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 (“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 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; and · 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; and · liquidity and cost of funds from third-party funding sources. 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. 17 Table of Contents 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 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. 18 Table of Contents Results of Operations 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 June 30 June 30 2023 2022 2023 2022 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 73.9 87.2 76.1 82.0 Gross profit 26.1 12.8 23.9 18.0 Operating expenses: Selling 5.8 8.9 3.8 6.7 Marketing 4.8 8.6 3.1 5.7 General and administrative 18.2 29.1 9.8 16.5 Total operating expenses 28.8 46.6 16.7 28.9 Operating (loss) income (2.7 ) (33.8 ) 7.2 (10.9 ) Interest income 2.2 0.9 1.3 0.2 (Loss) income before taxes (0.5 ) (32.9 ) 8.5 (10.7 ) Income tax expense 0.1 0.4 0.0 0.2 Net (loss) income (0.6 )% (33.3 )% 8.5 % (10.9 )% Three and Six Months Ended June 30, 2023 Compared to Three and Six Months Ended June 30, 2022 Net Sales. 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 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. 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. 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. 19 Table of Contents 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 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 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). 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 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 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. 20 Table of Contents 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. 2023 Pro Forma* 2022 Pro Forma General and administrative $ 557,000 $ 432,000 Operating loss from continuing operations (557,000 ) (432,000 ) Interest income 135,000 31,000 Loss before taxes from continuing operations $ (422,000 ) $ (401,000 ) * 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: 2023 Pro Forma 2022 Pro Forma Year-over- Year Change Percent Change General and administrative $ 557,000 $ 432,000 $ 125,000 28.9 % 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. 21 Table of Contents 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: 2023 Pro Forma 2022 Pro Forma Year-over- Year Change Percent Change Interest income $ 135,000 $ 31,000 $ 104,000 335.5 % 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 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. 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: 2023 Pro Forma 2022 Pro Forma Year-over- Year Change Percent Change Loss before income taxes $ 422,000 $ 401,000 $ 21,000 5.2 % 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 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 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 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 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 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. 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. 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 grow our non-bank lending business, or complete transactions related to the strategic alternatives process. 22 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 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. Factors that could cause our estimates and assumptions as to future performance, and our actual results, to differ materially include the following: 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 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. 23 Table of Contents Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.