Insignia(LDWY) - 2022 Q4 - Annual Report

PART I Item 1. Business Insignia Systems transitions from traditional POPS® signage to an expanded portfolio of display and on-pack solutions, settled a $20 million lawsuit, and explores strategic options to maximize shareholder value General Insignia Systems is winding down its POPS® signage business to focus on display and on-pack solutions, settled a $20 million lawsuit, and explores strategic options - Business transition: Winding down POPS® signage in 2023, focusing on display and on-pack solutions[13] - Revenue diversification: Over 90% of 2022 revenue from new display and on-pack solutions[13] - Litigation settlement: $20 million settlement with News America in July 2022, resulting in $12 million net pre-tax gain[15] - Strategic options: Actively exploring acquisitions, mergers, business combinations, or other strategic transactions[16] Industry and Market Background The in-store advertising industry faces evolving shopper behavior, e-commerce brand entry, demand for ROI, and supply chain pressures, driving demand for innovative solutions - Industry trends: Evolving shopper behavior (convenience, multi-service), e-commerce brands entering physical retail, demand for measurable ROI, and supply chain/cost pressures[18][19] - Market opportunity: Retailers and brands seek in-store solutions to inspire, educate, and convert shoppers, reinforcing brand equity at the point of purchase[19] Product Solutions Insignia diversifies from declining POPS® signage to focus on Display Solutions and On-Pack Solutions for brand discovery and impulse purchases - Product shift: POPS® signage declining and winding down in 2023[20] - New focus: Display Solutions (customized temporary, semi-permanent, permanent displays) and On-Pack Solutions (BoxTalk™, coupons, recipes, cross-promotions)[25] Sales and Design Sales focuses on client relationships and retail expansion, while design creates innovative solutions, with foreign sales remaining minimal - Sales team focus: Client relationships, sales pipeline, retail footprint expansion[26] - Design team focus: Innovative, executable designs, collaboration with production partners[26] - Foreign sales: Less than 1% of total net sales in 2022 and 2021, expected to remain so in 2023[24] Competition Insignia faces diverse competition in display and on-pack solutions, differentiating through end-to-end capabilities and project management rather than lowest price - Competitive landscape: More diverse with expanded display and on-pack solutions, compared to a single main competitor for signage[27] - Competitive strengths: Best-in-class execution, broad client-base, imagination, retail/brand expertise, innovative design, seamless project management[32] Intellectual Property: Patents and Trademarks Insignia protects its brands like Insignia® and BoxTalk™ with U.S. registered trademarks and safeguards trade secrets through agreements - Trademarks: Owns U.S. registered trademarks like Insignia®, Insignia POPS®, and Boxtalk™[28] - Protection: Uses nondisclosure and invention assignment agreements for employees and third parties[28] Service and Solution Development Insignia develops new services and enhancements internally and externally, significantly expanding its portfolio to meet evolving client needs - Development: New services and enhancements developed internally or externally, including proprietary data management and design guidance[29] - Portfolio expansion: Significant expansion to meet client and partner needs more holistically[29] Business Plan Insignia's strategic plan aims for differentiation and growth through portfolio diversification, focusing on display, on-pack, execution, and talent investment - Strategic pillars: Accelerate Display, Grow On-Pack, Executional Excellence, Invest in our Future (talent, resources)[33] - Goal: Differentiate, grow, and protect from competitive response through portfolio diversification[30] Customers Insignia serves CPG manufacturers and retailers, with significant revenue concentration from three customers in 2022, and sales fluctuate due to various market factors - Customer base: CPG manufacturers, retailers, shopper marketing agencies, brokerages[11][34] Customer Concentration (2022) | Metric | Customer 1 | Customer 2 | Customer 3 | | :-------------------- | :--------- | :--------- | :--------- | | % of Total Net Sales | 19% | 11% | 11% | | % of Total A/R | 20% | 19% | 11% | - Sales fluctuations: Influenced by sales cycles, brand decisions, promotional timing, budget, and seasonality[36] Environmental Matters The company's operations comply with environmental regulations, and compliance costs are not expected to be material - Compliance: Operations follow all applicable environmental regulations[37] - Impact: Costs and effects of compliance are not material[37] Human Capital Resources and Management Insignia had 31 employees as of March 2023, prioritizing engagement, talent development, diversity, and comprehensive compensation and benefits - Employee count: 31 employees (30 full-time) as of March 7, 2023[38] - HR initiatives: Employee engagement, talent development (9% promotions in 2022), Diversity, Equity, and Inclusion (recognized for diversity in leadership), comprehensive compensation and benefits[44] Segment Reporting The company operates in a single reportable segment - Single segment: Operates in one reportable segment[40] Item 1A. Risk Factors Insignia faces risks from intense competition, strategic development, economic conditions, operational challenges, stock price volatility, and cybersecurity threats COMPETITIVE AND REPUTATIONAL RISKS Insignia faces intense competition based on various factors and has settled significant litigation, with future legal actions posing potential risks - Competition: Intense, based on rates, market availability, quality, and store coverage[45] - Differentiation: Unique end-to-end capabilities and project management, but not always lowest price[46] - Litigation: Settled a significant lawsuit with News America in 2022; future litigation could be costly[47] STRATEGIC RISKS Growth depends on successful solution development and retailer access, while exploring strategic alternatives involves expenses, competition, and no guaranteed success - Growth dependency: Ability to develop successful solutions and secure retailer access[48] - Strategic alternatives risks: Increased expenses, highly competitive market for opportunities, no guarantee of successful transaction or favorable terms[49][50][51] RISKS RELATED TO ECONOMY AND MARKET CONDITIONS Revenues are sensitive to marketing spend and economic conditions, with inflation increasing costs and future downturns potentially reducing demand and affecting performance - Economic sensitivity: Revenues affected by CPG/retailer marketing spend and general economic conditions[53] - Inflation impact: Increased costs, limited ability to pass on price increases[53] - Pandemic risk: Future public health crises could reduce demand, cause inefficiencies, and disrupt supply chains, impacting financial condition[54] OPERATIONAL RISKS Success relies on attracting talent, maintaining internal controls, and managing third-party outsourcing, with failures in these areas posing significant risks - Talent retention: Critical for success, intense competition for personnel[55] - Internal controls: Risk of inaccurate financial reporting, market price decline, and regulatory sanctions if internal controls are ineffective[56][58] - Outsourcing reliance: Vulnerability to third-party failures in software, IT, and production operations[59][61] RISKS RELATED TO OUR COMMON STOCK Operating results and stock price are subject to volatility due to customer changes, seasonality, market acceptance, strategic activities, and limited trading volume - Operating results volatility: Fluctuations due to customer changes, seasonality, new product acceptance, expenses, competition, contracts, and strategic activities[62][66] - Stock price volatility: Influenced by operating results, market acceptance, strategic alternative exploration, limited trading volume, and general market conditions[63] TECHNOLOGY AND CYBERSECURITY RISKS Reliance on IT systems and increasing cybersecurity threats pose risks of data misuse, theft, disruptions, and litigation, materially affecting the business - IT reliance: Dependence on internal and outsourced IT systems for business activities and sensitive data[64] - Cybersecurity threats: Increasing frequency and sophistication of attacks (user error, targeted attacks)[64] - Potential impact: Misuse of information, theft, data manipulation, production disruptions, privacy breaches, litigation, regulatory action, material adverse effect on business[64] Item 1B. Unresolved Staff Comments As a smaller reporting company, Insignia Systems is not required to provide disclosure regarding unresolved staff comments - Disclosure exemption: Not required for smaller reporting companies[65] Item 2. Properties The company leases its corporate headquarters in Minneapolis through 2026 and warehouse space on a month-to-month basis - Corporate HQ: Leased 2,850 sq ft in Minneapolis, lease renewed through Dec 31, 2026[67] - Warehouse: Leased 2,560 sq ft in Minneapolis suburb, month-to-month lease from April 1, 2023[67] Item 3. Legal Proceedings The company is involved in routine legal actions, but their outcome is not expected to materially affect its financial position or results - Routine legal matters: Engaged in ordinary course legal actions[68] - Material effect: Not expected to have a material effect on financial position or results[68] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable: The company does not have mine safety disclosures[69] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Insignia's common stock is listed on Nasdaq under ISIG with 113 holders, and the company has not historically paid regular dividends Market Information and Holders Insignia's common stock is listed on the Nasdaq Capital Market under ISIG, with approximately 113 holders of record as of March 7, 2023 - Listing: Nasdaq Capital Market, symbol ISIG[71] - Holders: Approximately 113 holders of record as of March 7, 2023[72] Dividends The company has not paid regular dividends, only two one-time special dividends, and the Board periodically evaluates future payments - Dividend history: No regular dividends, only one-time special dividends in 2011 and 2016[73] - Future outlook: Board evaluates dividend payments based on financial condition and business plans[73] Item 6. [Reserved] This item is reserved and contains no information - Reserved: No content provided for this item[74] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Insignia's 2022 net income of $10 million was driven by a litigation settlement, with improved liquidity and sufficient cash for the next twelve months Overview Insignia diversifies its in-store advertising portfolio, with non-POPS solutions growing 22% in 2022, while POPS declines, and explores strategic options - Portfolio diversification: Non-POPS solutions revenue grew 22% in 2022[76] - POPS decline: POPS signage revenue declined to ~5% of total net sales in 2022 (from 24% in 2021) and will be wound down in 2023[76] - Strategic exploration: Continuing to explore strategic options (acquisition, merger, etc.) to maximize shareholder value[77] Results of Operations Net income of $10.046 million in 2022, up from a $3.534 million loss in 2021, was primarily due to a $12 million litigation settlement gain Financial Performance Summary | Metric | 2022 ($) | 2021 ($) | Change | | :-------------------------------- | :----------- | :----------- | :----------- | | Net Sales | 18,800,000 | 19,503,000 | -3.6% | | Gross Profit | 3,301,000 | 3,230,000 | +2.2% | | Operating Income (Loss) | 9,606,000 | (4,791,000) | N/A | | Net Income (Loss) | 10,046,000 | (3,534,000) | N/A | | Gain from litigation settlement | 12,000,000 | - | N/A | | Net income (loss) per share (Basic) | 5.61 | (2.01) | N/A | | Net income (loss) per share (Diluted) | 5.59 | (2.01) | N/A | Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 Net Sales Net sales decreased by 3.6% to $18.8 million in 2022 due to an 81.5% decline in POPS solutions, partially offset by a 21.5% increase in non-POPS revenue Net Sales Performance | Metric | 2022 ($) | 2021 ($) | Change | | :-------------------- | :----------- | :----------- | :----------- | | Total Net Sales | 18,800,000 | 19,503,000 | -3.6% | | POPS Solutions Revenue | 880,000 | N/A | -81.5% | | Non-POPS Revenue | N/A | N/A | +21.5% | - POPS revenue expected to continue declining in 2023[80] Gross Profit Gross profit increased by 2.2% to $3.301 million in 2022, with the margin improving to 17.6% due to decreased fixed costs Gross Profit Performance | Metric | 2022 ($) | 2021 ($) | Change | | :-------------------- | :----------- | :----------- | :----------- | | Gross Profit | 3,301,000 | 3,230,000 | +2.2% | | Gross Profit Margin | 17.6% | 16.5% | +1.1 pp | Operating Expenses Total operating expenses decreased significantly in 2022, driven by a 34.4% reduction in general and administrative expenses due to lower litigation costs Operating Expenses Summary | Expense Category | 2022 ($) | 2021 ($) | Change | | :------------------------ | :----------- | :----------- | :----------- | | Selling Expenses | 1,325,000 | 1,931,000 | -31.4% | | Marketing Expenses | 1,050,000 | 1,032,000 | +1.7% | | General and Administrative | 3,320,000 | 5,058,000 | -34.4% | - Decrease in G&A primarily due to lower litigation expenses post-settlement, partially offset by strategic alternative exploration costs[85] Gain from litigation settlement The company recorded a $12 million net pre-tax gain from the News America lawsuit settlement on July 1, 2022 - Litigation Settlement Gain: $12,000,000 net pre-tax gain recorded in 2022[86] Other Income Other income decreased to $222,000 in 2022 from $1.299 million in 2021, primarily due to non-recurring PPP loan forgiveness and ERC benefits in 2021 Other Income | Metric | 2022 ($) | 2021 ($) | | :-------------------------- | :----------- | :----------- | | Total Other Income | 222,000 | 1,299,000 | | PPP Loan Forgiveness (2021) | - | 1,062,000 | | Employee Retention Credit (2021) | - | 273,000 | | Interest Income (2022) | Primary source | N/A | Income Taxes The company recorded an income tax benefit of $218,000 in 2022, with a (2.2)% effective tax rate, influenced by a $1.971 million valuation allowance decrease Income Tax Performance | Metric | 2022 ($) | 2021 ($) | | :-------------------------- | :----------- | :----------- | | Income Tax (Benefit) Expense | (218,000) | 42,000 | | Effective Tax Rate | (2.2)% | (1.2)% | | Valuation Allowance Change | (1,971,000) | 1,200,000 | - Valuation allowance decrease in 2022 primarily related to utilization of net operating loss carryforward[88] Net Income (Loss) Net income was $10.046 million in 2022, a significant turnaround from a $3.534 million loss in 2021, driven by the litigation settlement gain Net Income (Loss) | Metric | 2022 ($) | 2021 ($) | | :-------------------- | :----------- | :----------- | | Net Income (Loss) | 10,046,000 | (3,534,000) | - Key drivers: Pre-tax gain from litigation settlement in 2022 and gain on PPP loan forgiveness in 2021[89] Liquidity and Capital Resources Working capital and cash significantly increased in 2022 to $13.379 million and $14.524 million respectively, primarily due to the $12 million litigation settlement proceeds Liquidity Metrics | Metric | Dec 31, 2022 ($) | Dec 31, 2021 ($) | | :------------------------------------------ | :----------- | :----------- | | Working Capital | 13,379,000 | 3,716,000 | | Cash & Equivalents + Restricted Cash | 14,524,000 | 3,851,000 | - Primary driver for increased liquidity: $12,000,000 net proceeds from litigation settlement[90][93] - Liquidity outlook: Sufficient cash for at least 12 months, but strategic alternatives may require additional financing (equity/debt) with potential dilution or covenants[93][94] Operating Activities Net cash provided by operating activities was $10.663 million in 2022, driven by net income and a $1.585 million increase in deferred revenue - Net cash from operating activities: $10,663,000 provided in 2022[91] - Key contributors: Net income ($10,046,000) and increase in deferred revenue ($1,585,000)[91] Investing Activities Net cash used in investing activities was $29,000 in 2022, primarily for the purchase of property and equipment - Net cash used in investing activities: $29,000 in 2022[92] - Purpose: Purchase of property and equipment[92] Financing Activities Net cash provided by financing activities was $39,000 in 2022, from common stock issuance under the ESPP and exercised stock options - Net cash from financing activities: $39,000 provided in 2022[92] - Source: Proceeds from common stock issuance (ESPP and stock options)[92] Critical Accounting Estimates Financial statements rely on critical accounting estimates for doubtful accounts, sales taxes, income taxes, and stock-based compensation, involving significant judgment and uncertainty - Key estimates: Allowance for doubtful accounts, sales taxes, income taxes, stock-based compensation expense[96] - Nature: Involve significant estimation uncertainty and judgment[96] Allowance for Doubtful Accounts An allowance for uncollectible accounts receivable is based on various factors, and unexpected changes could lead to materially different amounts - Factors: Past due status, loss history, customer payment ability, economic conditions[97] - Risk: Unexpected changes could result in materially different amounts[97] Allowance for Doubtful Accounts | Metric | 2022 ($) | 2021 ($) | | :-------------------- | :--------- | :--------- | | Beginning balance | 355,000 | 268,000 | | Bad debt provision | (44,000) | 103,000 | | Accounts written-off | (299,000) | (111,000) | | Recoveries | 92,000 | 95,000 | | Ending balance | 104,000 | 355,000 | Sales Taxes Sales tax accruals involve estimates and interpretations by taxing authorities, which could result in material differences in future periods - Complexity: Determining taxability, jurisdiction, and customer exemptions[98] - Risk: Subject to judgment and interpretation by taxing authorities, potentially leading to material differences[98] Income Taxes Deferred income taxes are based on future tax effects and taxable income, with valuation allowances applied when realization of deferred tax assets is uncertain - Deferred taxes: Based on temporary differences, tax laws, future income, and planning strategies[100] - Valuation allowances: Recorded based on "more likely than not" criteria for deferred tax asset realization[100] - Tax position recognition: Only when more likely than not to be sustained by tax authorities[101] Stock-Based Compensation Expense Stock-based compensation is measured at fair value using complex models like Black-Scholes, requiring subjective assumptions that can significantly alter recorded expense - Valuation methods: Restricted stock at closing market price; options/ESPP using Black-Scholes model[102] - Key assumptions: Stock price volatility, expected term, risk-free interest rate[102] - Risk: Changes in assumptions could significantly alter recorded compensation expense[103] Forward-Looking Statements The report contains forward-looking statements subject to dynamic information, known and unknown risks, and uncertainties, with no obligation to update except as required by law - Nature: Statements not of historical fact, identified by words like "anticipates," "expects," "will"[105] - Subject to risks: Based on dynamic information, involve known and unknown risks and uncertainties[105] - Disclaimer: Actual results may differ materially; no obligation to update except as required by law[105] Item 7A. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Insignia Systems is not required to provide disclosure regarding quantitative and qualitative market risk - Disclosure exemption: Not required for smaller reporting companies[106] Item 8. Financial Statements and Supplementary Data This section presents audited financial statements for 2022 and 2021, including Balance Sheets, Statements of Operations, Shareholders' Equity, Cash Flows, and Notes, with an unqualified audit opinion INDEX TO FINANCIAL STATEMENTS This section provides an index to the audited financial statements and accompanying notes - Contents: Lists the primary financial statements and accompanying notes[108] REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Baker Tilly US, LLP issued an unqualified opinion on Insignia's 2022 and 2021 financial statements, identifying no critical audit matters - Auditor: Baker Tilly US, LLP[115] - Opinion: Unqualified opinion on financial statements for 2022 and 2021[109] - Critical Audit Matters: None identified[114] BALANCE SHEETS Total assets and shareholders' equity significantly increased from 2021 to 2022, driven by a substantial rise in cash and net income Balance Sheet Summary | Metric | Dec 31, 2022 ($) | Dec 31, 2021 ($) | Change | | :-------------------------- | :----------- | :----------- | :----------- | | Total Current Assets | 20,753,000 | 10,354,000 | +100.4% | | Total Assets | 20,968,000 | 10,650,000 | +96.9% | | Total Current Liabilities | 7,374,000 | 6,638,000 | +11.1% | | Total Long-Term Liabilities | 193,000 | 819,000 | -76.4% | | Total Shareholders' Equity | 13,401,000 | 3,193,000 | +319.7% | STATEMENTS OF OPERATIONS The statements reflect a significant turnaround to $10.046 million net income in 2022 from a loss in 2021, primarily due to a $12 million litigation settlement gain Statements of Operations Summary | Metric | 2022 ($) | 2021 ($) | | :-------------------------------- | :----------- | :----------- | | Net services revenues | 18,800,000 | 19,503,000 | | Cost of services | 15,499,000 | 16,273,000 | | Gross Profit | 3,301,000 | 3,230,000 | | Total Operating Expenses | 5,695,000 | 8,021,000 | | Gain from litigation settlement, net | 12,000,000 | - | | Operating Income (Loss) | 9,606,000 | (4,791,000) | | Total Other Income | 222,000 | 1,299,000 | | Income (Loss) Before Taxes | 9,828,000 | (3,492,000) | | Income tax (benefit) expense | (218,000) | 42,000 | | Net Income (Loss) | 10,046,000 | (3,534,000) | | Basic EPS | 5.61 | (2.01) | | Diluted EPS | 5.59 | (2.01) | STATEMENTS OF SHAREHOLDERS' EQUITY Shareholders' equity significantly increased to $13.401 million in 2022, primarily driven by the $10.046 million net income reported for the year Shareholders' Equity Summary | Metric | Dec 31, 2022 ($) | Dec 31, 2021 ($) | | :-------------------------- | :----------- | :----------- | | Total Shareholders' Equity | 13,401,000 | 3,193,000 | | Net Income (Loss) | 10,046,000 | (3,534,000) | | Issued & Outstanding Shares | 1,797,000 | 1,782,000 | STATEMENTS OF CASH FLOWS Net cash provided by operating activities was $10.663 million in 2022, leading to a substantial increase in cash and cash equivalents and restricted cash by $10.673 million, reaching $14.524 million at year-end 2022 Cash Flow Summary | Activity | 2022 ($) | 2021 ($) | | :------------------------------------------ | :----------- | :----------- | | Net cash provided by (used in) operating activities | 10,663,000 | (3,000,000) | | Net cash used in investing activities | (29,000) | (90,000) | | Net cash provided by (used in) financing activities | 39,000 | (187,000) | | Increase (decrease) in cash and cash equivalents and restricted cash | 10,673,000 | (3,277,000) | | Cash and cash equivalents and restricted cash at end of year | 14,524,000 | 3,851,000 | Notes to Financial Statements The Notes detail Insignia's accounting policies, revenue recognition, cash management, lease obligations, stock-based compensation, income taxes, and customer concentrations 1. Summary of Significant Accounting Policies This section outlines Insignia's business, revenue recognition, cash, fair value, accounts receivable, inventories, property, leases, impairment, taxes, and stock-based compensation policies - Business: Provider of in-store solutions to CPG manufacturers, retailers, etc[129] - Revenue Recognition: Point-in-time for merchandising/on-pack; ratable over service period for signage[130] - Cash & Restricted Cash: $14,524,000 total at Dec 31, 2022, including $85,000 restricted for lease[132] - ASU 2016-13: Adoption in 2023 expected to have immaterial impact on financial statements[155] Description of Business Insignia is a leading provider of in-store solutions to CPG manufacturers, retailers, shopper marketing agencies, and brokerages, operating in a single reportable segment - Business: Leading provider of in-store solutions[129] - Clients: CPG manufacturers, retailers, shopper marketing agencies, brokerages[129] - Solutions: Merchandising, on-pack, and signage[129] Revenue Recognition Revenue from merchandising and on-pack solutions is recognized at a point in time, while signage solutions revenue is recognized ratably over the display cycle - Merchandising/On-pack: Revenue recognized at a point in time[130] - Signage: Revenue recognized ratably over service period (2-4 weeks)[130] Cash and Cash Equivalents and Restricted Cash Cash equivalents are highly liquid investments with original maturities of three months or less, with total cash and cash equivalents and restricted cash at $14.524 million at December 31, 2022 Cash and Cash Equivalents and Restricted Cash | Metric | Dec 31, 2022 ($) | Dec 31, 2021 ($) | | :------------------------------------------ | :----------- | :----------- | | Cash and cash equivalents | 14,439,000 | 3,766,000 | | Restricted cash | 85,000 | 85,000 | | Total cash and cash equivalents and restricted cash | 14,524,000 | 3,851,000 | - Restricted cash of $85,000 is for the headquarters lease[132] Fair Value of Financial Instruments Short-term financial assets and liabilities are recorded at carrying amounts approximating fair value, with no recurring fair value measurements as of December 31, 2022 - Fair value approximation: Short-term assets/liabilities (cash, A/R, A/P) recorded at carrying amounts[135] - No recurring fair value measurements: As of Dec 31, 2022 and 2021[135] Accounts Receivable Accounts receivable are primarily from CPG manufacturers, with an allowance for doubtful accounts based on past due status, loss history, and economic conditions - Primary source: CPG manufacturers[136] - Allowance factors: Past due status, loss history, customer payment ability, economic conditions[136] Inventories Inventories, mainly sign cards and hardware, are valued at the lower of cost or net realizable value using the FIFO method - Components: Sign cards and hardware[137] - Valuation: Lower of cost or net realizable value, FIFO method[137] Prepaid Production Costs Third-party costs for design and materials for merchandise and on-pack solutions are recorded as prepaid production costs until revenue is recognized - Definition: Third-party design and material costs for merchandising/on-pack solutions[138] - Recognition: Capitalized until revenue is recognized[138] Property and Equipment Property and equipment are recorded at cost, with significant additions capitalized and repairs expensed, and depreciation calculated using the straight-line method - Accounting: Recorded at cost, capitalized additions, expensed repairs[139] - Depreciation: Straight-line method over 1-6 years[139] Leases Operating leases for corporate headquarters and warehouse space are recognized as right-of-use (ROU) assets and lease liabilities, valued using the incremental borrowing rate - Accounting: Operating leases as ROU assets and lease liabilities[139] - Valuation: Present value of lease payments using incremental borrowing rate[139] Impairment of Long-Lived Assets Impairment losses on long-lived assets are recorded when indicators are present and undiscounted cash flows are less than the carrying amount, with impaired assets then recorded at fair value - Trigger: Indicators of impairment and undiscounted cash flows < carrying amount[140] - Measurement: Impaired assets recorded at estimated fair value[140] Restructuring In December 2021, the company restructured operations, including a 19% workforce reduction, incurring a pre-tax charge of $201,000 which was paid in 2022 - Restructuring (2021): 19% workforce reduction[141] - Charge: $201,000 pre-tax restructuring charge in 2021, paid in 2022[141] Sales Taxes Sales tax accruals involve estimates and judgment regarding taxability, jurisdiction, and customer exemptions, which are subject to interpretation by taxing authorities - Estimates: Taxability, jurisdiction, customer exemptions[142] - Risk: Subject to taxing authority interpretation, potential for material differences[142] Income Taxes Deferred income taxes account for temporary differences between financial reporting and tax bases, with valuation allowances applied to deferred tax assets if realization is not "more likely than not" - Deferred taxes: Account for temporary differences[143] - Valuation allowance: Applied when deferred tax asset realization is not "more likely than not"[143] - Uncertain tax positions: Recognized if "more likely than not" to be sustained[143] Stock-Based Compensation Stock-based compensation expense is measured at fair value, with restricted stock valued at grant date closing market price and options/ESPP using the Black-Scholes model - Measurement: Fair value for all stock-based awards[144] - Valuation models: Closing market price for restricted stock, Black-Scholes for options/ESPP[144] - Assumptions: Expected stock price volatility, expected term, risk-free rate[144][145] Advertising Costs Advertising costs are expensed as incurred, totaling $41,000 in 2022 and $34,000 in 2021 - Accounting: Expensed as incurred[146] Advertising Expenses | Year | Amount ($) | | :--- | :------- | | 2022 | 41,000 | | 2021 | 34,000 | Net Income (Loss) Per Share Basic net income (loss) per share is calculated by dividing net income (loss) by weighted average shares outstanding, while diluted EPS includes dilutive potential common shares - Basic EPS: Net income (loss) / weighted average shares outstanding[147] - Diluted EPS: Includes dilutive potential common shares[147] - Anti-dilutive: All stock awards were anti-dilutive in 2021 due to net loss[152] Use of Estimates The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts, and actual results may differ from these estimates - Nature: Financial statements rely on management estimates and assumptions[153] - Risk: Actual results may differ from estimates[153] New Accounting Pronouncements The adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments, effective January 1, 2023, is expected to have an immaterial impact on the company's financial statements - ASU 2016-13: Effective Jan 1, 2023[154] - Impact: Expected to be immaterial[155] 2. Revenue Recognition Revenue is recognized under Topic 606 when performance obligations are satisfied, distinguishing between point-in-time and over-time recognition for different solutions - Standard: Topic 606, revenue recognized when performance obligation satisfied[156] - Shipping/Handling: Included in revenues, costs in cost of services[157] Performance Obligations Display, On-Pack, and Non-POPS Signage Solutions are recognized at a point in time, while POPS Signage Services are recognized ratably over the display cycle - Display, On-Pack, Non-POPS: Point-in-time recognition due to variable nature[159] - POPS Signage: Over-time recognition on a straight-line basis over 2-4 week display cycle[160][162] Disaggregation of Revenue In 2022, $1.763 million of revenue was recognized over time and $17.037 million at a point in time, reflecting the decline in POPS services Revenue by Timing of Recognition | Timing of Recognition | 2022 ($) | 2021 ($) | | :-------------------------- | :----------- | :----------- | | Services transferred over time | 1,763,000 | 6,659,000 | | Services transferred at a point in time | 17,037,000 | 12,844,000 | | Total | 18,800,000 | 19,503,000 | Contract Costs Sales commissions are expensed as incurred, utilizing a practical expedient for costs with an amortization period of one year or less - Sales commissions: Expensed as incurred[165] - Practical expedient: Applied for amortization periods of one year or less[165] Deferred Revenue Deferred revenue increased to $2.427 million in 2022, primarily due to $2.076 million in cash received in advance for services not yet recognized Deferred Revenue | Metric | Dec 31, 2022 ($) | Dec 31, 2021 ($) | | :-------------------------- | :----------- | :----------- | | Balance | 2,427,000 | 842,000 | | Cash received in advance | 2,076,000 | N/A | - Driver: $2,076,000 cash received in advance[166] Transaction Price Allocated to Remaining Performance Obligations The company uses a practical expedient for short-term obligations, with $57,000 of revenue anticipated in 2023 from longer-term unsatisfied obligations - Disclosure exemption: For obligations with duration of one year or less[167] - Long-term obligations: $57,000 revenue expected in 2023 from unsatisfied obligations as of Dec 31, 2022[167] 3. Property and Equipment Net property and equipment decreased to $71,000 in 2022, with computer equipment and software being the largest component, and depreciation expense was $59,000 Property and Equipment (Net) | Metric | Dec 31, 2022 ($) | Dec 31, 2021 ($) | | :-------------------------- | :----------- | :----------- | | Net Property and Equipment | 71,000 | 113,000 | | Depreciation Expense | 59,000 | 60,000 | 4. Leases The company leases its corporate headquarters (lease renewed through 2026) and warehouse space (month-to-month from April 2023), with ROU assets and liabilities recognized based on present value of lease payments - Lease types: Two non-cancelable operating leases (corporate HQ, warehouse)[170] - HQ Lease: Renewed through Dec 31, 2026[172] - Warehouse Lease: Month-to-month from April 1, 2023[174] Lease Liabilities (Dec 31, 2022) | Metric | Amount ($) | | :-------------------------- | :------- | | Total Lease Payments | 170,000 | | Present Value of Lease Liabilities | 144,000 | | Cash Outflow for Operating Leases (2022) | 84,000 | 5. Commitments and Contingencies Routine legal matters are not expected to be material, and the News America lawsuit settled for $12 million net pre-tax proceeds in 2022, eliminating fixed retailer commitments - Legal: Routine matters not material[176] - News America Lawsuit: Settled July 1, 2022, for $20M, resulting in $12M net pre-tax proceeds[178] - Retailer Agreements: Fixed payment commitments eliminated due to POPS decline[179] 6. Shareholders' Equity This section details stock-based compensation plans and expenses, with $123,000 in 2022, and outlines outstanding stock options and unrecognized compensation costs Stock-Based Compensation Expense | Year | Amount ($) | | :--- | :------- | | 2022 | 123,000 | | 2021 | 232,000 | Stock Options Outstanding (Dec 31, 2022) | Number | Weighted Average Exercise Price ($) | | :----- | :------------------------------ | | 14,086 | 14.17 | - Unrecognized Compensation Costs (Dec 31, 2022): Approximately $32,000 for restricted stock/units, expected to be recognized over 0.6 years[191] - Dividends: No regular dividends, may consider special dividends in the future[193] 7. Income Taxes The company recorded a $218,000 income tax benefit in 2022, with federal and state NOLs, and a decrease in valuation allowance due to NOL utilization Income Tax Summary | Metric | 2022 ($) | 2021 ($) | | :-------------------------- | :----------- | :----------- | | Income Tax (Benefit) Expense | (218,000) | 42,000 | | Effective Tax Rate | (2.2)% | (1.2)% | | Federal NOLs (Dec 31, 2022) | 2,900,000 | N/A | | State NOLs (Dec 31, 2022) | 3,500,000 | N/A | | Valuation Allowance Change | (1,971,000) | 1,200,000 | | Uncertain Tax Positions Liability | 53,000 | 711,000 | - Valuation allowance decrease in 2022 primarily related to utilization of net operating loss carryforward[196] - Uncertain tax positions liability decreased due to a $678,000 decrease related to state exposure[197] 8. Employee Benefit Plans The company sponsors a 401(k) plan, with matching contributions expense of $53,000 in 2022 and $41,000 in 2021 - 401(k) Plan: Company sponsors a Retirement Profit Sharing and Savings Plan[200] Matching Contributions Expense | Year | Amount ($) | | :--- | :------- | | 2022 | 53,000 | | 2021 | 41,000 | 9. Concentrations In 2022, three major customers accounted for significant portions of total net sales (19%, 11%, 11%) and accounts receivable (20%, 19%, 11%), while export sales remained less than 1% Customer Concentration (2022) | Metric | Customer 1 | Customer 2 | Customer 3 | | :-------------------- | :--------- | :--------- | :--------- | | % of Total Net Sales | 19% | 11% | 11% | | % of Total A/R | 20% | 19% | 11% | - Export Sales: Less than 1% of total net sales in 2022 and 2021[203] 10. Loan The $1.054 million PPP loan was forgiven on January 29, 2021, resulting in a $1.062 million gain on debt extinguishment recorded in other income - PPP Loan: $1,054,000 loan obtained in April 2020[204] - Forgiveness: Approved Jan 29, 2021, resulting in $1,062,000 gain on debt extinguishment in 2021[205] PART III Item 10. Directors, Executive Officers and Corporate Governance This section incorporates by reference information from the 2023 Proxy Statement regarding director elections, corporate governance, and Section 16(a) reports, and details executive officers - Incorporated by reference: Information from 2023 Proxy Statement[215] Information about our Executive Officers Key executive officers include Kristine A. Glancy (CEO), Adam D. May (Chief Growth Officer), and Zackery A. Weber (VP of Finance), bringing extensive industry and finance experience - Executive Officers: Kristine A. Glancy (President, CEO), Adam D. May (Chief Growth Officer), Zackery A. Weber (VP of Finance)[216][217][218] - Experience: Extensive CPG, retail, sales, and finance backgrounds[216][217][218] Code of Ethics/Code of Conduct The company maintains a Code of Ethics for senior financial management, available on its website, with disclosures for any amendments or waivers - Code of Ethics: Applicable to senior financial management[220] - Availability: On company website, disclosures for amendments/waivers[220] Item 11. Executive Compensation This section incorporates by reference information from the Proxy Statement regarding executive and non-employee director compensation - Incorporated by reference: Information from Proxy Statement on executive and non-employee director compensation[221] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section incorporates by reference information from the Proxy Statement regarding equity compensation plan details and security ownership - Incorporated by reference: Information from Proxy Statement on equity compensation plans and security ownership[222] Item 13. Certain Relationships and Related Transactions and Director Independence This section incorporates by reference information from the Proxy Statement regarding related-party transactions and director independence - Incorporated by reference: Information from Proxy Statement on related-party transactions and director independence[223] Item 14. Principal Accountant Fees and Services This section incorporates by reference information from the Proxy Statement regarding principal accountant fees and services - Incorporated by reference: Information from Proxy Statement on principal accountant fees and services[224] PART IV Item 15. Exhibits and Financial Statement Schedules This item lists financial statements from Item 8 and provides a detailed table of exhibits, including corporate governance documents and the News America settlement agreement - Contents: Lists financial statements and detailed exhibit index[226][227][229][230] (a) Exhibits This section lists exhibits filed with the Form 10-K, including corporate governance documents, stock incentive plans, and the News America settlement agreement - Exhibit types: Corporate governance documents, stock incentive plans, employment agreements, and the News America settlement agreement[227][229] Item 16. Form 10-K Summary This item indicates that no Form 10-K summary is provided - No summary: Form 10-K Summary is not provided[232] SIGNATURES The report is signed by Kristine A. Glancy (CEO), Zackery A. Weber (VP Finance), and Board members, certifying its submission on March 9, 2023 - Signatories: Kristine A. Glancy (CEO), Zackery A. Weber (VP Finance), and Board of Directors[235][236] - Date: March 9, 2023[235]