What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-09 compared with 2022-03-09 · 58 added, 95 removed, 84 unchanged (65% of the section changed)

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Our focus on portfolio diversification resulted in our 2022 non-POPS solutions revenue growing 22% versus 2021, and also resulted in our POPS signage solutions declining to approximately 5% of our total net sales for 2022, compared to 24% of our total net sales in 2021.

In 2023 we will be winding down our POPS signage solution.

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.

Potential strategic alternatives that may be evaluated include, but are not limited to, an acquisition, merger, business combination, in-licensing, start-up of new business, 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

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Total operating expenses

Operating loss

Loss before taxes

Income tax expense (benefit)

Gain from litigation settlement, net

Operating income (loss)

Income (loss) before taxes

Income tax (benefit) expense

Net income (loss)

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

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.

Net sales for the year ended December 31, 2022 decreased 3.6% to $18,800,000, compared to $19,503,000 for the year ended December 31, 2021.

The decrease was due to an 81.5% decrease in POPS solutions revenue, partially offset by an increase in non-POPS revenue of 21.5%.

The increase in non-POPS revenue is due to both new client acquisition as well as repeat business from existing clients.

POPS sales for the year ended December 31, 2022 were $880,000.

Competitive pressures, including the expiration in April 2021 of our 10-year selling agreement with News America and management’s decision to prioritize resources to growth opportunities in non-POPS solutions, have resulted in decreased POPS solutions revenue for the year ended December 31, 2022 versus the year ended December 31, 2021.

We expect POPS revenue will continue to decline in 2023 in comparison to 2022.

Gross Profit.

Gross profit for the year ended December 31, 2022 increased 2.2% to $3,301,000, compared to $3,230,000 for the year ended December 31, 2021.

The increase in gross profit was primarily due to decreased fixed costs within gross margin from staff and staff related expenses.

Gross profit as a percentage of total net sales increased to 17.6% for the year ended December 31, 2022, compared to 16.5% for the year ended December 31, 2021.

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.

The increase was primarily due to reduction of fixed expense as discussed above, partially offset by decreased net sales.

Operating Expenses

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.

Selling expenses for the year ended December 31, 2022 decreased 31.4% to $1,325,000, compared to $1,931,000 for the year ended December 31, 2021, primarily due to decreased staff and staff related expenses.

Selling expenses as a percentage of total net sales decreased to 7.0% in 2022, compared to 9.9% in 2021, primarily due to decreased expense described above, partially offset by decreased net sales for the year ended December 31, 2022.

Marketing expenses for the year ended December 31, 2022 increased 1.7% to $1,050,000, compared to $1,032,000 for the year ended December 31, 2021.

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.

Marketing expenses as a percentage of total net sales increased to 5.6% in 2022, compared to 5.3% in 2021, primarily due to relatively flat expense over decreased sales in 2022.

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.

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.

General and administrative expenses for the year ended December 31, 2022 decreased 34.4% to $3,320,000, compared to $5,058,000 for the year ended December 31, 2021.

The decrease was primarily due to higher expenses incurred in the year ended December 31, 2021 as a result of litigation with News America.

Following the litigation settlement on July 1, 2022, the Company does not expect to incur further expenses related to the legal proceedings with News America.

The decrease in litigation expenses was partially offset by increase in expenses related to exploring strategic alternatives.

General and administrative expenses as a percentage of total net sales decreased to 17.7% in 2022, compared to 25.9% in 2021, primarily due to the decreases in expense as described above.

Gain from litigation settlement.

On July 1, 2022, the Company entered into the settlement agreement with News America, with net proceeds after expenses of $12,000,000, which was recorded as a gain on litigation settlement in operations in the three months ended September 30, 2022.

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.

Other income for the year ended December 31, 2022 was $222,000 compared to other income of $1,299,000 for the year ended December 31, 2021.

The decrease was due to two items in 2021 that did not recur in 2022, the gain on forgiveness of debt and accrued interest of $1,062,000 from the SBA forgiving the Company of its loan pursuant to the Paycheck Protection Program, as well as a $273,000 benefit received under the Employee Retention Credit.

Other income in 2022 consisted primarily of interest income from investment in short-term treasury bills.

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.

For the year ended December 31, 2022, the Company recorded an income tax benefit of $218,000, compared to an income expense of $42,000 for the year ended December 31, 2021.

The effective tax rate was 2.2% and (1.2)% for the years ended December 31, 2022 and 2021, 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.

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.

The primary differences between the Company’s 2022 effective tax rate and the statutory federal rates were the reversal of non-deductible penalties, the reversal of unrecognized tax benefits, and a change in the Company’s valuation allowance against its deferred assets of ($1,971,000).

The valuation allowance decrease in 2022 was primarily related to the utilization of the Company’s net operating loss carryforward against the Company’s taxable income.

Such utilization was limited to 80% of the Company’s taxable income for the year.

The primary differences in 2021 were due to the forgiveness of the Company’s PPP loan of $1,062,000 and a change in the Company’s valuation allowance against its deferred assets of $1,200,000.

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 income or loss for the period.

Net Income (Loss).

For the reasons stated above including the pre-tax gain from litigation settlement in 2022, and the gain on debt forgiveness of the PPP loan and accrued interest of $1,062,000 in 2021, the net income for the year ended December 31, 2022 was $10,046,000 compared to a net loss of $3,534,000 for the year ended December 31, 2021.

Liquidity and Capital Resources

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At December 31, 2022, working capital (current assets less current liabilities) was $13,379,000 compared to $3,716,000 at December 31, 2021.

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.

During the year ended December 31, 2022, cash and cash equivalents and restricted cash increased $10,673,000 from $3,851,000 at December 31, 2021, to $14,524,000 at December 31, 2022.

These increases were the result of the net proceeds of $12,000,000 from the litigation settlement.

The Company has invested a significant portion of its cash and cash equivalents in short-term Treasury Bills.

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.

Net cash provided by operating activities during the year ended December 31, 2022 was $10,663,000.

Net income of $10,046,000, less non-cash adjustments of $69,000, plus changes in operating assets and liabilities of $686,000 resulted in the $10,663,000 of cash provided by 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 deferred revenue which increased $1,585,000 from December 31, 2021.

The increase was a result of an increase in prepaid revenue from our customers.

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.

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Net cash used in investing activities during the year ended December 31, 2022 was $29,000.

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

This was related to the purchase 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.

Net cash provided by financing activities during the year ended December 31, 2022 was $39,000, which related to proceeds from the issuance of common stock under the employee stock purchase plan and exercised stock options.

Primarily as a result of the net proceeds from the litigation settlement of $12 million, cash and cash equivalents plus restricted cash at December 31, 2022 was $14.5 million.

The Company believes that based upon current business conditions and plans, its cash and cash equivalents balances will be sufficient for its cash requirements for at least the twelve-month period subsequent to the filing of this Form 10-K.

Depending on the outcome our strategic alternative process we may be required to finance this process through equity offerings or debt financings.

To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our shareholders will be diluted, and the terms of those securities may include liquidation or other preferences that adversely affect the rights of our shareholders.

Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

Additional capital may not be available when needed, on reasonable terms, or at all, and our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to and volatility in the credit and financial markets in the U.S.

and worldwide resulting from the ongoing COVID-19 pandemic.

If we are unable to raise additional funds when needed we may not be able to complete transactions related to the strategic alternatives process.

Critical Accounting Estimates

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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.

Critical accounting estimates are those estimates made in accordance with GAAP which involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations.

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.

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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 .

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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.

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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.

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, 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.

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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-K

Item 7. Management’s Discussion and Analysis