Notes to Financial Statements
1.
Summary of Significant Accounting
Policies.
Description of Business and
Basis of Presentation. Insignia (the
“Company”) is a leading provider of in-store and
digital advertising solutions to consumer-packaged goods (“CPG”)
manufacturers, retailers, shopper
marketing agencies and brokerages. The Company operates in a single
reportable segment. The Company’s leadership and employees
have extensive industry knowledge with direct experience in both
CPG manufacturers and retailers. The Company provides marketing
solutions to CPG manufacturers spanning from some of the largest
multinationals to new and emerging brands.
As
described in Note 2, “Restatement of Previously Issued
Financial Statements”, the financial statements for the years
ended December 31, 2020 and 2019, have been restated to reflect the
correction of misstatements to the financial statements. We have
also restated all amounts impacted within the notes to the
financial statements.
Reverse
Stock Split. Effective December
31, 2020, the Company implemented a seven-for-one reverse stock
split. All share and per share information, including for stock
options and restricted stock units, in the financial statements
gives retroactive effect to the reverse stock split for all periods
presented.
Sale of
Custom Print Business. In
August 2020, the Company sold its custom print business to an
existing strategic partner. This divestiture has allowed the
Company to focus on its core business, selling product solutions to
CPGs. The custom print business was not material to operations as a
whole and did not represent a strategic shift and therefore is not
presented as a discontinued operation. The sale price was $300,000
resulting in a gain on the sale of $195,000. The Company received
$200,000 of cash and recorded a short-term receivable of $75,000
and a long-term receivable of $25,000. In addition to the initial
sale price, the Company is eligible to receive up to $100,000 in
additional payments to the extent net sales by the custom print
business during the first year after closing exceed a threshold
amount. Due to the contingent nature of the earn-out, no additional
gain has been recognized as part of the recorded
gain.
Revenue
Recognition. The
Company recognizes revenue from Insignia In-Store Signage Solutions
ratably over the period of service, which is typically a
two-to-four-week display cycle. The Company recognized revenue
related to custom print solutions and sign card sales at the time
the products are shipped to customers. Revenue from non-POPS
solutions is recognized with a mix of
over-time and point in time recognition dependent on type of
service performed. Revenue that has been billed and not yet
recognized is reflected as deferred revenue on the Company’s
balance sheet.
Cash and Cash
Equivalents. The Company considers all highly liquid
investments with an original maturity date of three months or less
to be cash equivalents. Cash equivalents are stated at cost, which
approximates fair value. At December 31, 2020 and 2019, $7,135,000
and $7,333,000 was invested in an insured sweep account and money
market account, respectively. The balances in cash accounts, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts and believes it is not
exposed to any significant credit risk on cash and cash
equivalents. Amounts held in checking accounts and in insured cash
sweep accounts during the years ended December 31, 2020 and 2019
were fully insured under the Federal Deposit Insurance
Corporation.
Fair Value of Financial
Measurements. Fair
value is defined as the exit price, or the amount that would be
received to sell an asset, or paid to transfer a liability, in an
orderly transaction between market participants as of the
measurement date. Accounting Standards Codification
(“ASC”) 820-10 also establishes a hierarchy for inputs
used in measuring fair value that maximizes the use of observable
inputs and minimizes the use of unobservable inputs by requiring
that the most observable inputs be used when
available. Observable inputs are inputs market participants
would use in valuing the asset or liability, developed based on
market data obtained from sources independent of the
Company. Unobservable inputs are inputs that reflect
management’s assumptions about the factors market
participants would use in valuing the asset or liability developed
based upon the best information available in the
circumstances.
The
hierarchy is divided into three levels. Level 1 inputs are
quoted prices (unadjusted) in active markets for identical assets
or liabilities. Level 2 inputs include quoted prices for
similar assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not
active and inputs (other than quoted prices) that are observable
for the asset or liability, either directly or
indirectly. Level 3 inputs are unobservable inputs for the
asset or liability. Categorization within the valuation hierarchy
is based upon the lowest level of input that is significant to the
fair value measurement.
The
Company records certain financial assets and liabilities at their
carrying amounts that approximate fair value, based on their
short-term nature. These financial assets and liabilities
included cash and cash equivalents, accounts receivable3accounts
payable. The carrying value of long-term debt approximates fair
value, as the loan is repayable over the next 16 months at an
interest rate prescribed by a government agency (see Note
12).
Accounts
Receivable. The majority
of the Company’s accounts receivable is due from companies in
the consumer-packaged goods industry. Credit is extended based on
evaluation of a customer’s financial condition and,
generally, collateral is not required. Accounts receivable are due
within 30-150 days and are stated at amounts due from customers,
net of an allowance for doubtful accounts. Accounts receivable
outstanding longer than the contractual payment terms are
considered past due. The Company determines its allowance by
considering a number of factors, including the length of time trade
accounts receivable are past due, the Company’s previous loss
history, the customer’s current ability to pay its obligation
to the Company, and the condition of the general economy and the
industry as a whole. The Company writes-off accounts receivable
when they become uncollectible, and payments subsequently received
on such receivables are credited to the allowance for doubtful
accounts.
Changes
in the Company’s allowance for doubtful accounts are as
follows:
|
|
December 31
|
|
|
Beginning
balance
|
$65,000
|
$22,000
|
Bad
debt provision
|
203,000
|
47,000
|
Accounts
written-off
|
-
|
(4,000)
|
Ending
balance
|
$268,000
|
$65,000
|
Inventories.
Inventories are primarily comprised of sign cards and hardware.
Inventory is valued at the lower of cost or net realizable value
using the first-in, first-out (FIFO) method, and consists of the
following:
December 31
|
|
|
Raw
materials
|
$32,000
|
$47,000
|
Work-in-process
|
2,000
|
16,000
|
Finished
goods
|
51,000
|
259,000
|
|
$85,000
|
$322,000
|
Property and
Equipment. Property and equipment is recorded at cost.
Significant additions or improvements extending asset lives are
capitalized, while repairs and maintenance are charged to expense
when incurred. Internally developed software is capitalized upon
completion of preliminary project stage and when it is probable the
project will be completed. Expenditures are capitalized for all
development activities, while expenditures related to planning,
training, and maintenance are expensed. Depreciation is provided in
amounts sufficient to relate the cost of assets to operations over
their estimated useful lives. The straight-line method of
depreciation is used for financial reporting purposes and
accelerated methods are used for tax purposes. Estimated useful
lives of the assets are as follows:
Production
tooling, machinery and equipment
|
1 - 6
years
|
Office
furniture and fixtures
|
1 - 3
years
|
Computer
equipment and software
|
3 - 5
years
|
During
December 2020, in connection with the outsourcing of certain
printing operations, the Company sold property and equipment with a
net book value of $230,000, for $195,000, resulting in a loss on
sale of $35,000. The proceeds were in the form of receivables due
in four equal amounts due in June and December 2021 and June and
December 2022.
Impairment of Long-Lived
Assets. The Company records impairment losses on long-lived
assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those
assets are less than the assets’ carrying amount. Impaired
assets are then recorded at their estimated fair
value.
A
hierarchy for inputs used in measuring fair value is in place that
distinguishes market data between observable independent market
inputs and unobservable market assumptions by the reporting entity.
The hierarchy is intended to maximize the use of observable inputs
and minimize the use of unobservable inputs by requiring that the
most observable inputs be used when
available.
At
March 31, 2020, the impact of COVID-19 was determined to be a
triggering event requiring an impairment review of long-lived
assets. In 2011, the Company paid News America Marketing In-Store,
L.L.C. (“News America”) $4,000,000 in exchange for a
10-year arrangement to sell signs with price into News
America’s network of retailers as News America’s
exclusive agent. The $4,000,000 was being amortized over the
10-year term of the arrangement. In 2019, the Company accelerated
the amortization based on the anticipated recovery period over the
remaining term of the contract due to the loss of a significant
retailer that exited the Company’s retailer network in the
first half of 2019 as a result of competitive pressures. As a
result of the accelerated amortization, amortization expense for
the year ended December 31, 2019 was $600,000. At March 31, 2020,
the Company determined the asset was impaired based upon continued
revenue declines driven by changes in market conditions due to
COVID-19 within the stores that this agreement affords the Company
access to. As a result, an impairment of $159,000 was recognized as
of March 31, 2020. The Company also shortened the useful life of
the underlying asset from March 31, 2021 to December 31, 2020 and
recorded remaining amortization expense on a straight-line basis
over the remainder of 2020. Amortization expense without the
impairment was $158,000 for the year ended December 31, 2020. The
net carrying amount of the selling arrangement was recorded within
other assets on the Company’s balance sheet. A summary of the
carrying amount of this selling arrangement is as follows as of
December 31:
|
|
|
Gross
cost
|
$4,000,000
|
$4,000,000
|
Accumulated
amortization
|
(4,000,000)
|
(3,683,000)
|
Net
carrying amount
|
$-
|
$317,000
|
In
2019, the Company identified indicators of impairment due to the
2019 operating loss, cash flows used in operations and the excess
of the book value of the Company compared to its market
capitalization, which became a significant difference during the
last two months of 2019. Due to these indicators of impairment, the
Company completed an impairment analysis on its long-lived assets
by first reviewing the expected undiscounted cash flows compared to
the carrying value over the primary asset’s remaining useful
life to determine if further impairment testing was required. The
Company prepared an undiscounted cash flow analysis related to its
selling agreement, described above, which is a separate asset group
and as the undiscounted cash flows exceeded the carrying value, no
further impairment testing was required. For the property and
equipment asset group, the undiscounted cash flows were less than
carrying value and therefore, a fair value assessment was required
to determine the amount of the impairment. Due to the nature of the
primary asset (internally developed software), the most readily
available fair market value related to the asset is the market
capitalization of the Company which is considered a level 1
measurement (quoted market price). After allocating the
Company’s market capitalization to its working capital, there
was no remaining value to allocate to long-lived assets which
included the internally developed software recently placed in
service. The Company utilized other level 3 inputs to determine the
fair value of other tangible long-lived assets, including appraised
values of production tooling, machinery and equipment. As a result,
the Company recorded a long-lived asset impairment charge totaling
$2,014,000 during the fourth quarter of 2019.
As
of December 31, 2019
|
|
Property and Equipment, net:
|
|
Balance
prior to impairment
|
$2,563,000
|
Impairment
charge
|
(2,014,000)
|
Ending
balance
|
$549,000
|
Income Taxes. Income
taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between the financial
reporting and tax basis of assets and liabilities. Deferred taxes
are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or the
entire deferred tax asset will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of the enactment. It is the Company’s
policy to provide for uncertain tax positions and the related
interest and penalties based upon management’s assessment of
whether a tax benefit is more likely than not to be sustained upon
examination by tax authorities. The Company recognizes interest and
penalties accrued on any unrecognized tax benefits as a component
of income tax expense (benefit).
Stock-Based
Compensation. The
Company measures and recognizes compensation expense for all
stock-based awards at fair value. Restricted stock units and awards
are valued at the closing market price of the Company’s stock
on the date of the grant. The Company uses the Black-Scholes option
pricing model to determine the weighted average fair value of
options and employee stock purchase plan rights. The determination
of fair value of share-based payment awards on the date of grant
using an option-pricing model is affected by our stock price as
well as by assumptions regarding a number of complex and subjective
variables. These variables include, but are not limited to, the
expected stock price volatility over the term of the awards, and
actual and projected employee stock option exercise
behaviors.
The expected lives of the options and employee
stock purchase plan rights are based on evaluations of historical
and expected future employee exercise behavior. The risk-free
interest rate is based on the U.S. Treasury rates at the date of
grant with maturity dates approximately equal to the expected term
at grant date. Volatility is based on historical and
expected future volatility of the Company’s stock. The
Company has not historically issued any dividends beyond one-time
dividends declared in 2011 and 2016 and does not expect to in the
future. Forfeitures are estimated at the time of the grant and
revised, if necessary, in subsequent periods if actual forfeitures
differ from estimates.
Advertising Costs.
Advertising costs are charged to operations as incurred.
Advertising expenses were approximately $69,000 and $133,000 during
the years ended December 31, 2020 and 2019,
respectively.
Net Income (Loss) Per
Share. Basic net income (loss) per share is computed by
dividing net income (loss) by the weighted average shares
outstanding and excludes any dilutive effects of stock options and
restricted stock units and awards. Diluted net income (loss) per
share gives effect to all diluted potential common shares
outstanding during the year.
Weighted average
common shares outstanding for the years ended December 31, 2020 and
2019 were as follows:
Year ended December 31
|
|
|
Denominator
for basic net loss per share - weighted average shares
|
1,734,000
|
1,706,000
|
Effect
of dilutive securities:
|
|
|
Stock
options, restricted stock units and restricted stock
awards
|
-
|
-
|
Denominator
for diluted net loss per share - weighted average
shares
|
1,734,000
|
1,706,000
|
Due to
the net loss incurred during the years ended December 31, 2020 and
2019, all stock awards were anti-dilutive for the
period.
Use of Estimates.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these
estimates.
2.
Restatement of Previously Issued Financial
Statements. The financial statements for the years ended
December 31, 2020 and 2019 have been restated to reflect the
correction of misstatements. The Company also restated all amounts
impacted within the notes to the financial statements. A
description of the adjustments and their impact on the previously
issued financial statements are included below.
Description of Restatement
Adjustments. Commencing in the second quarter of 2021, the
Company conducted a review of its sales tax positions, and related
accounting, with the assistance of outside consultants. As a result
of the review, it was determined that certain non-POPs
services/products sales were subject to sales tax and that the
Company had not assessed sales tax on sales of those
services/products to customers. Company management then undertook a
process to obtain documentation from significant customers to
determine if each was exempt from sales tax assessments during the
applicable periods. Based on responses received from these
customers, the Company determined that it did not properly accrue
sales tax and accrued the estimated sales tax. The misstatements in
the previously issued financial statements are considered material
and are described below.
In
light of the foregoing, the Company in accordance with ASC 250,
Accounting Changes and Error
Corrections is restating the previously issued financial
statements for the years ended December 31, 2020 and 2019 to
reflect the effects of misstatements, and to make certain
corresponding disclosures. The balance sheets, statements of
operations, shareholders’ equity and cash flows, and Notes 1,
4, 9 and 11, were updated to reflect the restatement.
A
summary of the impact of the misstatements is as
follows:
|
|
|
Year Ended
|
|
|
|
|
Net
Sales
|
$17,669,000
|
$17,482,000
|
$21,954,000
|
$21,528,000
|
Operating
Loss
|
(4,601,000)
|
(4,839,000)
|
(5,629,000)
|
(6,106,000)
|
Net
Loss
|
(4,300,000)
|
(4,615,000)
|
(5,021,000)
|
(5,577,000)
|
|
|
|
As of
|
|
|
|
|
Shareholders'
equity
|
$7,694,000
|
$6,668,000
|
$11,794,000
|
$11,083,000
|
The
restated interim financial information for the relevant unaudited
interim financial statements for the quarterly periods ended
September 30, 2020 and 2019, June 30, 2020 and 2019, and March 31,
2020 and 2019, is also included below.
The
categories of restatement adjustments and their impact on
previously reported financial statements are described
below:
(a)
Sales Tax and Related
Misstatements –
Sales tax on sales to customers who were subject to sales tax that
was not previously accrued by the Company is corrected by an
increase to accrued liabilities on the balance sheets and a
reduction of net sales on the statements of operations. The Company
also determined on which past sales the Company would bill for
sales tax and corrected by increasing accounts receivable, net of
an allowance for doubtful collectability, on the balance sheets and
increasing net sales on the statements of operations. Estimated
penalties on the related sales tax are corrected by an increase to
accrued liabilities on the balance sheets and an increase to
general and administrative expenses on the statements of
operations. Estimated interest on the related sales tax is
corrected by an increase to accrued liabilities on the balance
sheets and an increase to interest expense within other income on
the statements of operations.
(b)
Related Income Tax
Impact - Any impact on income
tax benefit from the impact on loss before taxes due to the
correction in (a) above is reflected as a change in deferred tax
asset or liability on the balance sheet and a change in income tax
benefit on the statements of operations.
The
following is a summary of the impact of the correction of the sales
tax error for the periods previously reported during the years
ended December 31, 2020 and 2019, and during the quarters in the
years ended December 31, 2020 and 2019.
Annual Financial Statements
The
following table sets forth the corrections in each of the
individual line items affected in the statements of
operations:
|
|
|
Year Ended
|
|
|
Reduction
of net sales
|
$187,000
|
$426,000
|
Increase
in general and administrative expense for penalities
|
51,000
|
51,000
|
Decrease
in other income for interest expense
|
77,000
|
37,000
|
Decrease
in income tax benefit
|
-
|
42,000
|
Total
increase in net loss due to restatement items
|
$315,000
|
$556,000
|
|
|
|
Year Ended
|
|
|
|
|
Services
revenues
|
$17,091,000
|
$16,904,000
|
$20,229,000
|
$19,803,000
|
Products
revenues
|
578,000
|
578,000
|
1,725,000
|
1,725,000
|
Total
Net Sales
|
17,669,000
|
17,482,000
|
21,954,000
|
21,528,000
|
|
|
|
|
|
Cost
of services
|
13,934,000
|
13,934,000
|
15,756,000
|
15,756,000
|
Cost
of goods sold
|
533,000
|
533,000
|
1,437,000
|
1,437,000
|
Impairment
loss
|
159,000
|
159,000
|
—
|
—
|
Total
Cost of Sales
|
14,626,000
|
14,626,000
|
17,193,000
|
17,193,000
|
Gross
Profit
|
3,043,000
|
2,856,000
|
4,761,000
|
4,335,000
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
Selling
|
2,877,000
|
2,877,000
|
2,658,000
|
2,658,000
|
Marketing
|
1,015,000
|
1,015,000
|
2,394,000
|
2,394,000
|
General
and administrative
|
3,947,000
|
3,998,000
|
3,324,000
|
3,375,000
|
Gain
on sale of business
|
(195,000)
|
(195,000)
|
—
|
—
|
Impairment
loss
|
—
|
—
|
2,014,000
|
2,014,000
|
Total
Operating Expenses
|
7,644,000
|
7,695,000
|
10,390,000
|
10,441,000
|
Operating
Loss
|
(4,601,000)
|
(4,839,000)
|
(5,629,000)
|
(6,106,000)
|
|
|
|
|
|
Other
income
|
110,000
|
33,000
|
142,000
|
105,000
|
Loss
Before Taxes
|
(4,491,000)
|
(4,806,000)
|
(5,487,000)
|
(6,001,000)
|
|
|
|
|
|
Income
tax benefit
|
(191,000)
|
(191,000)
|
(466,000)
|
(424,000)
|
Net
Loss
|
$(4,300,000)
|
$(4,615,000)
|
$(5,021,000)
|
$(5,577,000)
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
Basic
|
$(2.48)
|
$(2.66)
|
$(2.94)
|
$(3.27)
|
Diluted
|
$(2.48)
|
$(2.66)
|
$(2.94)
|
$(3.27)
|
|
|
|
|
|
Shares used in calculation of net loss per share:
|
|
|
|
Basic
|
1,734,000
|
1,734,000
|
1,706,000
|
1,706,000
|
Diluted
|
1,734,000
|
1,734,000
|
1,706,000
|
1,706,000
|
The
following table sets forth the corrections in each of the
individual line items affected in the balance sheets:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
$5,628,000
|
$229,000
|
$5,857,000
|
$7,559,000
|
$-
|
$7,559,000
|
Accrued
liabilities - sales tax
|
$-
|
$1,011,000
|
$1,011,000
|
$-
|
$594,000
|
$594,000
|
Accrued
liabilities - other
|
$827,000
|
$244,000
|
$1,071,000
|
$570,000
|
$117,000
|
$687,000
|
Accumulated
deficit
|
$8,561,000
|
$1,026,000
|
$9,587,000
|
$4,261,000
|
$711,000
|
$4,972,000
|
The
following table sets forth the corrections to retained earnings
(accumulated deficit) and total shareholders’ equity in the
statements of shareholders’ equity.
|
|
|
|
|
Retained Earnings (Accumulated Deficit)
|
Total Shareholders' Equity
|
January
1, 2019
|
|
|
As
reported
|
$760,000
|
$16,320,000
|
Adjustment
due to error correction prior to 2019
|
(155,000)
|
(155,000)
|
As
restated
|
$605,000
|
$16,165,000
|
|
|
|
December
31, 2019
|
|
|
As
reported
|
$(4,261,000)
|
$11,794,000
|
Adjustment
due to cumulative error correction
|
(711,000)
|
(711,000)
|
As
restated
|
$(4,972,000)
|
$11,083,000
|
|
|
|
December
31, 2020
|
|
|
As
reported
|
$(8,561,000)
|
$7,694,000
|
Adjustment
due to cumulative error correction
|
(1,026,000)
|
(1,026,000)
|
As
restated
|
$(9,587,000)
|
$6,668,000
|
Quarterly Financial Statements (Unaudited)
The
following table sets forth the corrections in each of the
individual line items affected in the statements of
operations:
|
|
|
|
|
Three Months Ended
|
|
|
|
|
Reduction
of net sales
|
$36,000
|
$41,000
|
$56,000
|
$54,000
|
Increase
in general and administrative expense for penalities
|
11,000
|
12,000
|
15,000
|
13,000
|
Decrease
in other income for interest expense
|
15,000
|
18,000
|
21,000
|
23,000
|
Change
in income tax benefit
|
-
|
-
|
-
|
-
|
Total
increase in net loss due to restatement items
|
$62,000
|
$71,000
|
$92,000
|
$90,000
|
|
|
|
Three Months Ended
|
|
|
|
|
Services
revenues
|
$4,436,000
|
$4,400,000
|
$3,174,000
|
$3,133,000
|
Products
revenues
|
246,000
|
246,000
|
214,000
|
214,000
|
Total
Net Sales
|
4,682,000
|
4,646,000
|
3,388,000
|
3,347,000
|
|
|
|
|
|
Cost
of services
|
3,382,000
|
3,382,000
|
2,807,000
|
2,807,000
|
Cost
of goods sold
|
172,000
|
172,000
|
208,000
|
208,000
|
Impairment
loss
|
159,000
|
159,000
|
—
|
—
|
Total
Cost of Sales
|
3,713,000
|
3,713,000
|
3,015,000
|
3,015,000
|
Gross
Profit
|
969,000
|
933,000
|
373,000
|
332,000
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
Selling
|
720,000
|
720,000
|
927,000
|
927,000
|
Marketing
|
365,000
|
365,000
|
243,000
|
243,000
|
General
and administrative
|
993,000
|
1,004,000
|
980,000
|
992,000
|
Gain
on sale of business
|
—
|
—
|
—
|
—
|
Total
Operating Expenses
|
2,078,000
|
2,089,000
|
2,150,000
|
2,162,000
|
Operating
Loss
|
(1,109,000)
|
(1,156,000)
|
(1,777,000)
|
(1,830,000)
|
|
|
|
|
|
Other
income (expense)
|
24,000
|
9,000
|
16,000
|
(2,000)
|
Loss
Before Taxes
|
(1,085,000)
|
(1,147,000)
|
(1,761,000)
|
(1,832,000)
|
|
|
|
|
|
Income
tax expense (benefit)
|
(222,000)
|
(222,000)
|
11,000
|
11,000
|
Net
Loss
|
$(863,000)
|
$(925,000)
|
$(1,772,000)
|
$(1,843,000)
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
Basic
|
$(0.50)
|
$(0.53)
|
$(1.03)
|
$(1.07)
|
Diluted
|
$(0.50)
|
$(0.53)
|
$(1.03)
|
$(1.07)
|
|
|
|
|
|
Shares used in calculation of net loss per share:
|
|
|
|
Basic
|
1,724,000
|
1,724,000
|
1,725,000
|
1,725,000
|
Diluted
|
1,724,000
|
1,724,000
|
1,725,000
|
1,725,000
|
|
|
|
Three Months Ended
|
|
|
|
|
Services
revenues
|
$4,373,000
|
$4,317,000
|
$5,108,000
|
$5,054,000
|
Products
revenues
|
118,000
|
118,000
|
—
|
—
|
Total
Net Sales
|
4,491,000
|
4,435,000
|
5,108,000
|
5,054,000
|
|
|
|
|
|
Cost
of services
|
3,764,000
|
3,764,000
|
3,981,000
|
3,981,000
|
Cost
of goods sold
|
112,000
|
112,000
|
41,000
|
41,000
|
Impairment
loss
|
—
|
—
|
—
|
—
|
Total
Cost of Sales
|
3,876,000
|
3,876,000
|
4,022,000
|
4,022,000
|
Gross
Profit
|
615,000
|
559,000
|
1,086,000
|
1,032,000
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
Selling
|
585,000
|
585,000
|
645,000
|
645,000
|
Marketing
|
192,000
|
192,000
|
215,000
|
215,000
|
General
and administrative
|
825,000
|
840,000
|
1,149,000
|
1,162,000
|
Gain
on sale of business
|
(195,000)
|
(195,000)
|
—
|
—
|
Total
Operating Expenses
|
1,407,000
|
1,422,000
|
2,009,000
|
2,022,000
|
Operating
Loss
|
(792,000)
|
(863,000)
|
(923,000)
|
(990,000)
|
|
|
|
|
|
Other
income (expense)
|
6,000
|
(15,000)
|
64,000
|
41,000
|
Loss
Before Taxes
|
(786,000)
|
(878,000)
|
(859,000)
|
(949,000)
|
|
|
|
|
|
Income
tax expense
|
8,000
|
8,000
|
12,000
|
12,000
|
Net
Loss
|
$(794,000)
|
$(886,000)
|
$(871,000)
|
$(961,000)
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
Basic
|
$(0.46)
|
$(0.51)
|
$(0.49)
|
$(0.55)
|
Diluted
|
$(0.46)
|
$(0.51)
|
$(0.49)
|
$(0.55)
|
|
|
|
|
|
Shares used in calculation of net loss per share:
|
|
|
|
Basic
|
1,740,000
|
1,740,000
|
1,745,000
|
1,745,000
|
Diluted
|
1,740,000
|
1,740,000
|
1,745,000
|
1,745,000
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
Reduction
of net sales
|
$63,000
|
$115,000
|
$105,000
|
$143,000
|
Increase
in general and administrative expense for penalities
|
8,000
|
14,000
|
13,000
|
16,000
|
Decrease
in other income (expense) for interest expense
|
5,000
|
8,000
|
10,000
|
14,000
|
Reduction
(increase) in income tax benefit
|
44,000
|
34,000
|
(9,000)
|
(27,000)
|
Total
increase in net loss due to restatement items
|
$120,000
|
$171,000
|
$119,000
|
$146,000
|
|
|
|
Three Months Ended
|
|
|
|
|
Services
revenues
|
$4,639,000
|
$4,576,000
|
$5,435,000
|
$5,320,000
|
Products
revenues
|
501,000
|
501,000
|
407,000
|
407,000
|
Total
Net Sales
|
5,140,000
|
5,077,000
|
5,842,000
|
5,727,000
|
|
|
|
|
|
Cost
of services
|
3,974,000
|
3,974,000
|
4,044,000
|
4,044,000
|
Cost
of goods sold
|
392,000
|
392,000
|
333,000
|
333,000
|
Total
Cost of Sales
|
4,366,000
|
4,366,000
|
4,377,000
|
4,377,000
|
Gross
Profit
|
774,000
|
711,000
|
1,465,000
|
1,350,000
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
Selling
|
738,000
|
738,000
|
693,000
|
693,000
|
Marketing
|
665,000
|
665,000
|
585,000
|
585,000
|
General
and administrative
|
708,000
|
716,000
|
870,000
|
884,000
|
Impairment
loss
|
—
|
—
|
—
|
—
|
Total
Operating Expenses
|
2,111,000
|
2,119,000
|
2,148,000
|
2,162,000
|
Operating
Loss
|
(1,337,000)
|
(1,408,000)
|
(683,000)
|
(812,000)
|
|
|
|
|
|
Other
income
|
37,000
|
32,000
|
30,000
|
22,000
|
Loss
Before Taxes
|
(1,300,000)
|
(1,376,000)
|
(653,000)
|
(790,000)
|
|
|
|
|
|
Income
tax benefit
|
(204,000)
|
(160,000)
|
(165,000)
|
(131,000)
|
Net
Loss
|
$(1,096,000)
|
$(1,216,000)
|
$(488,000)
|
$(659,000)
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
Basic
|
$(0.65)
|
$(0.72)
|
$(0.29)
|
$(0.39)
|
Diluted
|
$(0.65)
|
$(0.72)
|
$(0.29)
|
$(0.39)
|
|
|
|
|
|
Shares used in calculation of net loss per share:
|
|
|
|
Basic
|
1,694,000
|
1,694,000
|
1,698,000
|
1,698,000
|
Diluted
|
1,694,000
|
1,694,000
|
1,698,000
|
1,698,000
|
|
|
|
Three Months Ended
|
|
|
|
|
Services
revenues
|
$4,400,000
|
$4,295,000
|
$5,755,000
|
$5,612,000
|
Products
revenues
|
254,000
|
254,000
|
563,000
|
563,000
|
Total
Net Sales
|
4,654,000
|
4,549,000
|
6,318,000
|
6,175,000
|
|
|
|
|
|
Cost
of services
|
3,514,000
|
3,514,000
|
4,224,000
|
4,224,000
|
Cost
of goods sold
|
214,000
|
214,000
|
498,000
|
498,000
|
Total
Cost of Sales
|
3,728,000
|
3,728,000
|
4,722,000
|
4,722,000
|
Gross
Profit
|
926,000
|
821,000
|
1,596,000
|
1,453,000
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
Selling
|
573,000
|
573,000
|
654,000
|
654,000
|
Marketing
|
559,000
|
559,000
|
585,000
|
585,000
|
General
and administrative
|
865,000
|
878,000
|
881,000
|
897,000
|
Impairment
loss
|
—
|
—
|
2,014,000
|
2,014,000
|
Total
Operating Expenses
|
1,997,000
|
2,010,000
|
4,134,000
|
4,150,000
|
Operating
Loss
|
(1,071,000)
|
(1,189,000)
|
(2,538,000)
|
(2,697,000)
|
|
|
|
|
|
Other
income
|
46,000
|
36,000
|
29,000
|
15,000
|
Loss
Before Taxes
|
(1,025,000)
|
(1,153,000)
|
(2,509,000)
|
(2,682,000)
|
|
|
|
|
|
Income
tax benefit
|
(47,000)
|
(56,000)
|
(50,000)
|
(77,000)
|
Net
Loss
|
$(978,000)
|
$(1,097,000)
|
$(2,459,000)
|
$(2,605,000)
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
Basic
|
$(0.57)
|
$(0.64)
|
$(1.43)
|
$(1.52)
|
Diluted
|
$(0.57)
|
$(0.64)
|
$(1.43)
|
$(1.52)
|
|
|
|
|
|
Shares used in calculation of net loss per share:
|
|
|
|
Basic
|
1,712,000
|
1,712,000
|
1,720,000
|
1,720,000
|
Diluted
|
1,712,000
|
1,712,000
|
1,720,000
|
1,720,000
|
|
|
|
Three Months Ended
|
|
|
|
|
Services
revenues
|
$4,400,000
|
$4,295,000
|
$5,755,000
|
$5,612,000
|
Products
revenues
|
254,000
|
254,000
|
563,000
|
563,000
|
Total
Net Sales
|
4,654,000
|
4,549,000
|
6,318,000
|
6,175,000
|
|
|
|
|
|
Cost
of services
|
3,514,000
|
3,514,000
|
4,224,000
|
4,224,000
|
Cost
of goods sold
|
214,000
|
214,000
|
498,000
|
498,000
|
Total
Cost of Sales
|
3,728,000
|
3,728,000
|
4,722,000
|
4,722,000
|
Gross
Profit
|
926,000
|
821,000
|
1,596,000
|
1,453,000
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
Selling
|
573,000
|
573,000
|
654,000
|
654,000
|
Marketing
|
559,000
|
559,000
|
585,000
|
585,000
|
General
and administrative
|
865,000
|
878,000
|
881,000
|
897,000
|
Impairment
loss
|
—
|
—
|
2,014,000
|
2,014,000
|
Total
Operating Expenses
|
1,997,000
|
2,010,000
|
4,134,000
|
4,150,000
|
Operating
Loss
|
(1,071,000)
|
(1,189,000)
|
(2,538,000)
|
(2,697,000)
|
|
|
|
|
|
Other
income
|
46,000
|
36,000
|
29,000
|
15,000
|
Loss
Before Taxes
|
(1,025,000)
|
(1,153,000)
|
(2,509,000)
|
(2,682,000)
|
|
|
|
|
|
Income
tax benefit
|
(47,000)
|
(56,000)
|
(50,000)
|
(77,000)
|
Net
Loss
|
$(978,000)
|
$(1,097,000)
|
$(2,459,000)
|
$(2,605,000)
|
|
|
|
|
|
Net
loss per share:
|
|
|
|
|
Basic
|
$(0.57)
|
$(0.64)
|
$(1.43)
|
$(1.52)
|
Diluted
|
$(0.57)
|
$(0.64)
|
$(1.43)
|
$(1.52)
|
|
|
|
|
|
Shares used in calculation of net loss per share:
|
|
|
|
Basic
|
1,712,000
|
1,712,000
|
1,720,000
|
1,720,000
|
Diluted
|
1,712,000
|
1,712,000
|
1,720,000
|
1,720,000
|
The
following table sets forth the corrections in each of the
individual line items affected in the balance sheets:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
$6,360,000
|
$-
|
$6,360,000
|
$6,248,000
|
$-
|
$6,248,000
|
Accrued
liabilities - sales tax
|
$-
|
$232,000
|
$232,000
|
$-
|
$347,000
|
$347,000
|
Accrued
liabilities - other
|
$462,000
|
$41,000
|
$503,000
|
$374,000
|
$63,000
|
$437,000
|
Deferred
tax liabilities
|
$290,000
|
$2,000
|
$292,000
|
$116,000
|
$36,000
|
$152,000
|
Accumulated
deficit
|
$336,000
|
$275,000
|
$611,000
|
$824,000
|
$446,000
|
$1,270,000
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
$6,438,000
|
$-
|
$6,438,000
|
$6,199,000
|
$50,000
|
$6,249,000
|
Accrued
liabilities - sales tax
|
$-
|
$452,000
|
$452,000
|
$-
|
$681,000
|
$681,000
|
Accrued
liabilities - other
|
$413,000
|
$86,000
|
$499,000
|
$261,000
|
$142,000
|
$403,000
|
Deferred
tax liabilities
|
$61,000
|
$27,000
|
$88,000
|
$-
|
$-
|
$-
|
Accumulated
deficit
|
$1,802,000
|
$565,000
|
$2,367,000
|
$5,124,000
|
$773,000
|
$5,897,000
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
$5,319,000
|
$102,000
|
$5,421,000
|
$5,538,000
|
$174,000
|
$5,712,000
|
Accrued
liabilities - sales tax
|
$-
|
$773,000
|
$773,000
|
$-
|
$902,000
|
$902,000
|
Accrued
liabilities - other
|
$597,000
|
$172,000
|
$769,000
|
$664,000
|
$208,000
|
$872,000
|
Accumulated
deficit
|
$6,896,000
|
$844,000
|
$7,740,000
|
$7,690,000
|
$936,000
|
$8,626,000
|
The
following table sets forth the corrections to the retained earnings
(accumulated deficits) and total shareholders’ equity in the
statements of shareholders’ equity.
|
|
|
|
|
|
Total Shareholders' Equity
|
March
31, 2019
|
|
|
As
reported
|
$(336,000)
|
$15,470,000
|
Adjustment
due to cumulative error correction of net loss to first quarter
2019
|
(275,000)
|
(275,000)
|
As
restated
|
$(611,000)
|
$15,195,000
|
|
|
|
June
30, 2019
|
|
|
As
reported
|
$(824,000)
|
$15,112,000
|
Adjustment
due to cumulative error correction of net loss in second quarter
2019
|
(446,000)
|
(446,000)
|
As
restated
|
$(1,270,000)
|
$14,666,000
|
|
|
|
September
30, 2019
|
|
|
As
reported
|
$(1,802,000)
|
$14,209,000
|
Adjustment
due to cumulative error correction of net loss in third quarter
2019
|
(565,000)
|
(565,000)
|
As
restated
|
$(2,367,000)
|
$13,644,000
|
|
|
|
|
|
|
Total Shareholders' Equity
|
March
31, 2020
|
|
|
As
reported
|
$(5,124,000)
|
$11,000,000
|
Adjustment
due to cumulative error correction of net loss to first quarter
2020
|
(773,000)
|
(773,000)
|
As
restated
|
$(5,897,000)
|
$10,227,000
|
|
|
|
June
30, 2020
|
|
|
As
reported
|
$(6,896,000)
|
$9,287,000
|
Adjustment
due to cumulative error correction of net loss in second quarter
2020
|
(843,000)
|
(843,000)
|
As
restated
|
$(7,739,000)
|
$8,444,000
|
|
|
|
September
30, 2020
|
|
|
As
reported
|
$(7,690,000)
|
$8,538,000
|
Adjustment
due to cumulative error correction of net loss in third quarter
2020
|
(936,000)
|
(936,000)
|
As
restated
|
$(8,626,000)
|
$7,602,000
|
The
Company did not present tables for adjustments within the statement
of cash flows, since all of the foregoing adjustments were within
the operating activities section of the cash flows. These
adjustments did not affect total cash flows from operating
activities, financing activities or investing activities for any
period presented.
3.
Investments. During 2020 and as of
December 31, 2019, the Company did not have any investments. Prior
to December 31, 2019, the Company had invested its excess cash in
debt securities, with an average maturity of approximately six
months, and which were classified as held to maturity within
current assets.
4.
Revenue Recognition. Under ASU 2014-09
Revenue from Contracts with
Customers (“Topic 606”), revenue is measured based on consideration
specified in the contract with a customer, adjusted for any
applicable estimates of variable consideration and other factors
affecting the transaction price, including noncash consideration,
consideration paid or payable to a customer and significant
financing components. Revenue from all customers is recognized when
a performance obligation is satisfied by transferring control of a
distinct good or service to a customer, as further described below
under “Performance
Obligations.”
Taxes
collected from customers and remitted to governmental authorities
are excluded from revenue on the net basis of
accounting.
The
Company includes shipping and handling fees in revenues. Shipping
and handling costs associated with outbound freight after control
over a product has transferred to a customer are accounted for as a
fulfillment cost and are included in cost of goods
sold.
Performance Obligations
A performance obligation is a promise in a
contract to transfer a distinct good or service to the customer and
is the unit of account under Topic 606. A contract’s
transaction price is allocated to each distinct performance
obligation and recognized as revenue when, or as, the performance
obligation is satisfied. The following is a description of
the Company’s performance
obligations included in its primary revenue streams and the timing
or method of revenue recognition for each:
In-Store
Signage Solution Services. The Company provides a service of displaying promotional signs
in close proximity to the CPG manufacturer’s product in
participating stores, which the Company maintains in two-to-four-week cycle
increments.
Each of the individual activities under the
Company’s services, including
production activities, are inputs to an integrated sign display
service. Customers receive and consume the benefits from the
promotional displays over the duration of the contracted display
cycle. Additionally, the display of the signs does not have an
alternative use to the Company and the Company has an enforceable right to payment for services
performed to date. As a result, the Company recognizes the transaction price for service
performance obligations as revenue over time. Given the nature
of the Company’s performance obligations is to provide a display
service over the duration of a specified period or periods,
the Company recognizes revenue on a
straight-line basis over the display service period as it best
reflects the timing of transfer of its sign
solutions.
Non-POPS
Solutions. The Company also
supplies CPG manufacturers with other retailer approved promotional
services, such as signage, on-pack, merchandising and digital
solutions. These services are more customized than POPS, consisting
of variable durations and variable specifications. Due to the
variable nature of these services, revenue recognition is a mix of
over time and point in time recognition.
Products.
Prior to the August 2020 sale of the
Company’s custom print business, the Company
also sold custom print solutions
directly to its customers. Each such product was a distinct
performance obligation. Revenue was recognized at a point in time
upon shipment, when control of the goods transferred to the
customer.
Disaggregation of Revenue
In the
following table, revenue is disaggregated by major revenue stream
and timing of revenue recognition.
|
|
|
Year ended
December 31, 2020
|
|
|
|
|
Timing of revenue recognition:
|
|
|
|
Products
and services transferred over time
|
$10,670,000
|
$-
|
$10,670,000
|
Products
and services transferred at a point in time
|
6,234,000
|
578,000
|
6,812,000
|
Total
|
$16,904,000
|
$578,000
|
$17,482,000
|
|
|
|
|
|
|
|
Year ended
December 31, 2019
|
|
|
|
|
Timing of revenue recognition:
|
|
|
|
Products
and services transferred over time
|
$15,029,000
|
$-
|
$15,029,000
|
Products
and services transferred at a point in time
|
4,774,000
|
1,725,000
|
6,499,000
|
Total
|
$19,803,000
|
$1,725,000
|
$21,528,000
|
Contract Costs
Sales
commissions that are paid to internal or external sales
representatives are eligible for capitalization as they are
incremental costs that would not have been incurred without
entering into a specific sales arrangement and are recoverable
through the expected margin on the transaction. The Company is
applying the practical expedient in Accounting Standards
Codification 340-40-25-4 that allows the incremental costs of
obtaining a contract to be recorded as an expense when incurred
when the amortization period of the asset that would have otherwise
been recognized is one year or less. These costs are included in
selling expenses.
Deferred Revenue
Significant changes
in deferred revenue during the period are as follows:
Balance
at December 31, 2019
|
$140,000
|
Reclassification
of beginning deferred revenue to revenue, as a result of
performance obligations satisfied
|
(140,000)
|
Cash
received in advance and not recognized as revenue
|
180,000
|
Balance
at December 31, 2020
|
$180,000
|
Transaction Price Allocated to Remaining Performance
Obligations
The
Company applies the practical expedient in paragraph 606-10-50-14
and does not disclose information about remaining performance
obligations that have original expected durations of one year or
less, which reflect the majority of its performance obligations.
This practical expedient is being applied to arrangements for
certain incomplete services and unshipped custom signage materials.
At December 31, 2020, there were no contracts with an expected
duration of greater than one year.
5. Property and Equipment. Property and
equipment consists of the following at December 31:
Year ended December 31
|
|
|
Property and Equipment:
|
|
|
Production
tooling, machinery and equipment
|
$2,349,000
|
$3,685,000
|
Office
furniture and fixtures
|
425,000
|
393,000
|
Computer
equipment and software
|
1,447,000
|
1,426,000
|
Leasehold
improvements
|
-
|
-
|
Construction
in-progress
|
17,000
|
-
|
|
4,238,000
|
5,504,000
|
Accumulated
depreciation and amortization
|
(4,163,000)
|
(4,955,000)
|
Net
Property and Equipment
|
$75,000
|
$549,000
|
Depreciation
expense for the years ended December 31, 2020 and 2019 was $314,000
and $1,044,000, respectively. During December 2020, in connection
with the outsourcing of most printing operations, the Company sold
property and equipment with a net book value of $230,000, for
$195,000, resulting in a loss on sale of $35,000. The proceeds were
in the form of receivables due in four equal amounts due in June
and December 2021 and June and December 2022.
6.
Leases.
The
Company leases space under a
non-cancelable operating lease for its corporate headquarters. This
lease has escalating lease terms and also includes a tenant
incentive that was recorded at the time the lease was originally
entered into. The lease does not contain contingent rent
provisions. The Company also has a lease for additional office
space under an operating lease. The lease for the
Company’s corporate headquarters
includes both lease (e.g., fixed payments including rent, taxes,
and insurance costs) and non-lease components (e.g., fixed
common-area or other maintenance costs) which are accounted for as
a single lease component as the Company elected the practical
expedient to group lease and non-lease components for all leases.
The lease for the Company’s additional office space is non-cancelable with a
lease term of less than one year and therefore, the
Company elected the practical expedient to exclude this short-term
lease from the Company’s right-of-use assets and lease
liabilities.
The Company’s incremental borrowing rate used in determining the
present value of the lease payments was based on information
available at the lease commencement date.
The cost components of the Company’s
operating leases were as follows for
the years ended December 31, 2020 and 2019:
|
Year ended
December 31, 2020
|
|
|
|
|
|
|
|
|
Operating
lease cost
|
$150,000
|
$-
|
$150,000
|
Variable
lease cost
|
104,000
|
-
|
104,000
|
Short-term
lease cost
|
-
|
40,000
|
40,000
|
Total
|
$254,000
|
$40,000
|
$294,000
|
|
Year ended
December 31, 2019
|
|
|
|
|
|
|
|
|
Operating
lease cost
|
$150,000
|
$-
|
$150,000
|
Variable
lease cost
|
106,000
|
-
|
106,000
|
Short-term
lease cost
|
-
|
38,000
|
38,000
|
Total
|
$256,000
|
$38,000
|
$294,000
|
Variable lease costs consist primarily of taxes,
insurance, and common area or other maintenance costs for
the Company’s leased
corporate headquarters which are paid based on actual costs
incurred by the lessor.
Maturities of the Company’s
lease liabilities for its corporate
headquarters operating lease were as follows as of December 31,
2020:
2021
|
$57,000
|
Less:
Interest
|
1,000
|
Present
value of lease liabilities
|
$56,000
|
The
remaining lease term as of December 31, 2020 and 2019, was 0.25
years and 1.25 years, respectively. The discount rate as of both
December 31, 2020 and 2019 was 6%. The cash outflow for operating
leases for the years ended December 31, 2020 and December 31, 2019
was $222,000 and $217,000, respectively.
The
Company plans to enter into a lease for a new operations center in
suburban Minneapolis for a two-year term commencing in March 2021.
The Company also plans to enter into a lease by April 2021 for new
headquarters near downtown Minneapolis.
7.
Commitments
and Contingencies.
Retailer
Agreements. The Company has
contracts in the normal course of business with various retailers,
some of which provide for fixed or store-based payments rather than
sign placement-based payments resulting in minimum commitments each
year in order to maintain the agreements. During the years ended
December 31, 2020 and 2019, the Company incurred $2,765,000 and
$3,356,000 of costs related to fixed and store-based payments,
respectively. The amounts are recorded in cost of services in the
Company’s statements of operations.
Aggregate
commitment amounts under agreements with retailers are
approximately as follows for the years ending December
31:
2021
|
$418,000
|
2022
|
708,000
|
2023
|
354,000
|
During
2020, the Company renegotiated several fixed or store-based retail
payment contracts to sign placement-based payment contracts, in
each case with the general effect of reducing guaranteed payment
obligations. On an ongoing basis the Company negotiates renewals of
various agreements with retailers, retailer contracts generally have terms of one to
three years.
Legal. The Company is
subject to various legal matters in the normal course of
business.
In July
2019, the Company brought suit against News America in the U.S.
District Court in Minnesota, alleging violations of federal and
state antitrust and tort laws by News America. The complaint
alleges that News America has monopolized the national market for
third-party in-store advertising and promotion products and
services through various wrongful acts designed to harm the
Company, its last significant competitor. The suit seeks, among
other relief, an injunction sufficient to prevent further antitrust
injury and an award of treble damages to be determined at trial for
the harm caused to our Company.
In
August 2019, News America filed an answer and
counterclaim. In October 2019, News America moved for a
judgment on the pleadings. Management believes that the
counterclaim is without merit, and the Company filed a response
brief on November 11, 2019. The Company also moved to dismiss the
counterclaim against it. The court heard oral arguments from both
parties on January 14, 2020, and subsequently denied both motions.
On July 10, 2020 the parties cross-moved for summary judgment on
the counterclaim. On December 7, 2020, the Court granted News
America’s motion for summary judgment on the counterclaim in
part, requiring Insignia to strike certain allegations from its
Complaint and finding News America’s request for
attorneys’ fees and costs premature.
Discovery is
underway and trial has been scheduled for December 2021. At this
stage of the proceedings, the Company is unable to determine the
likelihood of an unfavorable outcome or estimate any potential
resulting liability at this time.
Stock-Based
Compensation. The Company’s stock-based compensation
plans are administered by the Compensation Committee of the Board
of Directors, which, subject to approval by the Board of Directors,
selects persons to receive awards and determines the number of
shares subject to each award and the terms, conditions, performance
measures and other provisions of the award.
The
following table summarizes the stock-based compensation expense
that was recognized in the Company’s statements of operations
for the years ended December 31, 2020 and 2019:
Year ended December 31
|
|
|
Cost
of sales
|
$5,000
|
$14,000
|
Selling
|
38,000
|
121,000
|
Marketing
|
(1,000)
|
12,000
|
General
and administrative
|
130,000
|
275,000
|
|
$172,000
|
$422,000
|
The
Company uses the Black-Scholes option pricing model to estimate
fair value of stock-based awards with the following weighted
average assumptions:
|
|
|
Stock Purchase Plan Options:
|
|
|
Expected
life (years)
|
1.0
|
1.0
|
Expected
volatility
|
59%
|
57%
|
Dividend
yield
|
0%
|
0%
|
Risk-free
interest rate
|
1.6%
|
2.6%
|
The
Company uses the graded attribution method to recognize expense for
unvested stock-based awards. The amount of stock-based compensation
recognized during a period is based on the value of the awards that
are ultimately expected to vest. Forfeitures are estimated at the
time of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. The Company
re-evaluates the forfeiture rate annually and adjusts it as
necessary.
Stock Options, Restricted
Stock, Restricted Stock Units, and Other Stock-Based Compensation
Awards. The Company maintains the 2003 Incentive Stock
Option Plan (the “2003 Plan”), the 2013 Omnibus Stock
and Incentive Plan (the “2013 Plan”) and the 2018
Equity Incentive Plan (the “2018 Plan”). The 2018 Plan
replaced the 2013 Plan upon its ratification by shareholders in
July 2018. No further awards may be granted under the 2013 Plan or
the 2003 Plan. Awards granted under the 2003 Plan and 2013 Plan
will remain in effect until they are exercised or expire according
to their terms.
Under
the terms of the 2018 Plan, the number of shares of our common
stock that may be the subject of awards and issued under the 2018
Plan was initially 128,571 plus any shares remaining available for
future grants under the 2013 Plan on the effective date of the 2018
Plan. All equity awards made during 2019 were under the 2018
Plan.
Under
the terms of the 2018 Plan, the Company may grant awards in a
variety of instruments including stock options, restricted stock
and restricted stock units to employees, consultants and directors
generally at an exercise price at or above 100% of fair market
value at the close of business on the date of grant. Stock options
expire 10 years after the date of grant and generally vest over
three years. The Company issues new shares of common stock upon
grant of restricted stock, when stock options are exercised, and
when restricted stock units are vested and/or settled.
The
following table summarizes activity under the 2003, 2013 and 2018
Plans:
|
Plan Shares Available for Grant
|
|
Weighted Average Exercise Price Per Share
|
Balance
at January 1, 2019
|
117,860
|
53,225
|
$16.49
|
Restricted
stock units and awards granted - 2018 Plan
|
(10,106)
|
—
|
|
Cancelled
or forfeited - 2018 Plan options
|
1,938
|
(1,938)
|
13.65
|
Cancelled
or forfeited - 2018 Plan restricted stock and restricted stock
units
|
1,938
|
—
|
13.65
|
Cancelled
or forfeited - 2013 Plan options
|
2,926
|
(2,926)
|
14.70
|
Cancelled
or forfeited - 2013 Plan restricted stock and restricted stock
units
|
3,105
|
—
|
12.02
|
Cancelled
or forfeited - 2003 Plan options
|
—
|
(5,945)
|
17.21
|
Balance
at December 31, 2019
|
117,661
|
42,416
|
16.66
|
|
|
|
|
Restricted
stock units and awards granted - 2018 Plan
|
(31,782)
|
—
|
|
Cancelled
or forfeited - 2018 Plan options
|
1,070
|
(1,070)
|
13.65
|
Cancelled
or forfeited - 2018 Plan restricted stock and restricted stock
units
|
3,091
|
—
|
9.58
|
Cancelled
or forfeited - 2013 Plan options
|
2,241
|
(2,241)
|
15.54
|
Cancelled
or forfeited - 2013 Plan restricted stock and restricted stock
units
|
1,450
|
—
|
13.34
|
Cancelled
or forfeited - 2003 Plan options
|
—
|
(8,607)
|
24.23
|
|
|
|
|
Balance
at December 31, 2020
|
93,731
|
30,498
|
$14.69
|
The
following table summarizes information about the stock options
outstanding at December 31, 2020:
|
|
|
Ranges of Exercise Prices
|
|
Weighted Average Remaining Contractual Life
|
Weighted Average Exercise Price Per Share
|
|
Weighted Average Exercise Price Per Share
|
$8.26 - $13.65
|
18,799
|
6.12
years
|
$12.36
|
9,424
|
$11.07
|
$15.54 - $21.63
|
11,699
|
1.97
years
|
18.43
|
11,699
|
18.43
|
|
30,498
|
4.53
years
|
$14.69
|
21,123
|
$15.15
|
Options
outstanding under the Plans expire at various dates during the
period from May 2021 through August 2028. Options outstanding
during 2020 and 2019 had no intrinsic value. Options exercisable at
December 31, 2020 had a weighted average remaining life of 3.16
years and no intrinsic value. No options were granted in either
2020 or 2019. The number of options exercisable at December 31,
2019 was 27,285.
During
the year ended December 31, 2020, the Company issued 24,282
restricted stock units. The shares underlying the awards were
assigned a weighted average value of $6.00 per share, which was the
closing price of the Company’s common stock on the date of
grants. These awards are scheduled to vest over one year. No
restricted stock or restricted stock unit awards were granted in
2019 to employees.
During
December 2020, non-employee members of the Board of Directors
received restricted stock grants totaling 7,500 shares. The shares
underlying the awards were assigned a value of $6.00 per share,
which was the closing price of the Company’s common stock on
the date of grants, for a total value of $45,000, and are scheduled
to vest the day immediately preceding the date of the next annual
shareholder meeting. During June 2019, non-employee members of the
Board of Directors received restricted stock grants totaling 10,106
shares pursuant to the 2018 Plan. The shares underlying the awards
were assigned a value of $7.42 per share, which was the closing
price of the Company’s common stock on the date of grants,
for a total value of $75,000, and were vested on July 30, 2020, the
day immediately preceding the 2020 annual shareholder
meeting.
Restricted stock
and restricted stock unit transactions during the years ended
December 31, 2020 and 2019 are summarized as follows:
|
|
Weighted average
grant date fair value
|
Unvested
shares at January 1, 2019
|
70,078
|
$12.47
|
Granted
|
10,106
|
7.42
|
Vested
|
(30,103)
|
11.15
|
Forfeited
or surrendered
|
(5,422)
|
12.88
|
Unvested
shares at December 31, 2019
|
44,659
|
$12.16
|
Granted
|
31,782
|
6.00
|
Vested
|
(22,315)
|
11.36
|
Forfeited
or surrendered
|
(4,162)
|
10.30
|
Unvested
shares at December 31, 2020
|
49,964
|
$8.76
|
As
of December 31, 2020, there was approximately $20,000 of total
unrecognized compensation costs related to outstanding stock
options, which is expected to be recognized over a weighted average
period of 1.61 years.
As
of December 31, 2020, there was approximately $242,000 of total
unrecognized compensation costs related to restricted stock and
restricted stock units, which is expected to be recognized over a
weighted average period of 0.88 years.
Employee Stock Purchase
Plan. The Company has an Employee Stock Purchase Plan (the
“ESPP”) that enables employees to contribute up to 10%
of their base compensation toward the purchase of the
Company’s common stock at 85% of its market value on the
first or last day of the year. During the years ended
December 31, 2020 and 2019, respectively, participants
purchased 6,152 and 4,638 shares under the ESPP. At December 31,
2020, 28,977 shares were reserved for future employee purchases of
common stock under the ESPP. For the years ended December 31, 2020
and 2019, the Company recognized $18,000 and $55,000, respectively,
of stock-based compensation expense related to the
ESPP.
Share Repurchase
Programs. On April 5, 2018, the Board authorized the
repurchase of up to $3,000,000 of the Company’s common stock
on or before March 31, 2020, when the program expired. During the
years ended December 31, 2020 and 2019, the Company did not
repurchase any shares.
Dividends. The
Company has not historically paid dividends, other than one-time
dividends declared in 2011 and 2016. The Company intends to retain
earnings from operations for use in advancing our business
strategy; however, the Company may consider special dividends in
the future depending on outcomes of actions such as legal
proceedings.
9.
Income Taxes. Income tax benefit consists of the
following:
|
|
Year Ended December 31
|
|
|
Current
taxes - Federal
|
$(233,000)
|
$-
|
Current
taxes - State
|
42,000
|
38,000
|
Deferred
taxes - Federal
|
-
|
(402,000)
|
Deferred
taxes - State
|
-
|
(60,000)
|
|
|
|
Income
tax benefit
|
$(191,000)
|
$(424,000)
|
The
actual tax benefit attributable to loss before taxes differs from
the expected tax benefit computed by applying the U.S. federal
corporate income tax rate of 21% as follows:
|
|
Year Ended December 31
|
|
|
Federal
statutory rate
|
21.0%
|
21.0%
|
|
|
|
Stock-based
awards
|
(0.8)
|
(0.7)
|
State
taxes
|
3.6
|
3.2
|
Other
permanent differences
|
(0.3)
|
(0.6)
|
Impact
of uncertain tax positions
|
(0.7)
|
(0.5)
|
Valuation
allowance
|
(19.6)
|
(15.4)
|
Other
|
0.8
|
0.1
|
|
|
|
Effective
federal income tax rate
|
4.0%
|
7.1%
|
Components of
resulting noncurrent deferred tax assets (liabilities) are as
follows:
|
|
As of December 31
|
|
|
Deferred tax assets
|
|
|
Accrued
expenses
|
$376,000
|
$260,000
|
Inventory
reserve
|
9,000
|
5,000
|
Stock-based
awards
|
65,000
|
88,000
|
Reserve
for bad debts
|
33,000
|
16,000
|
Net
operating loss and credit carryforwards
|
1,422,000
|
715,000
|
Other
|
47,000
|
26,000
|
Depreciation
|
52,000
|
-
|
Valuation
allowance
|
(1,946,000)
|
(1,003,000)
|
|
|
|
Total
deferred tax assets
|
$58,000
|
$107,000
|
|
|
|
Deferred tax liabilities
|
|
|
Depreciation
|
$-
|
$(18,000)
|
Prepaid
expenses
|
(58,000)
|
(89,000)
|
|
|
|
Total
deferred tax liabilities
|
(58,000)
|
(107,000)
|
|
|
|
Net
deferred income tax liabilities
|
$-
|
$-
|
As of
December 31, 2020, the Company had a Federal net operating loss
(NOL) to carry forward of approximately $5,400,000 and state NOLs
of approximately $4,500,000 to carry forward. The Federal NOLs can
be carried forward indefinitely. The expiration of state NOLs
carried forward varies by taxing jurisdiction.
Section
382 of the U.S. Internal Revenue Code of 1986 (“Section
382”), as amended, generally imposes an annual limitation on
the amount of NOL carryforwards that might be used to offset
taxable income when a corporation has undergone significant changes
in stock ownership. During 2020, we believe we may have experienced
an ownership change as defined in Section 382 which would limit our
ability to utilize our NOLs. The Company has not yet completed a
formal Section 382 analysis. In addition, our ability to utilize
the current NOL carryforwards might be further limited by future
issuances of our common stock.
In March 2020, Congress passed the Coronavirus
Aid, Relief and Economic Security (“CARES”) Act. The
CARES Act, among other provisions, allows for companies to carry
back federal NOLs generated in 2018, 2019 and 2020 for up to five
years for refunds of federal taxes paid. This provision created an
opportunity for the Company to utilize NOLs not previously expected
to be utilized. Thus, the Company has reversed approximately
$215,000 of its valuation allowance against the NOLs in its
deferred tax assets which the Company carried back to claim a refund of
federal taxes paid. As the Company expects to receive the tax
refund from the ability to carry back the NOLs within the next 12
months, this discrete benefit has been recorded within income taxes
receivable on the balance sheet. In addition to the $215,000
recognized, $17,000 was included as a discrete tax benefit for the
year and included in income taxes receivable related to the NOL
carry back due to differences in the federal tax rate utilized for
the deferred tax asset compared to the rates in effect for the
years in which the NOL is being carried back.
The
Company evaluates all significant available positive and negative
evidence, including the existence of losses in prior years and its
forecast of future taxable income, in assessing the need for a
valuation allowance. The underlying assumptions the Company uses in
forecasting future taxable income require significant judgment and
take into consideration the Company’s recent performance. The
change in the valuation allowance for the years ended December 31,
2020 and 2019 was $943,000 and $924,000, respectively.
The
Company has recorded a liability of $677,000 and $643,000 for
uncertain tax positions taken in tax returns in previous years as
of December 31, 2020 and 2019, respectively. This liability is
reflected as accrued income taxes on the Company’s balance
sheets. The Company files income tax returns in the United States
and numerous state and local tax jurisdictions. Tax years 2017 and
forward are open for examination and assessment by the Internal
Revenue Service. With limited exceptions, tax years prior to 2017
are no longer open in major state and local tax jurisdictions. The
Company does not anticipate that the total unrecognized tax
benefits will change significantly prior to December 31,
2021.
A
reconciliation of the beginning and ending amount of the liability
for uncertain tax positions is as follows:
Balance
at January 1, 2019
|
$613,000
|
Increases
due to interest and state tax
|
30,000
|
Balance
at December 31, 2019
|
643,000
|
Increases
due to interest and state tax
|
34,000
|
Balance
at December 31, 2020
|
$677,000
|
10.
Employee Benefit Plans. The Company
sponsors a Retirement Profit Sharing and Savings Plan under Section
401(k) of the Internal Revenue Code. The plan allows employees to
defer up to 50% of their wages, subject to Federal limitations, on
a pre-tax basis through contributions to the plan. During the years
ended December 31, 2020 and 2019, the Company’s expense for
matching contributions was $62,000 and $72,000,
respectively.
Major
Customers. During the
year ended December 31, 2020, one customer accounted for 14% of the
Company’s total net sales. At December 31, 2020, two
customers represented 17% and 10%, respectively of the
Company’s total accounts receivable. During the year ended
December 31, 2019, two customers accounted for 13% and 12%,
respectively of the Company’s total net sales. At December
31, 2019, four customers represented 17%, 12%, 12% and 10%,
respectively of the Company’s total accounts
receivable.
Export Sales. Export
sales accounted for less than 1% of total net sales during the
years ended December 31, 2020 and 2019.
12.
Loan. In April 2020, the Company
entered into a promissory note (the “Note”) with Alerus
Financial, N.A. The Note evidences a loan to the Company in the
amount of $1,054,000 pursuant to the Paycheck Protection Program
(the “PPP”) of the CARES Act administered by the U.S.
Small Business Administration (the “SBA”).
In
accordance with the requirements of the CARES Act, the Company used
the proceeds from the loan exclusively for qualified expenses under
the PPP, including payroll costs, rent and utility costs, as
further detailed in the CARES Act and applicable guidance issued by
the SBA. Interest was accrued on the outstanding balance of the
Note at a rate of 1.00% per annum. The Note was scheduled to mature
on April 22, 2022 and required 18 equal monthly payments of
principal and interest.
In
accordance with provisions of the CARES Act, the Company applied
for forgiveness of the amount due under the Note, including accrued
interest. The application for forgiveness of the principal amount
of $1,054,000 and accrued interest was approved by the SBA on
January 29, 2021. Accordingly, for the quarter ending March 31,
2021 the debt of $1,054,000, plus accrued interest which was $7,000
at December 31, 2020, will be eliminated with a gain on debt
extinguishment included in other income.
13.
Subsequent Events. The
Company evaluated all subsequent event activity and concluded that
no subsequent events have occurred that would require recognition
in the financial statements or disclosure in the Notes to Financial
Statements, with the exception of the forgiveness of the Paycheck
Protection Program loan disclosed in Note 12.