What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-11 compared with 2021-11-05 · 115 added, 144 removed, 60 unchanged (81% of the section changed)

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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/A for the fiscal year ended December 31, 2020, our Current Reports on Form 8-K and our other SEC filings.

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”) is a leading provider of in-store solutions to consumer-packaged goods (“CPG”) manufacturers, retailers, shopper marketing agencies and brokerages (“clients”).

We believe our products and services are attractive to our clients because of our speed to market, ability to customize our solutions down to store level 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 CPG manufacturers spanning from some of the largest multinationals to new and emerging brands.

For retailers and CPG manufacturers 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 focus on relationships with our clients and installation and print production vendors (“execution partners”) as we believe they are our future.

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 by delivering superior customer service that our clients deserve.

Our in-store solutions execute 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.

We have faced increasingly intense competition for the marketing expenditures of CPG manufacturers for in-store signage.

We have observed increased competition in growing and maintaining our network of retailers into which we are authorized to sell solutions as competitors continue to purchase new or extend exclusive arrangements with retailers for that purpose.

The increased competition has caused POPs sales to decline and we expect continued declines.

New product investments by large and emerging CPG manufacturers give us optimism that our product portfolio is relevant to our clients.

Over the past several years, we have diversified our portfolio through a significant expansion of our offered solutions and development of a portfolio designed to more holistically meet the needs of our clients and execution partners.

This diversification has resulted in non-POPS solutions revenue growing 70% for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

For the three months ended September 30, 2021, non-POPs solutions revenue declined 18% compared to the three months ended September 30, 2020 primarily due to an unusually strong third quarter of 2020 as programs deferred in the second quarter of 2020 due to Covid were executed and included in revenue in the third quarter of 2020.

Our non-POPS revenue has grown year over year since we began the expansion of our offered solutions in 2017.

We remain committed to further refining and enhancing our solutions and broadening our retailer relationships.

(“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

Evaluating the third quarter of 2021 is challenging given the dramatic impacts of the COVID-19 pandemic on the Company in the three and nine months ended September 30, 2020.

In the second quarter of 2020, the pandemic substantially reduced our sales due to the deferral and/or cancelation of a large number of programs that were originally slated for execution in the second quarter of 2020, the majority of these deferred programs executed during the third quarter of 2020.

In contrast to much of the preceding 15 to 18 months, we are currently seeing a limited direct impact on our business related to the pandemic.

However, 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.

Our future bookings may be negatively impacted due to these ongoing changes in the retail landscape and evolution of shoppers’ behavior in response to COVID-19.

The permanence of these changes is unknown.

Further, it is possible the COVID-19 pandemic, particularly in light of variant strains of the virus, could further impact our operations and the operations of customers and retailers as a result of quarantines, facility closures, illnesses, and travel and logistics restrictions.

The extent to which the COVID-19 pandemic impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the resumption of high levels of infection and hospitalization, the resulting impact on our customers, suppliers, and vendors and the overall retail landscape, the remedial actions and stimulus measures adopted by federal, state, and local governments, and to what extent normal economic and operating conditions are impacted.

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 will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders.

We are unable to determine or predict the nature, duration or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources.

However, we believe that it is important to share where our company stands today, how our response to COVID-19 is progressing and how our operations and financial condition may change as the fight against COVID-19 progresses.

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 September 30, 2021, the Company generated net sales of $3,493,000, as compared with revenues of $4,435,000 for the quarter ended September 30, 2020.

For the nine months ended September 30, 2021, the Company generated revenues of $14,975,000, as compared with revenues of $12,428,000 in the nine months ended September 30, 2020.

Net loss for the quarter ended September 30, 2021 was $921,000, as compared to net loss of $886,000 for the quarter ended September 30, 2020.

Net loss for the nine months ended September 30, 2021 was $2,552,000, as compared to net loss of $3,654,000 for the nine months ended September 30, 2020.

The COVID-19 pandemic negatively impacted revenue and net loss for the three and nine months ended September 30, 2020.

Revenue from our non-POPS solutions has increased significantly for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020.

This increase was partially offset by continued declines in our signage business due to competitive pressure, which we expect to continue.

We are investing in both people and resources to support the growth of non-POPS, while also shifting resources away from signage.

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 nine months ended September 30, 2021, cash and cash equivalents and restricted cash decreased $3,394,000 from $7,128,000 at December 31, 2020, to $3,734,000 at September 30, 2021.

The Company had no long-term debt other than its lease obligations as of September 30, 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

Nine Months Ended

For the Three Months Ended March 31

Cost of sales

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Total operating expenses

Operating loss

Operating income (loss)

Other income (expense)

Loss before taxes

Income tax expense (benefit)

Three and Nine months Ended September 30, 2021 Compared to Three and Nine months Ended September 30, 2020

Net sales for the three months ended September 30, 2021 decreased 21.2% to $3,493,000 compared to $4,435,000 for the three months ended September 30, 2020.

Net sales for the nine months ended September 30, 2021 increased 20.5% to $14,975,000 compared to $12,428,000 for the nine months ended September 30, 2020.

Service revenues .

Service revenues for the three months ended September 30, 2021 decreased 19.1% to $3,493,000 compared to $4,317,000 for the three months ended September 30, 2020.

The decrease is primarily due to the comparison with the strong sales in the third quarter of 2020 which resulted from the deferral of programs from the second quarter of 2020 to the third quarter of 2020 due to COVID-19.

Due to sales cycles within the retailers that our non-POPS solutions execute we anticipate some seasonality in sales, with those sales relatively stronger in the first half of the year.

Further declines in service revenue for the three months ended September 30, 2021 compared to the three months ended September 30, 2020 are due to continued declines in POPS solutions revenue of 21.5%.

Service revenues for the nine months ended September 30, 2021 increased 26.4% to $14,975,000 compared to $11,850,000 for the nine months ended September 30, 2020.

The increase was due to a 69.7% increase in non-POPS revenue, partially offset by a decrease in POPS solutions revenue of 26.9% for the nine months ended September 30, 2021.

For the nine months ended September 30, 2021, non-POPS revenue has increased due to both sales to new CPGs and an increase in sales to existing CPGs as well as the comparison to sales being depressed by the impact of COVID-19 in the nine months ended September 30, 2020.

Competitive pressures have resulted in decreased POPS solutions revenue for the three and nine months ended September 30, 2021 versus the three and nine months ended September 30, 2020.

We will continue to have increased pressure on our POPS business in 2021, including the impacts from the expiration in April 2021 of our 10-year selling agreement with News America Marketing In-Store (“News America”).

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.

Due to the August 2020 sale of the custom print business, there were no product sales for the three and nine months ended September 30, 2021 compared to $118,000 and $578,000 for the three and nine months ended September 30, 2020, respectively.

Income (loss) before taxes

Income tax expense

Net income (loss)

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

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 September 30, 2021 decreased 2.5% to $545,000 compared to $559,000 for the three months ended September 30, 2020.

Gross profit as a percentage of total net sales increased to 15.6% for the three months ended September 30, 2021 compared to 12.6% for the three months ended September 30, 2020.

Gross profit for the nine months ended September 30, 2021 increased 47.0% to $2,682,000 compared to $1,824,000 for the nine months ended September 30, 2020.

Gross profit as a percentage of total net sales increased to 17.9% for the nine months ended September 30, 2021 compared to 14.6% for the nine months ended September 30, 2020.

Service revenues.

Gross profit from our service revenues for the three months ended September 30, 2021 decreased 1.4% to $545,000 compared to $553,000 for the three months ended September 30, 2020.

The decrease in gross profit was primarily due to the decrease in non-POPS solution sales in comparison to 2020 which were strong due to the deferral of programs from the second quarter of 2020 to the third quarter of 2020 because of COVID-19, partially offset by POPS solutions margin as the Company reduced guaranteed payment obligations by renegotiating several fixed or store-based retail payment contracts to sign placement-based payment contracts during 2020.

Gross profit from our service revenues for the nine months ended September 30, 2021 increased 54.3% to $2,682,000 compared to $1,738,000 for the nine months ended September 30, 2020.

The increase was primarily due to the POPS solutions margin as described above, in addition to a 69.7% increase in non-POPS solutions revenue for the nine months ended September 30, 2021 compared to the nine months ended September 30,2020.

Gross profit as a percentage of service revenues for the three months ended September 30, 2021 increased to 15.6% compared to 12.8% for the three months ended September 30, 2020.

Gross profit as a percentage of service revenues for the nine months ended September 30, 2021 increased to 17.9% compared to 14.7% for the nine months ended September 30, 2020.

The increases for both periods were primarily due to the factors described above, partially offset by reduced gross profit rates on non-POPS solutions due to the Company’s decision to make an investment in the execution of a large non-POPS program in the first half of 2021.

Product revenues.

Due to the August 2020 sale of the custom print business, there was no gross profit for the three and nine months ended September 30, 2021 compared to $6,000 and $86,000 for the three and nine months ended September 30, 2020, respectively.

Gross profit as a percentage of product revenues for the three and nine months ended September 30, 2020 was 5.1% and 14.9%, respectively.

Impairment Loss.

Impairment loss for the nine months ended September 30, 2020 was $159,000 as a result of the impairment during the first quarter of the Company’s selling agreement with News America, a long-lived asset.

The impairment charge is described further in Note 3 of our accompanying unaudited financial statements.

There was no impairment loss during the three and nine months ended September 30, 2021.

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 expenses for the three months ended September 30, 2021 decreased 27.4% to $425,000 compared to $585,000 for the three months ended September 30, 2020.

Selling expenses for the nine months ended September 30, 2021 decreased 37.0% to $1,406,000 compared to $2,232,000 for the nine months ended September 30, 2020.

The decreases for both periods were primarily due to reductions in staffing incurred in 2020 and other decreased staff related expenses.

Selling expenses as a percentage of total net sales decreased to 12.2% for the three months ended September 30, 2021 compared to 13.2% for the three months ended September 30, 2020.

Selling expenses as a percentage of net sales decreased to 9.4% for the nine months ended September 30, 2021 compared to 17.9% for the nine months ended September 30, 2020.

The decreases for both periods were primarily due to decreased expense described above, in addition to increased sales for the nine months ended September 30, 2021.

Marketing expenses for the three months ended September 30, 2021 increased 38.5% to $266,000 compared to $192,000 for the three months ended September 30, 2020.

The increase was due to an increase in non-POPS solutions promotional activities.

Marketing expense for the nine months ended September 30, 2021 decreased 4.9% to $761,000 compared to $800,000 for the nine months ended September 30, 2020.

The decreases was primarily the result of decreased consulting expenses, partially offset by the increased promotional activities described above.

Marketing expenses as a percentage of total net sales increased to 7.6% for the three months ended September 30, 2021 compared to 4.3% for the three months ended September 30, 2020.

The increase was due to the factors described above.

Marketing expenses as a percentage of net sales decreased to 5.1% for the nine months ended September 30, 2021 compared to 6.4% for the nine months ended September 30, 2020.

The decrease was due to increased sales, in addition to the factors described above.

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 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 September 30, 2021 decreased 7.3% to $779,000 compared to $840,000 for the three months ended September 30, 2020.

The decrease was due to decreased staffing.

General and administrative expenses for the nine months ended September 30, 2021 increased 42.9% to $4,052,000 compared to $2,836,000 for the nine months ended September 30, 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.

General and administrative expenses as a percentage of total net sales increased to 22.3% for the three months ended September 30, 2021 compared to 19.0% for the three months ended September 30, 2020.

The increase was primarily due to decreased sales, partially offset by decreased staffing.

General and administrative expenses as a percentage of net sales increased to 27.0% for the nine months ended September 30, 2021 compared to 22.8% for the nine months ended September 30, 2020.

The increase was due to expenses incurred as a result of the litigation with News America, partially offset by increased sales.

Gain on sale.

Gain on sale for the three and nine months ended September 30, 2020 was $195,000 as a result of the sale of our custom print business.

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 income for the three months ended September 30, 2021 was $13,000 compared to other expense of $15,000 for the three months ended September 30, 2020.

Other income for the nine months ended September 30, 2021 was $1,017,000 compared to other expense of $8,000 for the nine months ended September 30, 2020.

The increase for the nine months ended September 30, 2021 was due to the gain on forgiveness of debt and accrued interest of $1,062,000 from the SBA forgiving the Company of its Note entered into pursuant to the PPP of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, partially offset of interest expense related to sales tax accrued.

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 and nine months ended September 30, 2021, the Company recorded income tax expense of $9,000 and $32,000, or 1.0% and 1.3% of loss before taxes, respectively.

For the three and nine months ended September 30, 2020, the Company recorded income tax expense and an income tax benefit, respectively, of $8,000 and $203,000, or 0.9% and (5.3%) of loss before taxes, respectively.

The income tax expense or benefit for the three and nine months ended September 30, 2021 and 2020 is comprised of federal and state taxes.

The primary differences between the Company’s September 30, 2021 and 2020 effective tax rates and the statutory federal rate are expenses related to stock-based compensation, nondeductible meals and entertainment and an increase in the Company’s valuation allowance against its deferred tax assets and for September 30, 2021, non-deductible penalties and loan forgiveness from the PPP loan.

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).

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Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria.

As of September 30, 2021, and December 31, 2020, the Company had unrecognized tax benefits totaling $703,000 and $677,000, 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 $703,000.

The Company believes that it is reasonably possible that a decrease of up to $650,000 in unrecognized tax benefits related to state exposures may be necessary within the coming year, which would reduce accrued income taxes and increase income tax benefit.

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.

At September 30, 2021 and December 31, 2020, the Company had a valuation allowance of approximately $2,811,000 and $1,946,000, respectively, against its entire net deferred tax asset because the Company does not believe it is more likely than not that it will realize its net deferred tax asset.

In March 2020, Congress passed the CARES Act.

The CARES Act, among other provisions, allows for companies to carry back federal NOLs generated in 2018, 2019 and 2020 for up to five years for refunds of federal taxes paid.

This provision created an opportunity for the Company to utilize NOLs not previously expected to be utilized.

Thus, in 2020 the Company reversed approximately $215,000 of its valuation allowance against the NOLs in its deferred tax assets which the Company carried back to claim a refund of federal taxes paid.

As the Company expects to receive the tax refund from the ability to carry back the NOLs within the next 12 months, this discrete benefit was recorded within income taxes receivable on the balance sheet.

In addition, to the $215,000 recognized, $17,000 was included as a discrete tax benefit for 2020 and included in income taxes receivable related to the NOL carry back due to differences in the federal tax rate utilized for the deferred tax asset compared to the rates in effect for the years in which the NOL is being carried back.

For the reasons stated above, net loss for the three and nine months ended September 30, 2021 was $921,000 and $2,552,000, respectively, compared to net loss of $886,000 and $3,654,000, respectively, for the three and nine months ending September 30, 2020.

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 September 30, 2021, working capital was $4,799,000 (defined as current assets less current liabilities) compared to $7,668,000 at December 31, 2020.

During the nine months ended September 30, 2021, cash and cash equivalents and restricted cash decreased $3,394,000 from $7,128,000 at December 31, 2020, to $3,734,000 at September 30, 2021.

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 nine months ended September 30, 2021, was $3,323,000.

Net loss of $2,552,000, less non-cash adjustments of $789,000, plus changes in operating assets and liabilities of $20,000 resulted in the $3,323,000 of cash used by operating activities.

The largest components of the change in operating assets and liabilities were accounts receivable which decreased $1,620,000 from December 31, 2020 and accounts payable, which decreased $1,655,000 from December 31, 2020, this decrease was a result of lower sales in the third quarter of 2021 which resulted in lower accounts receivable and which led to reduced amounts owed to POPS retailers and for execution costs on non-POPS solutions.

The non-cash adjustments consisted of depreciation and amortization expense, gain on sale of property and equipment, changes in allowance for doubtful accounts, gain on forgiveness of PPP loan and accrued interest and stock-based compensation expense.

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.

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 nine months ended September 30, 2021 was $65,000.

This was related to the purchase of property and equipment, partially offset by proceeds from the sale of property and equipment.

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 used in financing activities during the nine months ended September 30, 2021 was $6,000, which relates the repurchase of common stock upon the vesting of restricted stock awards, partially offset by proceeds received from issuance of common stock under the employee stock purchase plan.

Net cash provided by financing activities during the nine months ended September 30, 2020 was $1,059,000, which primarily related to proceeds received from our PPP loan.

The Company believes that based upon current business conditions and plans, its existing cash balance 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, 2020, included in our Form 10-K/A filed with the Securities and Exchange Commission on August 23, 2021.

We believe our most critical accounting policies and estimates include the following:

revenue recognition;

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:

allowance for doubtful accounts;

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(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, and revenue deferrals.

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.

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(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 are impacted 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;

(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;

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(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;

(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;

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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, 2020, as amended, 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.

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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis