BLOOMIA HOLDINGS, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the financial statements and the related notes included in this Annual Report on Form 10-K. This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those in such forward-looking statements as a result of many factors, including those discussed in “Forward-Looking Statements” and elsewhere in this report. Overview We are a leading provider of in-store advertising solutions to brands, retailers, shopper marketing agencies and brokerages (“clients”). We believe our products and services are attractive to our clients because of our ability to navigate the complex retail landscape, customize our solutions down to store level, execute with excellence and the results our solutions deliver. Our leadership and employees have extensive industry knowledge, including direct experience through former positions at CPG manufacturers and retailers. We provide marketing solutions to brands spanning from some of the largest multinationals to new and emerging brands. New product investments by large and emerging CPG manufacturers give us optimism that our product portfolio is relevant to our clients. 13 Table of Contents Over the past several years, we have significantly expanded our offered solutions and have developed a portfolio designed to more holistically meet the needs of our clients and execution partners which has diversified our portfolio. Our focus on portfolio diversification resulted in our 2021 non-POPS solutions revenue growing 61% versus 2020, and also resulted in our POPS signage solutions declining to approximately 24% of our total net sales for 2021, compared to 44% of our total net sales in 2020. We remain committed to further refining and enhancing our solutions and broadening our retailer relationships. We continue to optimize costs on our core signage business. The Company implemented a plan to restructure its operations in December 2021, including workforce reductions and other cost-saving initiatives. These changes are expected to result in approximately $500,000 of savings in 2022. We have also worked with our retail partners to optimize our overall fixed expenses on our POPS business. These changes will contribute significant savings to our 2022 plan. We are also continuing to explore strategic options to maximize shareholder value. Potential strategic alternatives that may be evaluated include, but are not limited to, an acquisition, merger, business combination, in-licensing, or other strategic transaction. There can be no assurance that this process will result in any transaction. Impacts and Potential Future Impacts of COVID-19 on Our Business The COVID-19 pandemic has significantly and adversely impacted our operations and the operations of our CPG customers and retailers because of quarantines, illnesses, and travel and logistics restrictions. It is likely to continue to adversely affect our business indefinitely. While we have continued to operate and maintain our continuity with our clients by working remotely, the retail landscape in which CPG manufacturers and retailers operate has changed substantially, as has our ability to execute programs due to both limited access to our retailers and reduced levels of staffing with our execution partners. The financial impact of COVID-19 for 2020 was significant. A significant number of programs originally slated for execution in the second quarter were cancelled. While the impact of COVID-19 moderated to some extent in 2021, we believe it negatively impacted our business in the current year. Our future bookings may be negatively impacted until the COVID-19 pandemic subsides. Factors deriving from the COVID-19 response that have impacted or we believe are likely to negatively impact sales and operating results in the future include, but are not limited to: reduced or delayed levels of CPG spending; reduced levels of staffing with our execution partners; limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state, or federal orders requiring employees to remain at home; and limitations on the ability of our customers to pay us on a timely basis. Even if the COVID-19 pandemic moderates further, we may continue to experience adverse impacts on our business because of any economic recession or depression that has occurred or may occur. Therefore, we cannot reasonably estimate the full extent of the impact on our results of operation and financial condition, but it could be material and last for an extended period of time. We continue to monitor our liquidity, including frequent cost and spending assessments and reductions across our organization. Results of Operations The following table sets forth, for the periods indicated, certain items in the Company’s Statements of Operations as a percentage of total net sales. For the Years Ended December 31 2021 2020 Net sales 100.0 % 100.0 % Cost of sales 83.5 83.7 Gross profit 16.5 16.3 Operating expenses: Selling 9.9 16.5 Marketing 5.3 5.8 General and administrative 25.9 22.8 Gain on sale — (1.1 ) Total operating expenses 41.1 44.0 Operating loss (24.6 ) (27.7 ) Other income 6.7 0.2 Loss before taxes (17.9 ) (27.5 ) Income tax expense (benefit) 0.2 (1.1 ) Net loss (18.1 )% (26.4 )% 14 Table of Contents Year Ended December 31, 2021 Compared to Year Ended December 31, 2020 Net Sales. Net sales for the year ended December 31, 2021 increased 11.6% to $19,503,000, compared to $17,482,000 for the year ended December 31, 2020. Service revenues. Service revenues for the year ended December 31, 2021 increased 15.4% to $19,503,000, compared to $16,904,000 for the year ended December 31, 2020. The increase was due to a 60.9% increase in non-POPS revenue, partially offset by a decrease in POPS solutions revenue of 38.6% for the year ended December 31, 2021. For the year ended December 31, 2021, non-POPS revenue increased due to both sales to new CPGs and an increase in sales to existing CPGs. Competitive pressures have resulted in decreased POPS solutions revenue for the year ended December 31, 2021 versus the year ended December 31, 2020. We expect POPS revenue will continue to decline in 2022 as we have reduced the number of stores in our network due to competitive pressures. While the negative impact from COVID-19 has lessened compared to 2020, future impacts are unknown as CPG manufacturers and retailers react to changes in shoppers’ behavior. Product revenues. Product revenues were from the custom print business which was sold in August 2020. Gross Profit. Gross profit for the year ended December 31, 2021 increased 13.1% to $3,230,000, compared to $2,856,000 for the year ended December 31, 2020. Gross profit as a percentage of total net sales increased to 16.5% for the year ended December 31, 2021, compared to 16.3% for the year ended December 31, 2020. Service revenues. Gross profit from service revenues for the year ended December 31, 2021 increased 14.9% to $3,230,000, compared to $2,811,000 for the year ended December 31, 2020. The increase in gross profit was primarily due to the POPS solutions margin, in addition to a 60.9% increase in non-POPS solutions revenue for the year ended December 31, 2021. The increase in POPS solutions margin was from the Company reducing guaranteed payment obligations by renegotiating several fixed or store-based retail payment contracts to sign placement-based payment contracts during 2020. Gross profit as a percentage of service revenues decreased to 16.5% for the year ended December 31, 2021, compared to 16.6% for the year ended December 31, 2020. The decrease was primarily due to decreased revenue from non-POPS signage solutions which tend to have higher margin rates, partially offset by increased margin rates from POPS signage due to negotiating reduced retail payment contracts, as discussed above. Product revenues. Gross profit from product sales was from the custom print business which was sold in August 2020. Impairment Loss – Services. There was no impairment loss impacting gross profit during the year ended December 31, 2021. Gross profit for the year ended December 31, 2020 was negatively impacted as a result of an impairment loss resulting from the impairment charge of $159,000 on the value of the Company’s selling agreement with News America, a long-lived asset. The impairment charge is described further in Item 8, Footnote 1. Operating Expenses Selling. Selling expenses for the year ended December 31, 2021 decreased 32.9% to $1,931,000, compared to $2,877,000 for the year ended December 31, 2020, primarily due to reductions in staffing in 2020 and other decreased staff related expenses. Selling expenses as a percentage of total net sales decreased to 9.9% in 2021, compared to 16.5% in 2020, primarily due to decreased expense described above, in addition to increased sales for the year ended December 31, 2021. Marketing. Marketing expenses for the year ended December 31, 2021 increased 1.7% to $1,032,000, compared to $1,015,000 for the year ended December 31, 2020. The increase was due to an increase in non-POPS solutions promotional activities, partially offset by decreased consulting expenses. Marketing expenses as a percentage of total net sales decreased to 5.3% in 2021, compared to 5.8% in 2020, primarily due to relatively flat expense over increased sales in 2021. General and Administrative. General and administrative expenses for the year ended December 31, 2021 increased 26.5% to $5,058,000, compared to $3,998,000 for the year ended December 31, 2020. The increase was primarily due to expenses incurred as a result of the litigation with News America, partially offset by a reduction in staff related expenses. 2022 litigation expenses are expected to decrease in comparison to 2021 and to be similar to 2020 expenses. General and administrative expenses as a percentage of total net sales increased to 25.9% in 2021, compared to 22.8% in 2020, primarily due to the increases in expense as described above, partially offset by increased sales. 15 Table of Contents Gain on sale. There was no gain on sale during the year ended December 31, 2021. Gain on sale for the year ended December 31, 2020 was $195,000 as a result of the sale of our custom print business. Other Income. Other income for the year ended December 31, 2021 was $1,299,000 compared to other expense of $33,000 for the year ended December 31, 2020. The increase was due to the gain on forgiveness of debt and accrued interest of $1,062,000 from the SBA forgiving the Company of its promissory note (the “Note”) with Alerus Financial, N.A. entered into pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, as well as a $273,000 benefit received under the Employee Retention Credit for the third quarter of 2021, see Item 8, Footnote 1, partially offset by interest expense related to sales tax accrued. Income Taxes. During the year ended December 31, 2021, the Company recorded an income tax expense of $42,000, compared to an income tax benefit of $191,000 for the year ended December 31, 2020. The effective tax rate was (1.2)% and 4.0% for the years ended December 31, 2021 and 2020, respectively. The primary differences between the Company’s December 31, 2021 and 2020 effective tax rates and the statutory federal rates are expenses related to stock-based compensation in the amounts of $277,000 and $152,000, respectively, forgiveness of the Company’s PPP loan of $1,062,000 in 2021 and a change in the Company’s valuation allowance against its deferred assets of $1,200,000 and $943,000, respectively. The effective tax rate fluctuates between periods based on the level of permanent differences and other discrete items relative to the level of pre-tax loss for the period. Net Loss. For the reasons stated above, including the gain on debt forgiveness of the PPP loan and accrued interest of $1,062,000, the net loss for the year ended December 31, 2021 was $3,534,000 compared to a net loss of $4,615,000 for the year ended December 31, 2020. Liquidity and Capital Resources The Company has financed its operations with proceeds from stock sales and sales of its services and products. At December 31, 2021, working capital (current assets less current liabilities) was $3,716,000 compared to $7,668,000 at December 31, 2020. During the year ended December 31, 2021, cash and cash equivalents and restricted cash decreased $3,277,000 from $7,128,000 at December 31, 2020, to $3,851,000 at December 31, 2021. Operating Activities: Net cash used in operating activities during the year ended December 31, 2021 was $3,000,000. Net loss of $3,534,000, less non-cash adjustments of $689,000, plus changes in operating assets and liabilities of $1,223,000 resulted in the $3,000,000 of cash used in operating activities. The non-cash adjustments consisted of depreciation expense, impairment loss, gain on sale of business, gain on sale of property and equipment, changes in allowance for doubtful accounts, gain on forgiveness of PPP loan and accrued interest of $1,062,000 and stock-based compensation expense. The largest component of the change in operating assets and liabilities was accrued liabilities which increased $665,000 from December 31, 2020. The increase was a result of prepaid production costs. In the normal course of business, our accounts receivable, accounts payable, accrued liabilities, deferred revenue and prepaid production costs will fluctuate depending on the level of revenues and related business activity, as well as billing arrangements with customers and payment terms with retailers. Investing Activities: Net cash used in investing activities during the year ended December 31, 2021 was $90,000. This was related to the purchase of property and equipment, partially offset by proceeds from the sale of property and equipment. Financing Activities: Net cash used in financing activities during the year ended December 31, 2021 was $187,000, which primarily related to the repurchase of common stock upon vesting of restricted stock. The Company used net cash in operating activities during the year ended December 31, 2021 of $3,000,000. Management has taken actions to reduce the cash use, including a restructuring in December 2021 which reduced its work force by 19% and is expected to reduce operating expenses by approximately $500,000 in 2022. The Company incurred significant litigation costs in 2021 in preparing for trial in its litigation against News America. The Company expects significantly lower litigation expenses in 2022. We believe that based upon these actions, current business conditions and plans, our existing cash balance will be sufficient for our cash requirements for at least the next twelve months. 16 Table of Contents Critical Accounting Estimates Our discussion of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. During the preparation of these financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions, including those related to allowance for doubtful accounts, impairment of long-lived assets, income taxes, sales tax, and stock-based compensation expense. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our financial statements. We believe the following are our critical accounting estimates used in preparation of our financial statements: Allowance for Doubtful Accounts . An allowance is established for estimated uncollectible accounts receivable. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, the condition of the general economy and the industry as a whole and other relevant facts and circumstances. Unexpected changes in the aforementioned factors could result in materially different amounts. Impairment of Long-Lived Assets. The Company periodically evaluates the carrying value of its long-lived assets for impairment indicators. If indicators of impairment are present, we evaluate the carrying value of the assets in relation to the future undiscounted cash flows of the underlying assets to assess recoverability of the assets. The estimates of these future cash flows are based on assumptions and projections believed by management to be reasonable and supportable. They require management’s subjective judgments and take into account assumptions about revenue and expense growth rates. Impaired assets are then recorded at their estimated fair market value. In 2011, we paid News America Marketing $4,000,000 in exchange for a 10-year arrangement to sell signs with price into News America Marketing’s network of retailers as News America Marketing’s exclusive agent. The $4,000,000 was being amortized over the 10-year term of the arrangement. During the three months ended March 31, 2020, the impact of COVID-19 was determined to be a triggering event requiring an impairment review of long-lived assets. As of March 31, 2020, the Company determined the asset was impaired based upon continued revenue declines driven by changes in market conditions due to COVID-19 within the stores covered by the agreement. As a result, an impairment of $159,000 was recognized as of March 31, 2020. We also shortened the end of the useful life of the underlying asset from March 31, 2021 to December 31, 2020 and recorded remaining amortization expense on a straight-line basis over the remainder of 2020. Amortization expense without the impairment was $158,000 for the year ended December 31, 2020. At December 31, 2021, the remaining balance of long-lived assets on the Company’s balance sheet was $296,000 inclusive of $183,000 for operating lease right-of-use assets. Sales Taxes . Sales taxes are based on determination of which of the Company’s products/services are subject to sales tax, and in which of various states and other jurisdictions the tax applies. Further, the Company must determine which of our customers are exempt from the Company charging sales tax because the customer is a reseller or self-assesses and direct pays to states and other jurisdictions on purchases the customer makes from the Company. These determinations contain estimates and are subject to judgment and interpretation by taxing authorities in various states and other jurisdictions, which could result in recognizing materially different amounts in future periods. Income Taxes . Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which it operates, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. 17 Table of Contents Stock-Based Compensation Expense . The Company measures and recognizes compensation expense for all stock-based payments at fair value. Restricted stock awards and restricted stock units are valued at the closing market price of the Company’s stock on the date of the grant. The Company uses the Black-Scholes option pricing model to determine the weighted average fair value of options and employee stock purchase plan rights. The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as by assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The expected terms of the options and employee stock purchase plan rights are based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected life at grant date. Volatility is based on historical volatility of the Company’s stock. The Company has not historically issued any dividends beyond the one-time dividends declared in 2011 and 2016 and does not expect to in the future. If factors change and the Company employs different assumptions in the valuation of grants in future periods, the compensation expense that the Company records may differ significantly from what it has recorded in the current period. Forward-Looking Statements Statements in this report that are not statements of historical or current facts are considered forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. The words “anticipates,” “believes,” “estimates,” “expects,” “future,” “likely,” “may,” “projects,” “seeks,” “will,” and similar expressions may identify forward-looking statements. Readers are cautioned not to place undue reliance on these or any forward-looking statements, which speak only as of the date of this report. Statements made in this report regarding, for instance, the ongoing exploration of strategic alternatives, changes in composition of retailer and CPG manufacturer networks, innovation and transformation of the Company’s business, cost savings from restructuring activities, the nature or impact of pending legal proceedings, benefits of outsourcing arrangements, are forward-looking statements. These forward-looking statements are based on current information, which we have assessed and which by its nature is dynamic and subject to rapid and even abrupt changes. As such, actual results may differ materially from the results or performance expressed or implied by such forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, including those set forth in this report and additional risks, if any, identified in our Quarterly Reports on Form 10-Q and our Current Reports on Forms 8-K filed with the SEC. Such forward-looking statements should be read in conjunction with the Company’s filings with the SEC. Insignia assumes no responsibility to update the forward-looking statements contained in this report or the reasons why actual results would differ from those anticipated in any such forward-looking statement, other than as required by law. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Smaller reporting companies are not required to provide disclosure pursuant to this Item. 18 Table of Contents