BLOOMIA HOLDINGS, INC. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS The following are included on the pages indicated: Report of Independent Registered Public Accounting Firm (PCAOB ID 23 ) 17 Balance Sheets as of December 31, 2022 and 2021 18 Statements of Operations for the years ended December 31, 2022 and 2021 19 Statements of Shareholders’ Equity for the years ended December 31, 2022 and 2021 20 Statements of Cash Flows for the years ended December 31, 2022 and 2021 21 Notes to Financial Statements 22 16 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the shareholders and the board of directors of Insignia Systems, Inc.: Opinion on the Financial Statements We have audited the accompanying balance sheets of Insignia Systems, Inc. (the "Company") as of December 31, 2022 and 2021, the related statements of operations, shareholders' equity, and cash flows, for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. 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 We have served as the Company's auditor since 2011. Minneapolis, Minnesota March 9, 2023 17 Table of Contents Insignia Systems, Inc. BALANCE SHEETS As of December 31 2022 2021 ASSETS Current Assets: Cash and cash equivalents $ 14,439,000 $ 3,766,000 Restricted cash 85,000 85,000 Accounts receivable, net 5,557,000 5,247,000 Inventories 29,000 19,000 Income taxes receivable 28,000 4,000 Prepaid production costs 535,000 867,000 Other prepaid expense 80,000 366,000 Total Current Assets 20,753,000 10,354,000 Other Assets: Property and equipment, net 71,000 113,000 Operating lease right-of-use assets 144,000 183,000 Total Assets $ 20,968,000 $ 10,650,000 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable 2,653,000 2,539,000 Accrued liabilities: Compensation 962,000 464,000 Sales tax 717,000 1,287,000 Other 611,000 1,430,000 Current portion of operating lease liabilities 4,000 76,000 Deferred revenue 2,427,000 842,000 Total Current Liabilities 7,374,000 6,638,000 Long-Term Liabilities: Accrued income taxes 53,000 711,000 Operating lease liabilities 140,000 108,000 Total Long-Term Liabilities 193,000 819,000 Commitments and Contingencies — — Shareholders' Equity: Common stock, par value $.01: Authorized shares - 5,714,000 Issued and outstanding shares - 1,797,000 and 1,782,000 at December 31, 2022 and 2021, respectively 18,000 18,000 Additional paid-in capital 16,458,000 16,296,000 Accumulated deficit ( 3,075,000 ) ( 13,121,000 ) Total Shareholders' Equity 13,401,000 3,193,000 Total Liabilities and Shareholders' Equity $ 20,968,000 $ 10,650,000 See accompanying notes to financial statements. 18 Table of Contents Insignia Systems, Inc. STATEMENTS OF OPERATIONS Year Ended December 31 2022 2021 Net services revenues $ 18,800,000 $ 19,503,000 Cost of services 15,499,000 16,273,000 Gross Profit 3,301,000 3,230,000 Operating Expenses: Selling 1,325,000 1,931,000 Marketing 1,050,000 1,032,000 General and administrative 3,320,000 5,058,000 Total Operating Expenses 5,695,000 8,021,000 Gain from litigation settlement, net 12,000,000 - Operating Income (Loss) 9,606,000 ( 4,791,000 ) Other Income (Expense): Gain on forgiveness of debt and accrued interest - 1,062,000 Benefit from Employee Retention Credit - 273,000 Other income (expense) 222,000 ( 36,000 ) Total Other Income 222,000 1,299,000 Income (Loss) Before Taxes 9,828,000 ( 3,492,000 ) Income tax (benefit) expense ( 218,000 ) 42,000 Net Income (Loss) $ 10,046,000 $ ( 3,534,000 ) Net income (loss) per share: Basic $ 5.61 $ ( 2.01 ) Diluted $ 5.59 $ ( 2.01 ) Shares used in calculation of net income (loss) per share: Basic 1,791,000 1,760,000 Diluted 1,796,000 1,760,000 See accompanying notes to financial statements. 19 Table of Contents Insignia Systems, Inc. STATEMENTS OF SHAREHOLDERS' EQUITY Common Stock Additional Paid-In Accumulated Shares Amount Capital Deficit Total Balance at January 1, 2021 1,748,000 $ 17,000 $ 16,238,000 $ ( 9,587,000 ) $ 6,668,000 Issuance of common stock, net 6,000 1,000 26,000 — 27,000 Issuance of common stock upon vesting of restricted stock units 28,000 — ( 200,000 ) — ( 200,000 ) Value of stock-based compensation — — 232,000 — 232,000 Net loss — — — ( 3,534,000 ) ( 3,534,000 ) Balance at December 31, 2021 1,782,000 18,000 16,296,000 ( 13,121,000 ) 3,193,000 Issuance of common stock, net 6,000 — 39,000 — 39,000 Issuance of common stock upon vesting of restricted stock units 9,000 — — — — Value of stock-based compensation — — 123,000 — 123,000 Net income — — — 10,046,000 10,046,000 Balance at December 31, 2022 1,797,000 $ 18,000 $ 16,458,000 $ ( 3,075,000 ) $ 13,401,000 See accompanying notes to financial statements. 20 Table of Contents Insignia Systems, Inc. STATEMENTS OF CASH FLOWS Year Ended December 31 2022 2021 Operating activities: Net income (loss) $ 10,046,000 $ ( 3,534,000 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 59,000 60,000 Gain on sale of property and equipment - ( 6,000 ) Changes in allowance for doubtful accounts ( 251,000 ) 87,000 Stock-based compensation expense 123,000 232,000 Gain on forgiveness of debt and accrued interest - ( 1,062,000 ) Changes in operating assets and liabilities: Accounts receivable ( 59,000 ) 523,000 Inventories ( 10,000 ) 66,000 Income taxes receivable ( 24,000 ) 237,000 Prepaid expenses and other 618,000 ( 392,000 ) Accounts payable 126,000 ( 572,000 ) Accrued liabilities ( 892,000 ) 665,000 Accrued income taxes ( 658,000 ) 34,000 Deferred revenue 1,585,000 662,000 Net cash provided by (used in) operating activities 10,663,000 ( 3,000,000 ) Investing activities: Purchases of property and equipment ( 29,000 ) ( 106,000 ) Sale of property and equipment - 16,000 Net cash used in investing activities ( 29,000 ) ( 90,000 ) Financing activities: Proceeds from issuance of common stock, net 39,000 27,000 Cash dividends paid ($0.70 per share) - ( 14,000 ) Repurchase of common stock upon vesting of restricted stock awards and vesting of restricted stock units - ( 200,000 ) Net cash provided by (used in) financing activities 39,000 ( 187,000 ) Increase (decrease) in cash and cash equivalents and restricted cash 10,673,000 ( 3,277,000 ) Cash and cash equivalents and restricted cash at beginning of year 3,851,000 7,128,000 Cash and cash equivalents and restricted cash at end of year $ 14,524,000 $ 3,851,000 Supplemental disclosures for cash flow information: Cash paid during the year for income taxes $ 464,000 $ 230,000 Non-cash investing and financing activities: Operating lease right-of-use asset obtained in exchange for lease obligations $ 38,000 $ 219,000 Purchase of property and equipment included in accounts payable $ 1,000 $ 13,000 See accompanying notes to financial statements. 21 Table of Contents Insignia Systems, Inc. Notes to Financial Statements 1. Summary of Significant Accounting Policies. Description of Business . Insignia (the “Company”) is a leading provider of in-store solutions to consumer-packaged goods (“CPG”) manufacturers, retailers, shopper marketing agencies and brokerages. The Company operates in a single reportable segment. The Company’s leadership and employees have extensive industry knowledge with direct experience in both CPG manufacturers and retailers. The Company provides marketing solutions to CPG manufacturers spanning from some of the largest multinationals to new and emerging brands. The Company’s primary solutions are merchandising solutions, on-pack solutions and signage. Revenue Recognition . 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. Cash and Cash Equivalents and Restricted Cash . The Company considers all highly liquid investments with an original maturity date of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value. 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. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. Amounts held in checking accounts and in insured cash sweep accounts during the years ended December 31, 2022 and 2021 were fully insured under the Federal Deposit Insurance Corporation. December 31 2022 2021 Cash and cash equivalents $ 14,439,000 $ 3,766,000 Restricted cash 85,000 85,000 Total cash and cash equivalents and restricted cash $ 14,524,000 $ 3,851,000 Restricted Cash. 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 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. Accounting Standards Codification (“ASC”) 820-10 also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability, developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect management’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is divided into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. 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. 22 Table of Contents The Company records certain financial assets and liabilities at their carrying amounts that approximate fair value, based on their short-term nature. These financial assets and liabilities included cash and cash equivalents, accounts receivable, and accounts payable. Accounts Receivable . The majority of the Company’s accounts receivable is due from companies in the consumer-packaged goods industry. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are due within 30-150 days and are stated at amounts due from customers, net of an allowance for doubtful accounts. Accounts receivable outstanding longer than the contractual payment terms are considered past due. The Company determines its allowance by considering a number of factors, including the length of time trade accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. Changes in the Company’s allowance for doubtful accounts are as follows: December 31 2022 2021 Beginning balance $ 355,000 $ 268,000 Bad debt provision ( 44,000 ) 103,000 Accounts written-off ( 299,000 ) ( 111,000 ) Recoveries 92,000 95,000 Ending balance $ 104,000 $ 355,000 Inventories . 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. Prepaid Production Costs . For merchandise and on-pack solutions, the Company incurs third party costs for design and materials prior to providing the solution to the customer. These costs are included in prepaid production costs until the revenue is recognized. Property and Equipment . Property and equipment is recorded at cost. Significant additions or improvements extending asset lives are capitalized, while repairs and maintenance are charged to expense when incurred. Expenditures are capitalized for all development activities, while expenditures related to planning, training, and maintenance are expensed. Depreciation is provided in amounts sufficient to relate the cost of assets to operations over their estimated useful lives. The straight-line method of depreciation is used for financial reporting purposes and accelerated methods are used for tax purposes. Estimated useful lives of the assets are as follows: Production tooling, machinery and equipment 1 – 6 years Office furniture and fixtures 1 – 3 years Computer equipment and software 3 – 5 years Leasehold improvements 1 – 3 years Leases. The Company determines if an arrangement contains a lease at inception. Operating leases are included in our operating lease right-of-use (ROU) assets, the current portion of operating lease liabilities, and the operating lease liabilities on the balance sheets. 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 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. Lease expense is recognized on a straight-line basis over the lease term. The Company has elected the practical expedient to exclude short-term leases (one year or less) from our ROU assets and lease liabilities. 23 Table of Contents Impairment of Long-Lived Assets . The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. Impaired assets are then recorded at their estimated fair value. Restructuring. The Company implemented a plan to restructure its operations in December 2021, including workforce reductions and other cost-saving initiatives. As part of this restructuring plan, the Company reduced its workforce by approximately 19 %. A pre-tax restructuring charge of $ 201,000 was recorded during the year ended December 31, 2021. The Company recorded $ 81,000 of this charge within cost of sales and $ 120,000 within operating expenses in the Company’s statement of operations. As of December 31, 2021, the $ 201,000 pre-tax restructuring charge was included in accrued compensation and was paid in 2022. Sales Taxes. The Company accrues sales taxes based on determination of which of its products/services are subject to sales tax, and in which states and jurisdictions the tax applies. Further, the Company must determine which of its customers are exempt from the Company charging sales tax because the customer is a reseller or self-assesses and direct pays to states and other jurisdictions on purchases the customer makes from the Company. These determinations contain estimates and are subject to judgment and interpretation by taxing authorities in various states and other jurisdictions, which could result in recognizing materially different amounts in future periods. Income Taxes . Income taxes are accounted for under the liability method. Deferred income taxes are provided for temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred taxes are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or the entire deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of the enactment. It is the Company’s policy to provide for uncertain tax positions and the related interest and penalties based upon management’s assessment of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. The Company recognizes interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense (benefit). Stock-Based Compensation . The Company measures and recognizes compensation expense for all stock-based awards at fair value. Restricted stock units and awards are valued at the closing market price of the Company’s stock on the date of the grant. The Company uses the Black-Scholes option pricing model to determine the weighted average fair value of options and employee stock purchase plan rights. The determination of fair value of share-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as by assumptions regarding several complex and subjective variables. These variables include, but are not limited to, the expected stock price volatility over the term of the awards, and actual and projected employee stock option exercise behaviors. The expected lives of the options and employee stock purchase plan rights are based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rate is based on the U.S. Treasury rates at the date of grant with maturity dates approximately equal to the expected term at grant date. Volatility is based on historical and expected future volatility of the Company’s stock. The Company has not historically issued any dividends beyond one-time dividends declared in 2011 and 2016 and does not expect to in the future. Advertising Costs . Advertising costs are charged to operations as incurred. Advertising expenses were approximately $ 41,000 and $ 34,000 during the years ended December 31, 2022 and 2021, respectively. Net Income (Loss) Per Share . Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average shares outstanding and excludes any dilutive effects of stock options and restricted stock units and awards. Diluted net income (loss) per share gives effect to all diluted potential common shares outstanding during the year. 24 Table of Contents Weighted average common shares outstanding for the years ended December 31, 2022 and 2021 were as follows: Year ended December 31 2022 2021 Denominator for basic net income (loss) per share - weighted average shares 1,791,000 1,760,000 Effect of dilutive securities: Stock options, restricted stock units and restricted stock awards 5,000 - Denominator for diluted net income (loss) per share - weighted average shares 1,796,000 1,760,000 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 . The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. 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. 2. Revenue Recognition. 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 .” Taxes collected from customers and remitted to governmental authorities are excluded from revenue on the net basis of accounting. 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 services. Performance Obligations A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. 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: 25 Table of Contents 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 primarily at a point-in-time recognition. POPS Signage Solution Services. The Company provides a service of displaying promotional signs in close proximity to the CPG manufacturer’s product in participating stores, which the Company maintains in two-to-four-week cycle increments. Each of the individual activities under the Company’s services, including production activities, are inputs to an integrated sign display service. Customers receive and consume the benefits from the promotional displays over the duration of the contracted display cycle. Additionally, the display of the signs does not have an alternative use to the Company and the Company has an enforceable right to payment for services performed to date. As a result, the Company recognizes the transaction price for service performance obligations as revenue over time. 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. Disaggregation of Revenue In the following table, revenue is disaggregated by timing of revenue recognition. Year ended December 31 2022 2021 Timing of revenue recognition: Services transferred over time $ 1,763,000 $ 6,659,000 Services transferred at a point in time 17,037,000 12,844,000 Total $ 18,800,000 $ 19,503,000 Contract Costs Sales commissions paid to internal or external sales representatives are eligible for capitalization because they are incremental costs that would not have been incurred without entering into a specific sales arrangement and are recoverable through the expected margin on the transaction. The Company is applying the practical expedient in Accounting Standards Codification 340-40-25-4 that allows the incremental costs of obtaining a contract to be recorded as an expense when incurred when the amortization period of the asset that would have otherwise been recognized is one year or less. These costs are included in selling expenses. Deferred Revenue Significant changes in deferred revenue during the period are as follows: Balance at December 31, 2021 $ 842,000 Reclassification of beginning deferred revenue to revenue, as a result of performance obligations satisfied ( 491,000 ) Cash received in advance and not recognized as revenue 2,076,000 Balance at December 31, 2022 $ 2,427,000 Transaction Price Allocated to Remaining Performance Obligations The Company applies the practical expedient in paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less, which reflect the majority of its performance obligations. 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 $ 57,000 related to performance obligations that are unsatisfied (or partially unsatisfied) as of December 31, 2022 will be recognized during 2023. 26 Table of Contents 3. Property and Equipment. Property and equipment consist of the following at December 31: Year ended December 31 2022 2021 Property and Equipment: Production tooling, machinery and equipment $ 27,000 $ 27,000 Office furniture and fixtures 95,000 95,000 Computer equipment and software 771,000 753,000 Leasehold improvements 19,000 19,000 Construction in-progress 3,000 4,000 915,000 898,000 Accumulated depreciation and amortization ( 844,000 ) ( 785,000 ) Net Property and Equipment $ 71,000 $ 113,000 Depreciation expense for the years ended December 31, 2022 and 2021 was $ 59,000 and $ 60,000 , respectively. 4. Leases. As of December 31, 2022, the Company leases space under two non-cancelable operating leases for its corporate headquarters and for warehouse space. Both leases have escalating lease payment terms but neither contains a contingent rent provision. The leases for both the Company’s corporate headquarters and its warehouse include both lease (e.g., fixed payments including rent, taxes, and insurance costs) and non-lease components which are accounted for as a single lease component as the Company has elected the practical expedient to group lease and non-lease components for all leases. 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 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. 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 Corporate Operating Headquarters Warehouse Leases Operating lease cost $ 67,000 $ 17,000 $ 84,000 Variable lease cost 40,000 12,000 52,000 Total $ 107,000 $ 29,000 $ 136,000 Year ended December 31, 2021 Prior Corporate Corporate Additional Operating Headquarters Headquarters Office Space Warehouse Leases Operating lease cost $ 38,000 $ 28,000 $ — $ 13,000 $ 79,000 Variable lease cost 24,000 16,000 — 12,000 52,000 Short-term lease cost — — 28,000 — 28,000 Total $ 62,000 $ 44,000 $ 28,000 $ 25,000 $ 159,000 27 Table of Contents 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: 2023 $ 10,000 2024 52,000 2025 53,000 2026 55,000 Total lease payments $ 170,000 Less: Interest ( 26,000 ) Present value of lease liabilities $ 144,000 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. 5. Commitments and Contingencies. Legal . The Company is subject to various legal matters in the normal course of business. 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. 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 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. 6. Shareholders’ Equity . Stock-Based Compensation . The Company’s stock-based compensation plans are administered by the Compensation Committee of the Board of Directors, which, subject to approval by the Board of Directors, selects persons to receive awards and determines the number of shares subject to each award and the terms, conditions, performance measures and other provisions of the award. 28 Table of Contents The following table summarizes the stock-based compensation expense that was recognized in the Company’s statements of operations for the years ended December 31, 2022 and 2021: Year ended December 31 2022 2021 Cost of sales $ 18,000 $ 24,000 Selling 1,000 25,000 Marketing 13,000 12,000 General and administrative 91,000 171,000 $ 123,000 $ 232,000 The Company uses the Black-Scholes option pricing model to estimate fair value of stock-based awards with the following weighted-average assumptions: 2022 2021 Employee Stock Purchase Plan: Expected life (years) 1.0 1.0 Expected volatility 169 % 142 % Dividend yield 0 % 0 % Risk-free interest rate 0.4 % 0.1 % The Company uses the graded attribution method to recognize expense for unvested stock-based awards. Forfeitures are recognized as incurred. Stock Options, Restricted Stock, Restricted Stock Units, and Other Stock-Based Compensation Awards . The Company maintains the 2003 Incentive Stock Option Plan (the “2003 Plan”), the 2013 Omnibus Stock and Incentive Plan (the “2013 Plan”) and the 2018 Equity Incentive Plan (the “2018 Plan”). The 2018 Plan replaced the 2013 Plan upon its ratification by shareholders in July 2018. No further awards may be granted under the 2013 Plan or the 2003 Plan. Awards granted under the 2003 Plan and 2013 Plan will remain in effect until they are exercised or expire according to their terms. 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. 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. Stock options expire 10 years after the date of grant and generally vest over three years. The Company issues new shares of common stock upon grant of restricted stock, when stock options are exercised, and when restricted stock units are vested and/or settled. 29 Table of Contents The following table summarizes activity under the 2003, 2013 and 2018 Plans: Plan Shares Available for Grant Plan Options Outstanding Weighted Average Exercise Price Per Share Aggregate Intrinsic Value Balance at January 1, 2021 93,731 30,498 $ 14.69 Restricted stock units and awards granted - 2018 Plan ( 5,514 ) — Cancelled or forfeited - 2018 Plan options 2,584 ( 2,584 ) 13.36 Cancelled or forfeited - 2018 Plan restricted stock and restricted stock units 5,508 — 8.69 Stock options exercised — ( 1,973 ) 13.59 $ 17,100 Cancelled or forfeited - 2013 Plan options 292 ( 292 ) 15.54 Cancelled or forfeited - 2013 Plan restricted stock and restricted stock units 1,047 — 12.39 Cancelled or forfeited - 2003 Plan options — ( 6,527 ) 19.66 Balance at December 31, 2021 97,648 19,122 $ 13.23 Restricted stock units and awards granted - 2018 Plan ( 6,248 ) — Stock options exercised — ( 1,300 ) 8.26 $ 2,422 Cancelled or forfeited - 2013 Plan options 1,462 ( 1,462 ) 15.54 Cancelled or forfeited - 2003 Plan options — ( 2,274 ) 8.76 Balance at December 31, 2022 92,862 14,086 14.17 The following table summarizes information about the stock options outstanding at December 31, 2022: Options Outstanding Options Exercisable Exercise Prices Number Outstanding Weighted Average Remaining Contractual Life Weighted Average Exercise Price Per Share Number Exercisable Weighted Average Exercise Price Per Share $ 13.65 10,185 5.61 years $ 13.65 10,185 $ 13.65 $ 15.54 3,901 1.39 years 15.54 3,901 15.54 14,086 4.44 years $ 14.17 14,086 $ 14.17 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 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 vested June 1, 2022. 30 Table of Contents Restricted stock and restricted stock unit transactions during the years ended December 31, 2022 and 2021 are summarized as follows: Number of Shares Weighted average grant date fair value Unvested shares at January 1, 2021 49,964 $ 8.76 Granted 5,514 8.16 Vested ( 40,392 ) 8.33 Forfeited or surrendered ( 6,555 ) 9.28 Unvested shares at December 31, 2021 8,531 $ 10.01 Granted 6,248 9.60 Vested ( 8,910 ) 10.25 Unvested shares at December 31, 2022 5,869 $ 9.21 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. Employee Stock Purchase Plan. The Company has an Employee Stock Purchase Plan (the “ESPP”) that enables employees to contribute up to 10% of their base compensation toward the purchase of the Company’s common stock at 85% of its market value on the first or last day of the year. During the years ended December 31, 2022 and 2021, respectively, participants purchased 1,153 and 4,541 shares under the ESPP. At December 31, 2022, 23,283 shares were reserved for future employee purchases of common stock under the ESPP. For the years ended December 31, 2022 and 2021, the Company recognized $ 60,000 and $ 23,000 , respectively, of stock-based compensation expense related to the ESPP. Dividends. The Company has not historically paid dividends, other than one-time dividends declared in 2011 and 2016. 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. 7. Income Taxes . Income tax expense (benefit) consists of the following: Year ended December 31 2022 2021 Current taxes - Federal $ 361,000 $ - Current taxes - State ( 579,000 ) 42,000 Income tax expense $ ( 218,000 ) $ 42,000 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: Year Ended December 31 2022 2021 Federal statutory rate 21.0 % 21.0 % Stock-based awards 0.2 2.0 State taxes 3.6 3.6 Impact of uncertain tax positions ( 6.7 ) ( 1.0 ) Valuation allowance ( 20.0 ) ( 34.3 ) Other ( 0.3 ) 7.5 Effective federal income tax rate ( 2.2 )% ( 1.2 )% 31 Table of Contents Components of resulting noncurrent deferred tax assets (liabilities) are as follows: As of December 31 2022 2021 Deferred tax assets Accrued expenses $ 231,000 $ 507,000 Inventory reserve 23,000 23,000 Stock-based awards 24,000 31,000 Reserve for bad debts 26,000 88,000 Net operating loss and credit carryforwards 824,000 2,507,000 Other 23,000 33,000 Depreciation 43,000 33,000 Valuation allowance ( 1,175,000 ) ( 3,146,000 ) Total deferred tax assets $ 19,000 $ 76,000 Deferred tax liabilities Prepaid expenses ( 19,000 ) ( 76,000 ) Total deferred tax liabilities ( 19,000 ) ( 76,000 ) Net deferred income tax liabilities $ - $ - 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. The expiration of state NOLs carried forward varies by taxing jurisdiction. Future utilization of NOLs carried forward may be subject to certain limitations under Section 382 of the Internal Revenue Code. 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, 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. This liability is reflected as accrued income taxes on the Company’s balance sheets. The Company files income tax returns in the United States and numerous state and local tax jurisdictions. Tax years 2019 and forward are open for examination and assessment by the Internal Revenue Service. With limited exceptions, tax years prior to 2019 are no longer open in major state and local tax jurisdictions. 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. 32 Table of Contents A reconciliation of the beginning and ending amount of the liability for uncertain tax positions is as follows: Balance at January 1, 2021 $ 677,000 Increases due to interest and state tax 34,000 Balance at December 31, 2021 711,000 Decrease due to state tax expense ( 678,000 ) Increases due to interest and state tax 20,000 Balance at December 31, 2022 $ 53,000 8. Employee Benefit Plans . The Company sponsors a Retirement Profit Sharing and Savings Plan under Section 401(k) of the Internal Revenue Code. The plan allows employees to defer up to 50 % of their wages, subject to Federal limitations, on a pre-tax basis through contributions to the plan. During the years ended December 31, 2022 and 2021, the Company’s expense for matching contributions was $ 53,000 and $ 41,000 , respectively. 9. Concentrations. 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. Export Sales . Export sales accounted for less than 1% of total net sales during the years ended December 31, 2022 and 2021. 10. Loan. 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. 33 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None.