plan, the number of shares of our common
stock that may be the subject of awards and issued under the 2018
Plan was initially 128,571 plus any shares remaining available for
future grants under the 2013 Plan on the effective date of the 2018
Plan. All equity awards made during 2019 were under the 2018
Plan.
Under
the terms of the 2018 Plan, the Company may grant awards in a
variety of instruments including stock options, restricted stock
and restricted stock units to employees, consultants and directors
generally at an exercise price at or above 100% of fair market
value at the close of business on the date of grant. Stock options
expire 10 years after the date of grant and generally vest over
three years. The Company issues new shares of common stock upon
grant of restricted stock, when stock options are exercised, and
when restricted stock units are vested and/or settled.
44
The
following table summarizes activity under the 2003, 2013 and 2018
Plans:
|
Plan Shares Available for Grant
|
Plan Options Outstanding
|
Weighted Average Exercise Price Per Share
|
Balance
at January 1, 2019
|
117,860
|
53,225
|
$16.49
|
Restricted
stock units and awards granted - 2018 Plan
|
(10,106)
|
—
|
|
Cancelled
or forfeited - 2018 Plan options
|
1,938
|
(1,938)
|
13.65
|
Cancelled
or forfeited - 2018 Plan restricted stock and restricted stock
units
|
1,938
|
—
|
13.65
|
Cancelled
or forfeited - 2013 Plan options
|
2,926
|
(2,926)
|
14.70
|
Cancelled
or forfeited - 2013 Plan restricted stock and restricted stock
units
|
3,105
|
—
|
12.02
|
Cancelled
or forfeited - 2003 Plan options
|
—
|
(5,945)
|
17.21
|
Balance
at December 31, 2019
|
117,661
|
42,416
|
16.66
|
|
|
|
|
Restricted
stock units and awards granted - 2018 Plan
|
(31,782)
|
—
|
|
Cancelled
or forfeited - 2018 Plan options
|
1,070
|
(1,070)
|
13.65
|
Cancelled
or forfeited - 2018 Plan restricted stock and restricted stock
units
|
3,091
|
—
|
9.58
|
Cancelled
or forfeited - 2013 Plan options
|
2,241
|
(2,241)
|
15.54
|
Cancelled
or forfeited - 2013 Plan restricted stock and restricted stock
units
|
1,450
|
—
|
13.34
|
Cancelled
or forfeited - 2003 Plan options
|
—
|
(8,607)
|
24.23
|
|
|
|
|
Balance
at December 31, 2020
|
93,731
|
30,498
|
$14.69
|
The
following table summarizes information about the stock options
outstanding at December 31, 2020:
|
Options Outstanding
|
Options Exercisable
|
|||
Ranges of Exercise Prices
|
Number Outstanding
|
Weighted Average Remaining Contractual Life
|
Weighted Average Exercise Price Per Share
|
Number Exercisable
|
Weighted Average Exercise Price Per Share
|
$8.26 - $13.65
|
18,799
|
6.12
years
|
$12.36
|
9,424
|
$11.07
|
$15.54 - $21.63
|
11,699
|
1.97
years
|
18.43
|
11,699
|
18.43
|
|
30,498
|
4.53
years
|
$14.69
|
21,123
|
$15.15
|
Options
outstanding under the Plans expire at various dates during the
period from May 2021 through August 2028. Options outstanding
during 2020 and 2019 had no intrinsic value. Options exercisable at
December 31, 2020 had a weighted average remaining life of 3.16
years and no intrinsic value. No options were granted in either
2020 or 2019. The number of options exercisable at December 31,
2019 was 27,285.
During
the year ended December 31, 2020, the Company issued 24,282
restricted stock units. The shares underlying the awards were
assigned a weighted average value of $6.00 per share, which was the
closing price of the Company’s common stock on the date of
grants. These awards are scheduled to vest over one year. No
restricted stock or restricted stock unit awards were granted in
2019 to employees.
45
During
December 2020, non-employee members of the Board of Directors
received restricted stock grants totaling 7,500 shares. The shares
underlying the awards were assigned a value of $6.00 per share,
which was the closing price of the Company’s common stock on
the date of grants, for a total value of $45,000, and are scheduled
to vest the day immediately preceding the date of the next annual
shareholder meeting. During June 2019, non-employee members of the
Board of Directors received restricted stock grants totaling 10,106
shares pursuant to the 2018 Plan. The shares underlying the awards
were assigned a value of $7.42 per share, which was the closing
price of the Company’s common stock on the date of grants,
for a total value of $75,000, and were vested on July 30, 2020, the
day immediately preceding the 2020 annual shareholder
meeting.
Restricted stock
and restricted stock unit transactions during the years ended
December 31, 2020 and 2019 are summarized as follows:
|
Number of Shares
|
Weighted average
grant date fair value
|
Unvested
shares at January 1, 2019
|
70,078
|
$12.47
|
Granted
|
10,106
|
7.42
|
Vested
|
(30,103)
|
11.15
|
Forfeited
or surrendered
|
(5,422)
|
12.88
|
Unvested
shares at December 31, 2019
|
44,659
|
$12.16
|
Granted
|
31,782
|
6.00
|
Vested
|
(22,315)
|
11.36
|
Forfeited
or surrendered
|
(4,162)
|
10.30
|
Unvested
shares at December 31, 2020
|
49,964
|
$8.76
|
As
of December 31, 2020, there was approximately $20,000 of total
unrecognized compensation costs related to outstanding stock
options, which is expected to be recognized over a weighted average
period of 1.61 years.
As
of December 31, 2020, there was approximately $242,000 of total
unrecognized compensation costs related to restricted stock and
restricted stock units, which is expected to be recognized over a
weighted average period of 0.88 years.
Employee Stock Purchase
Plan. The Company has an Employee Stock Purchase Plan (the
“ESPP”) that enables employees to contribute up to 10%
of their base compensation toward the purchase of the
Company’s common stock at 85% of its market value on the
first or last day of the year. During the years ended
December 31, 2020 and 2019, respectively, participants
purchased 6,152 and 4,638 shares under the ESPP. At December 31,
2020, 28,977 shares were reserved for future employee purchases of
common stock under the ESPP. For the years ended December 31, 2020
and 2019, the Company recognized $18,000 and $55,000, respectively,
of stock-based compensation expense related to the
ESPP.
Share Repurchase
Programs. On April 5, 2018, the Board authorized the
repurchase of up to $3,000,000 of the Company’s common stock
on or before March 31, 2020, when the program expired. During the
years ended December 31, 2020 and 2019, the Company did not
repurchase any shares.
Dividends. The
Company has not historically paid dividends, other than one-time
dividends declared in 2011 and 2016. The Company intends to retain
earnings from operations for use in advancing our business
strategy; however, the Company may consider special dividends in
the future depending on outcomes of actions such as legal
proceedings.
46
9.
Income Taxes. Income tax benefit consists of the
following:
|
As Restated
|
|
Year Ended December 31
|
2020
|
2019
|
Current
taxes - Federal
|
$(233,000)
|
$-
|
Current
taxes - State
|
42,000
|
38,000
|
Deferred
taxes - Federal
|
-
|
(402,000)
|
Deferred
taxes - State
|
-
|
(60,000)
|
|
|
|
Income
tax benefit
|
$(191,000)
|
$(424,000)
|
The
actual tax benefit attributable to loss before taxes differs from
the expected tax benefit computed by applying the U.S. federal
corporate income tax rate of 21% as follows:
|
As Restated
|
|
Year Ended December 31
|
2020
|
2019
|
Federal
statutory rate
|
21.0%
|
21.0%
|
|
|
|
Stock-based
awards
|
(0.8)
|
(0.7)
|
State
taxes
|
3.6
|
3.2
|
Other
permanent differences
|
(0.3)
|
(0.6)
|
Impact
of uncertain tax positions
|
(0.7)
|
(0.5)
|
Valuation
allowance
|
(19.6)
|
(15.4)
|
Other
|
0.8
|
0.1
|
|
|
|
Effective
federal income tax rate
|
4.0%
|
7.1%
|
Components of
resulting noncurrent deferred tax assets (liabilities) are as
follows:
|
As Restated
|
|
As of December 31
|
2020
|
2019
|
Deferred tax assets
|
|
|
Accrued
expenses
|
$376,000
|
$260,000
|
Inventory
reserve
|
9,000
|
5,000
|
Stock-based
awards
|
65,000
|
88,000
|
Reserve
for bad debts
|
33,000
|
16,000
|
Net
operating loss and credit carryforwards
|
1,422,000
|
715,000
|
Other
|
47,000
|
26,000
|
Depreciation
|
52,000
|
-
|
Valuation
allowance
|
(1,946,000)
|
(1,003,000)
|
|
|
|
Total
deferred tax assets
|
$58,000
|
$107,000
|
|
|
|
Deferred tax liabilities
|
|
|
Depreciation
|
$-
|
$(18,000)
|
Prepaid
expenses
|
(58,000)
|
(89,000)
|
|
|
|
Total
deferred tax liabilities
|
(58,000)
|
(107,000)
|
|
|
|
Net
deferred income tax liabilities
|
$-
|
$-
|
47
As of
December 31, 2020, the Company had a Federal net operating loss
(NOL) to carry forward of approximately $5,400,000 and state NOLs
of approximately $4,500,000 to carry forward. The Federal NOLs can
be carried forward indefinitely. The expiration of state NOLs
carried forward varies by taxing jurisdiction.
Section
382 of the U.S. Internal Revenue Code of 1986 (“Section
382”), as amended, generally imposes an annual limitation on
the amount of NOL carryforwards that might be used to offset
taxable income when a corporation has undergone significant changes
in stock ownership. During 2020, we believe we may have experienced
an ownership change as defined in Section 382 which would limit our
ability to utilize our NOLs. The Company has not yet completed a
formal Section 382 analysis. In addition, our ability to utilize
the current NOL carryforwards might be further limited by future
issuances of our common stock.
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.
The
Company evaluates all significant available positive and negative
evidence, including the existence of losses in prior years and its
forecast of future taxable income, in assessing the need for a
valuation allowance. The underlying assumptions the Company uses in
forecasting future taxable income require significant judgment and
take into consideration the Company’s recent performance. The
change in the valuation allowance for the years ended December 31,
2020 and 2019 was $943,000 and $924,000, respectively.
The
Company has recorded a liability of $677,000 and $643,000 for
uncertain tax positions taken in tax returns in previous years as
of December 31, 2020 and 2019, respectively. This liability is
reflected as accrued income taxes on the Company’s balance
sheets. The Company files income tax returns in the United States
and numerous state and local tax jurisdictions. Tax years 2017 and
forward are open for examination and assessment by the Internal
Revenue Service. With limited exceptions, tax years prior to 2017
are no longer open in major state and local tax jurisdictions. The
Company does not anticipate that the total unrecognized tax
benefits will change significantly prior to December 31,
2021.
A
reconciliation of the beginning and ending amount of the liability
for uncertain tax positions is as follows:
Balance
at January 1, 2019
|
$613,000
|
Increases
due to interest and state tax
|
30,000
|
Balance
at December 31, 2019
|
643,000
|
Increases
due to interest and state tax
|
34,000
|
Balance
at December 31, 2020
|
$677,000
|
10.
Employee Benefit Plans. The Company
sponsors a Retirement Profit Sharing and Savings Plan under Section
401(k) of the Internal Revenue Code. The plan allows employees to
defer up to 50% of their wages, subject to Federal limitations, on
a pre-tax basis through contributions to the plan. During the years
ended December 31, 2020 and 2019, the Company’s expense for
matching contributions was $62,000 and $72,000,
respectively.
48
11.
Concentrations.
Major
Customers. During the
year ended December 31, 2020, one customer accounted for 14% of the
Company’s total net sales. At December 31, 2020, two
customers represented 17% and 10%, respectively of the
Company’s total accounts receivable. During the year ended
December 31, 2019, two customers accounted for 13% and 12%,
respectively of the Company’s total net sales. At December
31, 2019, four customers represented 17%, 12%, 12% and 10%,
respectively of the Company’s total accounts
receivable.
Export Sales. Export
sales accounted for less than 1% of total net sales during the
years ended December 31, 2020 and 2019.
12.
Loan. In April 2020, the Company
entered into a promissory note (the “Note”) with Alerus
Financial, N.A. The Note evidences a loan to the Company in the
amount of $1,054,000 pursuant to the Paycheck Protection Program
(the “PPP”) of the CARES Act administered by the U.S.
Small Business Administration (the “SBA”).
In
accordance with the requirements of the CARES Act, the Company used
the proceeds from the loan exclusively for qualified expenses under
the PPP, including payroll costs, rent and utility costs, as
further detailed in the CARES Act and applicable guidance issued by
the SBA. Interest was accrued on the outstanding balance of the
Note at a rate of 1.00% per annum. The Note was scheduled to mature
on April 22, 2022 and required 18 equal monthly payments of
principal and interest.
In
accordance with provisions of the CARES Act, the Company applied
for forgiveness of the amount due under the Note, including accrued
interest. The application for forgiveness of the principal amount
of $1,054,000 and accrued interest was approved by the SBA on
January 29, 2021. Accordingly, for the quarter ending March 31,
2021 the debt of $1,054,000, plus accrued interest which was $7,000
at December 31, 2020, will be eliminated with a gain on debt
extinguishment included in other income.
13.
Subsequent Events. The
Company evaluated all subsequent event activity and concluded that
no subsequent events have occurred that would require recognition
in the financial statements or disclosure in the Notes to Financial
Statements, with the exception of the forgiveness of the Paycheck
Protection Program loan disclosed in Note 12.
49
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures
None.
Item 9A. Controls and
Procedures
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 Chief
Executive Officer (principal executive officer and interim
principal financial officer) and the Company’s Senior
Director of Financial Planning and Analysis (interim principal
accounting 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 December 31,
2020, pursuant to Exchange Act Rule 13a-15. Based upon that
evaluation, the Company’s principal executive officer and the
interim principal accounting officer concluded that the
Company’s disclosure controls and procedures as of December
31, 2020 were effective. However, due to the material weakness in
our internal control over financial reporting subsequently
identified and described below, our management re-evaluated the
effectiveness of our disclosure controls and procedures as of
December 31, 2020 and has concluded that our disclosure controls
and procedures were not effective as of that date because of such
material weakness.
A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of our annual or interim financial statements will not be prevented
or detected on a timely basis.
Management’s Annual Report on Internal Control Over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
control over financial reporting, as such term is defined in Rule
13a-15(f) of the Exchange Act. Under the supervision and with the
participation of our management, including our Chief Executive
Officer and Senior Director of Financial Planning and Analysis, we
conducted an evaluation of the effectiveness of our internal
control over financial reporting as of December 31, 2020. In
conducting its evaluation, our management used the criteria set
forth by the framework in the 2013 Internal Control –
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on that evaluation,
management believed our internal control over financial reporting
was effective as of December 31, 2020. Subsequent to that
assessment, management identified a
material weakness in our internal controls as we did not have
adequate internal controls to address the risk of not collecting
and remitting sales tax that was due on sales of certain of our
products and services to certain of our customers.
Consequently, our management has reassessed the effectiveness of
our internal control over financial reporting as of December 31,
2020 and has concluded that our internal control over financial
reporting was not effective as of December 31, 2020 due to the
material weaknesses.
Remediation Plan and Status for Material Weakness
In response to the identified material weakness, our management,
with the oversight of the Audit Committee of our Board of
Directors, has dedicated significant resources, including the
involvement of outside advisors, and efforts to improve our
internal control over financial reporting and has taken immediate
action to remediate the material weakness identified. Certain
remedial actions have been completed including ongoing involvement
of outside advisors, review of taxability of new products and
services and obtaining of appropriate documentation of exempt
status from customers. The Company will further enhance these
controls over the remainder of 2021.
Implemented Remedial Actions in Response to Material Weakness That
Existed at December 31, 2019
In connection with management’s evaluation of the
effectiveness of our internal control over financial reporting as
of December 31, 2019, management identified a material weakness
because the Company had not designed and maintained effective
internal control over the impairment testing required to be
performed in accordance with ASC 360, Property, Plant, and
Equipment. Specifically,
the Company did not appropriately evaluate the indicators of
impairment primarily related to its review of the impact of
operating losses and negative cash flows attributable to the asset
group which included the Company’s internally developed
software as well as consideration of the decline in the Company's
market capitalization during the fourth quarter of 2019 as an
indicator of impairment.
50
To address the material weakness, we designed, implemented and
tested new review controls to properly evaluate the indicators of
impairment including the review of the impact of operating losses
and negative cash flows attributable to asset groups, as well as
consideration of the Company’s market capitalization. Our
management determined the foregoing material weakness to be
remediated as of December 31, 2020.
Inherent Limitations on Control Systems
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, will be or have been
detected. These inherent limitations include the realities that
judgments in decision making can by faulty, and that breakdowns can
occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the
control. The design of any system of controls also is based in part
upon certain assumptions about the likelihood of future events and
there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions. Over time,
controls may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures may
deteriorate.
Changes in Internal Control Over Financial Reporting
Except
as noted above, no changes in the Company’s internal control
over financial reporting occurred during the Company’s most
recently completed fiscal quarter that have materially affected, or
are reasonably likely to materially affect, the Company’s
internal control over financial reporting.
This Annual Report on Form 10-K/A does not include an
attestation report of the Company’s registered public
accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation
by the Company’s registered public accounting firm pursuant
to rules of the Securities and Exchange Commission that permit the
Company to provide only management’s report in this Annual
Report on Form 10-K/A.
51
PART IV.
Item 15. Exhibits and Financial
Statement Schedules
The
following financial statements of Insignia Systems, Inc. are
included in Item 8:
Report
of Independent Registered Public Accounting Firm
Balance
Sheets as of December 31, 2020 and 2019
Statements of
Operations for the years ended December 31, 2020 and
2019
Statements of
Shareholders’ Equity for the years ended December 31, 2020
and 2019
Statements of Cash
Flows for the years ended December 31, 2020 and 2019
Notes
to Financial Statements
(a)
Exhibits
|
|
|
|
|
Exhibit
Number
|
|
Description
|
|
Incorporated by Reference To
|
|
|
|
|
|
|
Restated
Articles of Incorporation (effective as of January 4,
2021)
|
|
Exhibit
3.1 to Current Report filed January 6, 2021
|
|
|
|
|
|
|
|
Composite
Bylaws, as amended through December 5, 2015
|
|
Exhibit
3.2 to Annual Report on Form 10-K for the year ended December 31,
2015
|
|
|
|
|
|
|
|
Description
of Securities
|
|
Exhibit
4.1 to Annual Report on Form 10-K for the year ended December 31,
2019
|
|
|
|
|
|
|
|
2003
Incentive Stock Option Plan, as amended
|
|
Exhibit
10.1 to Form 8-K filed December 2, 2016
|
|
|
|
|
|
|
|
Form of
Incentive Stock Option Agreement under 2003 Incentive Stock Option
Plan
|
|
Exhibit
10.1 to Form 8-K filed January 16, 2013
|
|
|
|
|
|
|
|
2013
Omnibus Stock and Incentive Plan, as amended
|
|
Exhibit
10.2 to Form 8-K filed December 2, 2016
|
|
|
|
|
|
|
|
Form of
Incentive Stock Option Agreement under 2013 Omnibus Stock and
Incentive Plan
|
|
Exhibit
10.1 to Form 8-K filed August 23, 2013
|
|
|
|
|
|
|
|
Form of
Restricted Stock Unit Agreement for Employees under 2013 Omnibus
Stock and Incentive Plan
|
|
Exhibit
10.1 to Form 8-K filed May 28, 2014
|
|
|
|
|
|
|
|
Form of
Restricted Stock Award Agreement for Employees under the 2013
Omnibus Stock and Incentive Plan
|
|
Exhibit
10.1 to Form 10-Q for the quarterly period ended September 30,
2017
|
|
|
|
|
|
|
|
2018
Equity Incentive Plan
|
|
Exhibit
99.1 to Registration Statement on Form S-8, Reg. No.
333-226670
|
|
|
|
|
|
|
|
Form of
Non-Qualified Stock Option Agreement under 2018 Equity Incentive
Plan
|
|
Exhibit
10.1 to Form 8-K filed August 14, 2018
|
|
|
|
|
|
|
52
|
Form of
Restricted Stock Unit Agreement under 2018 Equity Incentive
Plan
|
|
Exhibit
10.2 to Form 8-K filed August 14, 2018
|
|
|
|
|
|
|
|
Form of
Restricted Stock Unit Agreement for Non-Employee Directors under
the 2018 Equity Incentive Plan
|
|
Exhibit
10.1 to Form 10-Q for the quarterly period ended June 30,
2019
|
|
|
|
|
|
|
|
Employee
Stock Purchase Plan, as amended
|
|
Exhibit
99.2 to Registration Statement on Form S-8, filed August 8,
2018
|
|
|
|
|
|
|
|
Deferred
Compensation Plan for Directors
|
|
Exhibit
10.1 to Form 10-Q for the quarterly period ended March 31,
2018
|
|
|
|
|
|
|
|
Employment
Agreement with Kristine Glancy dated April 8, 2016
|
|
Exhibit
10.1 to Form 8-K filed April 13, 2016
|
|
|
|
|
|
|
|
Change
in Control Severance Agreement with Kristine Glancy dated April 8,
2016
|
|
Exhibit
10.2 to Form 8-K filed April 13, 2016
|
|
|
|
|
|
|
|
First
Amendment to Change in Control Agreement with Kristine A. Glancy
dated April 28, 2018
|
|
Exhibit
10.1 to Form 10-Q for the quarterly period ended March 31,
2019
|
|
|
|
|
|
|
|
Employment
Agreement with Jeffrey Jagerson dated July 17, 2017
|
|
Exhibit
10.1 to Form 8-K filed June 30, 2017
|
|
|
|
|
|
|
|
Change
in Control Agreement with Jeffrey Jagerson dated July 17,
2017
|
|
Exhibit
10.2 to Form 8-K filed June 30, 2017
|
|
|
|
|
|
|
|
Employment
Agreement with Adam May dated December 20, 2019
|
|
Exhibit
10.18 to Annual Report on Form 10-K for the year ended December 31,
2019
|
|
|
|
|
|
|
|
Change
in Control Agreement with Adam May dated December 20,
2019
|
|
Exhibit
10.19 to Annual Report on Form 10-K for the year ended December 31,
2019
|
|
|
|
|
|
|
|
Industrial/Warehouse
Lease Agreement between the Company and Opus Northwest L.L.C. dated
March 27, 2008**
|
|
Exhibit
10.22 to Annual Report on Form 10-K for the year ended December 31,
2007
|
|
|
|
|
|
|
|
First
Amendment to Industrial/Warehouse Lease Agreement with James
Campbell Company LLC (as successor in interest to Opus Northwest
L.L.C.) dated September 14, 2015
|
|
Exhibit
10.1 to Form 10-Q for the quarterly period ended September 30,
2015
|
|
|
|
|
|
|
|
Exclusive
Agreement for Sale and Implementation of Specified Signs with Price
approved June 6, 2011
|
|
Exhibit
10.2 to Form 10-Q for the quarterly period ended June 30,
2011
|
|
|
|
|
|
|
|
Settlement
Agreement and Release with News America Marketing In-Store, LLC,
dated February 9, 2011, including exhibits
|
|
Exhibit
10.1 to Form 10-Q/A for the quarterly period ended March 31,
2011
|
|
|
|
|
|
|
53
|
Promissory
Note with Alerus Financial, N.A., dated April 22, 2020
|
|
Exhibit
10.1 to Form 8-K filed April 28, 2020
|
|
|
|
|
|
|
+23.1
|
|
Consent
of Independent Registered Public Accounting Firm
|
|
|
|
|
|
|
|
|
Powers
of Attorney
|
|
|
|
|
|
|
|
|
+31
|
|
Certification
of Principal Executive and Financial Officer pursuant to Section
302 of the Sarbanes Oxley Act of 2002
|
|
|
++32
|
|
Section
1350 Certifications
|
|
|
+101.1
|
|
The
following materials from Insignia Systems, Inc.’s Annual
Report on Form 10-K/A for the year ended December 31, 2020 are
filed herewith, formatted in XBRL (Extensible Business
Reporting
Language):
(i) Balance Sheets, (ii) Statements of Operations, (iii) Statements
of Shareholders’ Equity (iv) Statements of Cash Flows, and
(v) Notes to Financial Statements.
|
|
|
*
Denotes a
management contract or compensatory plan or arrangement required to
be filed as an exhibit to this report pursuant to Item 15(b) of
Form 10-K/A.
**
Schedules and
exhibits to the agreement have been omitted pursuant to Item
601(a)(5) of Regulation S-K. A copy of any omitted schedule or
exhibit will be furnished to the SEC upon request.
+
Filed
herewith.
++
Furnished
herewith.
^
Portions of this
exhibit are treated as confidential pursuant to a request for
confidential treatment filed by Insignia with the SEC.
Item 16. Form 10-K/A
Summary
None.
54
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized.
|
Insignia Systems, Inc. |
|
|
|
|
|
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Dated: August 23,
2021
|
By:
|
/s/ Kristine A.
Glancy
|
|
|
|
Kristine A.
Glancy
|
|
|
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President and Chief
Executive Officer
|
|
55