LENDWAY, INC. - Annual Report: 2021 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________

FORM 10-K

 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

Securities Registered Pursuant to Section 12(b) of the Act:

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.

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, 2021) was approximately $5,460,000 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, 2022 was 1,786,296.

DOCUMENTS INCORPORATED BY REFERENCE: 

Portions of the registrant’s definitive proxy for its 2022 Annual Meeting of Shareholders are incorporated by reference into Part III.

TABLE OF CONTENTS

PART I.

Item 1. Business

General

Insignia Systems, Inc. (“Insignia,” “we,” “us,” “our” and the “Company”) was incorporated in Minnesota in 1990. We are a leading provider of in-store advertising solutions to brands, retailers, shopper marketing agencies and brokerages (“clients”). We believe our products and services are attractive to our clients because of our ability to navigate the complex retail landscape, to customize our solutions down to store level, to execute with excellence and the results our solutions deliver. Our leadership and employees have extensive industry knowledge, including direct experience through former positions at consumer-packaged goods (“CPG”) manufacturers and retailers. We provide marketing solutions to brands spanning from some of the largest multinationals to new and emerging brands.

For retailers and brands 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 take the relationships we have with our clients and vendor partnerships very seriously by having our team stretch the extra mile to ensure flawless execution. We sincerely approach our projects with the same passion as our clients do. 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 our delivery of superior customer service that our clients deserve. Our in-store solutions are 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.

Up until 2020, our primary solution had 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. Primarily as a result of competitive pressures and most recently due to COVID-19, our in-store signage business has declined and become less of a focus in our growth. Beginning in 2018 we began developing and offering 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 brands, retailers and their agents as their business strategies evolve behind an ever-changing retail landscape. Over the course of 2021 based on client feedback, business results and expanded team capabilities our primary focus is now on in-store solutions, resulting in our decision to exit digital solutions in addition to right-sizing our in-store signage portfolio. With our diversification of business, we recognized over 75% of our revenue from these recently developed solutions in 2021.

In the last half of 2020 we outsourced most of our printing and IT operations. In 2021 we relocated our headquarters and operations, both to smaller, more efficient leased spaces. These changes have allowed us to not only significantly reduce lease expense but also adapt to a hybrid work environment due to COVID-19 and move closer in proximity to multiple clients and vendor partners. The new office spaces also enhance our ability to recruit top talent based on the overall proximity and appeal of our locations.

Our 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 is 7308 Aspen Lane North, Suite 153, Minneapolis, Minnesota 55428; telephone 763-392-6200.

Industry and Market Background

Our industry continues to rapidly evolve in several ways:

Despite continued rapid growth in e-commerce, both retailers and brands are actively seeking to grow their brands in physical stores. We continue to execute programs for brands who started as direct-to-consumer (DTC) brands and are launching in physical stores, as well as brands launching for the first time. On the retail side, many of the top US retailers have recently renovated their stores to deliver a multi-service approach, whether their shoppers are coming in-store to shop traditionally, picking up in-store or waiting in the parking lot for their order. Driving traffic to stores and giving shoppers a reason to come into their stores and shop are extremely important. 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. Brands 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.

Product Solutions

Since the Company’s inception in 1990, we have worked closely with our clients to understand their evolving needs and introduce solutions that help them achieve their business strategies. Historically, 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 primarily due to competitive pressures while our non-POPS solutions have significantly expanded as we have developed our portfolio to meet the needs of our clients and execution partners more holistically. For example, our in-store signage solutions represented approximately 25% of our total net sales for 2021, compared to 44% of our total net sales in 2020.

Marketing and Sales

Our highly skilled direct sales and marketing teams are a major asset for the organization with their deep knowledge of brands and retailers.

Our sales team is focused on:

Our marketing team is focused on the following:

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 and Grocery 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 2022.

Competition

As we have diversified our portfolio, our competition has as well. Historically on our in-store signage business, we had one main competitor, News America (which has been sold to Neptune Retail Solutions). We observed increased competition in growing and maintaining our network of retailers into which we are authorized to sell solutions as a result of our competitor continuing to purchase new exclusive arrangements or extend existing exclusive arrangements with retailers for that purpose. 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”). In short, the Company 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 lawsuit is described further in Item 3 of Part I of this report. With our expanded merchandising and on-pack solutions, the competitive landscape is much more diverse and broad and our results vary based on what the client’s priority is whether that is price, design or execution.

We believe our primary competitive strengths include:

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 Boxtalk^TM. 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 meet the needs of our clients and execution partners more holistically.

Business Plan

Our strategic plan, seeks to differentiate Insignia from our competition, situate Insignia for growth within our industry and better protect Insignia from competitive response through our overall portfolio diversification. The strategic plan consists of:

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.

Customers

We are a leading provider of in-store 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 brands are fast moving with products that would be found in grocery, mass and drug channels.

During 2021, two CPG manufacturers accounted for 15% and 12% of our total net sales, respectively. During 2020, one CPG manufacturer accounted for 14% of our total net sales. At December 31, 2021, two CPG manufacturers represented 25% and 19% of the Company’s total accounts receivable, respectively. At December 31, 2020, two CPG manufacturers represented 17% and 10% of the Company’s total accounts receivable, respectively.

Our sales historically have fluctuated from period to period, primarily because of:

Environmental Matters

We believe our operations follow 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 32 employees, of which 31 were full-time employees, as of March 8, 2022. 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. We also strive to create a work environment that employees are proud to be a part of.

Segment Reporting

The Company operates in a single reportable segment.

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 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.

We face significant competition from News America (which has been sold to Neptune Retail Solutions), 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. Because our competition has continued to develop and extend their exclusive relationships with both our current as well as prospective retailers our revenues and related operations have been adversely affected.

We Have Been, and Are, Party to Significant Litigation

We were involved in significant litigation with News America between 2003 and 2011. In 2011, we entered into a Settlement Agreement with News America to resolve the antitrust and false advertising lawsuit that had been outstanding for several years.

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. 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.

Following the close of discovery, on August 27, 2021, News America moved for summary judgment on Insignia’s claims. On September 17, 2021, Insignia filed its response opposing summary judgment. On October 1, 2021, News America filed its reply brief. The court cancelled a hearing on the motion originally scheduled for January 26, 2022, and referred the case to mediation. News America’s summary judgment motion remains pending. At this stage of the proceedings, the Company is unable to determine the likelihood of an unfavorable outcome or estimate any potential resulting liability.

STRATEGIC RISKS

Our Growth Is Dependent on Our Ability to Successfully Develop and Design 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 solutions 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 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. As a result, 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.

We Face a Number of Risks Associated With Potential Strategic Alternatives

As announced in December 2021, we have commenced a formal process to explore strategic options to maximize shareholder value. We intend to use reasonable efforts to identify and evaluate potential transactions. Such activities are accompanied by risks commonly encountered in pursuing and completing such transactions, including, but not limited to, increased expenses associated with the process. Failure to manage the process to a desirable outcome could harm our business, our strategy and our operating results in a material way.

We are in a highly competitive market for a small number of business opportunities, which could reduce the likelihood of consummating one or more strategic alternatives. We are and will continue to be one of many participants in the pool of companies exploring strategic alternatives. A large number of established and well-financed entities, including special purpose acquisition companies, other public companies and venture capital firms, are active in mergers and acquisitions of companies that may be competing for similar opportunities or desirable target candidates as us. Nearly all these entities have significantly greater financial resources, technical expertise, and managerial capabilities than we do; consequently, we are at a competitive disadvantage in identifying possible business opportunities and successfully completing a business combination. These competitive factors may reduce the likelihood of our identifying and consummating one or more strategic alternatives.

While we are committed to exploring strategic options to maximize shareholder value, our management remains dedicated to operating our existing business and operations. This and other limitations on time and resources may adversely impact our ability to identify and consummate a successful strategic alternative. No assurances can be given that we will successfully identify and evaluate suitable business opportunities or that we will consummate any transaction. We cannot guarantee that we will be able to negotiate a business combination or other transaction on favorable terms.

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. Additionally, 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 because of the COVID-19 pandemic or otherwise, may reduce demand or depress pricing for our products and services and have an adverse effect on our results of operations. 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 during the COVID-19 pandemic. 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.

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. 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. As a result, the financial impact to our operating results cannot be reasonably estimated; however, 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 Material Weaknesses in Our Internal Control Over Financial Reporting During the Past Three Years. 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.

The Company had a material weakness at December 31, 2020 related to sales tax accounting that was remediated as of December 31, 2021 and had a material weakness at December 31, 2019 related to impairment testing that we performed in accordance with ASC 360, Property, Plant, and Equipment that was remediated as of December 31, 2020.

In connection with the material weakness identified related to sales tax accounting, we 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 for the year ended December 31, 2020. The existence of one or more material weaknesses precludes a conclusion by management that a company’s internal control over financial reporting is effective.

In response to these identified material weaknesses, our management, with the oversight of the Audit Committee of our Board of Directors, has dedicated significant resources, including the involvement of outside advisors, in efforts to improve our internal control over financial reporting. If we fail to 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. We cannot assure you that the measures we have taken to date, and actions we may take in the future, will prevent or avoid potential future material weaknesses. If we are unable to maintain effective 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.

We May Not Be Able to Generate Enough Cash or Secure Enough Capital to Execute Our Future Business Plans

The Company has experienced net losses and used significant cash in operations in each of the last three years and there is uncertainty regarding our ability to achieve and maintain profitability. Although the Company is continuing to explore strategic alternatives to maximize shareholder value and management has taken actions to reduce cash use, we cannot be sure these actions will sufficiently reduce or eliminate future losses. While we believe the Company has adequate cash to meet its liquidity needs for at least the next 12 months, if cash flows from operations together with cash and cash equivalents are not sufficient to fund our operations and any necessary capital expenditures in the longer term, and we are unable to secure alternative sources of financing on terms acceptable to us, then our results of operations, financial condition and liquidity would be materially adversely affected.

We may pursue debt, equity or other forms of financing to supplement our current capital resources. Our ability to obtain additional financing will depend upon a number of factors, including our future performance and financial results, the status of the strategic alternatives exploration process and our pending litigation, and general economic and capital market conditions. We may not be able to maintain adequate capital or raise additional capital on reasonable terms or at all, if needed.

Our Outsourcing Arrangements May Not Yield the Desired Efficiencies Within Our Planned Timeline, If At All

We have 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 production operations that are necessary to conduct our 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, 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:

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 2021, the sale prices of our common stock as reported by The Nasdaq Stock Market ranged from a low of $4.76 to a high of $35.50. 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.

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. 

Item 1B. Unresolved Staff Comments

Smaller reporting companies are not required to provide disclosure pursuant to this Item.

Item 2. Properties

The Company has a lease for its corporate headquarters in downtown Minneapolis, Minnesota which expires July 31, 2024, and a lease for warehouse space in a suburb of Minneapolis which expires March 31, 2023. The headquarters lease is for 2,850 square feet and the warehouse lease is for 2,560 square feet.

Item 3. Legal Proceedings

See Item 8, Footnote 5. Risk Factors of this report for a detailed description of the Company’s lawsuit with News America.

Item 4. Mine Safety Disclosures

Not applicable.

PART II.

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information and Holders

The Company’s common stock is listed on the Nasdaq Capital Market under the symbol ISIG.

As of March 8, 2022, our common stock was held by approximately 109 holders of record.

Dividends

The Company has not historically paid dividends, other than two one-time special dividends declared in 2011 and 2016. The Board of Directors periodically evaluates our ability to pay dividends in light of our financial condition. The Company intends to retain earnings from operations for use in advancing our business strategy; however, we may consider special dividends in the future depending on outcomes of actions such as legal proceedings.

Item 6. [Reserved]

Not applicable.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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. 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.

Overview

We are a leading provider of in-store advertising solutions to brands, retailers, shopper marketing agencies and brokerages (“clients”). We believe our products and services are attractive to our clients because of our ability to navigate the complex retail landscape, customize our solutions down to store level, execute with excellence 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 brands spanning from some of the largest multinationals to new and emerging brands. 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 2021 non-POPS solutions revenue growing 61% versus 2020, and also resulted in our POPS signage solutions declining to approximately 24% of our total net sales for 2021, compared to 44% of our total net sales in 2020. We remain committed to further refining and enhancing our solutions and broadening our retailer relationships.

We continue to optimize costs on our core signage business.  The Company implemented a plan to restructure its operations in December 2021, including workforce reductions and other cost-saving initiatives. These changes are expected to result in approximately $500,000 of savings in 2022.  We have also worked with our retail partners to optimize our overall fixed expenses on our POPS business. These changes will contribute significant savings to our 2022 plan.

We are also continuing to explore strategic options to maximize shareholder value. Potential strategic alternatives that may be evaluated include, but are not limited to, an acquisition, merger, business combination, in-licensing, or other strategic transaction. There can be no assurance that this process will result in any transaction.

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 because of quarantines, illnesses, and travel and logistics restrictions. 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. While the impact of COVID-19 moderated to some extent in 2021, we believe it negatively impacted our business in the current year. Our future bookings may be negatively impacted until the COVID-19 pandemic subsides. 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 if the COVID-19 pandemic moderates further, we may continue to experience adverse impacts on our business because of any economic recession or depression that has occurred or may occur. 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.

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.

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

Net Sales. Net sales for the year ended December 31, 2021 increased 11.6% to $19,503,000, compared to $17,482,000 for the year ended December 31, 2020.

Service revenues. Service revenues for the year ended December 31, 2021 increased 15.4% to $19,503,000, compared to $16,904,000 for the year ended December 31, 2020. The increase was due to a 60.9% increase in non-POPS revenue, partially offset by a decrease in POPS solutions revenue of 38.6% for the year ended December 31, 2021. For the year ended December 31, 2021, non-POPS revenue increased due to both sales to new CPGs and an increase in sales to existing CPGs. Competitive pressures have resulted in decreased POPS solutions revenue for the year ended December 31, 2021 versus the year ended December 31, 2020. We expect POPS revenue will continue to decline in 2022 as we have reduced the number of stores in our network due to competitive pressures. While the negative impact from COVID-19 has lessened compared to 2020, future impacts are unknown as CPG manufacturers and retailers react to changes in shoppers’ behavior.

Product revenues. Product revenues were from the custom print business which was sold in August 2020.

Gross Profit. Gross profit for the year ended December 31, 2021 increased 13.1% to $3,230,000, compared to $2,856,000 for the year ended December 31, 2020. Gross profit as a percentage of total net sales increased to 16.5% for the year ended December 31, 2021, compared to 16.3% for the year ended December 31, 2020.

Service revenues. Gross profit from service revenues for the year ended December 31, 2021 increased 14.9% to $3,230,000, compared to $2,811,000 for the year ended December 31, 2020. The increase in gross profit was primarily due to the POPS solutions margin, in addition to a 60.9% increase in non-POPS solutions revenue for the year ended December 31, 2021. The increase in POPS solutions margin was from the Company reducing guaranteed payment obligations by renegotiating several fixed or store-based retail payment contracts to sign placement-based payment contracts during 2020.

Gross profit as a percentage of service revenues decreased to 16.5% for the year ended December 31, 2021, compared to 16.6% for the year ended December 31, 2020. The decrease was primarily due to decreased revenue from non-POPS signage solutions which tend to have higher margin rates, partially offset by increased margin rates from POPS signage due to negotiating reduced retail payment contracts, as discussed above.

Product revenues. Gross profit from product sales was from the custom print business which was sold in August 2020.

Impairment Loss – Services. There was no impairment loss impacting gross profit during the year ended December 31, 2021. Gross profit for the year ended December 31, 2020 was 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.

Operating Expenses

Selling. Selling expenses for the year ended December 31, 2021 decreased 32.9% to $1,931,000, compared to $2,877,000 for the year ended December 31, 2020, primarily due to reductions in staffing in 2020 and other decreased staff related expenses. Selling expenses as a percentage of total net sales decreased to 9.9% in 2021, compared to 16.5% in 2020, primarily due to decreased expense described above, in addition to increased sales for the year ended December 31, 2021.

Marketing. Marketing expenses for the year ended December 31, 2021 increased 1.7% to $1,032,000, compared to $1,015,000 for the year ended December 31, 2020. The increase was due to an increase in non-POPS solutions promotional activities, partially offset by decreased consulting expenses. Marketing expenses as a percentage of total net sales decreased to 5.3% in 2021, compared to 5.8% in 2020, primarily due to relatively flat expense over increased sales in 2021.

General and Administrative. General and administrative expenses for the year ended December 31, 2021 increased 26.5% to $5,058,000, compared to $3,998,000 for the year ended December 31, 2020. The increase was primarily due to expenses incurred as a result of the litigation with News America, partially offset by a reduction in staff related expenses. 2022 litigation expenses are expected to decrease in comparison to 2021 and to be similar to 2020 expenses. General and administrative expenses as a percentage of total net sales increased to 25.9% in 2021, compared to 22.8% in 2020, primarily due to the increases in expense as described above, partially offset by increased sales.

Gain on sale. There was no gain on sale during the year ended December 31, 2021. Gain on sale for the year ended December 31, 2020 was $195,000 as a result of the sale of our custom print business.

Other Income. Other income for the year ended December 31, 2021 was $1,299,000 compared to other expense of $33,000 for the year ended December 31, 2020. The increase was due to the gain on forgiveness of debt and accrued interest of $1,062,000 from the SBA forgiving the Company of its promissory note (the “Note”) with Alerus Financial, N.A. entered into pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, as well as a $273,000 benefit received under the Employee Retention Credit for the third quarter of 2021, see Item 8, Footnote 1, partially offset by interest expense related to sales tax accrued.

Income Taxes. During the year ended December 31, 2021, the Company recorded an income tax expense of $42,000, compared to an income tax benefit of $191,000 for the year ended December 31, 2020. The effective tax rate was (1.2)% and 4.0% for the years ended December 31, 2021 and 2020, respectively. The primary differences between the Company’s December 31, 2021 and 2020 effective tax rates and the statutory federal rates are expenses related to stock-based compensation in the amounts of $277,000 and $152,000, respectively, forgiveness of the Company’s PPP loan of $1,062,000 in 2021 and a change in the Company’s valuation allowance against its deferred assets of $1,200,000 and $943,000, 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, including the gain on debt forgiveness of the PPP loan and accrued interest of $1,062,000, the net loss for the year ended December 31, 2021 was $3,534,000 compared to a net loss of $4,615,000 for the year ended December 31, 2020.

Liquidity and Capital Resources

The Company has financed its operations with proceeds from stock sales and sales of its services and products. At December 31, 2021, working capital (current assets less current liabilities) was $3,716,000 compared to $7,668,000 at December 31, 2020. During the year ended December 31, 2021, cash and cash equivalents and restricted cash decreased $3,277,000 from $7,128,000 at December 31, 2020, to $3,851,000 at December 31, 2021.

Operating Activities: Net cash used in operating activities during the year ended December 31, 2021 was $3,000,000. Net loss of $3,534,000, less non-cash adjustments of $689,000, plus changes in operating assets and liabilities of $1,223,000 resulted in the $3,000,000 of cash used in operating activities. The non-cash adjustments consisted of depreciation expense, impairment loss, gain on sale of business, gain on sale of property and equipment, changes in allowance for doubtful accounts, gain on forgiveness of PPP loan and accrued interest of $1,062,000 and stock-based compensation expense. The largest component of the change in operating assets and liabilities was accrued liabilities which increased $665,000 from December 31, 2020. The increase was a result of prepaid production costs. In the normal course of business, our accounts receivable, accounts payable, accrued liabilities, deferred revenue and prepaid production costs will fluctuate depending on the level of revenues and related business activity, as well as billing arrangements with customers and payment terms with retailers.

Investing Activities: Net cash used in investing activities during the year ended December 31, 2021 was $90,000. This was related to the purchase of property and equipment, partially offset by proceeds from the sale of property and equipment.

Financing Activities: Net cash used in financing activities during the year ended December 31, 2021 was $187,000, which primarily related to the repurchase of common stock upon vesting of restricted stock.

The Company used net cash in operating activities during the year ended December 31, 2021 of $3,000,000. Management has taken actions to reduce the cash use, including a restructuring in December 2021 which reduced its work force by 19% and is expected to reduce operating expenses by approximately $500,000 in 2022. The Company incurred significant litigation costs in 2021 in preparing for trial in its litigation against News America. The Company expects significantly lower litigation expenses in 2022. We believe that based upon these actions, current business conditions and plans, our existing cash balance will be sufficient for our cash requirements for at least the next twelve months.

Critical Accounting 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 allowance for doubtful accounts, impairment of long-lived assets, income taxes, sales tax, 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 are our critical accounting estimates used in preparation of our financial statements:

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 $4,000,000 in exchange for a 10-year arrangement to sell signs with price into News America Marketing’s network of retailers as News America Marketing’s exclusive agent. The $4,000,000 was being amortized over the 10-year term of the arrangement. 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 end of 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.

At December 31, 2021, the remaining balance of long-lived assets on the Company’s balance sheet was $296,000 inclusive of $183,000 for operating lease right-of-use assets.

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.

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.

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.

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, the ongoing exploration of strategic alternatives, 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.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Smaller reporting companies are not required to provide disclosure pursuant to this Item.

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

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, 2021 and 2020, the related statements of operations, shareholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

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.

Accounting for sales taxes

Critical Audit Matter Description

The Company previously 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. The Company accrued the estimated sales taxes due in the amounts of $1,007,000 and $1,011,000, and interest and penalties of $313,000 and $244,000, as of December 31, 2021 and 2020, 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 $135,000 and $266,000 as of December 31, 2021 and 2020, respectively. The Company was required to apply judgment regarding the determination of the tax status of the customers that did not respond to management’s 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:

/s/ Baker Tilly US, LLP

We have served as the Company's auditor since 2011.

Minneapolis, Minnesota

March 9, 2022

Insignia Systems, Inc.

BALANCE SHEETS

See accompanying notes to financial statements.                                                                                    

Insignia Systems, Inc.

STATEMENTS OF OPERATIONS

See accompanying notes to financial statements. 

Insignia Systems, Inc.

STATEMENTS OF SHAREHOLDERS’ EQUITY

See accompanying notes to financial statements.          

Insignia Systems, Inc.

NOTES TO FINANCIAL STATMENTS