What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-14 compared with 2023-05-11 · 148 added, 104 removed, 63 unchanged (80% of the section changed)

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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.

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 (“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.

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 are building a scalable non-bank lending business to purchase existing loans or originate and fund new loans, all of which will be secured by collateral (individually or collectively, the “Secured Loans”).

On April 7, 2023, we announced the launch of our non-bank lending business, through the hiring of a Senior Vice President of Lending with over 20 years of experience in credit and lending.

Initially, we intend to focus on loans secured by real estate, primarily for agricultural purposes.

We expect to expand our product offerings over time as we identify needs and opportunities in the marketplace for loans generally.

Our plan, therefore, is to build a portfolio of well-secured loans, with a portion of the credit risk being participated to third parties in most cases, to maintain a low net loss experience and to charge fully compensatory rates and fees.

The primary sources of revenue from our non-bank lending business are expected to consist of:

interest income earned on assets on the balance sheet, including but not limited to Secured Loans, net of related funding costs and interest payments, and

fee income generated from origination and servicing of Secured Loans.

We are building our strategy and long-term growth initiatives upon a few fundamental factors:

streamlined systems and processes to support the growth of our core business through connecting customers with competitive funding;

establishment of market presence through direct marketing, purchase of existing loan portfolios, and/or third-party origination agreements;

development of long-term customer relationships;

creation of customized niche products and solutions to support identified customer needs and opportunities in the marketplace;

effective capital and funding structures to maximize returns;

development of mutually beneficial funding and origination partner relationships to expand Company loan volumes and margins over time;

evaluation of strategic acquisition(s) that align with our initiatives.

We face competition from other entities that originate, purchase, securitize, or provide financing for Secured Loans.

These entities include commercial and investment banks, insurance companies, Farm Credit System institutions, and financial funds.

We plan to compete by controlling overhead costs and by sourcing competitive cost of funds to blend with equity capital to provide flexible financing options and products designed to meet the varied needs of our customers.

The relative competitiveness of our loan rates and our ability to grow loan volume are affected by many factors, including:

demand for lending products we offer;

available capital;

liquidity and cost of funds from third-party funding sources.

We continue to explore other strategic options to maximize shareholder value.

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There can be no assurance that this process will result in any transaction or other initiatives.

Recent Developments

On August 4, 2023 we changed our name from “Insignia Systems, Inc.” and reincorporated from Minnesota to Delaware.

As part of the name change, our common stock now trades under the symbol “LDWY” on The Nasdaq Stock Market LLC.

On August 3, 2023, we completed the sale of certain assets and certain liabilities relating to our business of providing in-store advertising solutions to brands, retailers, shopper marketing agencies and brokerages (the “Legacy Business”) for a cash purchase price of $3.5 million to TIMIBO LLC, an affiliate of Park Printing, Inc.

(the “Buyer”), under an Asset Purchase Agreement (the “Purchase Agreement”).

We retained accounts receivable, as well as cash, cash equivalents and marketable securities.

The purchase price is subject to a post-closing adjustment depending on the net balance of (i) cash received by us for programs that remained unexecuted as of August 3, 2023, minus (ii) the payments we made to vendors for unexecuted programs.

We received significant cash payments between July 1 and August 3, 2023 for unexecuted programs, which we will retain, but which will reduce the purchase price.

Under the Purchase Agreement, $200,000 was escrowed for a twelve-month period for any future claims, as defined in the Purchase Agreement, by the Buyer against the Company.

We incurred approximately $350,000 of transaction-related costs that had not previously been expensed.

We also incurred transaction-related severance and other separation benefits in connection with the termination of certain of our officers and employees of approximately $1,537,000, as well as retention award payouts totaling $143,000 and employee bonuses totaling $164,000, each of which will be recorded as expense in the three months ended September 30, 2023.

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.

The operations of the Legacy Business will be presented as a discontinued operation beginning with the Quarterly Report on Form 10-Q for the three months ended September 30, 2023, the quarter in which the sale of the Legacy Business met the criteria as a discontinued operation.

We have provided supplemental operating results on a pro forma basis below for a further description of the impact of the sale of the Legacy Business on the financial statements.

For the quarter ended June 30, 2023, we generated net sales of $6,211,000, as compared with net sales of $3,254,000 for the quarter ended June 30, 2022.

For the six months ended June 30, 2023, we generated net sales of $19,042,000, as compared with net sales of $9,402,000 in the six months ended June 30, 2022.

Net loss for the quarter ended June 30, 2023 was $36,000, as compared to a net loss of $1,084,000 for the quarter ended June 30, 2022.

Net income for the six months ended June 30, 2023 was $1,612,000, as compared to a net loss of $1,022,000 for the six months ended June 30, 2022.

Our non-bank lending business had no revenue and had incremental general and administrative expenses of $101,000 for the three months ended June 30, 2023.

During the six months ended June 30, 2023, cash and cash equivalents and restricted cash decreased by $3,020,000 from $14,524,000 at December 31, 2022, to $11,504,000 at June 30, 2023.

The decrease was primarily driven by an increase in accounts receivable from December 31, 2022.

We had no debt other than our lease obligations at June 30, 2023.

Working capital increased $1,652,000 from $13,379,000 at December 31, 2022 to $15,031,000 at June 30, 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

The following table sets forth, for the periods indicated, certain items in our condensed consolidated statements of operations as a percentage of total net sales.

Three Months Ended

Six Months Ended

Cost of sales

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Total operating expenses

Operating income

Other income (expense)

Income before taxes

Operating (loss) income

Interest income

(Loss) income before taxes

Income tax expense

Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022

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.

Net (loss) income

Three and Six Months Ended June 30, 2023 Compared to Three and Six Months Ended June 30, 2022

Net sales for the three months ended June 30, 2023 increased 90.9% to $6,211,000 compared to $3,254,000 for the three months ended June 30, 2022.

The increase is primarily due to executing our largest display program to date.

Net sales for the six months ended June 30, 2023 increased 102.5% to $19,042,000 compared to $9,402,000 for the six months ended June 30, 2022.

For the six months ended June 30, 2023, display revenue had 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 anticipated seasonality in sales, with those sales being significantly stronger in the first quarter of the year.

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.

Gross profit for the three months ended June 30, 2023 increased 290.1% to $1,623,000 compared to $416,000 for the three months ended June 30, 2022.

The increase in gross profit was primarily due to increased sales.

Gross profit as a percentage of total net sales increased to 26.1% for the three months ended June 30, 2023 compared to 12.8% for the three months ended June 30, 2022.

The increase was primarily due to the impact fixed costs have on the gross profit percentage when sales increase.

Gross profit for the six months ended June 30, 2023 increased 167.9% to $4,543,000 compared to $1,696,000 for the six months ended June 30, 2022.

The increase in gross profit was primarily due to increased sales.

Gross profit as a percentage of total net sales increased to 23.9% for the six months ended June 30, 2023 compared to 18.0% for the six months ended June 30, 2022.

The increase was primarily due to the impact fixed costs have on the gross profit percentage when sales increase.

Operating Expenses

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 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.

Selling expenses for the three months ended June 30, 2023 increased 24.5% to $361,000 compared to $290,000 for the three months ended June 30, 2022.

Selling expenses for the six months ended June 30, 2023 increased 14.7% to $725,000 compared to $632,000 for the six months ended June 30, 2022.

The increases for both periods was primarily due to higher commissions due to the higher sales.

Selling expenses as a percentage of total net sales decreased to 5.8% for the three months ended June 30, 2023 compared to 8.9% for the three months ended June 30, 2022.

Selling expenses as a percentage of net sales decreased to 3.8% for the six months ended June 30, 2023 compared to 6.7% for the six months ended June 30, 2022.

The decreases for both periods was primarily due to increased sales, partially offset by an increase in commissions.

Marketing expenses for the three months ended June 30, 2023 increased 7.5% to $300,000 compared to $279,000 for the three months ended June 30, 2022.

Marketing expense for the six months ended June 30, 2023 increased 10.8% to $596,000 compared to $538,000 for the six months ended June 30, 2022.

The increases for both periods were primarily the result of increased staff and staff related expenses.

Marketing expenses as a percentage of total net sales decreased to 4.8% for the three months ended June 30, 2023 compared to 8.6% for the three months ended June 30, 2022.

Marketing expenses as a percentage of net sales decreased to 3.1% for the six months ended June 30, 2023 compared to 5.7% for the six months ended June 30, 2022.

The decreases for both periods 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.

General and administrative expenses for the three months ended June 30, 2023 increased 19.1% to $1,129,000 compared to $948,000 for the three months ended June 30, 2022.

The increase was primarily due to costs incurred with the sale of the Legacy Business and other strategic alternative costs which totaled $339,000 compared to $138,000 for the three months ended June 30, 2023 and 2022, respectively.

Incremental general and administrative expenses for the non-bank lending business were $101,000 for the three months ended June 30, 2023.

General and administrative expenses for the six months ended June 30, 2023 increased 19.0% to $1,850,000 compared to $1,554,000 for the six months ended June 30, 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 during the six months ended June 30, 2022, in addition to costs incurred related to the sale of the Legacy Business and other strategic alternative costs which totaled $393,000 compared to $210,000 for the three months ended June 30, 2023 and 2022, respectively.

General and administrative expenses as a percentage of total net sales decreased to 18.2% for the three months ended June 30, 2023 compared to 29.1% for the three months ended June 30, 2022 due to increased sales, partially offset by the factors described above.

General and administrative expenses as a percentage of net sales decreased to 9.8% for the six months ended June 30, 2023 compared to 16.5% for the six months ended June 30, 2022.

The decrease was due to increased sales, partially offset by the factors described above.

Interest Income.

Interest income for the three months ended June 30, 2023 was $135,000 compared to $31,000 for the three months ended June 30, 2022.

Interest income for the six months ended June 30, 2023 was $247,000 compared to $28,000 for the six months ended June 30, 2022.

Interest income in 2023 increased over 2022 primarily due to higher invested balances, which included the net proceeds from litigation of $12 million received in July 2022 and the higher interest rates available on investment in short-term treasury bills and interest-bearing savings.

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.

For the three and six months ended June 30, 2023 the Company recorded income tax expense of $4,000 and $7,000, respectively, or 12.5% and 0.4% of loss (income) before taxes, respectively.

For the three and six months ended June 30, 2022 the Company recorded income tax expense of $14,000 and $22,000, respectively, or 1.3% and 2.2% of loss before taxes, respectively.

The income tax expense for the three and six months ended June 30, 2023 and 2022 comprises federal and state income taxes.

The primary differences between the Company’s June 30, 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).

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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.

As of June 30, 2023, and December 31, 2022, the Company had unrecognized tax benefits totaling $55,000 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 $55,000.

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.

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.

As of June 30, 2023, the Company estimates remaining Federal NOL carryforwards to be approximately $1,300,000.

Federal NOL utilization is limited to 80% of estimated taxable income.

The estimated NOL carry forward will be adjusted at year end for actual results.

Net (Loss) Income.

For the reasons stated above, net loss for the three months ended June 30, 2023 was $36,000 and net income for the six months ended June 30, 2023 was $1,612,000, compared to net loss of $1,084,000 and $1,022,000, respectively, for the three and six months ending June 30, 2022.

As we seek to grow our non-bank lending business, we anticipate minimal revenue and to have losses from continuing operations for the remainder of the year.

Supplemental Operating Results on a Pro Forma Basis

Results of Operations

The operations of the Legacy Business will be presented as discontinued operations beginning with the Quarterly Report on Form 10-Q for the three months ended September 30, 2023, and prior period results of operations will also be presented on a discontinued operations basis.

The Company is presenting unaudited pro forma condensed consolidated information to illustrate the significant impact had discontinued operations presentation been used in prior periods.

With discontinued operations presentation, the continuing operations relate to the non-bank lending business.

The Company is presenting the pro forma information for the three months ended June 30, 2023, as that is the period in which the non-bank lending business began, along with a comparison to the three months ended June 30, 2022 on the same basis.

No impact from the sale proceeds and related costs, which occurred August 3, 2023 is included in the pro forma information.

The following table sets forth certain pro forma condensed consolidated statement of operations data for continuing operations for the three months ended June 30, 2023 and 2022.

The continuing operations had no net sales or cost of sales;

or selling and marketing expenses.

General and administrative

Operating loss from continuing operations

Interest income

Loss before taxes from continuing operations

* See Note 2 to the condensed consolidated financial statements appearing in Part 1, Item 1, of this Quarterly Report on Form 10-Q for additional detail.

Discussion of Results of Operations on Pro-Forma Basis

Operating Expenses

The amount of each type of operating expense for the three months ended June 30, 2023 and 2022, as well as the percentage change between such periods, were as follows:

General and administrative

General and administrative expenses increased by 28.9% in the three months ended June 30, 2023 as compared to the prior year comparable period.

This increase was due primarily to incremental expenses for the non-bank lending business of $101,000 in the three months ended June 30, 2023.

Interest Income

Interest income for the three months ended June 30, 2023 and 2022, as well as the percentage change in interest income between those periods, was as follows:

Interest income

Interest income for the three months ended June 30, 2023 was $135,000 compared to $31,000 for the three months ended June 30, 2022.

Pro Forma Loss Before Income Taxes

Pro forma loss before income taxes for the three months ended June 30, 2023 and 2022, as well as the percentage change in loss before between those periods, were as follows:

Loss before income taxes

As we seek to grow our non-bank lending business, we anticipate minimal revenue and to have losses from continuing operations for the remainder of the year.

We also expect to incur reduced general and administrative expenses in the near term as a result of lower headcount and the reduced administrative requirements associated with the current scale of our non-bank lending business.

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.

We have historically financed our operations with proceeds from stock sales and sales of its services and products, subject to occasional supplemental proceeds from the settlement of litigation.

At June 30, 2023, working capital (current assets less current liabilities) was $15,031,000, compared to $13,379,000 at December 31, 2022.

During the six months ended June 30, 2023, cash and cash equivalents and restricted cash decreased $3,020,000 from $14,524,000 at December 31, 2022 to $11,504,000 at June 30, 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.

Net cash used by operating activities during the six months ended June 30, 2023, was $3,009,000.

Net income of $1,612,000, plus non-cash adjustments of $73,000, less changes in operating assets and liabilities of $4,694,000, resulted in the $3,009,000 of cash used in operating activities.

The non-cash adjustments consisted of depreciation expense, changes in allowance for doubtful accounts and stock-based compensation expense.

The largest component of the change in operating assets and liabilities was accounts receivable, which increased $2,037,000 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.

The increase was a result of increased net sales in the six months ended June 30, 2023.

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.

Net cash used in investing activities during the six months ended June 30, 2023 was $19,000, 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.

Net cash provided by financing activities during the six months ended June 30, 2023 was $8,000, which related to proceeds received from issuance of common stock under the employee stock purchase plan and exercised stock options.

Cash and cash equivalents plus restricted cash at June 30, 2023 were $11.5 million.

The Company believes that based upon current business conditions and plans, its cash and cash equivalents balances will be sufficient for its cash requirements for at least the 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.

As the Company grows its non-bank lending business, 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.

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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.

If we are unable to raise additional funds when needed we may not be able to grow our non-bank lending business, or complete transactions related to the strategic alternatives process.

Critical Accounting Estimates

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(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.

(ii) that we expect fluctuations in accounts receivable and payable, accrued liabilities, revenue deferrals and prepaid production costs.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.

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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.

Forward-looking statements involve known and unknown risks, uncertainties and other factors, including:

(1) the availability of strategic alternatives on acceptable terms, if at all, (2) the limited history of our new non-bank lending business, (3) the substantial risk of loss associated with lending generally, (4) market conditions that may restrict or delay appropriate or desirable non-bank lending opportunities, (5) our ability to develop and maintain necessary processes and controls relating to our non-bank lending business (6) reliance on one or a small number of employees, (7) potential adverse classifications of our Company if we are unsuccessful in executing our business plan, (8) other economic, business, market, financial, competitive and/or regulatory factors affecting the Company’s business generally;

and (9) our ability to attract and retain highly qualified managerial, operational and sales personnel.

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.

We undertake no obligation (and expressly disclaim any such obligation) to update forward-looking statements made in this Quarterly Report on Form 10-Q to reflect events or circumstances after the date of this Quarterly Report on 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.

Quantitative and Qualitative Disclosures about Market Risk

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What changed 10-Q

Item 2. Management’s Discussion and Analysis