LENDWAY, INC. - Quarter Report: 2022 March (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

☒     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended March 31, 2022

or

☐     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from ___________ to ____________

Commission File Number: 1-13471

212 Third Avenue N, Suite 356, Minneapolis, MN 55401 

(Address of principal executive offices; zip code) 

(763) 392-6200 

(Registrant’s telephone number, including area code) 

Securities registered to Section 12(b) of the Act:

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, smaller reporting company, or an 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of shares outstanding of Common Stock, $.01 par value, as of May 9, 2022 was 1,786,296.

Insignia Systems, Inc.

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Insignia Systems, Inc.

CONDENSED BALANCE SHEETS

See accompanying notes to financial statements. 

Insignia Systems, Inc.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes to financial statements.

Insignia Systems, Inc.

CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY

(Unaudited)

See accompanying notes to financial statements.                                                                                                                                                                                                                                                            

Insignia Systems, Inc.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to financial statements.

Insignia Systems, Inc.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Description of Business. Insignia (the “Company”) is a leading provider of in-store solutions to consumer-packaged goods (“CPG”) manufacturers, retailers, shopper marketing agencies and brokerages. The Company operates in a single reportable segment. The Company’s leadership and employees have extensive industry knowledge with direct experience in both CPG manufacturers and retailers. The Company provides marketing solutions to CPG manufacturers spanning from some of the largest multinationals to new and emerging brands. The Company’s primary solutions are merchandising solutions, on-pack solutions and signage.

Basis of Presentation. The accompanying unaudited condensed financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Securities and Exchange Commission (“SEC”) Regulation S-X. They do not include all information and footnotes required by U.S. GAAP for complete financial statements. However, except as described herein, there has been no material change in the information disclosed in the notes to financial statements included in the Company’s financial statements as of and for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 9, 2022 (the Form 10-K). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. The accompanying condensed balance sheet as of December 31, 2021 has been derived from the audited balance sheet as of December 31, 2021 contained in the Form 10-K.

Cash and Cash Equivalents and Restricted Cash. The following table provides a reconciliation of cash, cash equivalents and restricted cash to amounts shown in the statement of cash flows:

Inventories. Inventories are primarily comprised of sign cards and hardware. Inventory is valued at the lower of cost or net realizable value using the first-in, first-out (“FIFO”) method.

Property and Equipment. Property and equipment consisted of the following as of the dates indicated:

Depreciation expense was approximately $16,000 and $21,000 in the three months ended March 31, 2022 and 2021, respectively.

Stock-Based Compensation. The Company measures and recognizes compensation expense for all stock-based payments at fair value. Restricted stock units and awards are valued at the closing market price of the Company’s stock as of 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 the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s 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.

During the three months ended March 31, 2022 and 2021, no stock options or restricted stock were issued by the Company.

The Company estimated the fair value of stock-based awards granted during the three months ended March 31, 2022, under the Company’s employee stock purchase plan using the following weighted average assumptions: expected life of 1.0 year, expected volatility of 168.7%, dividend yield of 0% and risk-free interest rate of 0.4%.

The Company recorded total stock-based compensation expense of $30,000 and $56,000 for the three months ended March 31, 2022 and 2021, respectively.

Net Income (Loss) per Share. Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average shares outstanding and excludes any potential dilutive effects of stock options and restricted stock units and awards. Diluted net income (loss) per share gives effect to all dilutive potential common shares outstanding during the period.

Options to purchase approximately 14,000 shares of common stock with a weighted average exercise price of 12.60, were outstanding at March 31, 2022 and were not included in the computation of common stock equivalents for the three months ended March 31, 2022 because their exercise prices were higher than the average fair market value of the common stock during the reporting period.

Due to the net loss incurred during the three months ended March 31, 2021 all outstanding stock options were anti-dilutive for the periods.

Weighted average common shares outstanding for the three months ended March 31, 2022 and 2021 were as follows:

Taxes collected from customers and remitted to governmental authorities are excluded from revenue on the net basis of accounting.

The Company includes shipping and handling fees in revenues. Shipping and handling costs associated with outbound freight after control over a product has been passed to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The following is a description of the Company’s performance obligations included in its primary revenue streams and the timing or method of revenue recognition for each:

Merchandising, On-Pack, and Non-POPS Signage Solutions. The Company supplies CPG manufacturers with retailer approved promotional services, such as merchandising, on-pack, and signage solutions. These services are more customized than POPS, consisting of variable durations and variable specifications. Due to the variable nature of these services, revenue recognition is a mix of over-time and point-in-time recognition.

POPS Signage Solution Services. The Company provides a service of displaying promotional signs in close proximity to the CPG manufacturer’s product in participating stores, which the Company maintains in two-to-four-week cycle increments.

Each of the individual activities under the Company’s services, including production activities, are inputs to an integrated sign display service. Customers receive and consume the benefits from the promotional displays over the duration of the contracted display cycle. Additionally, the display of the signs does not have an alternative use to the Company and the Company has an enforceable right to payment for services performed to date. As a result, the Company recognizes the transaction price for service performance obligations as revenue over time. Given the nature of the Company’s performance obligations is to provide a display service over the duration of a specified period or periods, the Company recognizes revenue on a straight-line basis over the display service period as it best reflects the timing of transfer of its sign solutions.

Disaggregation of Revenue

In the following table, revenue is disaggregated by timing of revenue recognition.

Contract Costs

Sales commissions paid to internal or external sales representatives are eligible for capitalization because they are incremental costs that would not have been incurred without entering into a specific sales arrangement and are recoverable through the expected margin on the transaction. The Company is applying the practical expedient in Accounting Standards Codification 340-40-25-4 that allows the incremental costs of obtaining a contract to be recorded as an expense when incurred when the amortization period of the asset that would have otherwise been recognized is one year or less. These costs are included in selling expenses.

Deferred Revenue

Deferred revenues represent amounts collected from customers in advance of the satisfaction of performance obligations. Significant changes in deferred revenue during the period are as follows:

Transaction Price Allocated to Remaining Performance Obligations

The Company applies the practical expedient in paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less, which reflect the majority of its performance obligations. This practical expedient is being applied to arrangements for certain incomplete services and unshipped custom signage materials. Among our contracts with an expected duration of greater than one year, we anticipate that revenue of $84,000 and $57,000 related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2022 will be recognized during the remainder of fiscal 2022 and 2023, respectively.

The Company’s leases include options to renew. The exercise of lease renewal options is at the Company’s sole discretion. Therefore, the renewals to extend the lease terms are not included in the Company’s right of use assets and lease liabilities as they are not reasonably certain of exercise. The Company regularly evaluates the renewal options and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term.

The Company used its incremental borrowing rate of approximately 4.8% in determining the present value of the lease payments based on the information available at the lease commencement date.

The cost components of the Company’s operating leases were as follows for the periods ended March 31, 2022 and 2021:

Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs which are paid based on actual costs incurred by the lessor.

Maturities of the Company’s lease liabilities for its corporate headquarters and its warehouse operating leases are as follows as of March 31, 2022:

The remaining lease terms as of March 31, 2022 for the Company’s corporate headquarters and its warehouse leases were 2.3 years and 1.0 years, respectively. The cash outflows for operating leases for the three months ended March 31, 2022 and March 31, 2021 were $21,000 and $68,000, respectively.

Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statements and tax basis of assets and liabilities given the provisions of enacted tax laws. 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, adjustment to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria.

As of March 31, 2022, and December 31, 2021, the Company had unrecognized tax benefits totaling $721,000 and $711,000, respectively, including interest, which relates to state nexus issues. The amount of the unrecognized tax benefits, if recognized, that would affect the effective income tax rates of future periods is $721,000. The Company believes that it is probable that a decrease of up to $665,000 in unrecognized tax benefits related to state exposures may be necessary in the third quarter of 2022, which would reduce accrued income taxes and increase income tax benefit.

In July 2019, the Company filed suit against News Corporation, News America Marketing FSI L.L.C., and News America Marketing In-Store Services L.L.C. (collectively, “News America”) in the U.S. District Court in Minnesota, alleging violations of federal and state antitrust and tort laws by News America. The complaint alleges that News America has monopolized the national market for third-party in-store advertising and promotion products and services through various wrongful acts designed to harm the Company, its last significant competitor. The suit seeks, among other relief, an injunction sufficient to prevent further antitrust injury and an award of treble damages to be determined at trial for the harm caused to our Company.

In August 2019, News America filed an answer and counterclaim. In October 2019, News America moved for a judgment on the pleadings. Management believes that the counterclaim is without merit, and the Company filed a response brief on November 11, 2019. The Company also moved to dismiss the counterclaim against it. The court heard oral arguments from both parties on January 14, 2020, and subsequently denied both motions. On July 10, 2020 the parties cross-moved for summary judgment on the counterclaim. On December 7, 2020, the Court granted News America’s motion for summary judgment on the counterclaim in part, requiring Insignia to strike certain allegations from its complaint and finding News America’s request for attorneys’ fees and costs premature.

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. The court has rescheduled the hearing on News America’s summary judgment motion for June 22, 2022. At this stage of the proceedings, the Company is unable to determine the likelihood of an unfavorable outcome or estimate any potential resulting liability.

In accordance with the requirements of the CARES Act, the Company used the proceeds from the loan exclusively for qualified expenses under the PPP, including payroll costs, rent and utility costs. Interest was accrued on the outstanding balance of the Note at a rate of 1.00% per annum. The Note was scheduled to mature on April 22, 2022 and required 18 equal monthly payments of principal and interest.

The Company’s application for forgiveness of the amount due under the Note, including accrued interest, was approved by the SBA on January 29, 2021. Accordingly, for the year ended December 31, 2021 the debt of $1,054,000, plus accrued interest of $8,000 was eliminated with a gain on debt extinguishment included in other income.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Company’s financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated due to various factors discussed under “Cautionary Statement Regarding Forward-Looking Statements” and elsewhere, including Part II, Item 1A, in this Quarterly Report on Form 10-Q and the “Risk Factors” described in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, our Current Reports on Form 8-K and our other SEC filings.

Company Overview

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 also 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 and over 95% for the three months ended March 31, 2022.

Over the last two years we have significantly reduced operating costs and retailer commitments. 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, and also restructured operations in December 2021. These changes contributed to reduced expenses in the three months ended March 31, 2022 and are expected to continue to drive savings for the remainder of 2022 compared to 2021.

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. 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 and the first quarter of 2022, we believe it continues to negatively impact our business. 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.

Business Overview

Summary of Financial Results

For the quarter ended March 31, 2022, the Company generated revenues of $6,148,000, as compared with revenues of $5,386,000 for the quarter ended March 31, 2021. Net income for the quarter ended March 31, 2022 was $62,000, as compared to a net loss of $737,000 for the quarter ended March 31, 2021. Revenue from our non-POPS solutions has increased significantly for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, partially offset by continued declines in our signage business due to competitive pressure, which we expect to continue. In 2021 we invested in both people and resources to support the growth of non-POPS, while also shifting resources away from signage. We continue to pursue a variety of efforts designed to drive innovation, client acquisitions and retailer expansions. During the first nine months of 2021, litigation expenses increased significantly compared to prior quarters. Litigation expenses for 2022 are expected to decrease in comparison to 2021 and to be similar to 2020 expenses. We also recognized a gain of $1,062,000 on the forgiveness of our PPP loan during the first quarter of 2021.

During the quarter ended March 31, 2022, cash and cash equivalents and restricted cash decreased $3,370,000 from $3,851,000 at December 31, 2021 to $481,000 at March 31, 2022. The decrease was primarily driven by the increase in net sales for the three months ended March 31, 2022 compared to the three months ended December 31, 2021, resulting in a $2,206,000 increase in accounts receivable. We have no debt other than our lease obligations at March 31, 2022. Working capital increased $135,000 from $3,716,000 at December 31, 2021 to $3,851,000 at March 31, 2022. Cash and cash equivalents plus restricted cash at April 30, 2022 was $3.0 million.

Results of Operations

The following table sets forth, for the periods indicated, certain items in our Condensed Statements of Operations as a percentage of total net sales.

Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021

Net Sales. Net sales for the three months ended March 31, 2022 increased 14.1% to $6,148,000 compared to $5,386,000 for the three months ended March 31, 2021. The increase was due to 48.0% increase in non-POPS revenue, partially offset by a 83.0% decrease in POPS solutions revenue. For the three months ended March 31, 2022, non-POPS revenue has increased due to both sales to new CPGs and an increase in sales to existing CPGs. Due to sales cycles within the retailers that our non-POPS solutions execute we anticipate seasonality in sales, with those sales being relatively stronger in the first quarter of the year. Our display business generally consists of larger contracts versus our historical signage business. As a result, our revenue may be prone to variances on a year over year basis. This is expected the case for the three months ending June 30, 2022, when we will be lapping two programs from the three months ended June 30, 2021 that will not be repeating in 2022. Competitive pressures have resulted in decreased POPS solutions revenue for three months ended March 31, 2022 versus the three months ended March 31, 2021, including the expiration in April 2021 of our 10-year selling agreement with News America Marketing In-Store (“News America”). We expect POPS revenue will continue to decline in 2022 in comparison to 2021 as we have reduced the number of stores in our network due to competitive pressures.

Gross Profit. Gross profit for the three months ended March 31, 2022 increased 37.8% to $1,280,000 compared to $929,000 for the three months ended March 31, 2021. Gross profit as a percentage of total net sales increased to 20.8% for the three months ended March 31, 2022, compared to 17.2% for the three months ended March 31, 2021. The increase in gross profit was primarily due to an improvement in non-POPS gross profit due to the Company’s decision in the prior year to make an investment in the execution of a large non-POPS program in the three months ended March 31, 2021.

Operating Expenses

Selling. Selling expenses for the three months ended March 31, 2022 decreased 33.7% to $342,000 compared to $516,000 for the three months ended March 31, 2021. Decreased selling expense was primarily the result of decreased staff related expenses. Selling expenses as a percentage of total net sales decreased to 5.6% for the three months ended March 31, 2022 compared to 9.6% for the three months ended March 31, 2021. The decrease was primarily due to the factors described above, in addition to increased sales.

Marketing. Marketing expenses for the three months ended March 31, 2022 increased 10.2% to $259,000 compared to $235,000 for the three months ended March 31, 2021. Increased marketing expense was primarily the result of increased staffing expenses. Marketing expenses as a percentage of total net sales decreased to 4.2% for the three months ended March 31, 2022 compared to 4.4% for the three months ended March 31, 2021. The decrease was primarily due to increased sales, partially offset by the factors described above.

General and administrative. General and administrative expenses for the three months ended March 31, 2022 decreased 68.7% to $606,000 compared to $1,937,000 for the three months ended March 31, 2021. The decrease was primarily due to expenses incurred as a result of the litigation with News America. Litigation expenses in 2022 are expected to be substantial but to decrease in comparison to 2021 and to be similar to 2020 expenses. General and administrative expenses as a percentage of total net sales decreased to 9.8% for the three months ended March 31, 2022 compared to 35.9% for the three months ended March 31, 2021. The decrease was primarily due to the factors described above, in addition to increased sales.

Other Income (Expense). Other expense for the three months ended March 31, 2022 was $3,000 compared to income of $1,035,000 for the three months ended March 31, 2021. The change was due to the 2021 gain on forgiveness of debt and accrued interest of $1,062,000 from the SBA forgiving the Company of its promissory loan entered into pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act.

Income Taxes. For the three months ended March 31, 2022, the Company recorded income tax expense of $8,000, or 11.4% of income before taxes. For the three months ended March 31, 2021, the Company recorded income tax expense of $13,000, or (1.8%) of loss before taxes. The income tax expense for the three months ended March 31, 2022 and 2021 is comprised of federal and state taxes. The primary differences between the Company’s March 31, 2022 and 2021 effective tax rates and the statutory federal rate are nondeductible stock-based compensation, nondeductible meals and entertainments as well as changes in the Company’s valuation allowance against its deferred tax assets.

The Company reassesses its effective tax rate each reporting period and adjusts the annual effective rate if deemed necessary, based on projected annual taxable income (loss).

Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statements and tax basis of assets and liabilities given the provisions of enacted tax laws. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustment to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria.

As a result of the Company’s future outlook, management has reviewed its deferred tax assets and concluded that the uncertainties related to the realization of its deferred tax assets have become unfavorable. Management has considered positive and negative evidence for the potential utilization of the deferred tax assets and has concluded that it is more likely than not that Company will not realize the full amount of its net deferred tax assets.

As of March 31, 2022, and December 31, 2021, the Company had unrecognized tax benefits totaling $721,000 and $711,000, respectively, including interest, which relates to state nexus issues. The amount of the unrecognized tax benefits, if recognized, that would affect the effective income tax rates of future periods is $721,000. Due to the current statute of limitations regarding the unrecognized tax benefits, the Company believes that it is probable that a decrease of up to $665,000 in unrecognized tax benefits related to state exposures may be necessary in the third quarter of 2022, which would reduce accrued income taxes and increase income tax benefit.

Net Income (Loss). For the reasons stated above, net income for the three months ended March 31, 2022 was $62,000, compared to a net loss of $737,000 for the three months ending March 31, 2021. As discussed in the sales section, we anticipate seasonality in sales, with sales relatively lower in the remaining quarters of the year and correspondingly lower gross profit and income in the subsequent quarters.

Liquidity and Capital Resources

The Company has financed its operations with proceeds from stock sales and sales of its services and products. At March 31, 2022, working capital was $3,851,000 (defined as current assets less current liabilities) compared to $3,716,000 at December 31, 2021. During the three months ended March 31, 2022, cash and cash equivalents and restricted cash decreased $3,370,000 from $3,851,000 at December 31, 2021 to $481,000 at March 31, 2022. Cash and cash equivalents at April 30, 2022 was $3.0 million.

Operating Activities. Net cash used in operating activities during the three months ended March 31, 2022 was $3,380,000. Net income of $62,000, plus non-cash adjustments of $34,000, less changes in operating assets and liabilities of $3,476,000 resulted in the $3,380,000 of cash used in operating activities. The non-cash adjustments consisted of depreciation expense, changes in allowance for doubtful accounts and stock-based compensation expense. The largest component of the change in operating assets and liabilities was accounts receivable which increased $2,206,000 from December 31, 2021. The increase was a result of increased net sales for the three months ended March 31, 2022 compared to the fourth quarter of 2021. 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 three months ended March 31, 2022 was $18,000, which related to purchases of property and equipment.

Financing Activities. Net cash provided by financing activities during the three months ended March 31, 2022 was $28,000, which related to proceeds received from issuance of common stock under the employee stock purchase plan.

The Company has experienced net losses and used significant cash in operations in each of the last three years and also used significant cash in the first quarter of 2022. 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 cash requirements 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.

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, 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.

Our significant accounting policies are described in Note 1 to the annual financial statements included in Part II, Item 8 of our Annual Report on Form 10-K as of and for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 9, 2022. We believe our most critical accounting estimates include the following:

Cautionary Statement Regarding Forward-Looking Statements

Certain statements made in this Quarterly Report on Form 10-Q, in the Company’s other SEC filings, in press releases and in oral statements to shareholders and securities analysts that are not statements of historical or current facts are “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance of the Company to be materially different from the results or performance expressed or implied by such forward-looking statements. The words “anticipates,” “believes,” “estimates,” “expects,” “future,” “likely,” “may,” “projects,” “seeks,” “will” and similar expressions identify forward-looking statements. Forward-looking statements include statements expressing the intent, belief or current expectations of the Company and members of our management team regarding, for instance: (i) our belief that our cash balance and cash generated by operations will provide adequate liquidity and capital resources for at least the next twelve months; and (ii) that we expect fluctuations in accounts receivable and payable, accrued liabilities, revenue deferrals, and prepaid production costs. 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 forward-looking statements are based on current information, which we have assessed and which by its nature is dynamic and subject to rapid and even abrupt changes.

Factors that could cause our estimates and assumptions as to future performance, and our actual results, to differ materially include the following: (i) the impacts of the COVID-19 pandemic including the duration, spread, severity, and any recurrence of the COVID-19 pandemic, the duration and scope of related government orders and restrictions, the impact on our employees, and the extent of the impact of the COVID-19 pandemic on overall demand for our products and services; (ii) local, regional, national, and international economic conditions that have deteriorated as a result of the COVID-19 pandemic including the risks of a global recession or a recession in one or more of our key markets, and the impact they may have on us and our customers and our assessment of that impact; (iii) management’s ability to fully or successfully implement its business plan to achieve and maintain increased sales and resultant profitability in the future; (iv) the Company’s success in developing and implementing new product offerings, in a successful manner; (v) prevailing market conditions, including pricing and other competitive pressures, in the in-store advertising industry and, intense competition for agreements with CPG retailers and manufacturers; (vi) potentially incorrect assumptions by management with respect to the financial effect of current strategic decisions and the effect of current sales trends on fiscal year 2022 results; (vii) termination of all or a major portion of, or a significant change in terms and conditions of, a material agreement with a CPG manufacturer or retailer; (viii) other economic, business, market, financial, competitive and/or regulatory factors affecting the Company’s business generally; (ix) our ability to successfully manage our IT operating infrastructure outsourcing arrangement; (x) our ability to attract and retain highly qualified managerial, operational and sales personnel; and (xi) the final outcome of our litigation with News America. Our risks and uncertainties also include, but are not limited to, the risks presented in our Annual Report on Form 10-K for the year ended December 31, 2021 and this Quarterly Report on Form 10-Q, and any additional risks presented in our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K. We undertake no obligation (and expressly disclaim any such obligation) to update forward-looking statements made in this Form 10-Q to reflect events or circumstances after the date of this Form 10-Q or to update reasons why actual results would differ from those anticipated in any such forward-looking statements, other than as required by law.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains 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) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer and its principal accounting officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s principal executive officer and the principal accounting officer concluded that the Company’s disclosure controls and procedures as of March 31, 2022 were effective.

Changes in Internal Control Over Financial Reporting

No changes in the Company’s internal control over financial reporting occurred during the first quarter of 2022 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

A description of our legal proceedings, if any, is contained in Note 6 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 of this Quarterly Report on Form 10-Q, incorporated herein by reference.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those previously disclosed in of Part 1, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

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.