Insignia(LDWY) - 2023 Q3 - Quarterly Report

Explanatory Note This section provides key information regarding Lendway, Inc.'s name change, reincorporation, the sale of its In-Store Marketing Business, and its strategic shift to a non-bank lending model - Lendway, Inc. (formerly Insignia Systems, Inc.) changed its name and reincorporated from Minnesota to Delaware on August 4, 2023, with its common stock now trading under 'LDWY' on Nasdaq[7][25] - On August 3, 2023, the company sold its In-Store Marketing Business for $3.5 million (subject to post-closing adjustment), and its operations are now presented as discontinued[8][9][26] - The company is building a scalable non-bank lending business focused on purchasing or originating collateral-secured loans[10][25] PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, stockholders' equity, and cash flows, with detailed explanatory notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets | ASSETS / LIABILITIES AND SHAREHOLDERS' EQUITY | September 30, 2023 (Unaudited) | December 31, 2022 | | :-------------------------------------------- | :----------------------------- | :------------------ | | ASSETS | | | | Cash and cash equivalents | $ 14,954,000 | $ 14,439,000 | | Other current assets related to discontinued operations | $ 2,199,000 | $ 6,171,000 | | Total Current Assets | $ 17,587,000 | $ 20,753,000 | | Total Assets | $ 17,638,000 | $ 20,968,000 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | Current liabilities related to discontinued operations | $ 547,000 | $ 6,666,000 | | Total Current Liabilities | $ 1,695,000 | $ 7,374,000 | | Total Shareholders' Equity | $ 15,902,000 | $ 13,401,000 | | Total Liabilities and Shareholders' Equity | $ 17,638,000 | $ 20,968,000 | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net loss from continuing operations | $ (1,511,000) | $ (434,000) | $ (2,654,000) | $ (1,613,000) | | (Loss) Income from discontinued operations, net of tax | $ (333,000) | $ 12,235,000 | $ 2,422,000 | $ 12,392,000 | | Gain from sale of discontinued operations, net of tax | $ 2,970,000 | $ - | $ 2,970,000 | $ - | | Net Income | $ 1,126,000 | $ 11,801,000 | $ 2,738,000 | $ 10,779,000 | | Basic and diluted earnings per share | $ 0.63 | $ 6.58 | $ 1.53 | $ 6.02 | Condensed Consolidated Statements of Stockholders' Equity Condensed Consolidated Statements of Stockholders' Equity | Item | December 31, 2022 | September 30, 2023 | | :---------------------------------- | :---------------- | :----------------- | | Total Shareholders' Equity (Balance) | $ 13,401,000 | $ 15,902,000 | | Net income (9 months ended Sep 30, 2023) | | $ 2,738,000 | | Repurchase of common stock (9 months ended Sep 30, 2023) | | $ (437,000) | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows | Cash Flow Activity (Nine Months Ended September 30) | 2023 | 2022 | | :-------------------------------------------------- | :------------ | :------------- | | Net cash used in operating activities of continuing operations | $ (2,325,000) | $ (2,142,000) | | Net cash provided by operating activities of discontinued operations | $ 1,735,000 | $ 12,530,000 | | Net cash (used in) provided by operating activities | $ (590,000) | $ 10,388,000 | | Net cash provided by investing activities of continuing operations | $ 1,557,000 | $ - | | Net cash provided by (used in) investing activities | $ 1,533,000 | $ (25,000) | | Net cash (used in) provided by financing activities | $ (428,000) | $ 39,000 | | Increase in cash and cash equivalents and restricted cash | $ 515,000 | $ 10,402,000 | | Cash and cash equivalents and restricted cash at end of period | $ 15,039,000 | $ 14,253,000 | Notes to Condensed Consolidated Financial Statements Note 1. Description of Business and Basis of Presentation This note describes Lendway, Inc.'s strategic shift to a scalable non-bank lending business, its recent name change and reincorporation, and the reclassification of its former In-Store Marketing Business as discontinued operations - Lendway, Inc. is building a scalable non-bank lending business to purchase existing loans or originate and fund new loans, all secured by collateral[25] - The company changed its name from "Insignia Systems, Inc." and reincorporated from Minnesota to Delaware on August 4, 2023[25] - The In-Store Marketing Business was sold on August 3, 2023, and its operations are presented as discontinued in the financial statements[26][28] Note 2. Sale of In-Store Marketing Business and Presentation as Discontinued Operations This note details the sale of the In-Store Marketing Business for $3.5 million, including the calculation of the gain on sale and the reclassification of its financial results as discontinued operations, also highlighting a significant litigation settlement in the prior year's discontinued operations - The In-Store Marketing Business was sold on August 3, 2023, for $3.5 million to TIMIBO LLC, subject to a post-closing adjustment and a $200,000 escrow[31] Gain on Sale of In-Store Marketing Business | Item | Amount | | :---------------------------------------- | :---------- | | Sale price | $ 3,500,000 | | Carrying value of assets sold, less liabilities | $ (247,000) | | Transaction costs not previously expensed | $ (209,000) | | Gain on sale of In-Store Marketing Business | $ 3,044,000 | - Transaction-related severance, retention awards, and employee bonuses totaled approximately $1,923,000 in Q3 2023, with $949,000 recorded in discontinued operations[33][72] Results of Discontinued Operations (Selected Items) | Item | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | | :-------------------------------------------- | :------------------------------ | :------------------------------ | | Net services revenues | $ 1,976,000 | $ 4,869,000 | | Gross Profit | $ 408,000 | $ 838,000 | | Operating Income (Loss) | $ (354,000) | $ 12,027,000 | | (Loss) income from discontinued operations, net of tax | $ (333,000) | $ 12,235,000 | | Gain from sale of discontinued operations, net of tax | $ 2,970,000 | $ - | - The 2022 income from discontinued operations included a $12,000,000 gain from a litigation settlement with News America[37] Note 3. Summary of Significant Accounting Policies This note outlines the company's accounting policies for cash, restricted cash, stock-based compensation, and net (loss) income per share, highlighting the release of restricted cash post-period and the anti-dilutive nature of stock awards due to continuing operational losses Cash, Cash Equivalents and Restricted Cash | Item | September 30, 2023 | December 31, 2022 | | :-------------------------------------- | :----------------- | :---------------- | | Cash and cash equivalents | $14,954,000 | $14,439,000 | | Restricted cash | $85,000 | $85,000 | | Total cash, cash equivalents and restricted cash | $15,039,000 | $14,524,000 | - The restriction on cash was released after September 30, 2023, as it was related to a lease transferred to the buyer of the In-Store Marketing Business[40] Stock-Based Compensation Expense | Period | 2023 | 2022 | | :------------------------------------ | :------ | :------ | | Three months ended September 30 | $ 7,000 | $ 32,000 | | Nine months ended September 30 | $ 43,000 | $ 91,000 | - Due to a net loss from continuing operations, all outstanding stock awards were considered anti-dilutive for the three and nine months ended September 30, 2023 and 2022[48][50] - The Company recorded $926,000 in severance and separation benefits for its prior CEO, Kristine A. Glancy, who departed on August 31, 2023, with $650,000 remaining to be paid as of September 30, 2023[52] Note 4. Leases This note describes the company's current lease arrangements, noting the termination of a significant lease and the assignment of the headquarters lease as part of the In-Store Marketing Business sale, with the company now operating under a month-to-month lease with a related party - As part of the In-Store Marketing Business sale, the headquarters lease was assigned to the buyer, and another significant lease was terminated[53] - The Company now has a month-to-month operating lease with a related party, with monthly payments of $375[53] Total Operating Lease Costs (Continuing Operations) | Period | 2023 | 2022 | | :------------------------------------ | :------ | :------ | | Three months ended September 30 | $ 6,000 | $ 3,000 | | Nine months ended September 30 | $ 15,000 | $ 11,000 | Note 5. Income Taxes This note details the income tax (benefit) expense for continuing operations, the effective tax rates, and the impact of valuation allowances and unrecognized tax benefits, also providing an update on the company's Federal Net Operating Loss (NOL) carryforwards Income Tax (Benefit) Expense from Continuing Operations | Period | 2023 | 2022 | | :------------------------------------ | :---------- | :--------- | | Three months ended September 30 | $ (11,000) | $ 1,000 | | Nine months ended September 30 | $ (4,000) | $ 5,000 | Effective Federal Income Tax Rate Reconciliation (Nine Months Ended September 30) | Item | 2023 | 2022 | | :------------------------ | :---- | :---- | | Federal statutory rate | 21.0% | 21.0% | | Valuation allowance | (24.5)% | (24.6)% | | Effective federal income tax rate | 0.1% | (0.3)% | - Unrecognized tax benefits totaled $41,000 as of September 30, 2023, a decrease from $53,000 at December 31, 2022[58] - Estimated Federal NOL carryforwards decreased from approximately $2,900,000 at December 31, 2022, to approximately $1,390,000 at September 30, 2023[59] Note 6. Stock Repurchase Plan This note outlines the Board's authorization of a stock repurchase plan for up to 400,000 shares and details the repurchase activity during the three months ended September 30, 2023 - The Board of Directors authorized the repurchase of up to 400,000 shares of common stock on August 28, 2023[60] - During the three months ended September 30, 2023, the company repurchased 75,345 shares for $437,000[61] Note 7. Legal Proceedings This note states that the company is subject to various legal matters in the normal course of business, but their outcome is not expected to have a material effect on its financial position or results of operations - The company is involved in routine legal matters, but their outcome is not expected to materially affect its financial position or results of operations[62] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and operational results, emphasizing the new lending business and discontinued operations Company Overview - The company is building a scalable non-bank lending business (Lending Business) to purchase or originate collateral-secured loans, launched in April 2023[64] - Initial focus is on real estate-secured loans, primarily for agricultural purposes, with plans to expand product offerings[65] - Primary revenue sources are expected to be interest income on secured loans (net of funding costs) and fee income from origination and servicing[66] - Competition includes commercial/investment banks, insurance companies, Farm Credit System institutions, and financial funds[67] - The company anticipates minimal revenue and losses from continuing operations for the remainder of 2023[68] Recent Developments - On August 4, 2023, the company changed its name to Lendway, Inc. and reincorporated from Minnesota to Delaware, with its common stock now trading under 'LDWY'[70] - The In-Store Marketing Business was sold on August 3, 2023, for $3.5 million, with a post-closing adjustment reducing the cash consideration by $1.5 million[71] - Transaction-related severance, retention awards, and bonuses totaled $1,923,000 in Q3 2023, with $974,000 attributed to continuing operations and $949,000 to discontinued operations[72] Results of Operations - Continuing operations (the Lending Business) had no revenue for the three and nine months ended September 30, 2023[73][76] Operating Expenses (Continuing Operations) | Operating Expenses (Continuing Operations) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :----------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Sales and marketing | $ 69,000 | $ - | $ 134,000 | $ - | | General and administrative | $ 1,564,000 | $ 488,000 | $ 2,849,000 | $ 1,663,000 | | Total operating expenses | $ 1,633,000 | $ 488,000 | $ 2,983,000 | $ 1,663,000 | - General and administrative expenses increased by 220.5% for the three months and 71.3% for the nine months ended September 30, 2023, primarily due to $926,000 in severance for the former CEO[79] Interest Income (Continuing Operations) | Interest Income (Continuing Operations) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :-------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Interest income | $ 111,000 | $ 55,000 | $ 325,000 | $ 55,000 | - Interest income increased significantly due to higher invested balances (including $12 million litigation proceeds from July 2022) and higher interest rates on short-term treasury bills[80] Net Loss from Continuing Operations | Net Loss from Continuing Operations | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :---------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net Loss from continuing operations | $ (1,511,000) | $ (434,000) | $ (2,654,000) | $ (1,613,000) | Liquidity and Capital Resources - Working capital increased by $2,513,000 to $15,892,000 at September 30, 2023, from $13,379,000 at December 31, 2022[76][87] - Cash and cash equivalents and restricted cash increased by $515,000 to $15,039,000 at September 30, 2023, primarily from collections of accounts receivable from discontinued operations and proceeds from its sale[76][87] - Net cash used in continuing operating activities for the nine months ended September 30, 2023, was $2,325,000, largely due to severance-related payments[88] - Net cash provided by investing activities from continuing operations was $1,557,000, primarily from the proceeds of the In-Store Marketing Business sale[89] - Net cash used in financing activities was $428,000, mainly due to common stock repurchases[90] - The company believes its current cash and cash equivalents will be sufficient for its cash requirements for at least the next 12 months[91] - The Board authorized the repurchase of up to 400,000 shares of common stock on August 28, 2023; 75,345 shares were repurchased for $437,000 in Q3 2023[92] - Future growth of the Lending Business may require additional equity or debt financing, which could dilute stockholders or impose restrictive covenants[93] Critical Accounting Estimates - The company's most critical accounting estimates include allowance for doubtful accounts, sales taxes, income taxes, and stock-based compensation expense[96] Cautionary Statement Regarding Forward-Looking Statements - Forward-looking statements in the report involve known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially[95] - Key risks include the availability of strategic alternatives, the limited history of the Lending Business, substantial risk of loss in lending, market conditions, ability to develop necessary processes and controls, reliance on a small number of employees, and potential adverse classifications[97] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section states that there are no quantitative and qualitative disclosures about market risk applicable to the company - This item is not applicable[98] Item 4. Controls and Procedures This section confirms that the company's disclosure controls and procedures were effective as of September 30, 2023, and that no material changes in internal control over financial reporting occurred during the third quarter - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2023[100] - No changes in the company's internal control over financial reporting occurred during the third quarter of 2023 that materially affected, or are reasonably likely to materially affect, internal control over financial reporting[101] PART II. OTHER INFORMATION Item 1. Legal Proceedings This section states that there are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, that would significantly impact the company's financial position or results of operations - There are no material pending legal proceedings expected to have a material effect on the company's financial position or results of operations[104] Item 1A. Risk Factors This section updates the risk factors, emphasizing those related to the company's new lending business, the broader economic and market conditions, and operational challenges inherent in its new strategic direction Risks Relating to Our Business - The new Non-Bank Lending business has limited operating history and has generated no revenues through September 30, 2023, making it difficult to evaluate future prospects and risks[106] - Non-bank lending involves a substantial risk of loss from borrower defaults, which could materially and adversely affect operations if collateral value does not cover exposure[107] Risks Relating to Economy and Market Conditions - Operating results can be materially and adversely affected by external factors such as disruptions in debt or equity capital markets, competitive pressures, changes in interest rates, and market or customer perception of the company's reputation[108][112] Operational Risks - The Lending Business requires the development of new processes and controls, exposing it to risks from inadequate systems, failed execution, internal control failures, or external events like cyber incidents[109][113] - The success of the Lending Business initially depends on a small number of employees, posing a risk if the company cannot retain and attract motivated and qualified personnel[110] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities This section details the company's common stock repurchase program, including the Board's authorization and the actual repurchase activity during the third quarter of 2023 - On August 28, 2023, the Board of Directors authorized the repurchase of up to 400,000 shares of the company's common stock[111] Common Stock Repurchase Activity (Three Months Ended September 30, 2023) | Period | Total number of shares purchased | Average price paid per share | Total dollar value of shares purchased | Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs | | :--------------------- | :------------------------------- | :--------------------------- | :------------------------------------- | :----------------------------------------------------------------------------- | | July 1 - 31, 2023 | - | $ - | $ - | 400,000 | | August 1 - 31, 2023 | 66,108 | $ 5.76 | $ 380,782 | 333,892 | | September 1 - 30, 2023 | 9,237 | $ 5.94 | $ 54,868 | 324,655 | | Total | 75,345 | | $ 435,650 | | Item 3. Defaults upon Senior Securities This section states that there were no defaults upon senior securities during the period - None[115] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Not applicable[116] Item 5. Other Information This section reports that no director or officer adopted, modified, or terminated a Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement during the three months ended September 30, 2023 - No director or officer adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended September 30, 2023[117] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including key agreements, corporate documents, certifications, and XBRL data - Exhibits include the Asset Purchase Agreement, Certificate of Incorporation, Bylaws, Letter Agreements, Certifications of Principal Executive and Financial Officers, and XBRL data[118]