LENDWAY, INC. - Quarter Report: 2006 September (Form 10-Q)
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the quarterly period ended September 30, 2006
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ___________________ to _________________
Commission File Number: 1-13471
INSIGNIA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
|
Minnesota |
41-1656308 |
|
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.)
|
6470 Sycamore Court North
Maple Grove, MN 55369
(Address of principal executive offices)
(763) 392-6200
(Registrant’s telephone number, including area code)
Not applicable.
(Former name, former address and former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Number of shares outstanding of Common Stock, $.01 par value, as of October 31, 2006, was 15,148,674.
TABLE OF CONTENTS
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PART I. |
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FINANCIAL INFORMATION |
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Item 1. |
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Balance Sheets – September 30, 2006 and December 31, 2005 (unaudited) |
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Statements of Operations – Three and nine months ended September 30, 2006 and 2005 (unaudited) |
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Statements of Shareholder’s Equity – Nine months ended September 30, 2006 and 2005 (unaudited) |
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Statements of Cash Flows -- Nine months ended September 30, 2006 and 2005 (unaudited) |
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Notes to Financial Statements – September 30, 2006 (unaudited) |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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PART II. |
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OTHER INFORMATION |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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2
PART I. FINANCIAL INFORMATION
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Item 1. |
Financial Statements |
BALANCE SHEETS
(Unaudited)
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September 30, |
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December 31, |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
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$ |
3,380,000 |
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$ |
2,711,000 |
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Accounts receivable, net |
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3,003,000 |
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2,294,000 |
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Inventories |
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465,000 |
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448,000 |
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Prepaid expenses and other |
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916,000 |
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811,000 |
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Total Current Assets |
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7,764,000 |
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6,264,000 |
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Property and Equipment: |
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Production tooling, machinery and equipment |
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1,767,000 |
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1,657,000 |
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Office furniture and fixtures |
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191,000 |
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191,000 |
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Computer equipment and software |
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638,000 |
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564,000 |
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Leasehold improvements |
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331,000 |
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327,000 |
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2,927,000 |
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2,739,000 |
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Accumulated depreciation and amortization |
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(2,478,000 |
) |
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(2,330,000 |
) |
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Net Property and Equipment |
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449,000 |
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409,000 |
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Other Assets |
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22,000 |
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— |
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Total Assets |
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$ |
8,235,000 |
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$ |
6,673,000 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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Current Liabilities: |
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Line of credit |
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$ |
164,000 |
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$ |
132,000 |
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Current maturities of long-term liabilities |
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235,000 |
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201,000 |
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Accounts payable |
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1,383,000 |
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1,770,000 |
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Accrued liabilities |
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Compensation |
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482,000 |
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496,000 |
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Employee stock purchase plan |
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73,000 |
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35,000 |
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Legal |
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87,000 |
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92,000 |
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Retailer guarantees |
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— |
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271,000 |
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Other |
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145,000 |
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63,000 |
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Deferred revenue |
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701,000 |
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612,000 |
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Total Current Liabilities |
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3,270,000 |
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3,672,000 |
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Long-Term Liabilities, less current maturities |
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750,000 |
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929,000 |
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Shareholders’ Equity: |
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Common stock, par value $.01; |
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Authorized shares — 40,000,000 at September 30, 2006 and 20,000,000 at December 31, 2005 |
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Issued and outstanding shares — 15,149,000 at September 30, 2006 and 15,002,000 at December 31, 2005 |
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152,000 |
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150,000 |
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Additional paid-in capital |
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29,490,000 |
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29,165,000 |
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Accumulated deficit |
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(25,427,000 |
) |
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(27,243,000 |
) |
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Total Shareholders’ Equity |
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4,215,000 |
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2,072,000 |
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Total Liabilities and Shareholders’ Equity |
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$ |
8,235,000 |
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$ |
6,673,000 |
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See accompanying notes to financial statements.
3
STATEMENTS OF OPERATIONS
(Unaudited)
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Three Months Ended |
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Nine Months Ended |
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2006 |
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2005 |
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2006 |
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2005 |
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Services revenues |
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$ |
4,452,000 |
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$ |
4,498,000 |
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$ |
14,294,000 |
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$ |
13,276,000 |
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Products sold |
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660,000 |
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787,000 |
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2,093,000 |
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2,377,000 |
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Total Net Sales |
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5,112,000 |
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5,285,000 |
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16,387,000 |
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15,653,000 |
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Cost of services |
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2,113,000 |
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2,875,000 |
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6,360,000 |
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8,561,000 |
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Cost of products sold |
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399,000 |
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430,000 |
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1,221,000 |
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1,272,000 |
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Total Cost of Sales |
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2,512,000 |
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3,305,000 |
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7,581,000 |
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9,833,000 |
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Gross Profit |
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2,600,000 |
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1,980,000 |
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8,806,000 |
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5,820,000 |
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Operating Expenses: |
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Selling |
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1,174,000 |
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1,438,000 |
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3,615,000 |
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4,316,000 |
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Marketing |
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265,000 |
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246,000 |
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754,000 |
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911,000 |
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General and administrative |
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935,000 |
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739,000 |
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2,686,000 |
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2,615,000 |
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Total Operating Expenses |
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2,374,000 |
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2,423,000 |
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7,055,000 |
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7,842,000 |
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Operating Income (Loss) |
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226,000 |
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(443,000 |
) |
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1,751,000 |
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(2,022,000 |
) |
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Other Income (Expense): |
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Interest income |
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38,000 |
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18,000 |
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82,000 |
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55,000 |
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Interest expense |
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(36,000 |
) |
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(12,000 |
) |
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(117,000 |
) |
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(36,000 |
) |
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Other income (expense) |
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— |
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5,000 |
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100,000 |
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6,000 |
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Total Other Income (Expense) |
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2,000 |
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11,000 |
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65,000 |
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25,000 |
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Net Income (Loss) |
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$ |
228,000 |
|
$ |
(432,000 |
) |
$ |
1,816,000 |
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$ |
(1,997,000 |
) |
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Net income (loss) per share: |
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Basic |
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$ |
0.02 |
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$ |
(0.03 |
) |
$ |
0.12 |
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$ |
(0.13 |
) |
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Diluted |
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$ |
0.01 |
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$ |
(0.03 |
) |
$ |
0.12 |
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$ |
(0.13 |
) |
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Shares used in calculation of net income (loss) per share: |
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Basic |
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15,104,000 |
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15,002,000 |
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15,074,000 |
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15,002,000 |
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Diluted |
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15,897,000 |
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15,002,000 |
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15,408,000 |
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|
15,002,000 |
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See accompanying notes to financial statements.
4
Statements of Shareholders’ Equity
(Unaudited)
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|
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Common Stock |
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Additional |
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Accumulated |
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Shares |
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Amount |
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Total |
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Nine Months Ended September 30, 2006 |
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Balance at December 31, 2005 |
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15,002,000 |
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$ |
150,000 |
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$ |
29,165,000 |
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$ |
(27,243,000 |
) |
$ |
2,072,000 |
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Issuance of common stock, net |
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147,000 |
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2,000 |
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|
134,000 |
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— |
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136,000 |
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Value of stock-based compensation |
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— |
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— |
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191,000 |
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— |
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191,000 |
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Net income |
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— |
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— |
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— |
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1,816,000 |
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1,816,000 |
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Balance at September 30, 2006 |
|
15,149,000 |
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$ |
152,000 |
|
$ |
29,490,000 |
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$ |
(25,427,000 |
) |
$ |
4,215,000 |
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Nine Months Ended September 30, 2005 |
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Balance at December 31, 2004 |
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14,974,000 |
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$ |
150,000 |
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$ |
29,118,000 |
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$ |
(23,935,000 |
) |
$ |
5,333,000 |
|
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Issuance of common stock, net |
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28,000 |
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|
— |
|
|
47,000 |
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— |
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|
47,000 |
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Net loss |
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— |
|
|
— |
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|
— |
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(1,997,000 |
) |
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(1,997,000 |
) |
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Balance at September 30, 2005 |
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15,002,000 |
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$ |
150,000 |
|
$ |
29,165,000 |
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$ |
(25,932,000 |
) |
$ |
3,383,000 |
|
See accompanying notes to financial statements.
5
STATEMENTS OF CASH FLOWS
(Unaudited)
|
Nine Months Ended September 30 |
|
2006 |
|
2005 |
| ||
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Operating Activities: |
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|
|
|
|
|
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Net income (loss) |
|
$ |
1,816,000 |
|
$ |
(1,997,000 |
) |
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Adjustments to reconcile net income (loss) to net cash |
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provided by (used in) operating activities: |
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|
|
|
|
|
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Depreciation and amortization |
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|
154,000 |
|
|
185,000 |
|
|
Stock-based compensation |
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|
191,000 |
|
|
— |
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Changes in operating assets and liabilities: |
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|
|
|
|
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Accounts receivable |
|
|
(709,000 |
) |
|
(729,000 |
) |
|
Inventories |
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|
(17,000 |
) |
|
19,000 |
|
|
Prepaid expenses and other |
|
|
(127,000 |
) |
|
(430,000 |
) |
|
Accounts payable |
|
|
(387,000 |
) |
|
(279,000 |
) |
|
Accrued liabilities |
|
|
(170,000 |
) |
|
(121,000 |
) |
|
Deferred revenue |
|
|
89,000 |
|
|
(18,000 |
) |
|
Net cash provided by (used in) operating activities |
|
|
840,000 |
|
|
(3,370,000 |
) |
|
|
|
|
|
|
|
|
|
|
Investing Activities: |
|
|
|
|
|
|
|
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Purchases of property and equipment |
|
|
(194,000 |
) |
|
(130,000 |
) |
|
Net cash used in investing activities |
|
|
(194,000 |
) |
|
(130,000 |
) |
|
|
|
|
|
|
|
|
|
|
Financing Activities: |
|
|
|
|
|
|
|
|
Net change in line of credit |
|
|
32,000 |
|
|
15,000 |
|
|
Payment of long-term liabilities |
|
|
(145,000 |
) |
|
— |
|
|
Proceeds from issuance of common stock, net |
|
|
136,000 |
|
|
47,000 |
|
|
Net cash provided by financing activities |
|
|
23,000 |
|
|
62,000 |
|
|
Increase (decrease) in cash and cash equivalents |
|
|
669,000 |
|
|
(3,438,000 |
) |
|
Cash and cash equivalents at beginning of period |
|
|
2,711,000 |
|
|
6,156,000 |
|
|
Cash and cash equivalents at end of period |
|
$ |
3,380,000 |
|
$ |
2,718,000 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures for cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during periods for interest |
|
$ |
73,000 |
|
$ |
25,000 |
|
See accompanying notes to financial statements
6
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
|
1. |
Summary of Significant Accounting Policies. |
Description of Business. Insignia Systems, Inc. (the “Company”) markets in-store advertising programs, services and products to retailers and consumer packaged goods manufacturers. The Company’s services and products include the Insignia Point-of-Purchase Services (POPS) in-store advertising program, thermal sign card supplies for the Company’s SIGNright and Impulse systems, Stylus software and laser printable cardstock and label supplies.
Basis of Presentation. Financial statements for the interim periods included herein are unaudited; however, they contain all adjustments, including normal recurring accruals, which in the opinion of management, are necessary to present fairly the financial position of the Company at September 30, 2006, and its results of operations and cash flows for the three and nine months ended September 30, 2006 and 2005. Results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.
The financial statements do not include certain footnote disclosures and financial information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America and, therefore, should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
The Summary of Significant Accounting Policies in the Company’s 2005 Annual Report on Form 10-K describes the Company’s accounting policies.
Inventories. Inventories are primarily comprised of parts and supplies for Impulse and SIGNright machines, sign cards, and rollstock. Inventory is valued at the lower of cost or market using the first-in, first-out (FIFO) method, and consists of the following:
|
|
|
September 30, |
|
December 31, |
| ||
|
Raw materials |
|
$ |
178,000 |
|
$ |
164,000 |
|
|
Work-in-process |
|
|
15,000 |
|
|
14,000 |
|
|
Finished goods |
|
|
272,000 |
|
|
270,000 |
|
|
|
|
$ |
465,000 |
|
$ |
448,000 |
|
Stock-Based Compensation. The Company has various types of stock-based compensation plans. These plans are administered by the Compensation Committee of the Board of Directors, which 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. Readers should refer to Notes 1 and 6 of the Company’s Financial Statements on Form 10-K for the year ended December 31, 2005, for additional information related to these stock-based compensation plans.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment (SFAS 123R), which requires companies to measure and recognize compensation expense for all stock-based payments at fair value. SFAS 123R is being applied on the modified prospective basis. Prior to the adoption of SFAS 123R, the Company accounted for its stock-based compensation plans under the intrinsic value method of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations, and accordingly, recognized no compensation expense related to the stock-based plans where the exercise price of options granted equaled the market value of the underlying common stock on the date of grant.
7
Under the modified prospective approach, SFAS 123R applies to new awards and to awards that were outstanding on January 1, 2006 that are subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation cost recognized beginning in the first quarter of fiscal 2006 includes compensation cost for all share-based payments granted prior to, but not yet vested on January 1, 2006, and compensation cost for all share-based payments granted subsequent to January 1, 2006 based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. Additionally, we will recognize compensation cost for the portion of awards for which the requisite service has not been rendered (unvested awards) that are outstanding as of January 1, 2006, as the remaining service is rendered. Prior periods were not restated to reflect the impact of adopting the new standard.
As a result of the adoption of SFAS 123R, our financial results were lower than under our previous accounting method for stock-based compensation by the following amounts:
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||
|
Income from continuing operations before income taxes |
|
$ |
40,000 |
|
$ |
191,000 |
|
|
Income from continuing operations |
|
$ |
40,000 |
|
$ |
191,000 |
|
|
Net income |
|
$ |
40,000 |
|
$ |
191,000 |
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic |
|
|
— |
|
$ |
0.01 |
|
|
Diluted |
|
$ |
0.01 |
|
$ |
0.01 |
|
The following table summarizes the stock-based compensation expense which was recognized in the Statements of Operations for the three months and nine months ended September 30, 2006:
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||
|
Cost of sales |
|
$ |
15,000 |
|
$ |
42,000 |
|
|
Selling |
|
|
(7,000 |
) |
|
40,000 |
|
|
Marketing |
|
|
8,000 |
|
|
23,000 |
|
|
General and administrative |
|
|
24,000 |
|
|
86,000 |
|
|
|
|
$ |
40,000 |
|
$ |
191,000 |
|
The following table illustrates the effect on net loss and net loss per share had the Company accounted for stock-based compensation in accordance with SFAS 123R for the three months and nine months ended September 30, 2005:
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||
|
Net loss, as reported |
|
$ |
(432,000 |
) |
$ |
(1,997,000 |
) |
|
Deduct: Total stock-based employee compensation |
|
|
|
|
|
|
|
|
expense determined under fair value based |
|
|
|
|
|
|
|
|
methods for all awards |
|
|
110,000 |
|
|
424,000 |
|
|
Pro forma net loss |
|
$ |
(542,000 |
) |
$ |
(2,421,000 |
) |
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.03 |
) |
$ |
(0.13 |
) |
|
Pro forma |
|
$ |
(0.03 |
) |
$ |
(0.16 |
) |
8
The Company uses the Black-Scholes option-pricing model to estimate fair value of stock-based awards with the following weighted average assumptions:
|
Nine Months Ended September 30 |
|
2006 |
|
2005 |
|
|
|
|
|
|
|
|
|
Stock Options: |
|
|
|
|
|
|
Expected life (years) |
|
2.66 |
|
3.00 |
|
|
Expected volatility |
|
63 |
% |
70 |
% |
|
Dividend yield |
|
0 |
% |
0 |
% |
|
Risk-free interest rate |
|
4.91 |
% |
3.70 |
% |
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 and expected future volatility of the Company’s stock. The Company has not historically issued any dividends and does not expect to in the future.
Stock option activity is summarized as follows:
|
|
|
Shares |
|
Exercise |
|
Weighted |
| |||||
|
Outstanding at December 31, 2005 |
|
1,859,329 |
|
$ |
0.58 |
– |
$ |
11.36 |
|
$ |
4.22 |
|
|
Granted |
|
594,700 |
|
$ |
0.84 |
– |
$ |
3.27 |
|
$ |
1.17 |
|
|
Exercised |
|
(109,999 |
) |
$ |
0.96 |
– |
$ |
1.72 |
|
$ |
1.54 |
|
|
Cancellations |
|
(313,800 |
) |
$ |
0.96 |
– |
$ |
8.25 |
|
$ |
3.45 |
|
|
Outstanding at September 30, 2006 |
|
2,030,230 |
|
$ |
0.58 |
– |
$ |
11.36 |
|
$ |
3.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at September 30, 2006 |
|
1,219,287 |
|
$ |
0.58 |
– |
$ |
11.36 |
|
$ |
5.24 |
|
Options outstanding at September 30, 2006 had a weighted average remaining life of 7.22 years and an aggregate intrinsic value of $3,607,000. Options exercisable at September 30, 2006 had a weighted average remaining life of 5.88 years and an aggregate intrinsic value of $1,262,000.
The following table summarizes information about the stock options outstanding at September 30, 2006:
|
|
|
Options Outstanding |
|
Options Exercisable |
| ||||||||||||
|
Ranges of Exercise |
|
Number |
|
Weighted Average Remaining |
|
Weighted Average Exercise Price |
|
Number Exercisable at |
|
Weighted Average Exercise Price |
| ||||||
|
$ |
0.58 |
– |
$ |
0.96 |
|
479,134 |
|
7.81 years |
|
$ |
0.88 |
|
185,326 |
|
$ |
0.90 |
|
|
|
0.97 |
– |
|
1.17 |
|
600 |
|
8.98 years |
|
|
1.06 |
|
66 |
|
|
1.17 |
|
|
|
1.18 |
– |
|
1.19 |
|
425,000 |
|
9.62 years |
|
|
1.19 |
|
15,000 |
|
|
1.19 |
|
|
|
1.20 |
– |
|
1.95 |
|
351,567 |
|
7.87 years |
|
|
1.44 |
|
256,566 |
|
|
1.48 |
|
|
|
1.96 |
– |
|
7.87 |
|
467,729 |
|
4.97 years |
|
|
6.43 |
|
456,129 |
|
|
6.52 |
|
|
|
7.88 |
– |
|
11.36 |
|
306,200 |
|
5.66 years |
|
|
9.31 |
|
306,200 |
|
|
9.31 |
|
|
$ |
0.58 |
– |
$ |
11.36 |
|
2,030,230 |
|
7.22 years |
|
$ |
3.59 |
|
1,219,287 |
|
$ |
5.24 |
|
9
Options outstanding under the Option Plans expire at various dates during the period February 2009 through September 2016.
As of September 30, 2006, there was $258,000 of total unrecognized compensation costs related to the outstanding stock options which is expected to be recognized over a weighted average period of 1.42 years.
At September 30, 2006, a total of 221,400 shares were available for grant under the Option Plans.
Net Income (Loss) Per Share. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average shares outstanding and excludes any dilutive effects of options, warrants and convertible securities. Diluted net income per share gives effect to all diluted potential common shares outstanding during the period. Options and warrants to purchase approximately 762,000 and 2,219,000 shares of common stock with weighted average exercise prices of $7.64 and $4.07 were outstanding at September 30, 2006 and 2005 and were not included in the computation of common stock equivalents for the three months ended September 30, 2006 and 2005 because their exercise prices were higher than the average fair market value of the common shares during the reporting period. Options and warrants to purchase approximately 1,181,000 and 1,747,000 shares of common stock with weighted average exercise prices of $5.96 and $4.92 were outstanding at September 30, 2006 and 2005 and were not included in the computation of common stock equivalents for the nine months ended September 30, 2006 and 2005 because their exercise prices were higher than the average fair market value of the common shares during the reporting period. For the nine months ended September 30, 2005, the effect of options and warrants was anti-dilutive due to the net loss incurred during the period. Had net income been achieved, approximately 48,000 of common stock equivalents would have been included in the computation of diluted net income per share.
Weighted average common shares outstanding for the three and nine months ended September 30, 2006 and 2005 were as follows:
|
|
|
Three Months Ended |
|
Nine Months Ended September 30 |
| ||||
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
Denominator for basic net income (loss) per share – weighted average shares |
|
15,104,000 |
|
15,002,000 |
|
15,074,000 |
|
15,002,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
Stock options and warrants |
|
793,000 |
|
— |
|
334,000 |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net income (loss) per share – adjusted weighted average shares |
|
15,897,000 |
|
15,002,000 |
|
15,408,000 |
|
15,002,000 |
|
|
2. |
Line of Credit. On September 16, 2004, the Company entered into a Financing Agreement, Security Agreement and Revolving Note (collectively, “the Credit Agreement”) with Marquette Business Credit, Inc. that initially provided for borrowings up to $1,500,000 for twelve months, subject to collateral availability. The borrowings are secured by all of the Company’s assets. The Credit Agreement provides that borrowings will bear interest at 2.5% over prime, with a minimum monthly interest charge of $2,500, and an annual fee of 1% of the Revolving Note payable. The Credit Agreement includes various other customary terms and conditions. On November 22, 2004, the Company entered into an amendment to the Credit Agreement to extend the term to April 30, 2006, and on May 8, 2006, the Company entered into a second amendment to the Credit Agreement to extend the term to April 30, 2007. Borrowings of $164,000 were outstanding with an effective rate of 10.75% as of September 30, 2006. |
10
|
3. |
Commitments and Contingencies. |
Legal. In August 2000, News America Marketing In-Store, Inc. (News America), brought suit against the Company in U.S. District Court in New York, New York. The case was settled in November 2002. The terms of the settlement agreement are confidential. The settlement did not impact the Company’s operating results.
In October 2003, News America brought suit against the Company in U.S. District Court in New York, New York, alleging that the Company has engaged in deceptive acts and practices, has interfered with existing business relationships with retailers and prospective economic advantage, and has engaged in unfair competition. The suit seeks unspecified damages and injunctive relief. The Company filed a motion to dismiss in February 2004. In June 2004, News America amended the suit against the Company and the Company filed an amended motion to dismiss in August 2004. The Company is awaiting decision by the Court. Discovery has been stayed in this action. If the Company is required to pay a significant amount in settlement or damages, it will have a material adverse effect on its operations and financial condition. In addition, a negative outcome of this litigation could affect long-term competitive aspects of the Company’s business. Management believes the allegations are without merit and that the Company will prevail.
On September 23, 2004, the Company brought suit against News America and Albertson’s Inc. in Federal District Court in Minneapolis, Minnesota, for violations of federal and state antitrust and false advertising laws, alleging that News America has acquired and maintained monopoly power through various wrongful acts designed to harm the Company in the in-store advertising and promotion products and services market. The suit seeks injunctive relief sufficient to prevent further antitrust injury and an award of treble damages to be determined at trial for the harm caused to the Company. On June 30, 2006 the Court denied the motions of News America and Albertson’s to dismiss the suit. On September 20, 2006, the State of Minnesota through its Attorney General intervened as a co-plaintiff in the business disparagement portion of the Minnesota case. The parties are now engaged in pre-trial discovery.
Management currently expects the amount of legal fees that will be incurred in connection with the ongoing lawsuits to be significant throughout 2006. During the nine months ended September 30, 2006, the Company incurred legal fees of $695,000 related to the News America litigation.
In September 2005, the Company brought a suit against Paul A. Richards and his company in Federal District Court in Minneapolis, Minnesota, alleging fraud and misrepresentation related to the 2002 VALUStix acquisition and asking that the acquisition be rescinded and all parties restored to their pre-acquisition status. The goodwill associated with the acquisition was written off by the Company in the fourth quarter of 2003 and the second quarter of 2004. The suit was settled in June 2006 with terms including mutual releases and payment of $100,000 to the Company in exchange for certain assets.
The Company is subject to various legal proceedings in the normal course of business. Management believes the outcome of these proceedings will not have a material adverse effect on the Company’s financial position or results of operations.
Retailer Agreements. The Company has contracts in the normal course of business with various retailers, some of which provide for minimum annual program levels. If those minimum levels are not met, the Company is obligated to pay the contractual difference to the retailers. The Company calculates these estimated minimum payments based on actual activity to date. Due to the annual nature of these contracts, increased activity with these retailers in subsequent fiscal quarters could decrease the estimated payment amounts recorded in the current period. During the nine months ended September 30, 2005, the Company incurred approximately $1,743,000 of costs related to these minimums. There was no expense in 2006 related to these minimums as the Company had met the minimum requirements. The amounts were recorded in Cost of Services in the Statements of Operations.
11
|
4. |
Concentrations. During the nine months ended September 30, 2006, two customers accounted for 27% and 10% of the Company’s total net sales. At September 30, 2006, one of these customers represented 36% of the Company’s total accounts receivable. During the nine months ended September 30, 2005, these two customers accounted for 14% and 17% of the Company’s total net sales. |
Although there are a number of customers that the Company sells to, the loss of a major customer could cause a delay in and possible loss of sales, which would adversely affect operating results.
|
5. |
Income Taxes. At December 31, 2005, the Company had net operating loss carryforwards of approximately $24,000,000, which are available to offset future taxable income. These carryforwards are subject to the limitations of Internal Revenue Code Section 382 which provides limitations on the availability of net operating losses to offset current taxable income if an ownership change has occurred as defined by the Code. The Company has established a valuation allowance against all deferred tax assets due to the uncertainties regarding the realization of the deferred tax assets based upon the Company’s lack of historical earnings. Readers should refer to Note 7 of the Company’s Financial Statements on Form 10-K for the year ended December 31, 2005, for additional information related to income taxes. |
The Company recorded no income tax expense for the quarter and nine months ended September 30, 2006, as it believes it has sufficient net operating losses available to offset taxable net income and continues to provide a full valuation allowance against all deferred tax assets as of September 30, 2006.
|
6. |
New Accounting Pronouncements. |
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements: In September 2006, the U.S. Securities and Exchange Commission staff issued Staff Accounting Bulletin No. 108 (SAB 108), Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 eliminates the diversity of practice regarding how public companies quantify financial statement misstatements. It establishes an approach that requires quantification of financial statement misstatements based on the effects of the misstatements on each of the company’s financial statements and the related financial statement disclosures. SAB 108 must be applied to annual financial statements for their first fiscal year ending after November 15, 2006. We do not expect SAB 108 to have a material impact on our financial condition or results of operations.
Accounting for Uncertainty in Income Taxes: In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109 which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that we recognize in our financial statements the impact of a tax position if that position is more likely than not to be sustained upon audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of our 2007 fiscal year, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. We are currently evaluating the impact of adopting FIN 48 on our financial statements.
12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Insignia Systems, Inc. markets in-store advertising programs, services and products to retailers and consumer packaged goods manufacturers. The Company’s services and products include the Insignia Point-of-Purchase Services (POPS) in-store advertising program, thermal sign card supplies for the Company’s SIGNright and Impulse systems, Stylus software and laser printable cardstock and label supplies.
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.
|
|
|
Three Months Ended |
|
Nine Months Ended |
| ||||
|
|
|
2006 |
|
2005 |
|
2006 |
|
2005 |
|
|
Net sales |
|
100.0 |
% |
100.0 |
% |
100.0 |
% |
100.0 |
% |
|
Cost of sales |
|
49.1 |
|
62.5 |
|
46.3 |
|
62.8 |
|
|
Gross profit |
|
50.9 |
|
37.5 |
|
53.7 |
|
37.2 |
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
Selling |
|
23.0 |
|
27.2 |
|
22.1 |
|
27.6 |
|
|
Marketing |
|
5.2 |
|
4.7 |
|
4.6 |
|
5.8 |
|
|
General and administrative |
|
18.3 |
|
14.0 |
|
16.3 |
|
16.6 |
|
|
Total operating expenses |
|
46.5 |
|
45.9 |
|
43.0 |
|
50.0 |
|
|
Operating income (loss) |
|
4.4 |
|
(8.4 |
) |
10.7 |
|
(12.8 |
) |
|
Other income (expense) |
|
— |
|
0.2 |
|
0.4 |
|
— |
|
|
Net income (loss) |
|
4.4 |
% |
(8.2 |
)% |
11.1 |
% |
(12.8 |
)% |
The Company experienced an increase in net sales in the first nine months of 2006 compared to the first nine months of 2005 due to increased revenue from POPSign programs which more than offset declines in products sold. Additionally, the Company instituted a number of cost reduction measures in late 2005 and renewed several retailer agreements in 2006 which resulted in reduced retailer expense. All of these factors contributed to profitability during the nine months ended September 30, 2006, as compared to losses in the previous year.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are described in Note 1 to the annual financial statements as of and for the year ended December 31, 2005, included in our Form 10-K filed with the Securities and Exchange Commission on March 30, 2006. We believe our most critical accounting policies and estimates include the following:
|
|
• |
revenue recognition; |
|
|
• |
allowance for doubtful accounts; |
|
|
• |
inventory valuation; |
|
|
• |
accounting for deferred income taxes; |
|
|
• |
valuation of long-lived and intangible assets; |
|
|
• |
accounting for accrued retailer guarantees; and |
|
|
• |
stock-based compensation. |
13
Three and Nine Months ended September 30, 2006 Compared to Three and Nine Months Ended September 30, 2005
Net Sales. Net sales for the three months ended September 30, 2006, decreased 3.3% to $5,112,000 compared to $5,285,000 for the three months ended September 30, 2005. Net sales for the nine months ended September 30, 2006, increased 4.7% to $16,387,000 compared to $15,653,000 for the nine months ended September 30, 2005.
Service revenues from our POPSign programs for the three months ended September 30, 2006, decreased 1.0% to $4,452,000 compared to $4,498,000 for the three months ended September 30, 2005. The decrease was primarily due to a decrease in the number of POPSign programs sold to customers (consumer packaged goods manufacturers) during the period, partially offset by a change in the sales mix towards higher-priced custom POPSign programs. Service revenues from our POPSign programs for the nine months ended September 30, 2006, increased 7.7% to $14,294,000 compared to $13,276,000 for the nine months ended September 30, 2005. The increase was primarily due to a change in the sales mix towards higher-priced custom POPSign programs sold to customers during the periods which more than offset a decrease in the number of POPSign programs.
Product sales for the three months ended September 30, 2006, decreased 16.1% to $660,000 compared to $787,000 for the three months ended September 30, 2005. Product sales for the nine months ended September 30, 2006, decreased 11.9% to $2,093,000 compared to $2,377,000 for the nine months ended September 30, 2005. The decreases were primarily due to decreasing sales of our other product categories based on decreased demand for those products from our customers.
Gross Profit. Gross profit for the three months ended September 30, 2006, increased 31.3% to $2,600,000 compared to $1,980,000 for the three months ended September 30, 2005. Gross profit for the nine months ended September 30, 2006, increased 51.3% to $8,806,000 compared to $5,820,000 for the nine months ended September 30, 2005. Gross profit as a percentage of total net sales increased to 50.9% for the three months ended September 30, 2006, compared to 37.5% for the three months ended September 30, 2005. Gross profit as a percentage of total net sales increased to 53.7% for the nine months ended September 30, 2006, compared to 37.2% for the nine months ended September 30, 2005.
Gross profit from our POPSign program revenues for the three months ended September 30, 2006, increased 44.1% to $2,339,000 compared to $1,623,000 for the three months ended September 30, 2005. Gross profit from our POPSign program revenues for the nine months ended September 30, 2006, increased 68.3% to $7,934,000 compared to $4,715,000 for the nine months ended September 30, 2005. The increases were primarily due to the effect of reduced retailer expense and other cost reductions in both the three months and nine months ended September 30, 2006, combined with increased revenues in the nine months ended September 30, 2006. Gross profit as a percentage of POPSign program revenues for the three months ended September 30, 2006, increased to 52.5% compared to 36.1% for the three months ended September 30, 2005. Gross profit as a percentage of POPSign program revenues for the nine months ended September 30, 2006, increased to 55.5%, compared to 35.5% for the nine months ended September 30, 2005. The increases were due to the factors discussed above.
14
Gross profit from our product sales for the three months ended September 30, 2006, decreased 26.9% to $261,000 compared to $357,000 for the three months ended September 30, 2005. Gross profit from our product sales for the nine months ended September 30, 2006, decreased 21.1% to $872,000 compared to $1,105,000 for the nine months ended September 30, 2005. The decreases in gross profit were primarily due to decreased sales of our products based on decreased demand for those products from our customers. Gross profit as a percentage of product sales was 39.6% for the three months ended September 30, 2006, compared to 45.4% for the three months ended September 30, 2005. Gross profit as a percentage of product sales was 41.7% for the nine months ended September 30, 2006, compared to 46.5% for the nine months ended September 30, 2005. The decreases in gross profit percentages were primarily due to decreases in sales of higher margin products and the effect of fixed costs on decreased sales.
Operating Expenses
Selling. Selling expenses for the three months ended September 30, 2006, decreased 18.4% to $1,174,000 compared to $1,438,000 for the three months ended September 30, 2005, primarily due to sales force reductions in December of 2005 and decreased third-party compliance costs. Selling expenses for the nine months ended September 30, 2006, decreased 16.2% to $3,615,000 compared to $4,316,000 for the nine months ended September 30, 2005, primarily due to the factors described above which were partially offset by increased sales commissions due to increased sales.
Selling expenses as a percentage of total net sales decreased to 23.0% for the three months ended September 30, 2006, compared to 27.2% for the three months ended September 30, 2005, due to the factors discussed above. Selling expenses as a percentage of total net sales decreased to 22.1% for the nine months ended September 30, 2006, compared to 27.6% for the nine months ended September 30, 2005, due to factors described above combined with the effect of increased sales.
Marketing. Marketing expenses for the three months ended September 30, 2006, increased 7.7% to $265,000 compared to $246,000 for the three months ended September 30, 2005, primarily due to increased data acquisition costs. Marketing expenses for the nine months ended September 30, 2006, decreased 17.2% to $754,000 compared to $911,000 for the nine months ended September 30, 2005, primarily due to reductions in staff, decreased out-sourced data analysis and reduced advertising expense.
Marketing expenses as a percentage of total net sales increased to 5.2% for the three months ended September 30, 2006, compared to 4.7% for the three months ended September 30, 2005, primarily due to the factor discussed above. Marketing expenses as a percentage of total net sales decreased to 4.6% for the nine months ended September 30, 2006, compared to 5.8% for the nine months ended September 30, 2005, primarily due to the factors discussed above, combined with the effect of higher net sales during the nine months ended September 30, 2006.
General and administrative. General and administrative expenses for the three months ended September 30, 2006, increased 26.5% to $935,000 compared to $739,000 for the three months ended September 30, 2005, primarily due to increased public relations expense, temporary staffing costs in 2006, and stock-based compensation costs recognized in 2006 due to the adoption of SFAS 123R. General and administrative expenses for the nine months ended September 30, 2006 increased 2.7% to $2,686,000 compared to $2,615,000 for the nine months ended September 30, 2005, primarily due to increased public relations expense, temporary staffing costs in 2006, and stock-based compensation costs recognized in 2006 due to the adoption of SFAS 123R, which were partially offset by decreased legal costs in 2006.
General and administrative expenses as a percentage of total net sales increased to 18.3% for the three months ended September 30, 2006, compared to 14.0% for the three months ended September 30, 2005, primarily due to the factors described above. General and administrative expenses as a percentage of total net sales decreased to 16.3% for the nine months ended September 30, 2006, compared to 16.7% for the nine months ended September 30, 2005. The decrease was primarily due to factors discussed above and the effect of higher net sales during the nine months ended September 30, 2006.
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Legal fees for the three months ended September 30, 2006, were $322,000 compared to $235,000 for the three months ended September 30, 2005. Legal fees for the nine months ended September 30, 2006, were $833,000 compared to $995,000 for the nine months ended September 30, 2005. The legal fees in each period were incurred primarily in connection with two News America lawsuits described in Note 3 to the financial statements. We currently expect the amount of additional legal fees that will be incurred in connection with the ongoing lawsuits to be significant throughout the remainder of 2006. Also, if the Company is required to pay a significant amount in settlement or damages, it will have a material adverse effect on its operations and financial condition. In addition, a negative outcome of this litigation could affect long-term competitive aspects of the Company’s business.
Other Income (Expense). Other income for the three months ended September 30, 2006, was $2,000 compared to $11,000 for the three months ended September 30, 2005. Other income for the nine months ended September 30, 2006, was $65,000 compared to $25,000 for the nine months ended September 30, 2005. Other income for the nine months ended September 30, 2006, includes $100,000 from the sale of certain assets per the terms of the settlement agreement with Paul Richards and his company (see Note 3 to the financial statements). Higher interest income in the three months and nine months ended September 30, 2006, versus the three and nine months ended September 30, 2005, is the result of higher interest rates and higher cash balances during the 2006 periods. Interest expense in the three months and nine months ended September 30, 2006, also includes interest expense related to an agreement reached with a retailer effective December 31, 2005, for the deferred payment of certain obligations.
Net Income (Loss). Net income for the three months ended September 30, 2006, was $228,000 compared to a net loss of $(432,000) for the three months ended September 30, 2005. Net income for the nine months ended September 30, 2006, was $1,816,000 compared to a net loss of $(1,997,000) for the nine months ended September 30, 2005.
Liquidity and Capital Resources
The Company has financed its operations with proceeds from public and private stock sales and sales of its services and products. At September 30, 2006, working capital was $4,494,000 compared to $2,592,000 at December 31, 2005. During the nine months ended September 30, 2006, cash and cash equivalents increased $669,000 to $3,380,000 at September 30, 2006, compared to $2,711,000 at December 31, 2005.
Net cash provided by operating activities during the nine months ended September 30, 2006, was $840,000. The increase was primarily due to net income during the period partially offset by the payment of retailer obligations which were recorded at December 31, 2005, and other changes in working capital items. Accounts receivable increased $709,000 during the nine months ended September 30, 2006, due to higher net sales in August and September of 2006, compared to net sales in November and December of 2005. Accounts payable and accrued liabilities decreased $557,000 during the nine month period primarily as a result of the payment of retailer obligations which were recorded at December 31, 2005. The Company expects accounts receivable and accounts payable to fluctuate during 2006 depending on the level of quarterly POPSign revenues.
Net cash of $194,000 was used in investing activities during the nine months ended September 30, 2006, due to the purchase of property and equipment, primarily the purchase of two previously leased digital printers and information technology hardware and software expenditures. The company expects total capital expenditures in 2006 to approach $250,000 with the remaining expenditures for the year to be primarily related to information technology hardware and software investments.
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Net cash of $23,000 was provided by financing activities during the nine months ended September 30, 2006, as a result of the payment of $145,000 of principal on long-term liabilities offset partially by $32,000 of additional advances on the line of credit and $136,000 of proceeds from the issuance of common stock, net of expenses. The Company has maintained a line of credit balance sufficient to generate interest charges to cover the required monthly minimum fee. The common stock issuances were the result of stock option exercises and shares issued from the Employee Stock Purchase Plan.
The Company anticipates that its working capital needs for the remainder of 2006 will remain consistent with the first nine months of 2006. The Company believes that based upon current business conditions, its existing cash balance, future cash from operations and borrowings on the line of credit will be sufficient for its cash requirements in the foreseeable future. However, there can be no assurances that this will occur or that the Company will be able to secure additional financing from public or private stock sales or from other financing agreements if needed.
Cautionary Statement Regarding Forward Looking Information
Statements made in this quarterly report on Form 10-Q, in the Company’s other SEC filings, in press releases and in oral statements to shareholders and securities analysts, which are not statements of historical or current facts, are “forward looking statements.” Such forward looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results or performance of the Company to be materially different from the results or performance expressed or implied by such forward looking statements. The words “believes,” “expects,” “anticipates,” “seeks” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward looking statements, which speak only as of the date the statement was made. These statements are subject to the risks and uncertainties that could cause actual results to differ materially and adversely from the forward looking statements. These risks and uncertainties include, but are not limited to, the risks presented in our Annual Report on Form 10-K for the year ended December 31, 2005 ,and updated in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company’s periodic filings under the Exchange Act.
(b) Changes in Internal Controls Over Financial Reporting
There was no change in our internal controls over financial reporting that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
In August 2000, News America Marketing In-Store, Inc. (News America), brought suit against the Company in U.S. District Court in New York, New York. The case was settled in November 2002. The terms of the settlement agreement are confidential. The settlement did not impact the Company’s operating results.
In October 2003, News America brought suit against the Company in U.S. District Court in New York, New York, alleging that the Company has engaged in deceptive acts and practices, has interfered with existing business relationships with certain retailers and prospective economic advantage, and has engaged in unfair competition. The suit seeks unspecified damages and injunctive relief. The Company filed a motion to dismiss in February 2004. In June 2004, News America amended the suit against the Company and the Company filed an amended motion to dismiss in August 2004. The Company is awaiting decision by the Court. Discovery has been stayed in this action. Management believes the allegations are without merit and that the Company will prevail.
On September 23, 2004, the Company brought suit against News America and Albertson’s Inc. in Federal District Court in Minneapolis, Minnesota, for violations of federal and state antitrust and false advertising laws, alleging that News America has acquired and maintained monopoly power through various wrongful acts designed to harm the Company in the in-store advertising and promotion products and services market. The suit seeks injunctive relief sufficient to prevent further antitrust injury and an award of treble damages to be determined at trial for the harm caused to the Company. On June 30, 2006, the Court denied the motions of News America and Albertson’s to dismiss the suit. On September 20, 2006, the State of Minnesota through its Attorney General intervened as a co-plaintiff in the business disparagement portion of the Minnesota case. The parties are now engaged in pre-trial discovery.
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Item 1A. |
Risk Factors |
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Not applicable. |
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Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
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None. |
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Item 3. |
Defaults upon Senior Securities |
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None. |
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Item 4. |
Submission of Matters to a Vote of Security Holders |
None.
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Item 5. |
Other Information |
None.
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Item 6. |
Exhibits |
The following exhibits are included herewith:
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31.1 |
Certification of Principal Executive Officer |
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31.2 |
Certification of Principal Financial Officer |
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32 |
Section 1350 Certification |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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Dated: November 13, 2006 |
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Insignia Systems, Inc. |
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(Registrant) |
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Scott F. Drill |
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/s/ Justin W. Shireman |
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Justin W. Shireman Vice President, Finance and Chief Financial Officer (principal financial officer) |
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EXHIBIT INDEX
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31.1 |
Certification of Principal Executive Officer |
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31.2 |
Certification of Principal Financial Officer |
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32 |
Section 1350 Certification |
20