BLOOMIA HOLDINGS, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Company’s financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated due to various factors discussed under “Cautionary Statement Regarding Forward-Looking Statements” and elsewhere, including Part II, Item 1A, in this Quarterly Report on Form 10-Q and the “Risk Factors” described in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, our Current Reports on Form 8-K and our other SEC filings. Company Overview Insignia Systems, Inc. (“Insignia,” “we,” “us,” “our” and the “Company”) was incorporated in Minnesota in 1990. We are a leading provider of in-store advertising solutions to brands, retailers, shopper marketing agencies and brokerages (“clients”). We believe our products and services are attractive to our clients because of our ability to navigate the complex retail landscape, to customize our solutions down to store level, to execute with excellence and the results our solutions deliver. Our leadership and employees have extensive industry knowledge, including direct experience through former positions at consumer-packaged goods (“CPG”) manufacturers and retailers. We provide marketing solutions to brands spanning from some of the largest multinationals to new and emerging brands. For retailers and brands working in an environment that is tighter, more competitive, and more complex every day, Insignia positions itself as the shopper marketing ally that combines best-in-class execution with imagination, responsiveness, and hunger to help move business forward. We take the relationships we have with our clients and vendor partnerships very seriously by having our team stretch the extra mile to ensure flawless execution. We sincerely approach our projects with the same passion as our clients do. These relationships are built with our brand-led, retailer centric mindset, our ability to be nimble and flexible to the ever-changing industry landscape and our delivery of superior customer service that our clients deserve. Our in-store solutions are executed in retailers spanning from some of the largest national retailers to regional US wholesalers and independents who are leaders in their respective channels and geographies. Up until 2020, our primary solution had been in-store signage, specifically Point-Of-Purchase Services (POPS®). The Insignia POPS solution is a national, account-specific, shelf-edge advertising and promotion tactic. Primarily as a result of competitive pressures and also due to COVID-19, our in-store signage business has declined and become less of a focus in our growth. Beginning in 2018 we began developing and offering an expanded portfolio of solutions including on-pack, merchandising and digital solutions in addition to our core business. Our expanded portfolio allows us to meet the needs of brands, retailers and their agents as their business strategies evolve behind an ever-changing retail landscape. Over the course of 2021 based on client feedback, business results and expanded team capabilities our primary focus is now on in-store solutions, resulting in our decision to exit digital solutions in addition to right-sizing our in-store signage portfolio. With our diversification of business, we recognized over 75% of our revenue from these recently developed solutions in 2021 and over 95% for the three months ended March 31, 2022. Over the last two years we have significantly reduced operating costs and retailer commitments. In the last half of 2020 we outsourced most of our printing and IT operations. In 2021 we relocated our headquarters and operations, both to smaller, more efficient leased spaces, and also restructured operations in December 2021. These changes contributed to reduced expenses in the three months ended March 31, 2022 and are expected to continue to drive savings for the remainder of 2022 compared to 2021. We are also continuing to explore strategic options to maximize shareholder value. Potential strategic alternatives that may be evaluated include, but are not limited to, an acquisition, merger, business combination, in-licensing, or other strategic transaction. There can be no assurance that this process will result in any transaction. 13 Table of Contents Impacts and Potential Future Impacts of COVID-19 on Our Business The COVID-19 pandemic has significantly and adversely impacted our operations and the operations of our CPG customers and retailers because of quarantines, illnesses, and travel and logistics restrictions. The financial impact of COVID-19 for 2020 was significant. A significant number of programs originally slated for execution in the second quarter were cancelled. While the impact of COVID-19 moderated to some extent in 2021 and the first quarter of 2022, we believe it continues to negatively impact our business. Even if the COVID-19 pandemic moderates further, we may continue to experience adverse impacts on our business because of any economic recession or depression that has occurred or may occur. Therefore, we cannot reasonably estimate the full extent of the impact on our results of operation and financial condition, but it could be material and last for an extended period of time. We continue to monitor our liquidity, including frequent cost and spending assessments and reductions across our organization. Business Overview Summary of Financial Results For the quarter ended March 31, 2022, the Company generated revenues of $6,148,000, as compared with revenues of $5,386,000 for the quarter ended March 31, 2021. Net income for the quarter ended March 31, 2022 was $62,000, as compared to a net loss of $737,000 for the quarter ended March 31, 2021. Revenue from our non-POPS solutions has increased significantly for the three months ended March 31, 2022 compared to the three months ended March 31, 2021, partially offset by continued declines in our signage business due to competitive pressure, which we expect to continue. In 2021 we invested in both people and resources to support the growth of non-POPS, while also shifting resources away from signage. We continue to pursue a variety of efforts designed to drive innovation, client acquisitions and retailer expansions. During the first nine months of 2021, litigation expenses increased significantly compared to prior quarters. Litigation expenses for 2022 are expected to decrease in comparison to 2021 and to be similar to 2020 expenses. We also recognized a gain of $1,062,000 on the forgiveness of our PPP loan during the first quarter of 2021. During the quarter ended March 31, 2022, cash and cash equivalents and restricted cash decreased $3,370,000 from $3,851,000 at December 31, 2021 to $481,000 at March 31, 2022. The decrease was primarily driven by the increase in net sales for the three months ended March 31, 2022 compared to the three months ended December 31, 2021, resulting in a $2,206,000 increase in accounts receivable. We have no debt other than our lease obligations at March 31, 2022. Working capital increased $135,000 from $3,716,000 at December 31, 2021 to $3,851,000 at March 31, 2022. Cash and cash equivalents plus restricted cash at April 30, 2022 was $3.0 million. Results of Operations The following table sets forth, for the periods indicated, certain items in our Condensed Statements of Operations as a percentage of total net sales. For the Three Months Ended March 31 2022 2021 Net sales 100.0 % 100.0 % Cost of sales 79.2 82.8 Gross profit 20.8 17.2 Operating expenses: Selling 5.6 9.6 Marketing 4.2 4.4 General and administrative 9.8 35.9 Total operating expenses 19.6 49.9 Operating income (loss) 1.2 (32.7 ) Other income (expense) (0.1 ) 19.2 Income (loss) before taxes 1.1 (13.5 ) Income tax expense 0.1 0.2 Net income (loss) 1.0 % (13.7 )% 14 Table of Contents Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021 Net Sales. Net sales for the three months ended March 31, 2022 increased 14.1% to $6,148,000 compared to $5,386,000 for the three months ended March 31, 2021. The increase was due to 48.0% increase in non-POPS revenue, partially offset by a 83.0% decrease in POPS solutions revenue. For the three months ended March 31, 2022, non-POPS revenue has increased due to both sales to new CPGs and an increase in sales to existing CPGs. Due to sales cycles within the retailers that our non-POPS solutions execute we anticipate seasonality in sales, with those sales being relatively stronger in the first quarter of the year. Our display business generally consists of larger contracts versus our historical signage business. As a result, our revenue may be prone to variances on a year over year basis. This is expected the case for the three months ending June 30, 2022, when we will be lapping two programs from the three months ended June 30, 2021 that will not be repeating in 2022. Competitive pressures have resulted in decreased POPS solutions revenue for three months ended March 31, 2022 versus the three months ended March 31, 2021, including the expiration in April 2021 of our 10-year selling agreement with News America Marketing In-Store (“News America”). We expect POPS revenue will continue to decline in 2022 in comparison to 2021 as we have reduced the number of stores in our network due to competitive pressures. Gross Profit. Gross profit for the three months ended March 31, 2022 increased 37.8% to $1,280,000 compared to $929,000 for the three months ended March 31, 2021. Gross profit as a percentage of total net sales increased to 20.8% for the three months ended March 31, 2022, compared to 17.2% for the three months ended March 31, 2021. The increase in gross profit was primarily due to an improvement in non-POPS gross profit due to the Company’s decision in the prior year to make an investment in the execution of a large non-POPS program in the three months ended March 31, 2021. Operating Expenses Selling. Selling expenses for the three months ended March 31, 2022 decreased 33.7% to $342,000 compared to $516,000 for the three months ended March 31, 2021. Decreased selling expense was primarily the result of decreased staff related expenses. Selling expenses as a percentage of total net sales decreased to 5.6% for the three months ended March 31, 2022 compared to 9.6% for the three months ended March 31, 2021. The decrease was primarily due to the factors described above, in addition to increased sales. Marketing. Marketing expenses for the three months ended March 31, 2022 increased 10.2% to $259,000 compared to $235,000 for the three months ended March 31, 2021. Increased marketing expense was primarily the result of increased staffing expenses. Marketing expenses as a percentage of total net sales decreased to 4.2% for the three months ended March 31, 2022 compared to 4.4% for the three months ended March 31, 2021. The decrease was primarily due to increased sales, partially offset by the factors described above. General and administrative. General and administrative expenses for the three months ended March 31, 2022 decreased 68.7% to $606,000 compared to $1,937,000 for the three months ended March 31, 2021. The decrease was primarily due to expenses incurred as a result of the litigation with News America. Litigation expenses in 2022 are expected to be substantial but to decrease in comparison to 2021 and to be similar to 2020 expenses. General and administrative expenses as a percentage of total net sales decreased to 9.8% for the three months ended March 31, 2022 compared to 35.9% for the three months ended March 31, 2021. The decrease was primarily due to the factors described above, in addition to increased sales. Other Income (Expense). Other expense for the three months ended March 31, 2022 was $3,000 compared to income of $1,035,000 for the three months ended March 31, 2021. The change was due to the 2021 gain on forgiveness of debt and accrued interest of $1,062,000 from the SBA forgiving the Company of its promissory loan entered into pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. Income Taxes. For the three months ended March 31, 2022, the Company recorded income tax expense of $8,000, or 11.4% of income before taxes. For the three months ended March 31, 2021, the Company recorded income tax expense of $13,000, or (1.8%) of loss before taxes. The income tax expense for the three months ended March 31, 2022 and 2021 is comprised of federal and state taxes. The primary differences between the Company’s March 31, 2022 and 2021 effective tax rates and the statutory federal rate are nondeductible stock-based compensation, nondeductible meals and entertainments as well as changes in the Company’s valuation allowance against its deferred tax assets. 15 Table of Contents The Company reassesses its effective tax rate each reporting period and adjusts the annual effective rate if deemed necessary, based on projected annual taxable income (loss). Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statements and tax basis of assets and liabilities given the provisions of enacted tax laws. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustment to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria. As a result of the Company’s future outlook, management has reviewed its deferred tax assets and concluded that the uncertainties related to the realization of its deferred tax assets have become unfavorable. Management has considered positive and negative evidence for the potential utilization of the deferred tax assets and has concluded that it is more likely than not that Company will not realize the full amount of its net deferred tax assets. As of March 31, 2022, and December 31, 2021, the Company had unrecognized tax benefits totaling $721,000 and $711,000, respectively, including interest, which relates to state nexus issues. The amount of the unrecognized tax benefits, if recognized, that would affect the effective income tax rates of future periods is $721,000. Due to the current statute of limitations regarding the unrecognized tax benefits, the Company believes that it is probable that a decrease of up to $665,000 in unrecognized tax benefits related to state exposures may be necessary in the third quarter of 2022, which would reduce accrued income taxes and increase income tax benefit. Net Income (Loss). For the reasons stated above, net income for the three months ended March 31, 2022 was $62,000, compared to a net loss of $737,000 for the three months ending March 31, 2021. As discussed in the sales section, we anticipate seasonality in sales, with sales relatively lower in the remaining quarters of the year and correspondingly lower gross profit and income in the subsequent quarters. Liquidity and Capital Resources The Company has financed its operations with proceeds from stock sales and sales of its services and products. At March 31, 2022, working capital was $3,851,000 (defined as current assets less current liabilities) compared to $3,716,000 at December 31, 2021. During the three months ended March 31, 2022, cash and cash equivalents and restricted cash decreased $3,370,000 from $3,851,000 at December 31, 2021 to $481,000 at March 31, 2022. Cash and cash equivalents at April 30, 2022 was $3.0 million. Operating Activities . Net cash used in operating activities during the three months ended March 31, 2022 was $3,380,000. Net income of $62,000, plus non-cash adjustments of $34,000, less changes in operating assets and liabilities of $3,476,000 resulted in the $3,380,000 of cash used in operating activities. The non-cash adjustments consisted of depreciation expense, changes in allowance for doubtful accounts and stock-based compensation expense. The largest component of the change in operating assets and liabilities was accounts receivable which increased $2,206,000 from December 31, 2021. The increase was a result of increased net sales for the three months ended March 31, 2022 compared to the fourth quarter of 2021. In the normal course of business, our accounts receivable, accounts payable, accrued liabilities, deferred revenue and prepaid production costs will fluctuate depending on the level of revenues and related business activity, as well as billing arrangements with customers and payment terms with retailers. Investing Activities . Net cash used in investing activities during the three months ended March 31, 2022 was $18,000, which related to purchases of property and equipment. Financing Activities . Net cash provided by financing activities during the three months ended March 31, 2022 was $28,000, which related to proceeds received from issuance of common stock under the employee stock purchase plan. The Company has experienced net losses and used significant cash in operations in each of the last three years and also used significant cash in the first quarter of 2022. There is uncertainty regarding our ability to achieve and maintain profitability. Although the Company is continuing to explore strategic alternatives to maximize shareholder value and management has taken actions to reduce cash use, we cannot be sure these actions will sufficiently reduce or eliminate future losses. While we believe the Company has adequate cash to meet its cash requirements for at least the next 12 months, if cash flows from operations together with cash and cash equivalents are not sufficient to fund our operations and any necessary capital expenditures in the longer term, and we are unable to secure alternative sources of financing on terms acceptable to us, then our results of operations, financial condition and liquidity would be materially adversely affected. 16 Table of Contents 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; · sales tax; · income taxes; and · stock-based compensation. Cautionary Statement Regarding Forward-Looking Statements Certain statements made in this Quarterly Report on Form 10-Q, in the Company’s other SEC filings, in press releases and in oral statements to shareholders and securities analysts that are not statements of historical or current facts are “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance of the Company to be materially different from the results or performance expressed or implied by such forward-looking statements. The words “anticipates,” “believes,” “estimates,” “expects,” “future,” “likely,” “may,” “projects,” “seeks,” “will” and similar expressions identify forward-looking statements. Forward-looking statements include statements expressing the intent, belief or current expectations of the Company and members of our management team regarding, for instance: (i) our belief that our cash balance and cash generated by operations will provide adequate liquidity and capital resources for at least the next twelve months; and (ii) that we expect fluctuations in accounts receivable and payable, accrued liabilities, revenue deferrals, and prepaid production costs. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. These statements are subject to the risks and uncertainties that could cause actual results to differ materially and adversely from the forward-looking statements. These forward-looking statements are based on current information, which we have assessed and which by its nature is dynamic and subject to rapid and even abrupt changes. 17 Table of Contents Factors that could cause our estimates and assumptions as to future performance, and our actual results, to differ materially include the following: (i) the impacts of the COVID-19 pandemic including the duration, spread, severity, and any recurrence of the COVID-19 pandemic, the duration and scope of related government orders and restrictions, the impact on our employees, and the extent of the impact of the COVID-19 pandemic on overall demand for our products and services; (ii) local, regional, national, and international economic conditions that have deteriorated as a result of the COVID-19 pandemic including the risks of a global recession or a recession in one or more of our key markets, and the impact they may have on us and our customers and our assessment of that impact; (iii) management’s ability to fully or successfully implement its business plan to achieve and maintain increased sales and resultant profitability in the future; (iv) the Company’s success in developing and implementing new product offerings, in a successful manner; (v) prevailing market conditions, including pricing and other competitive pressures, in the in-store advertising industry and, intense competition for agreements with CPG retailers and manufacturers; (vi) potentially incorrect assumptions by management with respect to the financial effect of current strategic decisions and the effect of current sales trends on fiscal year 2022 results; (vii) termination of all or a major portion of, or a significant change in terms and conditions of, a material agreement with a CPG manufacturer or retailer; (viii) other economic, business, market, financial, competitive and/or regulatory factors affecting the Company’s business generally; (ix) our ability to successfully manage our IT operating infrastructure outsourcing arrangement; (x) our ability to attract and retain highly qualified managerial, operational and sales personnel; and (xi) the final outcome of our litigation with News America. Our risks and uncertainties also include, but are not limited to, the risks presented in our Annual Report on Form 10-K for the year ended December 31, 2021 and this Quarterly Report on Form 10-Q, and any additional risks presented in our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K. We undertake no obligation (and expressly disclaim any such obligation) to update forward-looking statements made in this Form 10-Q to reflect events or circumstances after the date of this Form 10-Q or to update reasons why actual results would differ from those anticipated in any such forward-looking statements, other than as required by law. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.