10-K/A 1 isig_10ka.htm FORM 10-K/A isig_10ka
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K/A
(Amendment No. 1)
 
 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2020
Commission File Number 1-13471
 
INSIGNIA SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
 
Minnesota
41-1656308
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
 
8799 Brooklyn Blvd., Minneapolis, MN 55445
(Address of principal executive offices; zip code)
 
(763) 392-6200
(Registrant’s telephone number, including area code)
 
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, $0.01 par value
 
ISIG
 
The Nasdaq Stock Market LLC
 
Securities Registered Pursuant to Section 12(g) of the Act: None
_____________________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  ☑   No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☑ Smaller reporting company ☑ Emerging growth company ☐
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter (June 30, 2020) was approximately $3,965,000 based upon the price of the registrant’s Common Stock on such date.
 
Number of shares outstanding of Common Stock, $.01 par value, as of March 8, 2021 was 1,754,030.
 
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s definitive proxy for its 2021 Annual Meeting of Shareholders are incorporated by reference into Part III.

 
 
 
EXPLANATORY NOTE
 
Insignia Systems, Inc. (“we”, “us”, “our” and the “Company”) is filing this Amendment No. 1 on Form 10-K/A (the “Amendment”) to amend its Annual Report on Form 10-K for the fiscal year ended December 31, 2020, originally filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 11, 2021 (the “Original Report”). In filing this amendment, the Company is restating its previously issued audited financial statements for the years ended December 31, 2020 and 2019 to account for misstatements related to sales taxes. Those previously issued financial statements should no longer be relied upon. Except as described below, all other information in, and the exhibits to, the Original Report remain unchanged. Accordingly, this Amendment should be read in conjunction with the Original Report and with our filings with the SEC made after the Original Report. This Amendment speaks as of the date of the Original Report and the Company has not updated the Original Report to reflect events occurring subsequent to the date of the Original Report.
 
Background and Effects of the Restatement 
 
As disclosed in a current report on Form 8-K filed with the SEC on August 13, 2021, commencing in the second quarter of 2021, management conducted a review of the Company’s 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 incurred. The Company has identified the misstatements described below, and this Amendment restates the previously issued financial statements of the Company (the “Restated Financial Statements”) and certain other related disclosure, that were included in the Original Report.
 
The misstatements that appeared in the previously issued financial statements of the Company were material. For sales to the Company’s customers that were not exempt, the Company recorded a sales tax accrual, plus related estimated interest and penalties. The Company also determined on which past sales the Company would bill for sales tax and seek to collect from customers that were not tax exempt. The Company recorded accounts receivable deemed probable of collection. A summary of the impact of the misstatements is as follows:
 
 
 
December 31, 2020
 
 
December 31, 2019
 
Year Ended
 
As previously reported
 
 
Restated
 
 
As previously reported
 
 
Restated
 
Total 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)
 
    
    
    
    
 
 
 
December 31, 2020
 
 
December 31, 2019
 
As of
 
As previously reported
 
 
Restated
 
 
As previously reported
 
 
Restated
 
Shareholders' equity
 $7,694,000 
 $6,668,000 
 $11,794,000 
 $11,083,000 
 
Internal Control Over Financial Reporting
 
Management has reassessed its evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2020 as further described in item 9A of this Amendment, and concluded that a material weakness existed and that disclosure controls and procedures were not effective. Management’s previous annual report on internal control over financial reporting should no longer be relied upon. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial reports will not be prevented or detected on a timely basis. The existence of one or more material weaknesses precludes a conclusion by management that a company’s disclosure controls and procedures and internal control over financial reporting are effective. Management has taken, and is taking additional steps, as described under “Remediation Plan and Status” in Item 9A of this Amendment, to remediate the material weakness in our internal control over financial reporting. For more information regarding the restatement and its impact on our financial statements, refer to Note 2, Restatement of Previously Issued Financial Statements of the Notes to the Financial Statements included within this Amendment.
 

i
 
 
Items Amended in this Filing
 
This Amendment amends and restates the following Items 1 and 1A appearing in Part I, Items 7, 8 and 9A appearing in Part II, and Item 15 appearing in Part IV. In accordance with applicable SEC rules, this Amendment includes certifications as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) from the Company’s Principal Executive Officer and Principal Financial Officer dated as of the date of this Amendment.
 
 
TABLE OF CONTENTS
 
 
 
 
 
 
 
ii
 
 
PART I.
 
Item 1. Business
 
General
 
Insignia Systems, Inc. was incorporated in Minnesota in 1990. We are a leading provider of in-store and digital advertising solutions to consumer-packaged goods (“CPG”) manufacturers, retailers, shopper marketing agencies and brokerages (“clients”). We believe our products and services are attractive to our clients because of our speed to market, ability to customize our solutions down to store level and the results our solutions deliver. Our leadership and employees have extensive industry knowledge, including direct experience through former positions at CPG manufacturers and retailers. We provide marketing solutions to CPG manufacturers spanning from some of the largest multinationals to new and emerging brands.
 
For retailers and CPG manufacturers working in an environment that is tighter, more competitive, and more complex every day, Insignia positions itself as the shopper marketing ally that combines best-in-class execution with imagination, responsiveness, and hunger to help move business forward. We focus on relationships with our clients and installation and print production vendors (“execution partners”) as we believe they are our future. These relationships are built with our brand-led, retailer centric mindset, our ability to be nimble and flexible to the ever-changing industry landscape and by delivering superior customer service that our clients deserve. During 2020, our in-store solutions were executed in retailers spanning from some of the largest national retailers to regional US wholesalers and independents who are leaders in their respective channels and geographies.
 
Our relationships with shopper marketing agencies and brokerages continue to grow through our agility, responsiveness, custom production and execution capabilities, and our overall customer service in responding to their needs.
 
Historically, our primary solution has been in-store signage, specifically Point-Of-Purchase Services (POPS®). The Insignia POPS solution is a national, account-specific, shelf-edge advertising and promotion tactic. External and internal testing has validated the solution can deliver incremental sales for the featured brand. Participation in the POPS solution allows CPG manufacturers to deliver vital product information to consumers at the point-of-purchase, and to leverage the local retailer brand and store-specific prices to provide an innovative “call to action” that draws attention to the featured brand and triggers a purchase decision. CPG manufactures benefit from our nimble executional capabilities, which include short lead times, in-house graphic design capabilities and post-program analytics.
 
Over the past several years, we developed and now offer an expanded portfolio of solutions including on-pack, merchandising and digital solutions in addition to our core business. Our expanded portfolio allows us to meet the needs of CPG manufacturers, retailers and their agents as their business strategies evolve behind an ever-changing retail landscape. With our diversification of business, we now recognize over 50% of our revenue from these recently created solutions.
 
We continue to enhance our ability to be nimble and flexible by focusing and streamlining our operations. In the last half of 2020, we sold our custom print business and outsourced most of our printing and IT operations. In the first half of 2021, we will relocate our headquarters and operations to much smaller, more efficient leased spaces.
 
Effective December 31, 2020, we implemented a seven-for-one reverse stock split. As a result of the reverse stock split, at 5:00 p.m. Central Time on the effective date, every seven shares of common stock then issued and outstanding automatically were combined into one share of common stock, with no change in par value per share. No fractional shares were outstanding following the reverse stock split and any fractional shares resulting from the reverse stock split were aggregated and sold by our transfer agent. The total number of shares we are authorized to issue was reduced to 5,714,285 in proportion to the reverse stock split. All references to share and per share amounts included in this annual report on Form 10-K have been retroactively restated to reflect the reverse split.
 
The Company’s internet address is www.insigniasystems.com. The Company makes all the reports it files with the Securities and Exchange Commission (SEC) available free of charge on its website. The Company’s website is not incorporated by reference into this Annual Report on Form 10-K. Copies of reports can also be obtained free of charge by requesting them from Insignia Systems, Inc. Our mailing address effective March 22, 2021 will be 7308 Aspen Lane North, Suite 153, Minneapolis, Minnesota 55428; telephone 763-392-6200.
 
 
1
 
 
Industry and Market Background
 
Our industry continues to rapidly evolve in several ways:
 
1. 
Brand loyalty: consumer brand loyalty is shifting from established CPG manufacturers to emerging brands, who often have distribution outside our traditional syndicated in-store network and are looking for solutions to help them be discovered.
 
2. 
Retailer fragmentation: consumer habits are driving retailer fragmentation, including the growth of e-commerce and surrogate shoppers, as a result CPG manufacturers are diversifying their marketing dollars across an omnichannel environment.
 
3. 
Financial justification: CPG manufacturers are increasingly focused on top and bottom-line financial metrics, which drives increased pressure to generate positive advertising return on investments and by working with companies that can execute programs.
 
4. 
Competition shift: Digital advertising spend is reducing spend on traditional media, including in-store advertising, driving increased competition from direct competitors, retailer led marketing programs, and digital media companies.
 
Despite rapid growth in e-commerce, both retailers and CPG manufacturers are actively seeking to grow their brands in physical stores. During 2020, we executed programs for several brands who started as direct-to-consumer (DTC) brands and are launching in physical stores. On the retail side, many of the top US retailers have either opened new stores, introduced new formats, or invested heavily in major store renovations. As a result, retailers are actively seeking solutions that can help drive traffic into the store and build loyalty with their shoppers. Retailers are seeking companies with our capabilities and experience to help build in-store solutions that inspire, educate and ultimately convert active shoppers while they are shopping. Retailers are continuing to seek ways to connect their online strategies with their in-store strategies to build shopper loyalty and to develop solutions to enhance the shopper’s in-store experience. CPG manufacturers are increasingly looking for opportunities to reinforce their brand equity as close as possible to the point of purchase or to expand the number of locations where they are offered in store to ensure they are selected over competition. We believe emerging brands are looking for ways to get discovered and tell shoppers their story. These trends along with new developments in shopper analytics are opening opportunities for innovative companies to develop new products and new ways of helping retailers and brands connect with shoppers. We are usually engaged as part of an overall, mixed-media, brand marketing campaign. 
 
Product Solutions
 
Since the Company’s inception in 1990, we have worked closely with CPG manufacturers and retailers to understand their evolving needs and introduce solutions that help them achieve their business strategies. Over most of the past decade, our core product has been in-store signage solutions, namely the Insignia Point-of Purchase Services (POPS®). Over the past several years, our net sales from sign solutions have declined due to competitive pressures while our non-POPS solutions have significantly expanded as we have developed our portfolio to more holistically meet the needs of our clients and execution partners. For example, our in-store signage solutions represented approximately 57% of our total net sales for 2020, compared to 83% of our total net sales in 2018.
 
1. 
Our In-Store Signage Solutions, which include POPS signs, help brands achieve a variety of objectives that include awareness and sales lift. The in-store signage solutions are placed perpendicular to the shelf and are designed to attract the attention of the shopper even before they arrive in front of the shelf to consider the purchase of a product. Our POPS signs offer engaging creative along with our unique ability to include retailer logo and price helps convert the shopper from considering a product into purchasing the product.
 
● 
Our customers have typically averaged a 3:1 return on investment with our in-store POPS signage solution driven by the power of retailer endorsement and price inclusion on the signs.
 
● 
CPG manufacturers pay marketing program rates based upon the directed number of cycles and retailer/store count. We collect and organize data from the CPG manufacturers and participating retailers, design and have the signage printed, and deliver signage to specified retailers. Depending on the agreement with the retailer, either a third-party professional installer or store personnel use placement instructions to install the signage at the shelf.
 
 
2
 
 
2. 
Our Merchandising Solutions are designed to help brands get discovered, build awareness and drive impulse purchases via a secondary or often permanent placement of their products. Our merchandising solutions include a variety of creative corrugate displays, side caps, free standing shippers and full customized end-cap solutions that brands leverage to grow their sales.
 
3. 
Our On-Pack Solutions appear on the individual product package and are designed to drive awareness, impulse purchases and capture market share within a very short period. On-pack solutions include BoxTalkTM, coupons, recipes, and cross-promotions.
 
4. 
Our Digital Solutions consist of mobile programmatic advertising. Most CPG manufacturers are relying on digital advertising for promoting their products to consumers. We have invested in our proprietary targeting process, that brings product, store and shopper data together to identify consumers with the strongest propensity to buy. Our innovative targeting approach allows brands to cast a wider net in identifying potential buyers of their product by focusing on relevant attributes for a specific brand. As part of an integrated marketing plan, we can develop and execute digital advertising and in-store marketing in cadence with brand plans and expectations.
 
Marketing and Sales
 
Our highly skilled direct sales and marketing teams are a major asset for the organization with their deep knowledge of CPG manufacturers and retailers. Our sales organization is split into two separate groups:
 
1. 
Sales to CPG manufacturers. This group is dedicated to understanding the challenges faced by both large established brands and small emerging brands and developing solutions that address their needs.
 
2. 
Sales to retailers. This group is responsible for understanding each retailer’s unique needs and to build solutions to address them.
 
Our marketing is focused on the following:
 
● 
Increasing awareness of our corporate brand;
 
● 
Analyzing the effectiveness of executed offerings; and
 
● 
Developing and commercializing new and existing solutions.
 
Our in-store signage solutions are available for sale into a network of retailers that is managed and maintained through direct relationships, or can be sold to certain retailers in the Mass Merchant Channel.
 
During each of the last two most recently completed fiscal years, foreign sales accounted for less than 1% of total net sales each year. We expect sales to foreign distributors will remain less than 1% of total net sales in 2021.
 
Competition
 
We have faced increasingly intense competition for the marketing expenditures of CPG manufacturers for in-store signage. We have observed increased competition in growing and maintaining our network of retailers into which we are authorized to sell solutions as competitors continue to purchase new or extend exclusive arrangements with retailers for that purpose. We are party to an agreement with News America that entitles us to opportunities to sell signs with price in specific parts of News America’s retail network through April 2021, but we have experienced limited success gaining additional access to News America’s retail network. We are currently party to legal proceedings involving News Corporation, News America Marketing FSI L.L.C., and News America Marketing In-Store Services L.L.C. (collectively, “News America”). The lawsuit is described further in Item 3 of Part I of this report.
 
Our solutions are also subject to increasing pressures from alternatives to traditional in-store signage, including digital and merchandising solutions offered by competitors including Vestcom, Menasha, West Rock, Valassis Digital and Quotient.
 
 
3
 
 
We believe our primary competitive strengths include:
 
● 
Best-in-class execution across our portfolio product solutions;
 
● 
Broad client-base of CPG manufacturers inclusive of large Fortune 500 companies, and emerging start-ups;
 
● 
Managing and providing turn-key access to a national network of retailers;
 
● 
Imagination, responsiveness and hunger to help move our clients’ business forward; and
 
● 
Our speed to market on program execution.
 
Intellectual Property: Patents and Trademarks
 
The Company has developed and uses a number of trademarks, service marks, slogans, logos and other commercial symbols to advertise and sell its products. The Company owns U.S. registered trademarks for Insignia®, Insignia POPS®, Insignia POPSign®, Insignia ShelfPOPS®, Stylus®, freshADS®, DuraSign®, I-Care®, BannerPOPS®, BrandPOPS®, EquityPOPS®, ShapePOPS®, and BoxtalkTM. Certain employees are required to enter into nondisclosure and invention assignment agreements. Customers, vendors and other third parties also must agree to nondisclosure restrictions to prevent unauthorized disclosure of the Company’s trade secrets or other confidential or proprietary information.
 
Service and Solution Development
 
New services, solutions and enhancements to existing offerings are developed either internally or externally and may include proprietary data management, operations systems, and design guidance. Over the past several years, we have significantly expanded our offered solutions and have developed a portfolio designed to more holistically meet the needs of our clients and execution partners.
 
Business Plan
 
Our strategic plan, seeks to differentiate Insignia from our competition, situate Insignia for growth within our industry and better insulate Insignia to competitive response through our overall portfolio diversification. The strategic plan consists of:
 
1. 
Optimize our Core. Streamline and simplify day-to-day operations and execution. In the second half of 2020, we outsourced most of our printing and information technology operations.
 
2. 
Accelerate Innovation. Double down on our non-POPS solutions and invest in our growth.
 
3. 
Amplify Digital. Expand existing capabilities to capture a greater share of the market.
 
4. 
Deliver Corporate Rebrand. Launch new corporate branding and positioning to grow overall awareness and appeal.
 
5. 
Invest in our Future. Continue to recruit and retain top talent, invest in training and development and strengthening our capabilities.
 
Our strategic plan acknowledges the challenges and opportunities we face within our industry and given the rapid change in retail in the current environment, we continue to be faced with risk of short-to-intermediate term volatility in our operating and financial performance.
 
Customers
 
We are a leading provider of in-store and digital advertising solutions to our clients. These solutions help our clients connect, engage and build better relationships with their consumers to increase awareness, trial, sales and loyalty. Many of these CPG manufacturers are fast moving brands with products that would be found in grocery, mass and drug channels.
 
 
4
 
 
During 2020, one CPG manufacturer accounted for 14% of our total net sales. During 2019, two CPG manufacturers accounted for 13% and 12%, respectively, of our total net sales. At December 31, 2020, two CPG manufacturers represented 17% and 10% of the Company’s total accounts receivable, respectively. At December 31, 2019, four CPG manufacturers represented 17%, 12%, 12% and 10% of the Company’s total accounts receivable, respectively.
 
Our sales historically have fluctuated from period to period, primarily because of:
 
● 
CPG manufacturer determinations to purchase solutions from us versus competitor solutions;
● 
Promotional timing and new product launches by CPG manufacturers;
● 
CPG manufacturer budget fluctuations and amounts allocated to in-store or digital tactics vs. other tactics;
● 
Quantity and quality of retailer locations into which we are authorized to execute our in-store solutions;
● 
New solution acceptance by CPG manufacturers and retailers; and
● 
Changes in the salability and breadth of our retailer network.
 
Environmental Matters
 
We believe our operations are in compliance with all applicable environmental regulations within the jurisdictions in which we operate. The costs and effects of compliance with these regulations have not been, and are not expected to become material.
 
Human Capital Resources and Management
 
We had 40 employees, of which 39 were full-time employees, as of March 8, 2021. We believe relationships are our focus and our future, and that begins with our own team. We believe in creating an environment where our employees have opportunities to grow and develop professionally and a work environment that employees are proud to be a part of.
 
 
Employee Engagement. We believe in regular engagement with our full team, whether that is starting off our week together in our Monday Huddle meetings, celebrating nominated employees for quarterly recognition or enjoying events our Employee Engagement committee plans. We also take to heart our employees’ feedback and concerns and leverage this to help enhance our employee experience promoting retention and overall success of our organization.
 
 
Talent Development. We have all our employees participate in annual development plans where we focus on both employee strengths and opportunities. 22% of our employees in 2020 advanced their careers with earned promotions based on their development and performance. Based on our employee needs we can provide them a wide range of development opportunities both formal and informal. As an example, in 2020, we had three of our Senior Directors complete their Six Sigma Training to help improve our production and execution processes.
 
 
Focus on Safety. The safety of our employees is a priority. In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees, that included giving the majority of our employees the flexibility to work from home.
 
 
Diversity, Equity and Inclusion. We recognize that our best performance comes when we have a team built off of diversity, equity and inclusion. In 2020, we reemphasized our focus when we were recognized from Minnesota Census of Women in Corporate Leadership for our diversity both in our boardroom and our executive leadership team. In addition, we have added Juneteenth as a recognized paid holiday for employees after the events of George Floyd and provided resources to our employees to educate themselves on racial prejudices.
 
 
Compensation and Benefits. We provide robust compensation and benefits. In addition to salaries, these programs, can include annual bonuses, stock-based compensation awards, a 401(k) plan with employee matching opportunities, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, family care resources, flexible work schedules, adoption and surrogacy assistance, employee assistance programs, and on-site services.
 
Segment Reporting
 
The Company operates in a single reportable segment.
 
 
5
 
 
Item 1A. Risk Factors
 
Our business is subject to many risks. The following are significant factors known to us that could materially adversely affect our business, reputation, operating results, industry, financial position, or future financial performance.
 
COMPETITIVE AND REPUTATIONAL RISKS
 
We Face Significant Competition
 
We face significant competition from News America, the primary provider of at-shelf advertising and promotional signage for a significant majority of retailers. We continue to compete for advertising dollars with News America’s at-shelf advertising and promotional signage offerings. News America has significantly greater market presence and financial resources that can be used to market their products and purchase exclusive access to retailers and CPG manufacturers. Should our competition succeed in obtaining more of the at-shelf advertising business from our current CPG manufacturers, develop or extend exclusive relationships with our current retailers, our revenues and related operations would be adversely affected.
 
We also compete against other providers of advertising, marketing and merchandising products and services, and providers of point-of-purchase and other in-store solutions, as well as other marketing products and services. Competition is based on, among other things, rates, availability of markets, quality of products and services provided and their effectiveness, store coverage and other factors. The increasing popularity of digital media among consumers is driving a corresponding shift in advertising from traditional in-store tactics to digital. The development of new devices and technologies, as well as higher consumer engagement with other forms of digital media such as online and mobile social networking, are increasing the number of media choices and formats available to audiences, resulting in audience fragmentation and increased competition for advertising. The range of advertising choices across digital products and platforms and the large inventory of available digital advertising space have historically resulted in significantly lower rates for digital advertising than for in-store advertising. As a result, increasing consumer reliance on mobile devices may add additional pricing pressure, which would have an adverse effect on sales and our financial results.
 
Our Results May Be Dependent on Our CPG Manufacturers’ Continued Use of Our POPS Solution
 
Since late 2018, we have seen changes in the CPG manufacturers who participate in our solutions that have adversely impacted POPS sales, through CPG manufacturers both forgoing new contracts and reducing forward participation. We also have seen increased competitive activities that are expected to lead to further decreases in POPS sales. In addition, volatility in CPG manufacturer spend has resulted from shrinking advertising budgets, expanded product solutions, and increased competition.
 
While our dependence on POPS sales has declined over the last several years, POPS sales were still 44% of our total net sales in 2020. Further declines in our POPS sales would cause our business and results of operations to be adversely affected.
 
The Viability of Our POPS Solution and Our Results Are Dependent on Our Ongoing Business Relationships with Retailers
 
To execute our POPS solution, we have entered into arrangements with retailers that provide us with access to place signs on shelves in their stores for our CPG manufacturing customers. We have also accessed a portion of our retailer relationships through third parties. During 2020, our top three retailer relationships provided distribution for 16% of our total net sales.
 
A significant retailer exited our retailer network in the first half of 2019. The impacts of the loss of this retailer is reflected in our results for 2019 and 2020. Our ability to sell our in-store solutions is substantially dependent on the quantity and quality of the retailer locations in our network.
 
Our retailer contracts generally have terms of one to three years and we are negotiating the renewal of these contracts on an ongoing basis. The future renewal of these contracts on profitable terms is not free from doubt. Some of our retailer contracts require us to guarantee minimum payments and we may be unable to profitably perform under these fixed cost contracts, or to offer a guarantee at the level required by a retailer during renewal negotiations. Further decreases in the size or quality of our retail distribution network, would have an adverse effect on sales of our in-store signage solutions and our financial results.
 
 
6
 
 
We Have Been, and Are, Party to Significant Litigation
 
We monitor the competitive practices of those in our industry for fairness which may lead to disputes that could have adverse effects on our Company or its business. We were involved in significant litigation with News America between 2003 and 2011. In 2011, we and News America entered into a Settlement Agreement to resolve the antitrust and false advertising lawsuit that had been outstanding for several years.
 
In July 2019, we brought suit against News America in the U.S. District Court in Minnesota, alleging violations of federal and state antitrust and tortious interference laws by News America. The complaint alleges that News America has monopolized the relevant market through various wrongful acts designed to harm the Company, its last significant competitor, in the third-party in-store advertising and promotion products and services market. 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. For further description of our legal proceedings, see Item 3 in Part I of this report.
 
We cannot be assured that we will succeed in asserting our claims or, if we are successful, that our recovery (if any) will be adequate to cover the damages incurred and our costs of recovery. It is also possible that we may be unsuccessful in defending against any counterclaims, that a judgement will not be entered against us or that reserves (if any) we may set aside will be adequate to cover any such judgments. In addition, we have incurred significant expenses during the litigation and expect to incur significant expenses in the future, while recovery is uncertain or pending.
 
STRATEGIC RISKS
 
Our Growth Is Dependent on Our Ability to Successfully Develop and Introduce New Solution Offerings that Meet Client Demands
 
Our ability to retain, increase and engage our customers and to increase our revenues will depend partially on our ability to create successful new products and the ability to secure and maintain access to retailer locations that are appealing to CPG manufacturers. We may modify our existing products or develop and introduce new and unproven products, including acquired products. If new or enhanced products fail to engage consumers, we may fail to attract or retain customers or to generate sufficient revenues, margins, or other value to justify our investments and our business may be adversely affected. In the future, we may invest in new products and initiatives to generate revenue, but there is no guarantee these approaches will be successful or have the necessary scale to be profitable.
 
RISKS RELATED TO ECONOMY AND MARKET CONDITIONS
 
CPG Manufacturers and Retailers May Be Disproportionately Impacted by Changes in Economic Conditions
 
Our revenues are affected by CPG manufacturers’ and retailers’ marketing and advertising spending and our revenues and results of operations may be subject to fluctuations based upon general economic conditions inclusive of the dynamic global trade environment. Another economic downturn, whether as a result of the COVID-19 pandemic or otherwise, may reduce demand for our products and services or depress pricing of those products and services and have an adverse effect on our results of operations. Retailers may be impacted by changes in consumer spending as well, which may adversely impact our ability to renew contracts with our existing retailers as well as contract with new retailers on terms that are acceptable to us. In addition, if we are unable to successfully anticipate changing economic conditions, we may be unable to effectively plan for and respond to those changes, and our business could be negatively affected.
 
Current and Future Pandemics Are Likely to Impact Our Business
 
The COVID-19 pandemic has significantly and adversely impacted our operations and the operations of our CPG customers and retailers as a result of quarantines, illnesses, and travel and logistics restrictions and it is likely to continue to adversely affect our business indefinitely. Our future bookings may be negatively impacted until the COVID-19 pandemic moderates. Factors deriving from the COVID-19 response that have impacted or we believe are likely to negatively impact sales and operating results in the future include, but are not limited to: reduced or delayed levels of CPG spending; reduced levels of staffing with our execution partners; limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state, or federal orders requiring employees to remain at home; and limitations on the ability of our customers to pay us on a timely basis.
 
 
7
 
 
We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts on our business as a result of any economic recession or depression that has occurred or may occur in the future. Because we are unable to determine or predict the nature, duration or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources, the financial impact to our operating results cannot be reasonably estimated, but it could be material and last for an extended period of time.
 
OPERATIONAL RISKS
 
Our Ability to Attract and Retain Key Employees Is Critical to Our Success
 
Given the unique business we operate and the importance of customer relationships to our business, our future success is dependent, in large part, upon our ability to attract and retain highly qualified managerial, operational and sales personnel. Competition for talented personnel is intense, and we cannot be certain that we can retain our managerial, operational and sales personnel or that we can attract, assimilate or retain such personnel in the future. Our inability to attract and retain such personnel could have an adverse effect on our business, results of operations and financial condition.
 
We Have Identified a Material Weakness in Our Internal Control Over Financial Reporting. If This Material Weakness Persists or If We Fail to Establish and Maintain Effective Internal Control over Financial Reporting, We May Not Be Able to Accurately or Timely Report Our Financial Condition or Results of Operations, Which May Adversely Affect Our Business and the Market Price of Our Common Stock.
 
The Sarbanes-Oxley Act of 2002 requires that we maintain effective internal control over financial reporting and disclosure controls and procedures. We are required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting. This assessment includes disclosure of any material weaknesses identified by our management in our internal control over financial reporting, such as the material weaknesses as described below.
 
Our compliance with Section 404 necessitates that we incur substantial accounting expense and expend significant management efforts. We will continue to dedicate internal resources, engage outside consultants and adopt a detailed work plan to assess and document the adequacy of internal control over financial reporting, continue steps to improve control processes as appropriate, including the remediation of the material weakness described below, validate through testing that controls are functioning as documented and implement a continuous reporting and improvement process for internal control over financial reporting and to compile the system and process documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to remediate the material weakness described below, or any future material weaknesses that may be identified, or to complete our evaluation, testing and remediation in a timely fashion. Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial statements.
 
The Company had a material weakness at December 31, 2019 related to impairment testing that we performed in accordance with ASC 360, Property, Plant, and Equipment. This material weakness was remediated as of December 31, 2020.
 
We have concluded that a material weakness in our internal control over financial reporting existed as of December 31, 2020, and consequently our Board of Directors determined that management’s report on internal control over financial reporting as of December 31, 2020, included in our Annual Report on Form 10-K for the year then ended, should no longer be relied upon. In connection with the material weakness identified in Item 9A, Controls and Procedures, we have restated our financial statements for the years ended December 31, 2020 and 2019 as described in the Explanatory Paragraph and in Note 2 to our annual financial statements. This material weakness is discussed further within Item 9A, Controls and Procedures, of this Annual Report on Form 10-K/A. The existence of one or more material weaknesses precludes a conclusion by management that a corporation’s internal control over financial reporting is effective.
 
In response to the identified material weakness, our management, with the oversight of the Audit Committee of our Board of Directors, has dedicated significant resources, including the involvement of outside advisors, and efforts to improve our internal control over financial reporting and has taken immediate action to remediate the material weakness identified. Certain remedial actions have been completed including ongoing involvement of outside advisors, review of taxability of new products/services and obtaining of appropriate documentation of exempt status from customers. The Company will further enhance these controls over the remainder of 2021. If we fail to remediate this material weakness or fail to otherwise maintain effective control over financial reporting in the future, it could result in a material misstatement of our financial statements that would not be prevented or detected on a timely basis.
 
 
8
 
 
We cannot assure you that the measures we have taken to date, and actions we may take in the future, will be sufficient to remediate the control deficiencies that led to the material weakness in our internal control over financial reporting or that they will prevent or avoid potential future material weaknesses. If we are unable to successfully remediate the material weaknesses in our internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected, investors could lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could decline, we could be subject to sanctions or investigations by the Nasdaq Stock Market, the SEC or other regulatory authorities, and our ability to access the capital markets could be limited.
 
Our Outsourcing Arrangements May Not Yield the Desired Efficiencies Within Our Planned Timeline, If At All
 
We have recently entered into arrangements with third parties for them to operate certain software applications and significant portions of our information technology infrastructure, as well as most of our printing operations that are necessary to conduct our in-store signage business. We take steps to monitor and regulate the performance of these third parties, but we may not be successful in managing these relationships to achieve the desired outcomes.
 
These outsourcing arrangements make us reliant on third parties to conduct our operations and to satisfy commitments to customers. We are vulnerable to third party failures to satisfy their obligations to us for any reason, including as a result of their nonperformance, performance at standards that are not acceptable to us or our customers, changes in their methods of operation or financial condition, and other matters outside of our control. Further, we may not fully realize on a timely basis the anticipated economic and other benefits of the outsourcing projects or other relationships we entered into with these third parties, which could result in substantial costs or other operational or financial problems for the Company.
 
RISKS RELATED TO OUR COMMON STOCK
 
Our Results of Operations Have Been and May Be Subject to Significant Fluctuations
 
Our quarterly and annual operating results have fluctuated in the past and may vary in the future due to a wide variety of factors including:
 
● the addition or loss of contracts with retailers;
● the addition or loss of customers or changes in timing and amount of our customers’ spending with us;
● the timing of seasonal events for customers;
● the timing of new retail stores being added or removed;
● costs of evaluating and developing new products, and customers accepting new products;
● the timing of additional selling, marketing and general and administrative expenses; and
● competitive conditions in our industry.
Due to these factors, our quarterly and annual net sales, expenses and results of operations could vary significantly in the future and this could adversely affect the market price of our common stock.
 
Investment in Our Stock Could Result in Fluctuating Returns
 
During 2020, the sale prices of our common stock as reported by The Nasdaq Stock Market ranged from a low of $3.78 to a high of $12.25. We believe factors such as the fluctuations in our quarterly and annual operating results described above, the market’s acceptance of our services and products, the performance of our business relative to market expectations, as well as limited daily trading volume of our stock and general volatility in the securities markets, could cause the market price of our common stock to fluctuate substantially. In addition, the stock markets have experienced price and volume fluctuations, resulting in changes in the market prices of the stock of many companies, which may not have been directly related to the operating performance of those companies.
 
 
9
 
 
TECHNOLOGY AND CYBERSECURITY RISKS
 
We May be Impacted if Our Information Systems Are Attacked
 
We rely upon information technology systems and networks, both internal and outsourced, in connection with a variety of business activities, some of which are managed by third parties. Additionally, we collect and store data that is sensitive to Insignia and its employees, customers, retailer network and suppliers. The secure operation of these information technology systems and networks, and the processing and maintenance of this data, is critical to our business operations and strategy. Information technology security threats—from user error to attacks designed to gain unauthorized access to our systems, networks and data—are increasing in frequency and sophistication. Attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crime and advanced persistent threats. These threats pose a risk to the security of our systems, networks and products and the confidentiality, availability and integrity of the data we process and maintain. Establishing systems and processes to address these threats and changes in legal requirements relating to data collection and storage may increase our costs. Should such an attack succeed, it could expose us and our employees, customers, retailer network and suppliers to misuse of information or systems, the compromising of confidential information, theft of assets, manipulation and destruction of data, defective products, production downtimes and operations disruptions, and breach of privacy, which may require notification under data privacy and other applicable laws. The occurrence of any of these events could have a material adverse effect on our reputation, business, financial condition, results of operations and cash flows. In addition, such breaches in security could result in litigation, regulatory action and potential liability and the costs and operational consequences of implementing further data protection measures. 
 
 
PART II.
 
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”)
 
The following discussion should be read in conjunction with the financial statements and the related notes included in this Annual Report on Form 10-K/A. This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those in such forward-looking statements as a result of many factors, including those discussed in “Forward-Looking Statements” and elsewhere in this report.
 
Restatement
 
The accompanying MD&A gives effect to certain adjustments made to the previously reported financial statements for the years ended December 31, 2020 and 2019. Due to the restatement of these periods, the data set forth in the accompanying MD&A may not be comparable to discussions and data in our Original Report.
 
Refer to “Explanatory Note” immediately preceding Item 1 of this Annual Report on 10-K/A and Note 2, “Restatement of Financial Statements” in the accompanying financial statements for further details related to the restatement and impact on our financial statements.
 
Overview
 
We are a leading provider of in-store and digital advertising solutions to CPG manufacturers, retailers, shopper marketing agencies and brokerages. We believe our products and services are attractive to our clients because of our speed to market, ability to customize our solutions down to store level and the results our solutions deliver. Our leadership and employees have extensive industry knowledge, including direct experience through former positions at CPG manufacturers and retailers. We provide marketing solutions to CPG manufacturers spanning from some of the largest multinationals to new and emerging brands.
 
We face increasingly intense competition for the marketing expenditures of CPG manufacturers for in-store signage. We have observed increased competition in growing and maintaining our network of retailers into which we are authorized to sell solutions as competitors continue to purchase new or extend exclusive arrangements with retailers for that purpose. New product investments by large and emerging CPG manufacturers give us optimism that our product portfolio is relevant to our clients.
 
Over the past several years, we have significantly expanded our offered solutions and have developed a portfolio designed to more holistically meet the needs of our clients and execution partners which has diversified our portfolio. Our focus on portfolio diversification resulted in our 2020 non-POPS solutions revenue growing 15% versus 2019. We remain committed to further refining and enhancing our solutions and broadening our retailer relationships.
 
 
10
 
 
Sale of our Custom Print Business
 
In August 2020, we sold our custom print business to an existing strategic partner. This divestiture has allowed us to focus on our core business, selling product solutions to CPGs. The custom print business was not material to our 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. We 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, we are 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 exceeds a threshold amount. Due to the contingent nature of the earn-out, no gain has been recognized as part of the recorded gain.
 
Impacts and Potential Future Impacts of COVID-19 on Our Business
 
The COVID-19 pandemic has significantly and adversely impacted our operations and the operations of our CPG customers and retailers as a result of quarantines, illnesses, and travel and logistics restrictions and it is likely to continue to adversely affect our business indefinitely. While we have continued to operate and maintain our continuity with our clients by working remotely, the retail landscape in which CPG manufacturers and retailers operate has changed substantially, as has our ability to execute programs due to both limited access to our retailers and reduced levels of staffing with our execution partners. The financial impact of COVID-19 for 2020 was significant. A significant number of programs originally slated for execution in the second quarter were cancelled. Our future bookings may be negatively impacted until the COVID-19 pandemic moderates. Factors deriving from the COVID-19 response that have impacted or we believe are likely to negatively impact sales and operating results in the future include, but are not limited to: reduced or delayed levels of CPG spending; reduced levels of staffing with our execution partners; limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state, or federal orders requiring employees to remain at home; and limitations on the ability of our customers to pay us on a timely basis. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts on our business as a result of any economic recession or depression that has occurred or may occur in the future. Therefore, we cannot reasonably estimate the full extent of the impact on our results of operation and financial condition but it could be material and last for an extended period of time. We continue to monitor our liquidity, including frequent cost and spending assessments and reductions across our organization.
 
We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers, suppliers and shareholders. While we are unable to determine or predict the nature, duration or scope of the overall impact the COVID-19 pandemic will have on our business, results of operations, liquidity or capital resources, we believe that it is important to share where our company stands today, how our response to COVID-19 is progressing and how our operations and financial condition may change as the fight against COVID-19 progresses.
 
 
11
 
 
Results of Operations
 
The following table sets forth, for the periods indicated, certain items in the Company’s Statements of Operations as a percentage of total net sales.
 
 
 
As Restated
 
For the Years Ended December 31
 
2020
 
 
2019
 
Net sales
  100.0%
  100.0%
Cost of sales
  83.7 
  79.9 
Gross profit
  16.3 
  20.1 
Operating expenses:
    
    
Selling
  16.5 
  12.3 
Marketing
  5.8 
  11.1 
General and administrative
  22.8 
  15.7 
Gain on sale
  (1.1)
  - 
Impairment loss
  - 
  9.4 
Total operating expenses
  44.0 
  48.5 
Operating loss
  (27.7)
  (28.4)
Other income
  0.2 
  0.5 
Loss before taxes
  (27.5)
  (27.9)
Income tax benefit
  (1.1)
  (2.0)
Net loss
  (26.4)%
  (25.9)%
 
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
 
Net Sales. Net sales for the year ended December 31, 2020 decreased 18.8% to $17,482,000, compared to $21,528,000 for the year ended December 31, 2019.
 
Service revenues. Service revenues for the year ended December 31, 2020 decreased 14.6% to $16,904,000, compared to $19,803,000 for the year ended December 31, 2019. The decrease was primarily due to a $4,065,000, or 34.5%, decrease in POPS revenue, partially offset by a $1,165,000, or 14.6%, increase in non-POPS revenue. For the year ended December 31, 2020, the POPS revenue was significantly lower due to decreases in the number of signs placed and average price per sign due to existing competitive pressures and the absence of a significant retailer for the full year. We believe the COVID-19 pandemic also significantly impacted both POPS and non-POPS revenue. COVID-19 has resulted in both reduced and delayed spending on our programs by CPG manufacturers. We will continue to have increased pressure on our POPS business heading into 2021, including the expiration in April 2021 of our 10-year selling agreement with News America Marketing.
 
Product revenues. Product revenues for the year ended December 31, 2020 decreased 66.5% to $578,000, compared to $1,725,000 for the year ended December 31, 2019. The decrease was primarily due to the August 2020 sale of the custom print business.  We do not expect product revenues will be significant in future periods.
 
Gross Profit. Gross profit for the year ended December 31, 2020 decreased 34.1% to $2,856,000, compared to $4,335,000 for the year ended December 31, 2019. Gross profit as a percentage of total net sales decreased to 16.3% for the year ended December 31, 2020, compared to 20.1% for the year ended December 31, 2019.
 
Service revenues. Gross profit from service revenues for the year ended December 31, 2020 decreased 30.5% to $2,811,000, compared to $4,047,000 for the year ended December 31, 2019. The decrease in gross profit was primarily due to a decrease in POPS solution sales as gross profit is highly dependent on sales levels due to the relatively fixed nature of a portion of payments to retailers, combined with the decrease in average price per sign.
 
Gross profit as a percentage of service revenues decreased to 16.6% for the year ended December 31, 2020, compared to 20.4% for the year ended December 31, 2019. The decrease was primarily due to the factors described above.
 
Product revenues. Gross profit from product sales for the year ended December 31, 2020 decreased 84.4% to $45,000, compared to $288,000 for the year ended December 31, 2019. The decrease was primarily due to the August 2020 sale of the custom print business, which represented the bulk of this business.
 
 
12
 
 
Gross profit as a percentage of product sales decreased to 7.8% for 2020, compared to 16.7% for 2019. The decrease was primarily due to decreased sales volume and changes in the mix of customers and products sold.
 
Impairment Loss - Services. Gross profit for the year ended December 31, 2020 was also negatively impacted as a result of an impairment loss resulting from the impairment charge of $159,000 on the value of the Company’s selling agreement with News America, a long-lived asset. The impairment charge is described further in Item 8, footnote 1. There was no impairment loss impacting gross profit during the year ended December 31, 2019.
 
Operating Expenses
 
Selling. Selling expenses for the year ended December 31, 2020 increased 8.2% to $2,877,000, compared to $2,658,000 for the year ended December 31, 2019, primarily due to increased staff related expenses. Selling expenses as a percentage of total net sales increased to 16.5% in 2020, compared to 12.3% in 2019, primarily due to decreased sales, in addition to the increases in costs and expenses described above.
 
Marketing. Marketing expenses for the year ended December 31, 2020 decreased 57.6% to $1,015,000, compared to $2,394,000 for the year ended December 31, 2019. The decrease was primarily the result of decreased staffing and variable staff related expenses and due to decreased consulting expenses. Marketing expenses as a percentage of total net sales decreased to 5.8% in 2020, compared to 11.1% in 2019, primarily due to the factors described above, partially offset by decreased sales.
 
General and Administrative. General and administrative expenses for the year ended December 31, 2020 increased 18.5% to $3,998,000, compared to $3,375,000 for the year ended December 31, 2019. The increase was primarily due to expenses relating to the litigation with News America, partially offset by decreased staffing and reduced stock-based compensation. General and administrative expenses as a percentage of total net sales increased to 22.8% in 2020, compared to 15.7% in 2019, primarily due to decreased sales, in addition to the increases in expense described above.
 
Gain on sale. Gain on sale for the year ended December 31, 2020 was $195,000 as a result of the sale of our custom print business. There was no gain on sale during the year ended December 31, 2019.
 
Impairment Loss. There was no impairment loss included in operating expenses during the year ended December 31, 2020. The impairment loss of $2,014,000 for the year ended December 31, 2019 was driven by a long-lived asset impairment charge which is described further in Item 8, footnote 1.
 
Other Income. Other income for the year ended December 31, 2020 decreased to $33,000, compared to $105,000 for the year ended December 31, 2019. The decrease was due to increased interest expense related to sales tax accrued.
 
Income Taxes. During the year ended December 31, 2020, the Company recorded an income tax benefit of $191,000, compared to an income tax benefit of $424,000 for the year ended December 31, 2019. The effective tax rate was 4.0% and 7.1% for the years ended December 31, 2020 and 2019, respectively. The primary differences between the Company’s December 31, 2020 and 2019 effective tax rates and the statutory federal rates are expenses related to stock-based compensation in the amounts of $152,000 and $172,000, respectively, nondeductible meals and entertainment of $8,000 and $32,000, respectively, nondeductible penalties of $52,000 and $50,000, respectively, and a change in the Company’s valuation allowance against its deferred assets of $943,000 and $924,000, respectively. The effective tax rate fluctuates between periods based on the level of permanent differences and other discrete items relative to the level of pre-tax loss for the period.
 
Net Loss. For the reasons stated above, the net loss for the year ended December 31, 2020 was $4,615,000 compared to a net loss of $5,577,000 for the year ended December 31, 2019.
 
Liquidity and Capital Resources
 
The Company has financed its operations with proceeds from stock sales and sales of its services and products. At December 31, 2020, working capital (current assets less current liabilities) was $7,668,000 compared to $10,684,000 at December 31, 2019. During the year ended December 31, 2020, cash and cash equivalents decreased $382,000 from $7,510,000 at December 31, 2019, to $7,128,000 at December 31, 2020.
 
 
13
 
 
Operating Activities: Net cash used in operating activities during the year ended December 31, 2020 was $1,580,000. Net loss of $4,615,000, plus non-cash adjustments of $851,000, plus changes in operating assets and liabilities of $2,184,000 resulted in the $1,580,000 of cash used in operating activities. The non-cash adjustments included of depreciation and amortization expense, impairment loss, gain on sale of business, changes in allowance for doubtful accounts, and stock-based compensation expense. The largest component of the change in operating assets and liabilities was accounts receivable, which decreased $1,679,000 from December 31, 2019, as a result of lower sales in the third and fourth quarters of 2020 compared to 2019, as well as expected fluctuations based on business and market conditions. In the normal course of business, our accounts receivable, accounts payable, accrued liabilities and deferred revenue will fluctuate depending on the level of revenues and related business activity, as well as billing arrangements with customers and payment terms with retailers.
 
Investing Activities: Net cash provided by investing activities during the year ended December 31, 2020 was $139,000. The Company sold its custom print business for $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. Purchases of property and equipment of $61,000 in 2020 decreased in comparison to 2019 due to completion of a technology system project in the first half of 2019. With the commencement of outsourcing of most information technology and printing operations, the Company anticipates minimal purchases of property and equipment for that purpose in 2021. The Company does not anticipate significant cash outlays for leasehold improvements in connection with new facility leases anticipated in the first part of 2021.The monthly payments under the new leases are anticipated to be significantly less than the monthly payments under expiring leases. 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.
 
Financing Activities: Net cash provided by financing activities during the year ended December 31, 2020 was $1,059,000, which primarily related to proceeds received from our PPP loan.
 
On April 22, 2020, Company entered into the PPP Loan in the principal amount of $1,054,000, which was disbursed by Alerus Financial, N.A. (“Lender”). 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. Subsequent to the end of the fiscal year, on January 29, 2021, the SBA approved our application for forgiveness of the full amount due, including accrued interest. Accordingly, for the quarter ending March 31, 2021, the principal amount plus accrued interest, which was $1,061,000 at December 31, 2020, will be eliminated with a gain on debt extinguishment included in other income.
 
We believe that based upon current business conditions and plans, our existing cash balance and future cash generated from operations will be sufficient for our cash requirements for at least the next twelve months.
 
Critical Accounting Policies and Estimates
 
Our discussion of our financial condition and results of operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. During the preparation of these financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales, costs and expenses and related disclosures. On an ongoing basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowance for doubtful accounts, impairment of long-lived assets, income taxes, and stock-based compensation expense. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results of our analysis form the basis for making assumptions about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and the impact of such differences may be material to our financial statements.
 
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements:
 
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. 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.
 
 
14
 
 
Allowance for Doubtful Accounts. An allowance is established for estimated uncollectible accounts receivable. 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, the condition of the general economy and the industry as a whole and other relevant facts and circumstances. Unexpected changes in the aforementioned factors could result in materially different amounts.
 
Impairment of Long-Lived Assets. The Company periodically evaluates the carrying value of its long-lived assets for impairment indicators. If indicators of impairment are present, we evaluate the carrying value of the assets in relation to the future undiscounted cash flows of the underlying assets to assess recoverability of the assets. The estimates of these future cash flows are based on assumptions and projections believed by management to be reasonable and supportable. They require management’s subjective judgments and take into account assumptions about revenue and expense growth rates. Impaired assets are then recorded at their estimated fair market value.
 
In 2011, we 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, we accelerated the amortization based on the anticipated recovery period over the remaining term of the contract due to the loss of a significant retailer. During the three months ended March 31, 2020, the impact of COVID-19 was determined to be a triggering event requiring an impairment review of long-lived assets. As of 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 covered by the agreement. As a result, an impairment of $159,000 was recognized as of March 31, 2020. We also shortened the remaining 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 as of December 31, 2019.
 
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 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 4th quarter of 2019.
 
At December 31, 2020, the remaining balance of long-lived assets on the Company’s balance sheet was $75,000.
 
Sales Taxes. Sales taxes are based on determination of which of the Company’s products/services are subject to sales tax, and in which of various states and other jurisdictions the tax applies. Further, the Company must determine which of our customers are exempt from the Company charging sales tax because the customer is a reseller or self-assesses and direct pays to states and other jurisdictions on purchases the customer makes from the Company. These determinations contain estimates and are subject to judgment and interpretation by taxing authorities in various states and other jurisdictions, which could result in recognizing materially different amounts in future periods.
 
Income Taxes. Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers tax regulations of the jurisdictions in which it operates, estimates of future taxable income, and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax assets based on the “more likely than not” criteria.
 
 
15
 
 
The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority.
 
Stock-Based Compensation Expense. The Company measures and recognizes compensation expense for all stock-based payments at fair value. Restricted stock awards and restricted stock units 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 terms 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 life at grant date. Volatility is based on historical volatility of the Company’s stock. The Company has not historically issued any dividends beyond the 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.
 
If factors change and the Company employs different assumptions in the valuation of grants in future periods, the compensation expense that the Company records may differ significantly from what it has recorded in the current period.
 
New Accounting Pronouncements
 
There are no new accounting pronouncement that were effective for the year ended December 31, 2020 that had a significant impact on the Company and there are no new accounting pronouncements effective in the future that are expected to have a material impact in future years.
 
Off-Balance Sheet Transactions
 
None.
 
Forward-Looking Statements
 
Statements in this report that are not statements of historical or current facts are considered forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended. The words “anticipates,” “believes,” “estimates,” “expects,” “future,” “likely,” “may,” “projects,” “seeks,” “will,” and similar expressions may identify forward-looking statements. Readers are cautioned not to place undue reliance on these or any forward-looking statements, which speak only as of the date of this report. Statements made in this report regarding, for instance, changes in composition of retailer and CPG manufacturer networks, innovation and transformation of the Company’s business, cost savings from restructuring activities, the nature or impact of pending legal proceedings, benefits of outsourcing arrangements, are forward-looking statements. These forward-looking statements are based on current information, which we have assessed and which by its nature is dynamic and subject to rapid and even abrupt changes. As such, actual results may differ materially from the results or performance expressed or implied by such forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors, including those set forth in this report and additional risks, if any, identified in our Quarterly Reports on Form 10-Q and our Current Reports on Forms 8-K filed with the SEC. Such forward-looking statements should be read in conjunction with the Company's filings with the SEC. Insignia assumes no responsibility to update the forward-looking statements contained in this report or the reasons why actual results would differ from those anticipated in any such forward-looking statement, other than as required by law.
 
 
16
 
 
Item 8. Financial Statements and Supplementary Data
 
Index to Financial Statements
 
The following are included on the pages indicated:
 
Report of Independent Registered Public Accounting Firm
18
 
 
Balance Sheets as of December 31, 2020 and 2019
20
 
 
Statements of Operations for the years ended December 31, 2020 and 2019
21
 
 
Statements of Shareholders’ Equity for the years ended December 31, 2020 and 2019
22
 
 
Statements of Cash Flows for the years ended December 31, 2020 and 2019
23
 
 
Notes to Financial Statements
24
 
 
17
 
 
Report of Independent Registered Public Accounting Firm
 
To the shareholders and the board of directors of Insignia Systems, Inc.:
 
Opinion on the Financial Statements
 
We have audited the accompanying balance sheets of Insignia Systems, Inc. (the "Company") as of December 31, 2020 and 2019, the related statements of operations, shareholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
 
Restatement of Previously Issued Financial Statements
 
As discussed in Note 2 to the financial statements, the Company has restated its 2020 and 2019 financial statements to correct errors related to accounting for sales taxes.
 
See also the “Accounting for sales taxes” critical audit matter.
 
Basis for Opinion
 
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
 
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
Critical Audit Matter
 
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
 
 
18
 
 
Accounting for sales taxes
 
Critical Audit Matter Description
 
As described in Note 2 to the financial statements, the Company restated its financial statements for the years ended 2020 and 2019 as a result of incorrect accounting for sales taxes. See also the “Restatement of Previously Issued Financial Statements” section of our report. During 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 services and products sales were subject to sales tax and that the Company had not assessed sales tax on sales of those services and products to customers. The Company then undertook a process to obtain documentation from significant customers to determine if any was exempt from sales tax assessments during the applicable periods. Based on the responses received from these customers, the Company determined that it did not properly accrue sales tax. The Company accrued the estimated sales taxes due in the amounts of $1,011,000 and $594,000, and interest and penalties of $244,000 and $117,000, as of December 31, 2020 and 2019, respectively. For certain customers, the Company expects to bill and collect the related sales taxes that are due. The Company has estimated such amounts to be $229,000 as of December 31, 2020. The Company was required to apply judgment regarding the determination of the tax status of the customers that did not respond to managements’ inquiries, as well as in the estimation of sales tax rates, interest and penalties accruals, and of the sales tax amounts expected to be billed and collected.
 
The accounting for sales taxes is complex as each state has specific rules and regulations regarding the taxability of products and services. The Company’s evaluation of the estimated sales taxes accrual required the use of a complex model and the assistance of outside professionals that are experienced in accounting for sales taxes. There is significant judgment involved in determining the specific strategy to apply for estimating the accrual for sales taxes, including the judgment of taxability of customers who did not respond to the Company’s requests for documentation of the customers’ taxability, sales tax rates in each jurisdiction, and estimated interest and penalties. Judgment is also required to determine the Company’s ability to bill and collect from certain customers past sales taxes that are due.
 
How We Addressed the Matter in Our Audit
 
The primary procedures we performed to address this critical audit matter included:
 
Testing the accuracy and completeness of the products and services sales transactions that were included in the sales tax analysis.
 
Testing a sample of customer responses received by the Company to validate the completeness of the accrual.
 
Evaluating the process management used to estimate the sales tax liability for customers who did not respond to management’s inquiries regarding taxability.
 
Involving internal sales tax professionals to assist in assessing each type of product and service to determine whether or not it is taxable, as well as the sales tax rates utilized and related interest and penalty calculations.
 
Evaluating the process that management used to estimate the sales tax liability and the estimate regarding the collectability related to proposed billings to customers of sales tax by reviewing underlying documentation analyzed by the Company to support its estimates.
 
Testing the mathematical accuracy of the model used by management to calculate estimated sales tax, interest and penalties.
 
/s/ Baker Tilly US, LLP
 
(formerly known as Baker Tilly Virchow Krause, LLP)
We have served as the Company's auditor since 2011.
Minneapolis, Minnesota
 
March 11, 2021, except for the effects of the restatement in Notes 1, 2, 4, 9, 11 to the financial statements, and the critical audit matter related to the accounting for sales taxes, as to which the date is August 23, 2021
 
 
19
 
 
 
Insignia Systems, Inc.
 
 
BALANCE SHEETS
 
 
 
 As Restated
 
 
 As Restated
 
As of December 31
 
2020
 
 
2019
 
ASSETS
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
Cash and cash equivalents
 $7,128,000 
 $7,510,000 
Accounts receivable, net
  5,857,000 
  7,559,000 
Inventories
  85,000 
  322,000 
Income tax receivable
  241,000 
  126,000 
Prepaid expenses and other
  711,000 
  375,000 
Total Current Assets
  14,022,000 
  15,892,000 
 
    
    
Other Assets:
    
    
Property and equipment, net
  75,000 
  549,000 
Operating lease right-of-use assets
  37,000 
  177,000 
Other, net
  155,000 
  372,000 
 
    
    
Total Assets
 $14,289,000 
 $16,990,000 
 
    
    
LIABILITIES AND SHAREHOLDERS' EQUITY
    
    
Current Liabilities:
    
    
Accounts payable
  3,148,000 
  3,036,000 
Accrued liabilities:
    
    
     Compensation
  424,000 
  539,000 
  Sales tax
  1,011,000 
  594,000 
     Other
  1,071,000 
  687,000 
Current portion of long-term debt
  464,000 
   
Current portion of operating lease liabilities
  56,000 
  212,000 
Deferred revenue
  180,000 
  140,000 
Total Current Liabilities
  6,354,000 
  5,208,000 
 
    
    
Long-Term Liabilities:
    
    
Accrued income taxes
  677,000 
  643,000 
Long-term debt, net of current portion
  590,000 
   
Operating lease liabilities
   
  56,000 
Total Long-Term Liabilities
  1,267,000 
  699,000 
 
    
    
Commitments and Contingencies
    
    
 
    
    
Shareholders' Equity:
    
    
Common stock, par value $.01:
    
    
Authorized shares - 5,714,000
    
    
Issued and outstanding shares - 1,748,000 in 2020 and 1,725,000 in 2019
  122,000 
  121,000 
Additional paid-in capital
  16,133,000 
  15,934,000 
Accumulated deficit
  (9,587,000)
  (4,972,000)
Total Shareholders' Equity
  6,668,000 
  11,083,000 
 
    
    
Total Liabilities and Shareholders' Equity
 $14,289,000 
 $16,990,000 
 
    
    
See accompanying notes to financial statements.
    
    
 
 
20
 
 
 
Insignia Systems, Inc.
 
 
STATEMENTS OF OPERATIONS
 
 
 
 
 
 
 
 
 
 
 As Restated
 
 
 As Restated
 
Year Ended December 31
 
2020
 
 
2019
 
Services revenues
 $16,904,000 
 $19,803,000 
Products revenues
  578,000 
  1,725,000 
Total Net Sales
  17,482,000 
  21,528,000 
 
    
    
Cost of services
  13,934,000 
  15,756,000 
Cost of goods sold
  533,000 
  1,437,000 
Impairment loss - services
  159,000 
   
Total Cost of Sales
  14,626,000 
  17,193,000 
Gross Profit
  2,856,000 
  4,335,000 
 
    
    
Operating Expenses:
    
    
Selling
  2,877,000 
  2,658,000 
Marketing
  1,015,000 
  2,394,000 
General and administrative
  3,998,000 
  3,375,000 
Gain on sale of custom print business
  (195,000)
   
Impairment loss
   
  2,014,000 
Total Operating Expenses
  7,695,000 
  10,441,000 
Operating Loss
  (4,839,000)
  (6,106,000)
 
    
    
Other income
  33,000 
  105,000 
Loss Before Taxes
  (4,806,000)
  (6,001,000)
 
    
    
Income tax benefit
  (191,000)
  (424,000)
Net Loss
 $(4,615,000)
 $(5,577,000)
 
    
    
Net loss per share:
    
    
Basic
 $(2.66)
 $(3.27)
Diluted
 $(2.66)
 $(3.27)
 
    
    
Shares used in calculation of net
 loss per share:
    
    
Basic
  1,734,000 
  1,706,000 
Diluted
  1,734,000 
  1,706,000 
 
    
    
See accompanying notes to financial statements.
    
    
 
 
 
21
 
 
 
 
Insignia Systems, Inc.
 
 
STATEMENTS OF SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock    
 
 
Additional Paid-In
 
 
Retained Earnings
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Capital
 
 
(Accumulated Deficit)
 
 
Total
 
Balance at January 1, 2019, as previously reported
  1,692,000 
 $118,000 
 $15,442,000 
 $760,000 
 $16,320,000 
Cumulative restatement adjustments
  - 
  - 
  - 
  (155,000)
  (155,000)
Issuance of common stock, net
  15,000 
  1,000 
  107,000 
  - 
  108,000 
Vesting of restricted stock units offset by repurchase of common stock upon vesting of restricted stock units and awards
  (3,000)
  2,000 
  (37,000)
  - 
  (35,000)
Value of stock-based compensation
  - 
  - 
  422,000 
  - 
  422,000 
Restricted stock award issuance
  21,000 
  - 
  - 
  - 
  - 
Net loss
  - 
  - 
  - 
  (5,577,000)
  (5,577,000)
 
    
    
    
    
    
Balance at December 31, 2019, as restated
  1,725,000 
  121,000 
  15,934,000 
  (4,972,000)
  11,083,000 
Issuance of common stock, net
  5,000 
  - 
  20,000 
  - 
  20,000 
Vesting of restricted stock units offset by repurchase of common stock upon vesting of restricted stock units and awards
  16,000 
  1,000 
  (2,000)
  - 
  (1,000)
Value of stock-based compensation
  - 
  - 
  172,000 
  - 
  172,000 
Common stock issued for accrued liabilities
  - 
    
  9,000 
  - 
  9,000 
Restricted stock award issuance
  2,000 
  - 
  - 
  - 
  - 
Net loss
  - 
  - 
  - 
  (4,615,000)
  (4,615,000)
Balance at December 31, 2020, as restated
  1,748,000 
 $122,000 
 $16,133,000 
 $(9,587,000)
 $6,668,000 
 
    
    
    
    
    
See accompanying notes to financial statements.
    
    
    
    
    
 
 
22
 
 
Insignia Systems, Inc.
 
 
STATEMENTS OF CASH FLOWS
 
 
 
 
 
 
 
 
 
 
 As Restated
 
 
 As Restated
 
Year Ended December 31
 
2020
 
 
2019
 
Operating activities:
 
 
 
 
 
 
Net loss
 $(4,615,000)
 $(5,577,000)
Adjustments to reconcile net loss to net cash used in operating activities:
    
    
Depreciation and amortization
  477,000 
  1,647,000 
Impairment loss
  159,000 
  2,014,000 
Gain on sale of custom print business
  (195,000)
   
Loss on sale of property and equipment
  35,000 
   
Changes in allowance for doubtful accounts
  203,000 
  43,000 
Deferred income tax benefit
   
  (462,000)
Stock-based compensation expense
  172,000 
  422,000 
Changes in operating assets and liabilities:
    
    
Accounts receivable
  1,679,000 
  1,161,000 
Inventories
  135,000 
  31,000 
Income tax receivable
  (115,000)
  1,000 
Prepaid expenses and other
  (327,000)
  (69,000)
Accounts payable
  115,000 
  (224,000)
Accrued liabilities
  623,000 
  (1,166,000)
Accrued income taxes
  34,000 
  30,000 
Deferred revenue
  40,000 
  (162,000)
Net cash used in operating activities
  (1,580,000)
  (2,311,000)
 
    
    
Investing activities:
    
    
Purchases of property and equipment
  (61,000)
  (398,000)
Purchases of held to maturity investments
   
  (4,981,000)
Proceeds from sale of custom print business
  200,000 
   
Proceeds from sale of held to maturity investments
   
  4,981,000 
Net cash provided by (used in) investing activities
  139,000 
  (398,000)
 
    
    
Financing activities:
    
    
Cash dividends paid ($4.90 per share)
  (14,000)
  (14,000)
Proceeds from issuance of common stock, net
  20,000 
  108,000 
Repurchase of common stock upon vesting of restricted stock awards and vesting of restricted stock units
  (1,000)
  (35,000)
Proceeds from PPP Loan
  1,054,000 
   
Net cash provided by financing activities
  1,059,000 
  59,000 
 
    
    
Decrease in cash and cash equivalents
  (382,000)
  (2,650,000)
 
    
    
Cash and cash equivalents at beginning of year
  7,510,000 
  10,160,000 
Cash and cash equivalents at end of year
 $7,128,000 
 $7,510,000 
 
    
    
Supplemental disclosures for cash flow information:
    
    
Cash paid (refunded) during the year for income taxes
 $(112,000)
 $8,000 
 
    
    
Non-cash investing and financing activities:
    
    
Purchases of property and equipment included in accounts payable
 $11,000 
 $- 
Cash dividends declared included in accounts payable
 $- 
 $28,000 
Receivables recorded from sale of custom print business
 $100,000 
 $- 
Receivables recorded from sale of property and equipment
 $195,000 
 $- 
Common stock issued for accrued liabilities
 $9,000 
 $- 
 
    
    
See accompanying notes to financial statements.
    
    
 
 
23
 
 
Insignia Systems, Inc.
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.
 
 
24
 
 
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:
 
 
 
As Restated  
 
December 31
 
2020
 
 
2019
 
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
 
2020
 
 
2019
 
Raw materials
 $32,000 
 $47,000 
Work-in-process
  2,000 
  16,000 
Finished goods
  51,000 
  259,000 
 
 $85,000 
 $322,000 
 
 
25
 
 
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:
 
 
 
2020
 
 
2019
 
Gross cost
 $4,000,000 
 $4,000,000 
Accumulated amortization
  (4,000,000)
  (3,683,000)
Net carrying amount
 $- 
 $317,000 
  
 
26
 
 
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.
 
 
27
 
 
 
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
 
2020
 
 
2019
 
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.
 
 
 
28
 
 
A summary of the impact of the misstatements is as follows:
 
 
 
December 31, 2020
 
 
December 31, 2019
 
Year Ended
 
As previously reported
 
 
Restated
 
 
As previously reported
 
 
Restated
 
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)
 
 
 
December 31, 2020
 
 
December 31, 2019
 
As of
 
As previously reported
 
 
Restated
 
 
As previously reported
 
 
Restated
 
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:
 
 
 
December 31,
 
 
December 31,
 
Year Ended
 
2020
 
 
2019
 
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 
 
 
29
 
 
 
 
December 31, 2020
 
 
December 31, 2019
 
Year Ended
 
As previously reported
 
 
Restated
 
 
As previously reported
 
 
Restated
 
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:
 
 
 
December 31, 2020    
 
 
December 31, 2019    
 
 
 
As previously reported
 
 
Error correction
 
 
Restated
 
 
As previously reported
 
 
Error correction
 
 
Restated
 
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 
 
 
30
 
 
The following table sets forth the corrections to retained earnings (accumulated deficit) and total shareholders’ equity in the statements of shareholders’ equity.
 
 
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:
 
 
 
March 31,
 
 
June 30,
 
 
September 30,
 
 
December 31,
 
Three Months Ended
 
2020
 
 
2020
 
 
2020
 
 
2020
 
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 
 
 
31
 
 
 
 
March 31, 2020
 
 
June 30, 2020
 
Three Months Ended
 
As previously reported
 
 
Restated
 
 
As previously reported
 
 
Restated
 
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 
 
 
32
 
 
 
 
September 30, 2020
 
 
December 31, 2020
 
Three Months Ended
 
As previously reported
 
 
Restated
 
 
As previously reported
 
 
Restated
 
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