What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2023-03-09 compared with 2022-03-09 · 113 added, 217 removed, 420 unchanged (44% of the section changed)

28 unchanged sentences

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Accounting for sales taxes

Critical Audit Matter Description

The Company previously conducted a review of its sales tax positions and related accounting, with the assistance of outside consultants.

As a result of the review, it was determined that certain services and products sales were subject to sales tax and that the Company had not assessed sales tax on sales of those services and products to customers.

The Company then undertook a process to obtain documentation from significant customers to determine if any was exempt from sales tax assessments during the applicable periods.

The Company accrued the estimated sales taxes due in the amounts of $1,007,000 and $1,011,000, and interest and penalties of $313,000 and $244,000, as of December 31, 2021 and 2020, respectively.

For certain customers, the Company expects to bill and collect the related sales taxes that are due.

The Company has estimated such amounts to be $135,000 and $266,000 as of December 31, 2021 and 2020, respectively.

The Company was required to apply judgment regarding the determination of the tax status of the customers that did not respond to management’s inquiries, as well as in the estimation of sales tax rates, interest and penalties accruals, and of the sales tax amounts expected to be billed and collected.

The accounting for sales taxes is complex as each state has specific rules and regulations regarding the taxability of products and services.

The Company’s evaluation of the estimated sales taxes accrual required the use of a complex model and the assistance of outside professionals that are experienced in accounting for sales taxes.

There is significant judgment involved in determining the specific strategy to apply for estimating the accrual for sales taxes, including the judgment of taxability of customers who did not respond to the Company’s requests for documentation of the customers’ taxability, sales tax rates in each jurisdiction, and estimated interest and penalties.

Judgment is also required to determine the Company’s ability to bill and collect from certain customers past sales taxes that are due.

How We Addressed the Matter in Our Audit

The primary procedures we performed to address this critical audit matter included:

Testing the accuracy and completeness of the products and services sales transactions that were included in the sales tax analysis.

Testing a sample of customer responses received by the Company to validate the completeness of the accrual.

Evaluating the process management used to estimate the sales tax liability for customers who did not respond to management’s inquiries regarding taxability.

Involving internal sales tax professionals to assist in assessing each type of product and service to determine whether or not it is taxable, as well as the sales tax rates utilized and related interest and penalty calculations.

Evaluating the process that management used to estimate the sales tax liability and the estimate regarding the collectability related to proposed billings to customers of sales tax by reviewing underlying documentation analyzed by the Company to support its estimates.

Testing the mathematical accuracy of the model used by management to calculate estimated sales tax, interest and penalties.

Critical Audit Matters

Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

We determined that there are no critical audit matters.

/s/ Baker Tilly US, LLP

9 unchanged sentences

Accounts receivable, net

Income tax receivable

Income taxes receivable

Prepaid production costs

8 unchanged sentences

Accrued liabilities:

Current portion of long-term debt

Current portion of operating lease liabilities

3 unchanged sentences

Accrued income taxes

Long-term debt

Operating lease liabilities

15 unchanged sentences

Year Ended December 31

Services revenues

Products revenues

Total Net Sales

Net services revenues

Cost of services

Cost of goods sold

Impairment loss - services

Total Cost of Sales

Operating Expenses:

General and administrative

Gain on sale of business

Total Operating Expenses

Operating Loss

( 4,791,000 )

Gain from litigation settlement, net

Operating Income (Loss)

( 4,791,000 )

2 unchanged sentences

Benefit from Employee Retention Credit

Interest expense, net

Miscellaneous

Loss Before Taxes

( 3,492,000 )

( 4,806,000 )

Income tax expense (benefit)

Other income (expense)

Total Other Income

Income (Loss) Before Taxes

( 3,492,000 )

Income tax (benefit) expense

Net Income (Loss)

$ ( 3,534,000 )

Net loss per share:

Shares used in calculation of net loss per share:

Net income (loss) per share:

Shares used in calculation of net income (loss) per share:

See accompanying notes to financial statements.

1 unchanged sentence

STATEMENTS OF SHAREHOLDERS' EQUITY

Additional Paid-In

Balance at January 1, 2021

1 unchanged sentence

Issuance of common stock, net

Vesting of restricted stock units offset by repurchase of common stock upon vesting of restricted stock units and awards

Issuance of common stock upon vesting of restricted stock units

Value of stock-based compensation

Common stock issued for accrued liabilities

Restricted stock award issuance

( 3,534,000 )

3 unchanged sentences

Issuance of common stock, net

Repurchase of common stock upon vesting of restricted stock units

Issuance of common stock upon vesting of restricted stock units

Value of stock-based compensation

( 3,534,000 )

Balance at December 31, 2022

5 unchanged sentences

Operating activities:

$ ( 3,534,000 )

Net income (loss)

$ ( 3,534,000 )

Adjustments to reconcile net loss to

net cash used in operating activities:

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization

Impairment loss

Gain on sale of business

(Gain) Loss on sale of property and equipment

Gain on sale of property and equipment

Changes in allowance for doubtful accounts

4 unchanged sentences

Accounts receivable

Income tax receivable

Prepaid production cost, and other

Income taxes receivable

Prepaid expenses and other

Accounts payable

2 unchanged sentences

Deferred revenue

Net cash used in operating activities

( 3,000,000 )

Net cash provided by (used in) operating activities

( 3,000,000 )

1 unchanged sentence

Purchases of property and equipment

Proceeds from sale of custom print business

Proceeds from sale of property and equipment

Net cash provided by (used in) investing activities

Sale of property and equipment

Net cash used in investing activities

Financing activities:

Cash dividends paid ($0.70 per share)

Proceeds from issuance of common stock, net

Cash dividends paid ($0.70 per share)

Repurchase of common stock upon vesting of restricted stock awards and vesting of restricted stock units

Proceeds from PPP Loan

Net cash provided by (used in) financing activities

Decrease in cash and cash equivalents and restricted cash

Increase (decrease) in cash and cash equivalents and restricted cash

( 3,277,000 )

2 unchanged sentences

Supplemental disclosures for cash flow information:

Cash (paid) refunded during the year for income taxes

$ ( 112,000 )

Cash paid during the year for income taxes

Non-cash investing and financing activities:

Purchase of property and equipment included in accounts payable

Common stock issued for accrued liabilities

Receivables recorded from sale of custom print business

Receivables recorded from sale of property and equipment

Operating lease right-of-use asset obtained in exchange for lease obligations

Purchase of property and equipment included in accounts payable

See accompanying notes to financial statements.

Insignia Systems, Inc.

NOTES TO FINANCIAL STATMENTS

Notes to Financial Statements

Summary of Significant Accounting Policies.

5 unchanged sentences

The Company’s primary solutions are merchandising solutions, on-pack solutions and signage.

Sale of Custom Print Business.

In August 2020, the Company sold its custom print business to an existing strategic partner.

This divestiture has allowed the Company to focus on its core business, selling product solutions to CPGs.

The custom print business was not material to operations as a whole and did not represent a strategic shift and therefore is not presented as a discontinued operation.

The sale price was 300,000 resulting in a gain on the sale of $ 195,000 .

The Company received $ 200,000 of cash and recorded a short-term receivable of $ 75,000 and a long-term receivable of 25,000 .

At December 31, 2021, the remaining receivable balance is $ 25,000 .

Revenue Recognition .

Revenue from merchandising and on-pack solutions is recognized with a mix of over-time and point in time recognition dependent on type of service performed.

The Company recognizes revenue from Insignia In-Store Signage Solutions ratably over the period of service, which is typically a two-to-four-week display cycle.

The Company recognized revenue related to custom print solutions and sign card sales at the time the products are shipped to customers.

Revenue from merchandising and on-pack solutions is recognized primarily at a point in time.

The Company recognizes revenue from signage solutions ratably over the period of service, which is typically a two-to-four-week display cycle.

Revenue that has been billed and not yet recognized is reflected as deferred revenue on the Company’s balance sheet.

2 unchanged sentences

Cash equivalents are stated at cost, which approximates fair value.

Cash and cash equivalents of $ 3,849,000 and $ 7,113,000 were invested in bank accounts, an insured sweep account and a money market account, at December 31, 2021 and 2020, respectively.

Cash and cash equivalents of $ 14,521,000 and $ 3,849,000 were invested in bank accounts, an insured sweep account, a U.S.

Treasury bill and a money market account, at December 31, 2022 and 2021, respectively.

At December 31, 2022, cash equivalents included a short-term U.S.

Treasury bill which matures in March 2023.

The balances in cash accounts, at times, may exceed federally insured limits.

5 unchanged sentences

Restricted Cash.

The Company’s restricted cash consists of cash the Company is contractually obligated to maintain in accordance with the terms of its lease signed in April 2021 for its headquarters space in Minneapolis.

The Company’s restricted cash consists of cash the Company is contractually obligated to maintain in accordance with the terms of the lease for its headquarters space in Minneapolis.

See Note 4 for further discussion.

Fair Value of Financial Measurements .

Fair Value of Financial Instruments .

Fair value is defined as the exit price, or the amount that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants as of the measurement date.

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Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

As of December 31, 2022 and 2021, the Company had no financial assets or liabilities measured at a fair value on a recurring basis.

The Company records certain financial assets and liabilities at their carrying amounts that approximate fair value, based on their short-term nature.

14 unchanged sentences

Inventories are primarily comprised of sign cards and hardware.

Inventory is valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method, and consists of the following:

Raw materials

Work-in-process

Finished goods

Inventory is valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method.

Prepaid Production Costs .

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The ROU assets represent our right to control the use of an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease.

Operating lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term.

Operating lease ROU assets and lease liabilities are recognized at commencement date and date of any lease modification based on the present value of lease payments over the lease term.

The operating lease ROU assets also include any prepaid lease payments made and exclude lease incentives.

4 unchanged sentences

Impaired assets are then recorded at their estimated fair value.

A hierarchy for inputs used in measuring fair value is in place that distinguishes market data between observable independent market inputs and unobservable market assumptions by the reporting entity.

The hierarchy is intended to maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that the most observable inputs be used when available.

At March 31, 2020, the impact of COVID-19 was determined to be a triggering event requiring an impairment review of long-lived assets.

In 2011, the Company paid News America Marketing In-Store, L.L.C.

(“News America”) $4,000,000 in exchange for a 10 -year arrangement to sell signs with price into News America’s network of retailers as News America’s exclusive agent.

The $4,000,000 was being amortized over the 10-year term of the arrangement.

At 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 that this agreement affords the Company access to.

As a result, an impairment of $ 159,000 was recognized as of March 31, 2020.

The Company 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.

Restructuring.

18 unchanged sentences

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.

12 unchanged sentences

Year ended December 31

Denominator for basic net loss per share - weighted average shares

Denominator for basic net income (loss) per share - weighted average shares

Effect of dilutive securities:

Stock options, restricted stock units and restricted stock awards

Denominator for diluted net loss per share - weighted average shares

Due to the net loss incurred during the years ended December 31, 2021 and 2020, all stock awards were anti-dilutive for the period.

Immaterial Error in Three and Nine Months Ended September 30, 2021.

During the year-end close process, the Company determined that it qualified for a benefit under the Employee Retention Credit (ERC) for the third quarter of 2021 of $ 293,000 .

The $ 293,000 benefit was reduced by $ 20,000 for related filing and preparation costs, resulting in a net benefit of $ 273,000 .

This benefit is included in other income in the accompanying financial statements for the year ended December 31, 2021.

For the three and nine months ended September 30, 2021, the impact of the error of including the benefit in that quarter, would have increased other income and decreased net loss by $ 273,000 , and decreased net loss per share by $ 0.15 .

For the three months ended December 31, 2021, the impact of the error of including the benefit in that quarter, would have decreased other income and increased net loss by $ 273,000 , and increased net loss per share by $ 0.15 .

The error had no impact on previously reported net sales or operating loss.

In accordance with Staff Accounting Bulletin (SAB) 99 (“Materiality”) the Company evaluated this error, including both qualitative and quantitative considerations, and concluded this error did not result in a material misstatement of the previously issued financial statements for the three and nine months ended September 30, 2021.

Denominator for diluted net income (loss) per share - weighted average shares

For the year ended December 31, 2022, the Company excluded stock awards where the market price of the Company’s stock was less than the exercise price of the outstanding stock award.

Options to purchase approximately 45,000 shares of common stock with a weighted average exercise price of $ 11.91 , were outstanding at December 31, 2022 and were not included in the computation of common stock equivalents for the year ended December 31, 2022 because their exercise prices were higher than the average fair market value of the common stock during the reporting period.

Options to purchase approximately 22,000 shares of common stock with a weighted average exercise price of $ 12.64 , were outstanding at December 31, 2021 and were not included in the computation of common stock equivalents for the year ended December 31, 2021 because their exercise prices were higher than the average fair market value of the common stock during the reporting period.

For the year ended December 31, 2021, all stock awards were anti-dilutive for the period due to the net loss.

Use of Estimates .

1 unchanged sentence

Actual results could differ from these estimates.

New Accounting Pronouncements.

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments , which changes the way entities recognize impairment of most financial assets.

This update is effective for the Company for the year ending December 31, 2023 and interim periods within that year.

Short-term and long-term financial assets, as defined by the standard, are impacted by immediate recognition of estimated credit losses in the financial statements, reflecting the net amount expected to be collected.

We have evaluated the requirements of this standard on our financial assets and have concluded that the adoption of this ASU, beginning January 1, 2023, will have an immaterial impact on our financial statements.

Revenue Recognition.

Under Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (“Topic 606”), revenue is measured based on consideration specified in the contract with a customer, adjusted for any applicable estimates of variable consideration and other factors affecting the transaction price, including noncash consideration, consideration paid or payable to a customer and significant financing components.

Under ASU 2014-09 Revenue from Contracts with Customers (“Topic 606”), revenue is measured based on consideration specified in the contract with a customer, adjusted for any applicable estimates of variable consideration and other factors affecting the transaction price, including noncash consideration, consideration paid or payable to a customer and significant financing components.

Revenue from all customers is recognized when a performance obligation is satisfied by transferring control of a distinct good or service to a customer, as further described below under “ Performance Obligations .”

1 unchanged sentence

The Company includes shipping and handling fees in revenues.

Shipping and handling costs associated with outbound freight after control over a product has been passed to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.

Shipping and handling costs associated with outbound freight after control over a product has been passed to a customer are accounted for as a fulfillment cost and are included in cost of services.

Performance Obligations

2 unchanged sentences

The following is a description of the Company’s performance obligations included in its primary revenue streams and the timing or method of revenue recognition for each:

Merchandising, On-Pack, and Non-POPS Signage Solutions .

The Company supplies CPG manufacturers with retailer approved promotional services, such as merchandising, on-pack, and signage solutions.

Display, On-Pack, and Non-POPS Signage Solutions .

The Company supplies CPG manufacturers with retailer approved promotional services, such as display, on-pack, and signage solutions.

These services are more customized than POPS, consisting of variable durations and variable specifications.

Due to the variable nature of these services, revenue recognition is a mix of over-time and point-in-time recognition.

Due to the variable nature of these services, revenue recognition is a primarily at a point-in-time recognition.

POPS Signage Solution Services.

5 unchanged sentences

Given the nature of the Company’s performance obligations is to provide a display service over the duration of a specified period or periods, the Company recognizes revenue on a straight-line basis over the display service period as it best reflects the timing of transfer of its sign solutions.

Prior to the August 2020 sale of the Company’s custom print business, the Company also sold custom print solutions directly to its customers.

Each such product was a distinct performance obligation.

Revenue was recognized at a point in time upon shipment, when control of the goods transferred to the customer.

Disaggregation of Revenue

In the following table, revenue is disaggregated by major revenue stream and timing of revenue recognition.

Year ended December 31, 2021

Services Revenues

Products Revenue

Total Revenue

Timing of revenue recognition:

Products and services transferred over time

Products and services transferred at a point in time

In the following table, revenue is disaggregated by timing of revenue recognition.

Year ended December 31

Services Revenues

Products Revenue

Total Revenue

Timing of revenue recognition:

Products and services transferred over time

Products and services transferred at a point in time

Services transferred over time

Services transferred at a point in time

Contract Costs

11 unchanged sentences

This practical expedient is being applied to arrangements for certain incomplete services and unshipped custom signage materials.

Among our contracts with an expected duration of greater than one year, we anticipate that revenue of $ 111,000 and $ 57,000 related to performance obligations that are unsatisfied (or partially unsatisfied) as of December 31, 2021 will be recognized during 2022 and 2023, respectively.

Among our contracts with an expected duration of greater than one year, we anticipate that revenue of $ 57,000 related to performance obligations that are unsatisfied (or partially unsatisfied) as of December 31, 2022 will be recognized during 2023.

Property and Equipment.

Property and equipment consists of the following at December 31:

Property and equipment consist of the following at December 31:

Year ended December 31

Property and Equipment:

5 unchanged sentences

Accumulated depreciation and amortization

( 4,163,000 )

Net Property and Equipment

Depreciation expense for the years ended December 31, 2022 and 2021 was $ 59,000 and $ 60,000 , respectively.

During December 2020, in connection with the outsourcing of most printing operations, the Company sold property and equipment with a net book value of $ 230,000 , for $ 195,000 , resulting in a loss on sale of $ 35,000 .

The proceeds were in the form of receivables due in four equal amounts due in June and December 2021 and June and December 2022.

The receivables that were due in 2021 were collected.

As of December 31, 2022, the Company leases space under two non-cancelable operating leases for its corporate headquarters and for warehouse space.

2 unchanged sentences

The headquarters lease required the Company to provide a letter of credit, supported by an $ 85,000 deposit, which is reflected as restricted cash on the balance sheet.

The Company’s leases include options to renew.

The Company used its incremental borrowing rate of approximately 4.8 % in determining the present value of the lease payments based on the information available at the lease commencement date for its two leases.

The exercise of lease renewal options is at the Company’s sole discretion.

Therefore, the renewals to extend the lease terms are not included in the Company’s right of use assets and lease liabilities as they are not reasonably certain of exercise.

The Company regularly evaluates the renewal options and when they are reasonably certain of exercise, the Company includes the renewal period in its lease term.

The Company used its incremental borrowing rate of approximately 4.8 % in determining the present value of the lease payments based on the information available at the lease commencement date.

In December 2022, the Company decided to exercise the lease renewal option for its corporate headquarters, extending the lease term through December 31, 2026.

Operating lease liabilities and right-of-use assets were increased for lease renewal by $ 38,000 for the year ended December 31, 2022.

The Company used its incremental borrowing rate of approximately 7.0% in determining the present value of the extended lease payments.

The cost components of the Company’s operating leases were as follows:

Year ended December 31, 2022

Prior Corporate

Operating lease cost

Variable lease cost

Short-term lease cost

Year ended December 31, 2021

3 unchanged sentences

Short-term lease cost

Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for the Company’s leased corporate headquarters which are paid based on actual costs incurred by the lessor.

Maturities of the Company’s lease liabilities for is corporate headquarters and its warehouse operating leases are as follows as of December 31, 2021:

Variable lease costs are excluded from right-of-use assets and lease liabilities and consist primarily of taxes, insurance, and common area or other maintenance costs for the Company’s leased corporate headquarters which are paid based on actual costs incurred by the lessor.

Maturities of the Company’s lease liabilities for its corporate headquarters and its warehouse operating leases were as follows as of December 31, 2022:

Total lease payments

Present value of lease liabilities

The remaining lease terms as of December 31, 2021 for the Company’s corporate headquarters and its warehouse leases were 2.5 years and 1.2 years, respectively.

The remaining lease term as of December 31, 2022 for the Company’s corporate headquarters is 4 .0 years.

The warehouse lease which was set to expire on March 31, 2023 was extended on month-to-month basis with payments of $1,600 per month.

The cash outflow for operating leases for the years ended December 31, 2022 and December 31, 2021 were $ 84,000 and $ 97,000 , respectively.

Operating lease liabilities and right-of-use assets were increased for new non-cash leases by $ 219,000 for the year ended December 31, 2021.

Commitments and Contingencies.

The Company is subject to various legal matters in the normal course of business.

In July 2019, the Company filed suit against News America in the U.S.

The outcome of these matters is not expected to have a material effect on the Company’s financial position or results of operations.

In July 2019, the Company filed suit against News Corporation, News America Marketing FSI L.L.C., and News America Marketing In-Store Services L.L.C.

(collectively, “News America”) in the U.S.

District Court in Minnesota, alleging violations of federal and state antitrust and tort laws by News America.

The complaint alleges that News America has monopolized the national market for third-party in-store advertising and promotion products and services through various wrongful acts designed to harm the Company, its last significant competitor.

The suit seeks, among other relief, an injunction sufficient to prevent further antitrust injury and an award of treble damages to be determined at trial for the harm caused to our Company.

In August 2019, News America filed an answer and counterclaim.

In October 2019, News America moved for a judgment on the pleadings.

Management believes that the counterclaim is without merit, and the Company filed a response brief on November 11, 2019.

The Company also moved to dismiss the counterclaim against it.

The court heard oral arguments from both parties on January 14, 2020, and subsequently denied both motions.

On July 10, 2020 the parties cross-moved for summary judgment on the counterclaim.

On December 7, 2020, the Court granted News America’s motion for summary judgment on the counterclaim in part, requiring Insignia to strike certain allegations from its complaint and finding News America’s request for attorneys’ fees and costs premature.

Following the close of discovery, on August 27, 2021, News America moved for summary judgment on Insignia’s claims.

On September 17, 2021, Insignia filed its response opposing summary judgment.

On October 1, 2021, News America filed its reply brief.

The court cancelled a hearing on the motion originally scheduled for January 26, 2022, and referred the case to mediation.

News America’s summary judgment motion remains pending.

At this stage of the proceedings, the Company is unable to determine the likelihood of an unfavorable outcome or estimate any potential resulting liability.

On July 1, 2022, the Company entered into a $ 20 million settlement agreement with News America.

The agreement memorializes the amicable settlement of the Company’s outstanding lawsuit against News America.

The agreement resulted in net proceeds before income tax of $ 12,000,000 for the Company, which was recorded as a gain on litigation settlement in operations.

Retailer Agreements .

The Company has contracts in the normal course of business with various retailers, some of which provide for fixed or store-based payments rather than sign placement-based payments resulting in minimum commitments each year to maintain the agreements.

During the years ended December 31, 2021 and 2020, the Company incurred $ 199,000 and $ 2,765,000 of costs related to fixed and store-based payments, respectively.

The amounts are recorded in cost of services in the Company’s statements of operations.

The aggregate commitment amounts under agreements with retailers as of December 31, 2021 for future years are less than $ 50,000 .

The Company had contracts in the normal course of business with various retailers.

Due to the decline of POPS revenue all fixed or store-based payment commitments have been eliminated, and the Company incurred no such costs for the year ended December 31, 2022.

Shareholders’ Equity .

6 unchanged sentences

The Company uses the Black-Scholes option pricing model to estimate fair value of stock-based awards with the following weighted-average assumptions:

Stock Purchase Plan Options:

Employee Stock Purchase Plan:

Expected life (years)

10 unchanged sentences

Under the terms of the 2018 Plan, the number of shares of our common stock that may be the subject of awards and issued under the 2018 Plan was initially 128,571 plus any shares remaining available for future grants under the 2013 Plan on the effective date of the 2018 Plan.

All equity awards made during 2021 and 2020 were under the 2018 Plan.

Under the terms of the 2018 Plan, the Company may grant awards in a variety of instruments including stock options, restricted stock and restricted stock units to employees, consultants and directors generally at an exercise price at or above 100% of fair market value at the close of business on the date of grant.

10 unchanged sentences

Cancelled or forfeited - 2018 Plan restricted stock and restricted stock units

Stock options exercised

Cancelled or forfeited - 2013 Plan options

3 unchanged sentences

Restricted stock units and awards granted - 2018 Plan

Cancelled or forfeited - 2018 Plan options

Cancelled or forfeited - 2018 Plan restricted stock and restricted stock units

Stock options exercised

Cancelled or forfeited - 2013 Plan options

Cancelled or forfeited - 2013 Plan restricted stock and restricted stock units

Cancelled or forfeited - 2003 Plan options

3 unchanged sentences

Options Exercisable

Ranges of Exercise Prices

Exercise Prices

Number Outstanding

3 unchanged sentences

Weighted Average Exercise Price Per Share

$ 8.26 - $ 13.65

$ 15.54 - $ 21.63

Options outstanding under the Plans expire at various dates during the period from May 2022 through August 2028.

Options outstanding at December 31, 2021 had an aggregate intrinsic value of $ 188,322 .

Options outstanding under the Plans expire at various dates from May 2024 through August 2028.

Options outstanding at December 31, 2022 had no intrinsic value.

Options exercisable at December 31, 2021 had a weighted average remaining life of 3.82 years and an aggregate intrinsic value of $ 156,298 .

No options were granted in either 2021 or 2020.

The number of options exercisable at December 31, 2020 was 21,123 .

During the year ended December 31, 2021, no equity awards were issued by the Company, except those awarded to non-employee members of the Board of Directors.

Options outstanding at December 31, 2021 had an intrinsic value of $ 188,322 .

Options exercisable at December 31, 2022 had a weighted average remaining life of 4.44 years and no intrinsic value.

The 15,726 options exercisable at December 31, 2021 had a weighted average remaining life of 3.82 years and an aggregate intrinsic value of $ 156,298 .

During the years ended December 31, 2022 and 2021, no equity awards were issued by the Company, except for the following annual awards to non-employee members of the Board of Directors.

In August 2022, non-employee members of the Board of Directors received restricted stock grants totaling 6,248 shares pursuant to the 2018 Plan.

The shares underlying the awards were assigned a value of $ 9.60 per share, which was the closing price of the Company’s common stock on the date of grant, for a total grant date value of $ 60,000 .

The shares are scheduled to vest the earlier of August 4, 2023 or the day immediately preceding the date of the next annual shareholder meeting.

In June 2021, non-employee members of the Board of Directors received restricted stock grants totaling 5,514 shares pursuant to the 2018 Plan.

The shares underlying the awards were assigned a value of $ 8.16 per share, which was the closing price of the Company’s common stock on the date of grant, for a total grant date value of $ 45,000 .

The shares are scheduled to vest the earlier of June 10, 2022 or the day immediately preceding the date of the next annual shareholder meeting.

During the year ended December 31, 2020, the Company issued 24,282 restricted stock units.

The shares underlying the awards were assigned a weighted average value of $6.00 per share, which was the closing price of the Company’s common stock on the date of grants.

These awards vested on December 31, 2021.

During December 2020, non-employee members of the Board of Directors received restricted stock grants totaling 7,500 shares.

The shares underlying the awards were assigned a value of $6.00 per share, which was the closing price of the Company’s common stock on the date of grants, for a total value of $ 45,000 , and were vested in full the day immediately preceding the date of the 2021 annual shareholder meeting, June 9, 2021.

The shares vested June 1, 2022.

Restricted stock and restricted stock unit transactions during the years ended December 31, 2022 and 2021 are summarized as follows:

5 unchanged sentences

Unvested shares at December 31, 2021

Forfeited or surrendered

Unvested shares at December 31, 2022

As of December 31, 2021, there was approximately $ 5,000 of total unrecognized compensation costs related to outstanding stock options, which is expected to be recognized over a weighted average period of 0.6 years.

As of December 31, 2022, there were no unrecognized compensation costs related to outstanding stock options.

As of December 31, 2022, there was approximately $ 32,000 of total unrecognized compensation costs related to restricted stock and restricted stock units, which is expected to be recognized over a weighted average period of 0.6 years.

6 unchanged sentences

The Company intends to retain earnings from operations for use in advancing our business strategy;

however, the Company may consider special dividends in the future depending on outcomes of actions such as legal proceedings.

however, the Company may consider special dividends in the future.

Income Taxes .

Income tax benefit consists of the following:

Income tax expense (benefit) consists of the following:

Year ended December 31

Current taxes - Federal

$ ( 233,000 )

Current taxes - State

Income tax expense (benefit)

Income tax expense

$ ( 218,000 )

The actual tax benefit attributable to loss before taxes differs from the expected tax benefit computed by applying the U.S.

The actual tax (expense) benefit attributable to income (loss) before taxes differs from the expected tax benefit (expense) computed by applying the U.S.

federal corporate income tax rate of 21% as follows:

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Valuation allowance

PPP forgiveness

Effective federal income tax rate

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Net deferred income tax liabilities

As of December 31, 2021, the Company had a Federal net operating loss (NOL) to carry forward of approximately $ 9,700,000 and state NOLs of approximately $ 7,400,000 to carry forward.

As of December 31, 2022, the Company had a Federal pre-tax net operating loss (NOL) to carry forward of approximately $ 2,900,000 and state NOLs of approximately $ 3,500,000 to carry forward.

The Federal NOLs can be carried forward indefinitely.

1 unchanged sentence

Future utilization of NOLs carried forward may be subject to certain limitations under Section 382 of the Internal Revenue Code.

In March 2020, Congress passed the Coronavirus Aid, Relief and Economic Security (“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.

The Company received this refund in 2021.

The Company evaluates all significant available positive and negative evidence, including the existence of losses in prior years and its forecast of future taxable income, in assessing the need for a valuation allowance.

The underlying assumptions the Company uses in forecasting future taxable income require significant judgment and take into consideration the Company’s recent performance.

The change in the valuation allowance for the years ended December 31, 2021 and 2020 was $ 1,200,000 and $ 943,000 , respectively.

The change in the valuation allowance for the years ended December 31, 2022 and 2021 was a decrease of $ 1,971,000 and an increase of $ 1,200,000 , respectively.

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 Company has recorded a liability of $ 53,000 and $ 711,000 for uncertain tax positions taken in tax returns in previous years as of December 31, 2022 and 2021, respectively.

3 unchanged sentences

With limited exceptions, tax years prior to 2019 are no longer open in major state and local tax jurisdictions.

The Company believes that it is reasonably possible 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.

The Company has recorded a decrease of approximately $ 678,000 in unrecognized tax benefits related to state exposure in the third quarter of 2022, which reduced accrued income taxes and increased the current income tax benefit.

The Company has determined it is no longer more likely than not that the Company will realize the tax expense.

A reconciliation of the beginning and ending amount of the liability for uncertain tax positions is as follows:

2 unchanged sentences

Balance at December 31, 2021

Decrease due to state tax expense

Increases due to interest and state tax

5 unchanged sentences

Concentrations.

Major Customers During the year ended December 31, 2021, two customers accounted for 15 % and 12 %, respectively of the Company’s total net sales.

At December 31, 2021, two customers represented 25 % and 19 %, respectively of the Company’s total accounts receivable.

During the year ended December 31, 2020, one customer accounted for 14 % of the Company’s total net sales.

Major Customers .

During the year ended December 31, 2022, three customers accounted for 19 %, 11 % and 11 %, respectively of the Company’s total net sales.

At December 31, 2022, three customers represented 20 %, 19 % and 11 % respectively of the Company’s total accounts receivable.

During the year ended December 31, 2021, two customers accounted for 15 % and 12 %, respectively of the Company’s total net sales.

At December 31, 2021, two customers represented 25 % and 19 %, respectively of the Company’s total accounts receivable.

1 unchanged sentence

Export sales accounted for less than 1% of total net sales during the years ended December 31, 2022 and 2021.

In April 2020, the Company entered into a promissory note (the “Note”) with Alerus Financial, N.A.

The Note evidences a loan to the Company in the amount of $ 1,054,000 pursuant to the Paycheck Protection Program (the “PPP”) of the CARES Act administered by the U.S.

Small Business Administration (the “SBA”).

In accordance with the requirements of the CARES Act, the Company used the proceeds from the loan exclusively for qualified expenses under the PPP, including payroll costs, rent and utility costs, as further detailed in the CARES Act and applicable guidance issued by the SBA.

Interest was accrued on the outstanding balance of the Note at a rate of 1.00 % per annum.

The Note was scheduled to mature on April 22, 2022 and required 18 equal monthly payments of principal and interest.

The Company’s application for forgiveness of the amount due under the Note, including accrued interest, was approved by the SBA on January 29, 2021.

In April 2020, the Company entered into a loan agreement in the amount of $ 1,054,000 pursuant to the Paycheck Protection Program (the “PPP”) of the CARES Act.

The Company’s application for forgiveness of the amount due under the loan, including accrued interest, was approved by the U.S.

Small Business Administration on January 29, 2021.

Accordingly, for the year ended December 31, 2021, the debt of $ 1,054,000 , plus accrued interest of $ 8,000 was eliminated with a gain on debt extinguishment included in other income.

1 unchanged sentence

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 8. Financial Statements and Supplementary Data