BLOOMIA HOLDINGS, INC. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Company’s financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated due to various factors discussed under “Cautionary Statement Regarding Forward-Looking Statements” and elsewhere, including Part II, Item 1A, in this Quarterly Report on Form 10-Q and the “Risk Factors” described in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, our Current Reports on Form 8-K and our other SEC filings. Company Overview Insignia Systems, Inc. (“Insignia,” “we,” “us,” “our” and the “Company”) was incorporated in Minnesota in 1990. We are a leading provider of in-store advertising solutions to brands, retailers, shopper marketing agencies and brokerages (“clients”). We believe our products and services are attractive to our clients because of our ability to navigate the complex retail landscape, to customize our solutions for both our brand and retail partners, to execute with excellence and the results our solutions deliver. Our leadership and employees have extensive industry knowledge, including direct experience through former positions at consumer-packaged goods (“CPG”) manufacturers and retailers. We provide marketing solutions to brands spanning from some of the largest multinationals to new and emerging brands. For retailers and brands working in an environment that is tighter, more competitive, and more complex every day, Insignia positions itself as the shopper marketing ally that combines best-in-class execution with imagination, responsiveness, and hunger to help move business forward. We take the relationships we have with our clients and vendor partnerships very seriously by having our team stretch the extra mile to ensure flawless execution. We sincerely approach our projects with the same passion as our clients do. These relationships are built with our brand-led, retailer centric mindset, our ability to be nimble and flexible to the ever-changing industry landscape and our delivery of superior customer service that our clients deserve. Our in-store solutions are executed in retailers spanning from some of the largest national retailers to regional US wholesalers and independents who are leaders in their respective channels and geographies. Up until 2020, our primary solution had been in-store signage, specifically Point-Of-Purchase Services (POPS®). The Insignia POPS solution is a national, account-specific, shelf-edge advertising and promotion tactic. Primarily because of competitive pressures, market contraction and reduced spending post the COVID-19 pandemic, our POPS business has declined and will be wound down in 2023. Beginning in 2018, we began developing and offering an expanded portfolio of solutions including on-pack and displays in addition to what was our core business of Insignia POPS. Our expanded portfolio now allows us to meet the needs of brands, retailers and their agents as their business strategies evolve behind an ever-changing retail landscape. Since expanding our portfolio of solutions in 2018, our business results, investments and overall team capabilities are primarily focused on our display and on-pack solutions. With our diversification of business, we recognized over 95% of our revenue from these newer solutions in 2022 and for the three months ended March 31, 2023. 12 Table of Contents On July 1, 2022, we entered into a $20 million settlement agreement with News Corporation, News America Marketing FSI L.L.C., and News America Marketing In-Store Services L.L.C. (collectively, “News America”). The agreement memorializes the amicable settlement of our outstanding lawsuit against News America. The agreement resulted in net proceeds before income tax of $12,000,000, which was recorded as a net pretax gain from litigation settlement in operations during the three months ended September 30, 2022. On April 7, 2023 we announced the launch of our non-bank lending platform, through the hiring of a Senior Vice President of Lending with over 20 years of experience in credit and lending. Operations from non-bank lending did not have material impact on business for the three months ended March 31, 2023. We continue to explore other strategic options to maximize shareholder value. Potential strategic alternatives that may be evaluated include, but are not limited to, an acquisition, merger, business combination, in-licensing, start-up of new business or other strategic initiatives. There can be no assurance that this process will result in any transaction or other initiatives. Business Overview Summary of Financial Results For the quarter ended March 31, 2023, the Company generated revenues of $12,831,000, as compared with revenues of $6,148,000 for the quarter ended March 31, 2022. Net income for the quarter ended March 31, 2023 was $1,648,000, as compared to net income of $62,000 for the quarter ended March 31, 2022. Revenue from our display and on-pack offerings has increased significantly for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, partially offset by continued declines in our signage business due to competitive pressure, which we expect to continue for the remainder of 2023 as we wind down our POPS business. We continue to pursue a variety of efforts designed to drive innovation, client acquisitions and retailer expansions. The first quarter of the calendar year has historically been the strongest quarter of the year for our display and on-pack revenues. We expect the remaining quarters in 2023 to have significantly less revenue than this first quarter and also expect operating losses in the remaining quarters of the year, and a loss for the full year. During the quarter ended March 31, 2023, cash and cash equivalents and restricted cash decreased $3,844,000 from $14,524,000 at December 31, 2022 to $10,680,000 at March 31, 2023. The decrease was primarily driven by the increase in net sales for the three months ended March 31, 2023 compared to the three months ended December 31, 2022, resulting in a $3,770,000 increase in accounts receivable. We have no debt other than our lease obligations at March 31, 2023. Working capital increased $1,692,000 from $13,379,000 at December 31, 2022 to $15,071,000 at March 31, 2023. Results of Operations The following table sets forth, for the periods indicated, certain items in our Condensed Statements of Operations as a percentage of total net sales. For the Three Months Ended March 31 2023 2022 Net sales 100.0 % 100.0 % Cost of sales 77.2 79.2 Gross profit 22.8 20.8 Operating expenses: Selling 2.8 5.6 Marketing 2.3 4.2 General and administrative 5.7 9.8 Total operating expenses 10.8 19.6 Operating income 12.0 1.2 Other income (expense) 0.9 (0.1 ) Income before taxes 12.9 1.1 Income tax expense 0.1 0.1 Net income 12.8 % 1.0 % 13 Table of Contents Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022 Net Sales. Net sales for the three months ended March 31, 2023 increased 108.7% to $12,831,000 compared to $6,148,000 for the three months ended March 31, 2022. The increase was due to a 121% increase in the combination of display and on-pack revenue, partially offset by a 43% decrease in signage revenue. For the three months ended March 31, 2023, display revenue has increased due to securing larger contracts in addition to both an increase in sales to new CPGs and an increase in sales to existing CPGs. Due to sales cycles within the retailers that our display and on-pack solutions execute we anticipate seasonality in sales, with those sales being significantly stronger in the first quarter of the year. Our display business generally consists of larger contracts versus our historical signage business. As a result, our revenue may be prone to variances on both a quarter to quarter and a year over year basis. Competitive pressures have resulted in decreased POPS solutions revenue for three months ended March 31, 2023 versus the three months ended March 31, 2022. We expect POPS revenue will continue to decline in 2023 in comparison to 2022 due to the decision to wind down this product offering during the quarter ending June 30, 2023. Gross Profit. Gross profit for the three months ended March 31, 2023 increased 128.1% to $2,920,000 compared to $1,280,000 for the three months ended March 31, 2022. Gross profit as a percentage of total net sales increased to 22.8% for the three months ended March 31, 2023, compared to 20.8% for the three months ended March 31, 2022. The increase in gross profit was primarily due to increased sales. Operating Expenses Selling. Selling expenses for the three months ended March 31, 2023 increased 6.4% to $364,000 compared to $342,000 for the three months ended March 31, 2022. The increase in expense was due to higher commissions due to the higher sales, and were partially offset by open sales positions during the quarter. Selling expenses as a percentage of total net sales decreased to 2.8% for the three months ended March 31, 2023 compared to 5.6% for the three months ended March 31, 2022. The decrease was primarily due to increased sales, partially offset by an increase in commissions. Marketing. Marketing expenses for the three months ended March 31, 2023 increased 14.3% to $296,000 compared to $259,000 for the three months ended March 31, 2022. Increased marketing expense was primarily the result of increased staff and staff related expenses. Marketing expenses as a percentage of total net sales decreased to 2.3% for the three months ended March 31, 2023 compared to 4.2% for the three months ended March 31, 2022. The decrease was primarily due to increased sales, partially offset by increased staff and staff related expenses. General and administrative. General and administrative expenses for the three months ended March 31, 2023 increased 19.0% to $721,000 compared to $606,000 for the three months ended March 31, 2022. The increase was primarily from the comparison to the reduced expense in 2022 from the Director Deferred Compensation Plan due to a reduction in our share price for the three months ended March 31, 2022. General and administrative expenses as a percentage of total net sales decreased to 5.7% for the three months ended March 31, 2023 compared to 9.8% for the three months ended March 31, 2022. The decrease was primarily due to increased sales, partially offset by the factors described above. With the April 7, 2023 announcement of our non-bank lending platform we expect to incur between $65,000 to $75,000 of additional expense on a quarterly basis for the duration of 2023. Other Income (Expense). Other income for the three months ended March 31, 2023 was $112,000 compared to $3,000 of expense for the three months ended March 31, 2022. Other income in 2023 consisted primarily of interest income from investment in short-term treasury bills. Income Taxes. For the three months ended March 31, 2023, the Company recorded income tax expense of $3,000, or 0.2% of income before taxes. For the three months ended March 31, 2022, the Company recorded income tax expense of $8,000, or 11.4% of income before taxes. The income tax expense for the three months ended March 31, 2023 and 2022 is comprised of federal and state taxes. The primary differences between the Company’s March 31, 2023 and 2022 effective tax rates and the statutory federal rate are nondeductible stock-based compensation, nondeductible meals and entertainment, as well as changes in the Company’s valuation allowance against its deferred tax assets. The Company reassesses its effective tax rate each reporting period and adjusts the annual effective rate if deemed necessary, based on projected annual taxable income (loss). 14 Table of Contents Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statements and tax basis of assets and liabilities given the provisions of enacted tax laws. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustment to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria. As a result of the Company’s future outlook, management has reviewed its deferred tax assets and concluded that the uncertainties related to the realization of its deferred tax assets are unfavorable. Management has considered positive and negative evidence for the potential utilization of the deferred tax assets and has concluded that it is more likely than not that the Company will not realize the full amount of its net deferred tax assets. As of March 31, 2023, and December 31, 2022, the Company had unrecognized tax benefits totaling $54,000 and $53,000, respectively, including interest, which relates to state nexus issues. The amount of the unrecognized tax benefits, if recognized, that would affect the effective income tax rates of future periods is $54,000. At December 31, 2022, the Company had Federal net operating loss (NOL) to carry forward of approximately $2,900,000. As of March 31, 2023 the Company estimates remaining Federal NOL carryforwards to be approximately $1,200,000. The federal NOL utilization is limited to 80% of estimated taxable income. The estimated NOL carryforward will be adjusted at year end for actual results. Net Income. For the reasons stated above, net income for the three months ended March 31, 2023 was $1,648,000, compared to net income of $62,000 for the three months ending March 31, 2022. As discussed in the sales section, we anticipate seasonality in sales, with sales being lower in the remaining quarters of the year, resulting in expected losses for the remaining quarters in 2023 and a loss for the full year. Liquidity and Capital Resources The Company has financed its operations with proceeds from stock sales and sales of its services and products. At March 31, 2023, working capital was $15,071,000 (defined as current assets less current liabilities) compared to $13,379,000 at December 31, 2022. During the three months ended March 31, 2023 cash and cash equivalents and restricted cash decreased $3,844,000 from $14,524,000 at December 31, 2022 to $10,680,000 at March 31, 2023. Operating Activities . Net cash used by operating activities during the three months ended March 31, 2023 was $3,846,000. Net income of $1,648,000, plus non-cash adjustments of $56,000, was more than offset by changes in operating assets and liabilities of $5,550,000 which resulted in the $3,846,000 of cash used by operating activities. The non-cash adjustments consisted of depreciation expense, changes in allowance for doubtful accounts and stock-based compensation expense. The largest component of the change in operating assets and liabilities was accounts receivable which increased $3,770,000 from December 31, 2022. The increase was a result of increased net sales for the three months ended March 31, 2023 compared to the fourth quarter of 2022. In the normal course of business, our accounts receivable, accounts payable, accrued liabilities, deferred revenue and prepaid production costs will fluctuate depending on the level of revenues and related business activity, as well as billing arrangements with customers and payment terms with retailers. Investing Activities . Net cash used in investing activities during the three months ended March 31, 2023 was $6,000, which related to purchases of property and equipment. Financing Activities . Net cash provided by financing activities during the three months ended March 31, 2023 was $8,000, which related to proceeds received from issuance of common stock under the employee stock purchase plan. Cash and cash equivalents plus restricted cash at March 31, 2023 was $10.7 million. The Company believes that based upon current business conditions and plans, its cash and cash equivalents balances will be sufficient for its cash requirements for at least the next 12 months. Depending on the outcome of our strategic alternative process we may be required to finance this process through equity offerings or debt financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our shareholders will be diluted, and the terms of those securities may include liquidation or other preferences that adversely affect the rights of our shareholders. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Additional capital may not be available when needed, on reasonable terms, or at all, and our ability to raise additional capital may be adversely impacted by potential worsening global economic conditions and the recent disruptions to and volatility in the credit and financial markets in the U.S. and worldwide. If we are unable to raise additional funds when needed we may not be able to complete transactions related to the strategic alternatives process. 15 Table of Contents Critical Accounting Estimates Our discussion of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. During the preparation of these financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions, including those related to allowance for doubtful accounts, income taxes, sales tax, and stock-based compensation expense. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our financial statements. Our significant accounting policies are described in Note 1 to the annual financial statements included in Part II, Item 8 of our Annual Report on Form 10-K as of and for the year ended December 31, 2022, filed with the Securities and Exchange Commission on March 9, 2023. We believe our most critical accounting estimates include the following: · allowance for doubtful accounts; · sales taxes; · income taxes; and · stock-based compensation expense. Cautionary Statement Regarding Forward-Looking Statements Certain statements made in this Quarterly Report on Form 10-Q, in the Company’s other SEC filings, in press releases and in oral statements to shareholders and securities analysts that are not statements of historical or current facts are “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance of the Company to be materially different from the results or performance expressed or implied by such forward-looking statements. The words “anticipate,” “believe,” “could,” “estimate,” “expect,” “future,” “likely,” “may,” “plan,” “project,” “will” and similar expressions identify forward-looking statements. Forward-looking statements include statements expressing the intent, belief or current expectations of the Company and members of our management team regarding, for instance: (i) our belief that our cash balance and cash generated by operations will provide adequate liquidity and capital resources for at least the next twelve months; (ii) that we expect the remaining quarters in 2023 to have significantly less revenue than this first quarter and also expect operating losses in the remaining quarters of the year, and a loss for the full year; (iii) we anticipate seasonality in sales, with those sales being significantly stronger in the first quarter of the year and (iv) that we expect fluctuations in accounts receivable and payable, accrued liabilities, revenue deferrals and prepaid production costs. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. These statements are subject to the risks and uncertainties that could cause actual results to differ materially and adversely from the forward-looking statements. These forward-looking statements are based on current information, which we have assessed and which by its nature is dynamic and subject to rapid and even abrupt changes. 16 Table of Contents Factors that could cause our estimates and assumptions as to future performance, and our actual results, to differ materially include the following: (i) local, regional, national, and international economic conditions that have deteriorated including the risks of a global recession or a recession in one or more of our key markets, and the impact they may have on us and our customers and our assessment of that; (ii) impacts of a pandemic including the duration, spread, severity, and any recurrence of the COVID-19 pandemic, the duration and scope of related government orders and restrictions, the impact on our employees, and the extent of the impact of a pandemic on overall demand for our products and services; (iii) management’s ability to fully or successfully implement its business plan to achieve and maintain increased sales and resultant profitability in the future; (iv) the Company’s success in developing and implementing new product offerings, in a successful manner; (v) prevailing market conditions, including pricing and other competitive pressures, in the in-store advertising industry and, intense competition for agreements with CPG retailers and manufacturers; (vi) potentially incorrect assumptions by management with respect to the financial effect of current strategic decisions and the effect of current sales trends on fiscal year 2023 results; (vii) termination of all or a major portion of, or a significant change in terms and conditions of, a material agreement with a CPG manufacturer or retailer; (viii) other economic, business, market, financial, competitive and/or regulatory factors affecting the Company’s business generally; (ix) our ability to successfully manage our IT operating infrastructure outsourcing arrangement; (x) our ability to attract and retain highly qualified managerial, operational and sales personnel; and (xi) our ability to develop and operate our non-bank lending business. Our risks and uncertainties also include, but are not limited to, the risks presented in our Annual Report on Form 10-K for the year ended December 31, 2022 and this Quarterly Report on Form 10-Q, and any additional risks presented in our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K. We undertake no obligation (and expressly disclaim any such obligation) to update forward-looking statements made in this Form 10-Q to reflect events or circumstances after the date of this Form 10-Q or to update reasons why actual results would differ from those anticipated in any such forward-looking statements, other than as required by law. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.