LDWY 10-Q Quarterly Report Sept. 30, 2016 | Alphaminr
LENDWAY, INC.
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LDWY 10-Q Quarter ended Sept. 30, 2016

Balance Sheet
Cash Flow
Income Statement
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10-Q 1 isig_form10-q.htm INSIGNIA SYSTEMS INC. FORM 10Q Insignia Systems Inc. Form 10Q

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 September 30, 2016
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from ___________________ to _________________
Commission File Number: 1-13471
INSIGNIA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Minnesota
41-1656308
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
8799 Brooklyn Blvd., Minneapolis, MN 55445
(Address of principal executive offices; zip code)
(763) 392-6200
(Registrant’s telephone number, including area code)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
Yes ☒    No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☐
Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Smaller Reporting Company ☒
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 October 24, 2016 was 11,727,803.

Insignia Systems, Inc.
TABLE OF CONTENTS
PART I.
FINANCIAL INFORMATION
Page
Item 1.
Financial Statements
1
Condensed Balance Sheets – September 30, 2016 (unaudited) and December 31, 2015
1
Statements of Comprehensive Income (Loss) – Three and nine months ended September 30, 2016 and 2015 (unaudited)
2
Statements of Cash Flows – Nine months ended September 30, 2016 and 2015 (unaudited)
3
4
Item 2.
8
Item 3.
1 4
Item 4.
14
PART II.
OTHER INFORMATION
Item 1.
14
Item 1A.
14
Item 2.
15
Item 3.
15
Item 4.
15
Item 5.
15
Item 6.
16
i
PART I.              FINANCIAL INFORMATION
Item 1.                Financial Statements
Insignia Systems, Inc.
C ONDENSED BALANCE SHEETS
September 30,
2016
December 31,
(Unaudited)
2015
ASSETS
Current Assets:
Cash and cash equivalents
$ 11,412,000
$ 8,523,000
Available for sale investments
3,430,000
9,490,000
Accounts receivable, net
8,013,000
8,392,000
Inventories
575,000
391,000
Income tax receivable
325,000
1,000
Prepaid expenses and other
983,000
492,000
Total Current Assets
24,738,000
27,289,000
Other Assets:
Property and equipment, net
1,530,000
1,584,000
Other, net
2,094,000
2,841,000
Total Assets
$ 28,362,000
$ 31,714,000
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable
$ 2,084,000
$ 3,355,000
Accrued liabilities:
Compensation
789,000
1,494,000
Other
310,000
715,000
Income tax payable
80,000
264,000
Deferred revenue
36,000
164,000
Total Current Liabilities
3,299,000
5,992,000
Long-Term Liabilities:
Deferred tax liabilities
199,000
199,000
Accrued income taxes
528,000
528,000
Deferred rent
287,000
275,000
Total Long-Term Liabilities
1,014,000
1,002,000
Commitments and Contingencies
—
—
Shareholders' Equity:
Common stock, par value $.01:
Authorized shares - 40,000,000
Issued shares - 11,802,000 at September 30, 2016 and 11,721,000 at December 31, 2015
Outstanding shares - 11,632,000 at September 30, 2016 and 11,633,000 at December 31, 2015
116,000
116,000
Additional paid-in capital
17,704,000
17,810,000
Retained earnings
6,229,000
6,805,000
Accumulated other comprehensive loss
—
( 11,000 )
Total Shareholders' Equity
24,049,000
24,720,000
Total Liabilities and Shareholders' Equity
$ 28,362,000
$ 31,714,000
See accompanying notes to financial statements.
1
Insignia Systems, Inc.
S TATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
Three Months Ended
Nine Months Ended
September 30
September 30
2016
2015
2016
2015
Services revenues
$ 6,050,000
$ 7,098,000
$ 17,830,000
$ 19,356,000
Products revenues
419,000
450,000
1,334,000
1,406,000
Total Net Sales
6,469,000
7,548,000
19,164,000
20,762,000
Cost of services
4,171,000
3,734,000
12,153,000
10,494,000
Cost of goods sold
298,000
315,000
928,000
981,000
Total Cost of Sales
4,469,000
4,049,000
13,081,000
11,475,000
Gross Profit
2,000,000
3,499,000
6,083,000
9,287,000
Operating Expenses:
Selling
917,000
962,000
3,061,000
3,451,000
Marketing
242,000
468,000
769,000
1,254,000
General and administrative
879,000
1,145,000
3,149,000
3,110,000
Total Operating Expenses
2,038,000
2,575,000
6,979,000
7,815,000
Operating Income (Loss)
(38,000 )
924,000
(896,000 )
1,472,000
Other income
12,000
19,000
44,000
56,000
Income (Loss) Before Taxes
(26,000 )
943,000
(852,000 )
1,528,000
Income tax expense (benefit)
141,000
382,000
(276,000 )
621,000
Net Income (Loss)
$ (167,000 )
$ 561,000
$ (576,000 )
$ 907,000
Other comprehensive income (loss), net of tax:
Unrealized gain on available for sale securities
—
—
11,000
7,000
Comprehensive Income (Loss)
$ (167,000 )
$ 561,000
$ (565,000 )
$ 914,000
Net income (loss) per share:
Basic
$ (0.01 )
$ 0.05
$ (0.05 )
$ 0.07
Diluted
$ (0.01 )
$ 0.05
$ (0.05 )
$ 0.07
Shares used in calculation of net
income (loss) per share:
Basic
11,642,000
12,107,000
11,626,000
12,177,000
Diluted
11,642,000
12,241,000
11,626,000
12,351,000
See accompanying notes to financial statements.
2
Insignia Systems, Inc.
S TATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended September 30
2016
2015
Operating Activities:
Net income (loss)
$ (576,000 )
$ 907,000
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Depreciation and amortization
1,101,000
851,000
Changes in allowance for doubtful accounts
41,000
(19,000 )
Deferred income tax expense
—
119,000
Stock-based compensation expense
150,000
267,000
Gain on sale of property and equipment
(5,000 )
(25,000 )
Changes in operating assets and liabilities:
Accounts receivable
338,000
457,000
Inventories
(184,000 )
55,000
Income tax receivable
(324,000 )
277,000
Prepaid expenses and other
(266,000 )
118,000
Accounts payable
(1,271,000 )
(379,000 )
Accrued liabilities
(1,098,000 )
498,000
Income tax payable
(184,000 )
159,000
Excess tax benefit from stock-based awards
—
(4,000 )
Deferred revenue
(128,000 )
456,000
Net cash provided by (used in) operating activities
(2,406,000 )
3,737,000
Investing Activities:
Purchases of property and equipment
(524,000 )
(137,000 )
Purchases of investments
—
(4,513,000 )
Proceeds from sale or maturity of investments
6,071,000
4,308,000
Proceeds received from sale of property and equipment
5,000
25,000
Net cash provided by (used in) investing activities
5,552,000
(317,000 )
Financing Activities:
Proceeds from issuance of common stock, net
44,000
48,000
Excess tax benefit from stock-based awards
—
4,000
Repurchase of common stock, net
(301,000 )
(1,614,000 )
Net cash used in financing activities
(257,000 )
(1,562,000 )
Increase in cash and cash equivalents
2,889,000
1,858,000
Cash and cash equivalents at beginning of period
8,523,000
7,237,000
Cash and cash equivalents at end of period
$ 11,412,000
$ 9,095,000
Supplemental disclosures for cash flow information:
Cash paid during the period for income taxes
$ 238,000
$ 243,000
See accompanying notes to financial statements.
3
Insignia Systems, Inc.
N otes To Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies.
Description of Business. Insignia Systems, Inc. (the “Company”) markets in-store advertising products, programs and services primarily to consumer packaged goods manufacturers. The Company’s products include the Insignia Point-of-Purchase Services (POPS) in-store marketing program, thermal sign card supplies for the Company’s Impulse Retail System, and laser printable cardstock and label supplies. In October 2014, the Company announced the introduction of a new product, The Like Machine TM (“TLM”). The Company previously licensed this product from TLM Holdings, LLC (“TLMH”), a company in which Insignia’s former Chief Sales and Marketing Officer, Tim Halfmann, is the majority owner and serves as a principal. In March 2016, the Company and TLMH signed a new distribution agreement for the sale of The Like Machine to Insignia’s customers. This distribution agreement replaced the Company’s prior license agreement with TLMH. Mr. Halfmann resigned from Insignia, effective April 30, 2016, in order to focus his efforts more fully on the TLM product and its evolution going forward.
Basis of Presentation . Financial statements for the interim periods included herein are unaudited; however, they contain all adjustments, including normal recurring accruals, which in the opinion of management, are necessary to present fairly the financial position of the Company at September 30, 2016, and its results of operations for the three and nine months ended September 30, 2016 and 2015, and its cash flows for the nine months ended September 30, 2016 and 2015. Results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.
The financial statements do not include certain footnote disclosures and financial information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America and, therefore, should be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015.
The Summary of Significant Accounting Policies in the Company’s 2015 Annual Report on Form 10-K describes the Company’s accounting policies.
Inventories . Inventories are primarily comprised of parts and supplies for Impulse machine, sign cards, rollstock and TLM devices. Inventory is valued at the lower of cost or market using the first-in, first-out (FIFO) method, and consisted of the following as of the dates indicated:
September 30,
December 31,
2016
2015
Raw materials
$ 91,000
$ 69,000
Work-in-process
14,000
4,000
Finished goods
470,000
318,000
$ 575,000
$ 391,000
4
Property and Equipment . Property and equipment consisted of the following as of the dates indicated:
September 30,
2016
December 31,
2015
Property and Equipment:
Production tooling, machinery and equipment
$ 3,596,000
$ 3,722,000
Office furniture and fixtures
322,000
145,000
Computer equipment and software
1,280,000
1,233,000
Web site
40,000
40,000
Leasehold improvements
577,000
—
Construction in-progress
220,000
616,000
6,035,000
5,756,000
Accumulated depreciation and amortization
(4,505,000 )
(4,172,000 )
Net Property and Equipment
$ 1,530,000
$ 1,584,000
Depreciation expense was approximately $187,000 and $577,000 in the three and nine months ended September 30, 2016, respectively, and $160,000 and $482,000 in the three and nine months ended September 30, 2015, respectively.
Stock-Based Compensation . The Company measures and recognizes compensation expense for all stock-based awards at fair value using the Black-Scholes option pricing model to determine the weighted average fair value of options and employee stock purchase plan rights. The Company recognizes stock-based compensation expense on a graded-attribution method over the requisite service period of the award.
The Company issued options to purchase an aggregate of 20,000 shares of common stock under its 2013 Omnibus Stock and Incentive Plan, as amended (the “2013 Plan”), with a weighted average exercise price of $2.90, during the nine months ended September 30, 2016. The Company estimated the fair value of these awards using the following weighted average assumptions: expected life of 2.5 years, expected volatility of 41%, dividend yield of 0% and risk-free interest rate of 1.00%. The Company issued options to purchase an aggregate of 200,000 shares of common stock under the 2013 Plan, as amended, with a weighted average exercise price of $2.82, during the nine months ended September 30, 2015. The Company estimated the fair value of these awards using the following weighted average assumptions: expected life of 3.4 years, expected volatility of 45%, dividend yield of 0% and risk-free interest rate of 1.18%.
During the nine months ended September 30, 2016, the Company issued 100,000 shares of restricted stock under the 2013 Plan. The shares underlying the award were assigned a value of $2.33 per share, which was the closing price of our common stock on the date of grant, and is scheduled to vest over the five years following the date of grant. No restricted stock was issued during the nine months ended September 30, 2015.
During the nine months ended September 30, 2016, the Company issued 11,719 performance-based restricted stock units under the 2013 Plan. Each unit represents the right to acquire one share of the Company’s common stock. The units were assigned a weighted average value of $0.85 per unit, based on market condition assumptions, and are scheduled to vest with respect to 80% of the units if the price of the Company’s common stock during the applicable measurement period exceeds a minimum performance threshold or 100% if a maximum performance threshold is exceeded. No performance-based restricted stock units were issued during the nine months ended September 30, 2015.
During the nine months ended September 30, 2016, the Company issued 43,625 restricted stock units under the 2013 Plan. The units were assigned a weighted average value of $2.14 per share, based on the closing price of our common stock on the applicable dates of grant, and are scheduled to vest over the two years. During the nine months ended September 30, 2015, the Company issued 99,000 restricted stock units. The units were assigned a weighted average value of $2.71 per share, based on the closing price of our common stock on the applicable dates of grant, and are scheduled to vest over a weighted average of 2.3 years. Each of the foregoing restricted stock units represents the right to acquire one share of the Company’s common stock.
The Company estimated the fair value of stock-based awards granted during the nine months ended September 30, 2016, under the Company’s employee stock purchase plan using the following weighted average assumptions: expected life of 1.0 years, expected volatility of 31%, dividend yield of 0% and risk-free interest rate of 0.61%.
During May and June 2016, members of the Board of Directors received grants totaling 54,036 fully vested shares of common stock pursuant to the 2013 Plan. The shares were assigned a weighted average value of $2.19 per share, based on the stock prices on the applicable grant dates, for a total value of $119,000, of which $109,000 is included in stock-based compensation expense for the nine months ended September 30, 2016 and $10,000 was accrued for and expensed in the prior year. In June 2015, members of the Board of Directors received similar grants totaling 37,233 shares pursuant to the 2013 Plan. The shares were assigned a value of $2.82 per share, based on the stock price on the date of grant, for a total value of $105,000, which is included in stock-based compensation expense for the nine months ended September 30, 2015.
5
Total stock-based compensation (benefit) expense recorded for the three and nine months ended September 30, 2016 was $42,000 and $150,000, respectively, and for the three and nine months ended September 30, 2015 was $(11,000) and $267,000, respectively.
During the three and nine months ended September 30, 2016, there were approximately 54,700 shares and 115,700 shares issued pursuant to stock option exercises, for which the Company received proceeds of $0 and $16,000, respectively. During the three and nine months ended September 30, 2015, there were approximately 80,000 shares and 113,000 shares issued pursuant to stock option exercises, for which the Company received proceeds of $0 and $2,000, respectively. A portion of the stock option exercises in the three and nine months ended September 30, 2016 and 2015 were completed on a cashless basis.
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 diluted potential common shares outstanding during the period.
Due to the net loss incurred during the three and nine months ended September 30, 2016, all stock awards were anti-dilutive for the period. Options to purchase approximately 660,000 and 653,000 shares of common stock with a weighted average exercise price of $3.64 and $3.80, respectively, were outstanding at September 30, 2015 and were not included in the computation of common stock equivalents for the three and nine months ended September 30, 2015 because their exercise prices were higher than the average fair market value of the common shares during the reporting period.
Weighted average common shares outstanding for the three and nine months ended September 30, 2016 and 2015 were as follows:
Three Months Ended
Nine Months Ended
September 30
September 30
2016
2015
2016
2015
Denominator for basic net income (loss) per share -
weighted average shares
11,642,000
12,107,000
11,626,000
12,177,000
Effect of dilutive securities:
Stock options and restricted stock units and awards
—
134,000
—
174,000
Denominator for diluted net income (loss) per share -
weighted average shares
11,642,000
12,241,000
11,626,000
12,351,000
2. Restructuring . The Company implemented a plan to restructure its operations in September 2016, including workforce reductions and other cost-saving initiatives, as well as, adding certain positions. As part of this restructuring plan, the Company reduced its workforce by approximately 12%. A pre-tax restructuring charge of $121,000 was recorded during the three and nine months ended September 30, 2016 and is accrued for and included in accrued compensation as of September 30, 2016. The Company recorded $41,000 of this charge within cost of sales and $80,000 within operating expenses in the Company’s statement of comprehensive income (loss).
3. Investments . The Company carries certain investments intended to increase the yield on available cash balances. The Company has classified all investments as current assets, as they are available to fund current operations. These investments are in debt securities, with an average maturity of approximately one year, and are classified as available-for-sale.
These investments are accounted for in accordance with Accounting Standards Codification (“ASC”) 320-10, “Investments – Debt and Equity Securities.” At September 30, 2016 and December 31, 2015, the Company’s investment balances consisted solely of available-for-sale securities and were carried at fair value in accordance with ASC 820-10 and were valued using Level 2 inputs.

6
4. Selling Arrangement. In 2011, the Company paid News America Marketing In-Store, LLC (“News America”) $4,000,000 in exchange for a 10-year arrangement to sell signs with price into News America’s network of retailers as News America’s exclusive agent. The $4,000,000 is being amortized on a straight-line basis over the 10-year term of the arrangement. Amortization expense, which was $100,000 and $300,000 in both of the three and nine months ended September 30, 2016 and 2015, respectively, and is expected to be $400,000 per year over the next four years and $117,000 in the year ending December 31, 2021, is recorded within cost of services in the Company’s statements of comprehensive income (loss). The net carrying amount of the selling arrangement is recorded within other assets on the Company’s condensed balance sheet.
5. Income Taxes. For the three and nine months ended September 30, 2016, the Company recorded income tax expense (benefit) of $141,000 and $(276,000), or (542.3%) and 32.4% of loss before taxes, respectively. For the three and nine months ended September 30, 2015, the Company recorded income tax expense of $382,000 and $621,000, or 40.5% and 40.6% of income before taxes, respectively. The income tax provision (benefit) for the three and nine months ended September 30, 2016 and 2015 is composed of federal and state taxes. The primary differences between the Company’s September 30, 2016 and 2015 effective tax rates and the statutory federal rate are expenses related to stock-based compensation and nondeductible meals and entertainment. At relatively low levels of projected income (loss) before income taxes, these differences can result in large swings in the effective rate which resulted in an income tax expense for the three months ended September 30, 2016 despite a pre-tax loss. The Company reassesses its effective rate each reporting period and adjusts the annual effective rate if deemed necessary, based on projected annual taxable income (loss).
As of September 30, 2016 and December 31, 2015, the Company had unrecognized tax benefits totaling $528,000, including interest, which relate 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 $528,000. Due to the current statute of limitations regarding the unrecognized tax benefits, the unrecognized tax benefits and associated interest is not expected to change significantly in 2016.
6. Concentrations. During the nine months ended September 30, 2016, one customer accounted for 33% of the Company’s total net sales. During the nine months ended September 30, 2015, one customer accounted for 35% of the Company’s total net sales. At September 30, 2016, one customer accounted for 34% of the Company’s total accounts receivable. At December 31, 2015, one customer accounted for 62% of the Company’s total accounts receivable.
Although there are a number of customers that the Company sells to, the loss of either a major customer or a major retailer, from the Company’s retail network, could adversely affect operating results.
7. Share Repurchase. On October 30, 2015, the Board of Directors authorized the repurchase of up to $5,000,000 of the Company’s common stock on or before October 30, 2017. The plan allows the repurchases to be made in open market or privately negotiated transactions. The plan does not obligate the Company to repurchase any particular number of shares, and may be suspended at any time at the Company’s discretion. For the three and nine months ended September 30, 2016, the Company repurchased approximately 23,000 and 123,000 shares, respectively, at a total cost of $54,000 and $301,000. As of September 30, 2016, the approximate dollar value of shares that may yet be purchased by the Company under the plan was $4,687,000.
Under a prior plan that expired November 3, 2015, for the three and nine months ended September 30, 2015, the Company repurchased approximately 577,000 and 609,000 shares, respectively, at a total cost of $1,515,000 and $1,614,000.
7
8. Recently Issued Accounting Pronouncements . In May 2014, the Financial Accounting Standards Board (FASB) issued guidance creating Accounting Standards Codification (“ASC”) Section 606, “Revenue from Contracts with Customers”. The new section will replace Section 605, “Revenue Recognition” and creates modifications to various other revenue accounting standards for specialized transactions and industries. The section is intended to conform revenue accounting principles with a concurrently issued International Financial Reporting Standards with previously differing treatment between United States practice and those of much of the rest of the world, as well as, to enhance disclosures related to disaggregated revenue information. The updated guidance is effective for annual reporting periods beginning on or after December 15, 2017, and interim periods within those annual periods. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. We are in the process of determining the impact that the updated accounting guidance will have on our financial statements upon adoption.
In February 2016, FASB issued ASU 2016-2, Leases , under which lessees will recognize most leases on the balance sheet. This will generally increase reported assets and liabilities. For public entities, this ASU is effective for annual and interim periods in fiscal years beginning after December 15, 2018. ASU 2016-2 mandates a modified retrospective transition method for all entities. We are in the process of determining the impact that the updated accounting guidance will have on our financial statements.
In March 2016, the FASB issued ASU 2016-9, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting , which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, this ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company does not believe the standard will have a material impact on its financial statements upon adoption.
Item 2. M anagement’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 in this Quarterly Report on Form 10-Q and the "Risk Factors" described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, our Current Reports on Form 8-K and our other SEC filings.
Company Overview
Insignia Systems, Inc. (referred to in this Quarterly Report on Form 10-Q as “Insignia,” “we,” “us,” “our” and the “Company”) is a developer and marketer of innovative in-store products, programs and services that help consumer packaged goods (“CPG”) manufacturers and retail partners drive sales at the point of purchase. The Company was incorporated in 1990. Since 1998, the Company has focused on managing a retail network, made up of over 22,000 store locations, for the primary purpose of providing turn-key at-shelf market access for CPG manufacturers’ marketing programs. Insignia provides participating retailers with benefits including incremental revenue, incremental sales opportunities, increased shopper engagement in-store, and custom creative development and other in-kind services.
Insignia’s primary product is the Point-Of-Purchase Services (POPS ® ) in-store marketing program. Insignia POPS program is a national, account-specific, shelf-edge advertising and promotional tactic. Internal testing has indicated the program delivers incremental sales for the featured brand. The program allows manufacturers to deliver vital product information to consumers at the point-of-purchase, and to leverage the local retailer brand and store-specific prices to provide a unique “call to action” that draws attention to the featured brand and triggers a purchase decision. CPG customers benefit from Insignia’s nimble operational capabilities, which include short lead times, in-house graphic design capabilities, post-program analytics, and micro-marketing capabilities such as variable or bilingual messaging.
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In October 2014, the Company announced the introduction of a new product, The Like Machine TM , which is an innovative new media that harnesses the power of social media, consumer engagement, and word-of-mouth recommendation at the point of purchase. The Company previously licensed this product from TLM Holdings, LLC (“TLMH”), a company in which Insignia’s former Chief Sales and Marketing Officer, Tim Halfmann, is the majority owner and serves as a principal. In March 2016, the Company and TLMH signed a new distribution agreement for the sale of The Like Machine to Insignia’s customers. This distribution agreement replaced the Company’s prior license agreement with TLMH. Mr. Halfmann resigned from Insignia, effective April 30, 2016, in order to focus his efforts more fully on the TLM product and its evolution going forward.
The Company implemented a plan to restructure its operations in September 2016, including workforce reductions and other cost-saving initiatives, as well as, adding certain positions. As part of this restructuring plan, the Company reduced its workforce by approximately 12%. A pre-tax restructuring charge of $121,000 was recorded during the three and nine months ended September 30, 2016 and is accrued for and included in accrued compensation as of September 30, 2016. The Company recorded $41,000 of this charge within cost of sales and $80,000 within operating expenses in the Company’s statement of comprehensive income (loss). The Company anticipates $82,000 of additional restructuring charges for the year ended December 31, 2016.
2016 Business Overview
Summary of Financial Results
For the quarter ended September 30, 2016, the Company generated revenues of $6,469,000, as compared with revenues of $7,548,000 for the quarter ended September 30, 2015. For the nine months ended September 30, 2016, the Company generated total net sales of $19,164,000, as compared with total net sales of $20,762,000 in the nine months ended September 30, 2015. Net loss for the quarter ended September 30, 2016 was $167,000, as compared to net income of $561,000 for the quarter ended September 30, 2015. Net loss for the nine months ended September 30, 2016 was $576,000, as compared to net income of $907,000 for the nine months ended September 30, 2015.
During the nine months ended September 30, 2016, cash and cash equivalents increased $2,889,000 from $8,523,000 at December 31, 2015, to $11,412,000 at September 30, 2016. Available-for-sale investments decreased to $3,430,000 at September 30, 2016, compared to $9,490,000 at December 31, 2015. We had no debt as of September 30, 2016.
Results of Operations
The following table sets forth, for the periods indicated, certain items in the Company’s Statements of Comprehensive Income (Loss) as a percentage of total net sales.
Three Months Ended
Nine Months Ended
September 30
September 30
2016
2015
2016
2015
Net sales
100.0 %
100.0 %
100.0 %
100.0 %
Cost of sales
69.1
53.7
68.2
55.2
Gross profit
30.9
46.3
31.8
44.8
Operating expenses:
Selling
14.2
12.7
16.0
16.6
Marketing
3.7
6.2
4.0
6.0
General and administrative
13.6
15.1
16.5
15.0
Total operating expenses
31.5
34.0
36.5
37.6
Operating income (loss)
(0.6 )
12.3
(4.7 )
7.2
Other income
0.2
0.2
0.3
0.2
Income (loss) before taxes
(0.4 )
12.5
(4.4 )
7.4
Income tax expense (benefit)
2.2
5.1
(1.4 )
3.0
Net income (loss)
(2.6 )%
7.4 %
(3.0 )%
4.4 %
9
Three and Nine Months Ended September 30, 2016 Compared to Three and Nine Months Ended September 30, 2015
Net Sales. Net sales for the three months ended September 30, 2016 decreased 14.3% to $6,469,000, compared to $7,548,000 for the three months ended September 30, 2015. Total net sales for the nine months ended September 30, 2016 decreased 7.7% to $19,164,000, compared to $20,762,000 for the nine months ended September 30, 2015.
Service revenues for the three months ended September 30, 2016 decreased 14.8% to $6,050,000, compared to $7,098,000 for the three months ended September 30, 2015. The decrease was primarily due to a 9.6% decrease in the number of signs placed, partially due to a 2015 sales promotion which was not repeated in 2016, and a 6.7% decrease in average price per sign, which was a result of competitive pressures and changes in CPG spending patterns. Service revenues for the nine months ended September 30, 2016 decreased 7.9% to $17,830,000, compared to $19,356,000 for the nine months ended September 30, 2015. The decrease was primarily due to a 5.8% decrease in average price per sign, which was a result of competitive pressures and changes in CPG spending patterns, and a 2.7% decrease in the number of signs placed, partially due to a 2015 sales promotion which was not repeated in 2016. The 2015 sales promotion, which was not repeated in 2016, is also expected to have an impact on fourth quarter 2016.
Product revenues for the three months ended September 30, 2016 decreased 6.9% to $419,000, compared to $450,000 for the three months ended September 30, 2015. The decrease was primarily due to lower sales of sign card supplies. Product revenues for the nine months ended September 30, 2016 decreased 5.1% to $1,334,000, compared to $1,406,000 for the nine months ended September 30, 2015. The decrease was primarily due to lower sales of sign card supplies.
Gross Profit. Gross profit for the three months ended September 30, 2016 decreased 42.8% to $2,000,000, compared to $3,499,000 for the three months ended September 30, 2015. Gross profit for the nine months ended September 30, 2016 decreased 34.5% to $6,083,000, compared to $9,287,000 for the nine months ended September 30, 2015. Gross profit as a percentage of total net sales decreased to 30.9% for the three months ended September 30, 2016, compared to 46.3% for the three months ended September 30, 2015. Gross profit as a percentage of total net sales decreased to 31.8% for the nine months ended September 30, 2016, compared to 44.8% for the nine months ended September 30, 2015.
Service revenues: Gross profit from our service revenues for the three months ended September 30, 2016 decreased 44.1% to $1,879,000, compared to $3,364,000 for the three months ended September 30, 2015. The decrease was primarily due to a decrease in sales, as our gross profit percentage is highly dependent on sales levels, combined with a decreased average price per sign, and increased costs associated with retail network growth initiatives and costs associated with the implementation project for our new IT operating infrastructure, partially offset by decreased facilities costs. We estimate that the implementation of this new IT operating infrastructure will increase 2016 expense by approximately $400,000, including approximately $120,000 in the fourth quarter of 2016. The project is expected to be completed in mid-2017, with estimated incremental expense of $900,000 in 2016 and 2017. Gross profit from our service revenues for the nine months ended September 30, 2016 decreased 35.9% to $5,677,000, compared to $8,862,000 for the nine months ended September 30, 2015. The decrease was primarily due to the factors described above.
Gross profit as a percentage of service revenues for the three months ended September 30, 2016 decreased to 31.1%, compared to 47.4% for the three months ended September 30, 2015. The decrease was primarily due to the factors described above. Gross profit as a percentage of service revenues for the nine months ended September 30, 2016 decreased to 31.8%, compared to 45.8% for the nine months ended September 30, 2015. The decrease was primarily due to the factors described above.
Product revenues: Gross profit from our product revenues for the three months ended September 30, 2016 decreased 10.4% to $121,000, compared to $135,000 for the three months ended September 30, 2015. The decrease was primarily due to a decrease in sales. Gross profit from our product revenues for the nine months ended September 30, 2016 decreased 4.5% to $406,000, compared to $425,000 for the nine months ended September 30, 2015. The decrease was primarily due to a decrease in sales, partially offset by decreased facilities, production, and tooling costs.
10
Gross profit as a percentage of product revenues was 28.9% for the three months ended September 30, 2016, compared to 30.0% for the three months ended September 30, 2015. The decrease was primarily due to a decrease in sales. Gross profit as a percentage of product revenues was 30.4% for the nine months ended September 30, 2016, compared to 30.2% for the nine months ended September 30, 2015. The increase was primarily due to decreased facilities, production, and tooling costs, partially offset by a decrease in sales.
Operating Expenses
Selling. Selling expenses for the three months ended September 30, 2016 decreased 4.7% to $917,000, compared to $962,000 for the three months ended September 30, 2015. The decrease was primarily due to lower variable compensation related to lower sales, and other sales related expenses, partially offset by costs relating to restructuring. Selling expenses for the nine months ended September 30, 2016 decreased 11.3% to $3,061,000, compared to $3,451,000 for the nine months ended September 30, 2015. The decrease was primarily due to decreased staffing and staffing-related costs, combined with lower variable compensation and other sales related expenses, partially offset by  costs relating to restructuring.
Selling expenses as a percentage of total net sales increased to 14.2% for the three months ended September 30, 2016 compared to 12.7% for the three months ended September 30, 2015. The increase was primarily due decreased sales, combined with costs relating to restructuring, partially offset by lower variable compensation related to lower sales, and other sales related expenses. Selling expenses as a percentage of total net sales decreased to 16.0% for the nine months ended September 30, 2016 compared to 16.6% for the nine months ended September 30, 2015. The decrease was primarily due to lower staffing and staffing-related costs, combined with lower variable compensation and other sales related expenses, partially offset by decreased sales and costs relating to restructuring.
Marketing. Marketing expenses for the three months ended September 30, 2016 decreased 48.3% to $242,000, compared to $468,000 for the three months ended September 30, 2015. Decreased marketing expense was primarily due to decreased staffing and staff related costs, partially due to open positions, combined with decreased consulting fees. Marketing expenses for the nine months ended September 30, 2016 decreased 38.7% to $769,000, compared to $1,254,000 for the nine months ended September 30, 2015. The decrease was primarily due to the factors described above.
Marketing expenses as a percentage of total net sales decreased to 3.7% for the three months ended September 30, 2016, compared to 6.2% for the three months ended September 30, 2015. The decrease was primarily due to the factors described above, partially offset by decreased sales. Marketing expenses as a percentage of total net sales decreased to 4.0% for the nine months ended September 30, 2016, compared to 6.0% for the nine months ended September 30, 2015. The decrease was primarily due to the factors described above, partially offset by decreased sales.
General and administrative. General and administrative expenses for the three months ended September 30, 2016 decreased 23.2% to $879,000, compared to $1,145,000 for the three months ended September 30, 2015. The decrease was primarily due to costs associated with the resignation of the Company’s former Chief Executive Officer in 2015. General and administrative expenses for the nine months ended September 30, 2016 increased 1.3% to $3,149,000, compared to $3,110,000 for the nine months ended September 30, 2015. The increase was primarily due to increased legal fees, partially offset by decreased staffing and staff related costs and the costs associated with the resignation of the Company’s former Chief Executive Officer in 2015.
General and administrative expenses as a percentage of total net sales decreased to 13.6% for the three months ended September 30, 2016, compared to 15.1% for the three months ended September 30, 2015. The decrease was primarily due to the factors described above, partially offset by decreased sales. General and administrative expenses as a percentage of total net sales increased to 16.5% for the nine months ended September 30, 2016, compared to 15.0% for the nine months ended September 30, 2015. The increase was primarily due to the factors described above combined with decreased sales.
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Other Income. Other income for the three months ended September 30, 2016 was $12,000, compared to $19,000 for the three months ended September 30, 2015. Other income for the nine months ended September 30, 2016 was $44,000, compared to $56,000 for the nine months ended September 30, 2015. Other income is composed of interest earned on cash, cash equivalents, and available-for-sale investment balances.
Income Taxes. For the three and nine months ended September 30, 2016, the Company recorded income tax expense (benefit) of $141,000 and $(276,000), or (542.3%) and 32.4% of loss before taxes, respectively. For the three and nine months ended September 30, 2015, the Company recorded income tax expense of $382,000 and $621,000, or 40.5% and 40.6% of income before taxes, respectively. The income tax provision (benefit) for the three and nine months ended September 30, 2016 and 2015 is composed of federal and state taxes. The primary differences between the Company’s September 30, 2016 and 2015 effective tax rates and the statutory federal rate are expenses related to stock-based compensation and nondeductible meals and entertainment. At relatively low levels of projected income (loss) before income taxes, these differences can result in large swings in the effective rate which resulted in an income tax expense for the three months ended September 30, 2016 despite a pre-tax loss. The Company reassesses its effective rate each reporting period and adjusts the annual effective rate if deemed necessary, based on projected annual taxable income (loss).
Net Income (Loss). For the reasons stated above, net loss for the three and nine months ended September 30, 2016 was $167,000 and $576,000, respectively, compared to net income of $561,000 and $907,000, respectively, for the three and nine months ending September 30, 2015.
Other Comprehensive Income. Other comprehensive income is composed of unrealized gains and losses, net of tax, from available-for-sale investments.
Liquidity and Capital Resources
The Company has financed its operations with proceeds from stock sales and sales of its services and products. At September 30, 2016, working capital was $21,439,000, compared to $21,297,000 at December 31, 2015. During the nine months ended September 30, 2016, cash and cash equivalents increased $2,889,000 from $8,523,000 at December 31, 2015 to $11,412,000 at September 30, 2016, while available-for-sale investments decreased $6,060,000 from $9,490,000 at December 31, 2015 to $3,430,000 at September 30, 2016.
Operating Activities : Net cash used in operating activities during the nine months ended September 30, 2016 was $2,406,000. Net loss of $576,000, plus non-cash adjustments of $1,287,000 and changes in operating assets and liabilities of $(3,117,000) resulted in the $2,406,000 of cash used in operating activities. The largest component of the change in operating assets and liabilities was accounts payable and accrued liabilities, which decreased $2,369,000 and fluctuates based on normal business conditions. The non-cash adjustments consisted of depreciation and amortization expense, changes in allowance for doubtful accounts, stock-based compensation expense, and gain on sale of property and equipment. In the normal course of business, our accounts receivable, accounts payable, accrued liabilities and deferred revenue will fluctuate depending on the level of revenues and related business activity, as well as billing arrangements with customers and payment terms with retailers.
Investing Activities : Net cash provided by investing activities during the nine months ended September 30, 2016 was $5,552,000. This was related to the proceeds from sale or maturity of investments of $6,071,000 and proceeds received from the sale of property and equipment of $5,000, partially offset by the purchase of property and equipment of $524,000.
Financing Activities : Net cash used in financing activities during the nine months ended September 30, 2016 was $257,000, which related to the repurchase of common stock under the Company’s share repurchase plan of $301,000, partially offset by proceeds received from issuance of common stock under the employee stock purchase plan and stock option exercises of $44,000.
The Company anticipates capital expenditures to be approximately $1.5 million in 2016, of which approximately $1.0 million will be in the fourth quarter of 2016; primarily related to investment in production equipment and the continuing implementation of our new IT operating infrastructure.
12
The Company believes that based upon current business conditions and plans, its existing cash and investment balances and future cash generated from operations will be sufficient for its cash requirements for at least the next twelve months.
Critical Accounting Policies
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
Our significant accounting policies are described in Note 1 to the annual financial statements as of and for the year ended December 31, 2015, included in our Form 10-K filed with the Securities and Exchange Commission on March 18, 2016. We believe our most critical accounting policies and estimates include the following:
●
revenue recognition;
●
allowance for doubtful accounts;
●
impairment of long-lived assets;
●
income taxes; and
●
stock-based compensation.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements made in this Quarterly Report on Form 10-Q 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 which may cause the actual results or performance of the Company to be materially different from the results or performance expressed or implied by such forward-looking statements. The words “believes,” “expects,” “anticipates,” “seeks” and similar expressions identify forward-looking statements. 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; (ii) that we expect fluctuations in accounts receivable and payable, accrued liabilities, and deferred revenue; and (iii) plans to repurchase Company stock. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this statement was made. 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 risk that management may be unable to fully or successfully implement its business plan to achieve and maintain increased sales and resultant profitability in the future; (ii) the risk that the Company will not be able to develop and implement new product offerings, including mobile, digital or other new offerings, in a successful manner; (iii) prevailing market conditions, including pricing and other competitive pressures, in the in-store advertising industry and, intense competition for agreements with retailers and consumer packaged goods manufacturers; (iv) potentially incorrect assumptions by management with respect to the financial effect of current strategic decisions, the effect of current sales trends on fiscal year 2016 results and the benefit of our relationship with News America; (v) termination of all or a major portion of, or a significant change in terms and conditions of, a material agreement with a consumer packaged goods manufacturer, retailer, or News America; (vi) other economic, business, market, financial, competitive and/or regulatory factors affecting the Company’s business generally; (vii) our ability to successfully implement our new IT operating infrastructure; and (viii) our ability to attract and retain highly qualified managerial, operational and sales personnel. 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, 2015, 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.
13
Item 3. Q uantitative and Qualitative Disclosures about Market Risk
Not applicable.
I tem 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report. Disclosure controls and procedures ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and are designed to ensure that information required to be disclosed by us in these reports is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding disclosures.
(b) Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. L egal Proceedings
None.
Item 1A. R isk Factors
We described the most significant risk factors applicable to the Company in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2015. We believe there have been no material changes from the risk factors disclosed in that Form 10-K.
14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On October 30, 2015, the Board of Directors authorized the repurchase of up to $5,000,000 of the Company’s common stock on or before October 30, 2017. The plan allows the repurchases to be made in open market or privately negotiated transactions. The plan does not obligate the Company to repurchase any particular number of shares, and may be suspended at any time at the Company’s discretion.
Our share repurchase activity for the three months ended September 30, 2016, was as follows:
Total Number of Shares Repurchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans
July 1 – 31, 2016
8,644 (1)
$ 2.22
1,700
$ 4,736,000
August 1 – 31, 2016
7,965
$ 2.29
7,965
$ 4,718,000
September 1 – 30, 2016
13,544
$ 2.28
13,544
$ 4,687,000
Total
30,153
$ 2.28
(1)
Includes 6,944 shares surrendered to the Company to satisfy minimum tax withholding obligations in connection with the vesting of restricted stock units. These shares were not purchased under the Board of Directors authorization described above.
Item 3. D efaults upon Senior Securities
None.
Item 4. M ine Safety Disclosures
Not applicable.
Item 5. O ther Information
None.
15
Item 6. E xhibits
Unless otherwise indicated, all documents incorporated herein by reference to a document filed with the SEC pursuant to the Exchange Act are located under SEC file number 001-13471.
Exhibit Number
Description
3.1
Composite Articles of Incorporation of Registrant, as amended through July 31, 2008 (incorporated by reference to Exhibit 3.1 to annual report on Form 10-K for the year ended December 31, 2015)
3.2
Composite Bylaws of Registrant, as amended through December 5, 2015 (incorporated by reference to Exhibit 3.2 to annual report on Form 10-K for the year ended December 31, 2015)
31.1
Certification of Principal Executive Officer
31.2
Certification of Principal Accounting and Financial Officer
32
Section 1350 Certification
101
The following materials from Insignia Systems, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets; (ii) Statements of Comprehensive Income (Loss); (iii) Statements of Cash Flows; and (iv) Notes to Financial Statements.
16
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.
INSIGNIA SYSTEMS, INC.
Dated: October 27, 2016
By:
/s/ Kristine A. Glancy
Kristine A. Glancy
President and Chief Executive Officer
(on behalf of registrant)
Dated:  October 27, 2016
By:
/s/ Mark Cherrey
Mark Cherrey
Director of Finance and Controller
(interim principal accounting and financial officer)
EXHIBIT INDEX
Exhibit Number
Description
Method of Filing
3.1
Composite Articles of Incorporation of Registrant, as amended through July 31, 2008
Incorporated by Reference
3.2
Composite Bylaws of Registrant, as amended through December 5, 2015
Incorporated by Reference
31.1
Filed Electronically
31.2
Filed Electronically
32
Furnished Electronically
101
The following materials from Insignia Systems, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Balance Sheets; (ii) Statements of Comprehensive Income (Loss); (iii) Statements of Cash Flows; and (iv) Notes to Financial Statements.
Filed Electronically
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