Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the financial statements and the related notes included in this Annual Report on Form 10-K. This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those in such forward-looking statements as a result of many factors, including those discussed in “Cautionary Statement Regarding Forward-Looking Statements” and elsewhere in this report.
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Overview
The Company has evolved into a specialty agricultural and finance company focused on making and managing its agricultural investments in the United States and internationally. During the past twelve months, the Company took three major steps in this evolution.
In April 2023, the Company launched its lending business, through the hiring of a Senior Vice President of Lending with over 20 years of experience in credit and lending. The Company is seeking to build a scalable non-bank lending business to purchase existing loans or originate and fund new loans, all of which will be secured by collateral.
On August 3, 2023, the Company completed the sale of its In-Store Marketing Business. The operations of the In-Store Marketing Business are presented as discontinued operations. All prior periods presented have been restated to present the In-Store Marketing Business as discontinued operations. Related to change in strategy of the Company, 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.
Bloomia Business
On February 22, 2024, the Company acquired majority ownership in Bloomia B.V. and its subsidiaries (“Bloomia”). Bloomia produces and sells fresh cut tulips.
Bloomia purchases tulip bulbs, hydroponically grows tulips from the bulbs, and sells the stems to retail stores. Bloomia is a leading producer of fresh cut tulips in the United States, nurturing over 75 million stems annually. Net sales (unaudited) of Bloomia for the twelve months ended December 31, 2023 and 2022 were approximately $45 million and $43 million, respectively. Bloomia was founded in the Netherlands and is now strategically positioned in the United States, Netherlands, South Africa and Chile. Bloomia has relationships with prominent U.S. mass market retailers.
The Company acquired Bloomia for $47.5 million. The acquisition resulted in significantly leveraging the Company’s balance sheet. The acquisition price was paid with $9.2 million of the Company’s cash, $22.8 million of proceeds from a new credit facility, and notes payable of $15.5 million to the sellers. The new credit facility contains financial covenants that the Company is required to meet. See description of the credit facility below.
Non-Bank Lending Business
While the Company’s primary near-term focus will be on the Bloomia business, the Company plans to continue building a scalable non-bank lending business (our “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”). In April 2023, we launched our Lending Business, through the hiring of Randy Uglem as Senior Vice President of Lending, now CEO, 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. We are building our strategy and long-term growth initiatives through development of customized niche products to support identified customer needs and opportunities in the marketplace, and effective funding structures to maximize returns.
The Company met with a number of prospects for loan originations and/or purchases since the start of the lending business. Deals were negotiated, but ultimately did not close. With the Company’s decision to allocate capital to the Bloomia acquisition, capital available for the lending business will be significantly constrained in the near term. Accordingly, we anticipate minimal revenue and operating losses from the lending business during the remainder of 2024.
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Sale of In-Store Marketing Business
On August 3, 2023, we completed the sale of our former In-Store Marketing Business for a sale price of $3.5 million to TIMIBO LLC, an affiliate of Park Printing, Inc. (the “Buyer”), under an Asset Purchase Agreement dated May 24, 2023 (the “Purchase Agreement”). The Company retained accounts receivable, as well as all cash, cash equivalents and marketable securities. The cash consideration for the sale was subject to a post-closing adjustment that depended on the net balance of (i) cash received by the Company for programs that remained unexecuted as of August 3, 2023, minus (ii) the payments made by the Company to vendors for unexecuted programs. The final purchase adjustment for the net balance was to reduce the cash consideration by $1.5 million, with the Company retaining an equal amount of cash that had been received for unexecuted programs. 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 also incurred transaction-related severance and other separation benefits in connection with the termination of certain of our officers and employees of approximately $1,416,000, $490,000 of which was attributed to the sale of the In-Store Marketing Business, as well as retention award payouts totaling $343,000 and employee bonuses totaling $164,000, each of which were recorded as expense. The sum of transaction-related severance, retention awards and bonuses were $1,923,000, of which $974,000 was recorded in continuing operations and $949,000 was recorded in discontinued operations in 2023.
Results of Operations
The following table sets forth, for the periods indicated, certain items from our continuing operations in our consolidated statements of operations and the percentage change year-over-year. The Company had no revenue from continuing operations subsequent to the sale of the In-Store Marketing Business.
Year Ended
December 31,
Increase (decrease) from 2022 to 2023
2023
2022
Amount
Percent
Operating expenses:
Sales and marketing
$ 196,000
$ -
$ 196,000
100.0 %
General and administrative
3,323,000
2,442,000
881,000
36.1 %
Total operating expenses
3,519,000
2,442,000
1,077,000
44.1 %
Operating loss
(3,519,000 )
(2,442,000 )
(1,077,000 )
44.1 %
Interest income
518,000
154,000
364,000
236.4 %
Loss from continuing operations before income taxes
(3,001,000 )
(2,288,000 )
(713,000 )
31.2 %
Income tax expense
20,000
6,000
14,000
233.3 %
Net loss from continuing operations
(3,021,000 )
(2,294,000 )
(727,000 )
31.7 %
Income from discontinued operations, net of tax
2,474,000
12,340,000
(9,866,000 )
-80.0 %
Gain from sale of discontinued operations, net of tax
2,961,000
-
2,961,000
100.0 %
Net income
$ 2,414,000
$ 10,046,000
$ (7,632,000 )
-76.0 %
Year Ended December 31, 2023 Compared to Year Ended December 31, 2022
Operating Expenses
Sales and Marketing. Sales and marketing expenses for the year ended December 31, 2023 were $196,000, consisting of a portion of our CEO’s compensation, as well as travel and entertainment, website and public relations costs. There was no comparable expense for the year ended December 31, 2022.
General and Administrative. General and administrative expenses for the year ended December 31, 2023 increased 36.1% to $3,323,000, compared to $2,442,000 for the year ended December 31, 2022. The increase was primarily due to transaction-related severance and other separation benefits amounting to $926,000 in connection with the termination of Kristine Glancy, our previous CEO, in addition to the comparison of reduced expense in 2022 from the Director Deferred Compensation Plan due to a reduction in our share price during the year ended December 31, 2022.
Interest Income. Interest income for the year ended December 31, 2023 was $518,000 compared to interest income of $154,000 for the year ended December 31, 2022. Interest income in 2023 increased over 2022 primarily due to higher invested balances in short-term treasury bills and interest-bearing savings, and the higher interest rates available on the investments. The higher invested balances were primarily due to the net proceeds from litigation of $12 million received in July 2022, proceeds related to the sale of the In-Store Marketing Business, and collection of accounts receivable.
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Income Taxes. For the year ended December 31, 2023, the Company recorded income tax expense on continuing operations of $20,000, compared to income tax expense on continuing operations of $6,000 for the year ended December 31, 2022. The effective tax rate on continuing operations was (0.7)% and (0.3)% for the years ended December 31, 2023 and 2022, respectively. The primary differences between the Company’s 2023 and 2022 effective tax rates and the statutory federal rates include state taxes and an increase in the Company’s valuation allowance against its deferred assets. The effective tax rate fluctuates between periods based on the level of permanent differences and other discrete items relative to the level of pre-tax income or loss for the period.
Net Loss from Continuing Operations. For the reasons stated above, net loss from continuing operations for the year ended December 31, 2023 was $3,021,000, compared to loss of $2,294,000 for the year ended December 31, 2022.
Income from Discontinued Operations, Net of Tax and Gain from Sale of Discontinued Operations, Net of Tax. Income from discontinued operations, net of tax, was $2,474,000 for the year ended December 31, 2023 compared to $12,340,000 for the year ended December 31, 2022. In 2022, the Company recorded a pre-tax gain of $12 million as a gain on litigation settlement. For the year ended December 31, 2023, the Company recorded a gain from the sale of discontinued operations before tax of $3,044,000 from the sale of its In-Store Marketing Business. Information on the sale of the In-Store Marketing Business and statement of operations details of the discontinued operations are included in Note 2 to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.
Liquidity and Capital Resources
We have historically financed our operations with proceeds from stock sales and sales of our services and products, subject to occasional supplemental proceeds from the settlement of litigation. The sale of the In-Store Marketing Business on August 3, 2023 generated approximately $1.6 million in cash, directly from the buyer. On December 31, 2023, working capital (current assets less current liabilities) was $15,525,000, compared to $13,379,000 at December 31, 2022. During the year ended December 31, 2023, cash, cash equivalents and restricted cash increased $1,553,000 from $14,524,000 at December 31, 2022, to $16,077,000 at December 31, 2023.
Operating Activities. Net cash used in continuing operating activities during the year ended December 31, 2023 was $2,905,000. Net income of $2,414,000, less income from discontinued operations of $2,474,000, less gain from the sale of discontinued operations of $2,961,000 resulted in net cash used in continuing operations before adjustments and changes in operating assets and liabilities of $65,000. Non-cash adjustments for depreciation and stock-based compensation during the year ended December 31, 2023 was $51,000. The largest component of the change in operating assets and liabilities was accrued liabilities, which increased $376,000 from December 31, 2022. The increase was primarily due to $330,000 of severance related payments that remained to be paid to the Company’s prior CEO, Ms. Glancy.
Investing Activities. Net cash provided by investing activities from continuing operations during the year ended December 31, 2023 was $1,532,000, which was due to the proceeds from the sale of our In-Store Marketing Business.
Financing Activities. Net cash used in financing activities during the year ended December 31, 2023 was $473,000, which related to cash used for the repurchase of common stock, partially offset by proceeds from the issuance of shares per the Director Deferred Compensation Plan for two former non-employee directors.
On February 22, 2024, the Company acquired majority ownership in Bloomia for $47.5 million. The acquisition price was paid with $9.2 million of the Company’s cash, $22.8 million of proceeds from a new credit facility, and notes payable of $15.5 million to the sellers. The Company expects that the new credit facility will provide sufficient credit availability to support its ongoing operations, fund its new debt service requirements, capital expenditures and working capital for at least the next 12 months. The credit facility described below contains ongoing financial covenants that the Company is required to meet.
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As the Company grows its businesses, we may be required to obtain additional capital through equity offerings or additional debt financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of our stockholders will be diluted, and the terms of those securities may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing and preferred equity financing, if available, may involve agreements that include additional 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 businesses, or complete transactions related to the strategy.
Credit Agreement
To finance the Bloomia acquisition, the Company entered into the Credit Agreement, together with Tulp 24.1 as the borrower. Under the terms of the Credit Agreement, Tulp 24.1 had an $18.0 million term loan funded. The Credit Agreement also contains a $6.0 million revolving credit facility, which may be used by Tulp 24.1 for general business purposes and working capital.
Borrowings under the Credit Agreement bear interest at a rate per annum equal to Term SOFR for an interest period of one month plus 3.0%. In addition to paying interest on the outstanding principal under the Credit Agreement, Tulp 24.1 is required to pay a commitment fee of 0.50% on the unutilized commitments under the revolving credit facility.
The term loans will be repaid in quarterly installments of $450,000, commencing on June 30, 2024. The remaining outstanding balance will be repaid in full after five years. The scheduled maturity of the revolving facility is February 20, 2029.
The obligations under the Credit Agreement are secured by substantially all of the personal property assets of Tulp 24.1 and its subsidiaries. The Company provided an unsecured guaranty of the obligations of Tulp 24.1 under the Credit Agreement.
Commencing with the fiscal quarter ending on March 31, 2024, the Credit Agreement will require Tulp 24.1 and its subsidiaries to maintain (a) a minimum fixed charge coverage ratio of not less than 1.25 to 1.00 and (b) a maximum senior cash flow leverage ratio of 3.0 to 1.0 until September 30, 2024, and stepping down to 2.00 to 1.00 on December 31, 2027, until the maturity date of the Credit Agreement. The Credit Agreement also contains other customary affirmative and negative covenants, including covenants that restrict the ability of Tulp 24.1 and its subsidiaries to incur additional indebtedness, dispose of significant assets, make distributions or pay dividends to the Company, make certain investments, including any acquisitions other than permitted acquisitions, make certain payments, enter into sale and leaseback transactions or grant liens on its assets, subject to certain limitations.
The Credit Agreement contains customary events of default, the occurrence of which would permit the lenders to terminate their commitments and accelerate loans under the Credit Agreement, including failure to make payments under the credit facility, failure to comply with covenants in the Credit Agreement and other loan documents, cross default to other material indebtedness of Tulp 24.1 or any of its subsidiaries, failure of Tulp 24.1 or any of its subsidiaries to pay or discharge material judgments, bankruptcy of Tulp 24.1 or any of its subsidiaries, and change of control of the Company.
Promissory Notes
As part of the financing of the Bloomia acquisition, Tulp 24.1 entered into notes payable with the sellers. Notes payable for $12.8 million have a term of five years, subject to requiring principal payments based on “excess cash flow” as defined. Interest is at 8% per annum in the first year and increases annually by 2 percentage points. Notes payable for $2.7 million have a term of nine calendar weeks after the closing date. Interest is at 8% per annum.
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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. Critical accounting estimates are those estimates made in accordance with GAAP which involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition and results of operations. On an ongoing basis, we evaluate our estimates and assumptions, including those related to income taxes. 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.
We believe the following is our critical accounting estimate used in preparation of our consolidated financial statements:
Income Taxes . Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which it operates, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results, or the ability to implement tax-planning strategies vary, adjustments 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.
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
Cautionary Statement Regarding Forward-Looking Statements
Certain statements made in this Annual Report on Form 10-K, in the Company’s other SEC filings, in press releases and in oral statements to stockholders 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,” “intend,” “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, cash generated by operations and borrowings available under our Credit Agreement, will provide adequate liquidity and capital resources for at least the next twelve months, and (ii) regarding the potential for growth and other opportunities for our businesses. 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: (1) our ability to integrate and continue to successfully operate the newly acquired Bloomia business, (2) our ability to compete, (3) concentration of Bloomia’s historical revenue among a small number of customers, (4) changes in interest rates, (5) ability to comply with the requirements of the Credit Agreement, (6) the limited history of our Lending Business, (7) the substantial risk of loss associated with lending generally, (8) market conditions that may restrict or delay appropriate or desirable opportunities, (9) our ability to develop and maintain necessary processes and controls relating to our businesses (10) reliance on one or a small number of employees in each of our businesses, (11) potential adverse classifications of our Company if we are unsuccessful in executing our business plans, (12) other economic, business, market, financial, competitive and/or regulatory factors affecting the Company’s businesses generally; (13) our ability to attract and retain highly qualified managerial, operational and sales personnel; and (14) the availability of additional capital on desirable terms, if at all. Forward-looking statements involve known and unknown risks, uncertainties and other factors, including those set forth in this report and additional risks, if any, identified in this Form 10-K, our Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K filed with the SEC. Such forward-looking statements should be read in conjunction with the Company’s filings with the SEC. Lendway assumes no responsibility to update the forward-looking statements contained in this report or the reasons why actual results would differ from those anticipated in any such forward-looking statement, other than as required by law.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Smaller reporting companies are not required to provide disclosure pursuant to this Item.
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