10-Q/A 1 isig_10qa.htm FORM 10-Q/A isig_10qa
 

  UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q/A
(Amendment No. 1)
 
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
for the quarterly period ended March 31, 2021
or
 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
for the transition period from ___________ to ____________
 
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)
 
(I.R.S. Employer Identification No.)
 
7308 Aspen Lane N, Suite 153, Minneapolis, MN 55428
(Address of principal executive offices; zip code)
 
(763) 392-6200
(Registrant’s telephone number, including area code)
 
8799 Brooklyn Blvd, Minneapolis, MN 55445
(Former name, former address and former fiscal year, if changed since last report)
 
Securities registered 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
 
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, smaller reporting company, or an 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
 
Number of shares outstanding of Common Stock, $.01 par value, as of May 3, 2021 was 1,754,030.

 
 
 
EXPLANATORY NOTE
 
Insignia Systems, Inc. (“we”, “us”, “our” and the “Company”) is filing this Amendment No. 1 on Form 10-Q/A (the “Amendment”) to amend its Quarterly Report on Form 10-Q for the three months ended March 31, 2021, originally filed with the U.S. Securities and Exchange Commission (the “SEC”) on May 7, 2021 (the “Original Report”). In filing this amendment, the Company is restating its previously issued unaudited financial statements for the three months ended March 31, 2021 and 2020 to account for misstatements related to sales taxes. The 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 was 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:
 
 
 
March 31, 2021    
 
 
March 31, 2020    
 
Three Months Ended
 
As previously reported
 
 
Restated
 
 
As previously reported
 
 
Restated
 
Total Net Sales
 $5,419,000 
 $5,386,000 
 $4,682,000 
 $4,646,000 
Operating Loss
  (1,708,000)
  (1,759,000)
  (1,109,000)
  (1,156,000)
Net Loss
  (659,000)
  (737,000)
  (863,000)
  (925,000)
 
 
 
  March 31, 2021    
 
 
December 31, 2020    
 
As of
 
  As previously reported
 
 
Restated
 
 
As previously reported
 
 
Restated
 
Shareholder's equity
 $7,117,000 
 $6,013,000 
 $7,694,000 
 $6,668,000 
 
Internal Control Over Financial Reporting
 
Management has reassessed its evaluation of the effectiveness of its Disclosure Controls and Procedures as of March 31, 2021 as further described in item 4 of this Amendment and concluded that a material weakness existed and that disclosure controls and procedures were not effective. Management’s previously issued report 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 4 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.
 
Items Amended in this Filing
 
This Amendment amends and restates the following Items 1, 2 and 4 appearing in Part I, and Items 1A and 6 appearing in Part II. 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.
 
 
i
 
 
Insignia Systems, Inc.
 
TABLE OF CONTENTS
 
 
 
 
Page
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1
 
 
 
 
2
 
 
 
 
3
 
 
 
 
4
 
 
 
 
5
 
 
 
12
 

 
 
 
 
17
 
 
 
 
 
 
18
 
 
 
 
 
 
18
 
 
 
 
 
 
19
 

ii
 
 
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Insignia Systems, Inc.
CONDENSED BALANCE SHEETS
 
 
 
 As Restated
 
 
 As Restated
 
 
 
March 31, 2021
 
 
December 31, 2020
 
ASSETS
 
  (Unaudited)
 
 
 
 
Current Assets:
 
 
 
 
 
 
Cash and cash equivalents
 $6,838,000 
 $7,128,000 
Accounts receivable, net
  5,075,000 
  5,857,000 
Inventories
  102,000 
  85,000 
Income tax receivable
  238,000 
  241,000 
Prepaid expenses and other
  628,000 
  711,000 
Total Current Assets
  12,881,000 
  14,022,000 
 
    
    
Other Assets:
    
    
Property and equipment, net
  74,000 
  75,000 
Operating lease right-of-use assets
  33,000 
  37,000 
Other, net
  130,000 
  155,000 
 
    
    
Total Assets
 $13,118,000 
 $14,289,000 
 
    
    
LIABILITIES AND SHAREHOLDERS' EQUITY
    
    
Current Liabilities:
    
    
Accounts payable
  2,580,000 
  3,148,000 
Accrued liabilities:
    
    
     Compensation
  374,000 
  424,000 
Sales tax
  1,163,000 
  1,011,000 
     Other
  1,570,000 
  1,071,000 
Current portion of long-term debt
   
  464,000 
Current portion of operating lease liabilities
  16,000 
  56,000 
Deferred revenue
  700,000 
  180,000 
Total Current Liabilities
  6,403,000 
  6,354,000 
 
    
    
Long-Term Liabilities:
    
    
Accrued income taxes
  685,000 
  677,000 
Long-term debt, net of current portion
   
  590,000 
Operating lease liabilities
  17,000 
   
Total Long-Term Liabilities
  702,000 
  1,267,000 
 
    
    
Commitments and Contingencies
    
    
 
    
    
Shareholders' Equity:
    
    
Common stock, par value $.01:
    
    
Authorized shares - 5,714,000
    
    
Issued and outstanding shares - 1,754,000 at March 31, 2021 and 1,748,000 at December 31, 2020
  18,000 
  17,000 
Additional paid-in capital
  16,319,000 
  16,238,000 
Accumulated deficit
  (10,324,000)
  (9,587,000)
Total Shareholders' Equity
  6,013,000 
  6,668,000 
 
    
    
Total Liabilities and Shareholders' Equity
 $13,118,000 
 $14,289,000 

See accompanying notes to financial statements.

 
1
 
 
Insignia Systems, Inc.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
 

 
 As Restated
 
 
 As Restated
 
Three Months Ended March 31
 
2021
 
 
2020
 
Services revenues
 $5,386,000 
 $4,400,000 
Products revenues
   
  246,000 
Total Net Sales
  5,386,000 
  4,646,000 
 
    
    
Cost of services
  4,457,000 
  3,382,000 
Cost of goods sold
   
  172,000 
Impairment loss - services
   
  159,000 
Total Cost of Sales
  4,457,000 
  3,713,000 
Gross Profit
  929,000 
  933,000 
 
    
    
Operating Expenses:
    
    
Selling
  516,000 
  720,000 
Marketing
  235,000 
  365,000 
General and administrative
  1,937,000 
  1,004,000 
Total Operating Expenses
  2,688,000 
  2,089,000 
Operating Loss
  (1,759,000)
  (1,156,000)
 
    
    
Gain on forgiveness of debt and accrued interest
  1,062,000 
   
Other income (expense)
  (27,000)
  9,000 
Loss Before Taxes
  (724,000)
  (1,147,000)
 
    
    
Income tax expense (benefit)
  13,000 
  (222,000)
Net Loss
 $(737,000)
 $(925,000)
 
    
    
Net loss per share:
    
    
Basic
 $(0.42)
 $(0.54)
Diluted
 $(0.42)
 $(0.54)
 
    
    
Shares used in calculation of net
 loss per share:
    
    
Basic
  1,751,000 
  1,724,000 
Diluted
  1,751,000 
  1,724,000 
 
See accompanying notes to financial statements.
 
 
2
 
 
Insignia Systems, Inc.
CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
 
 
 
Common Stock    
 
 
Additional Paid-In
 
 
Accumulated
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Deficit
 
 
Total
 
Balance at December 31, 2020, as previously reported
  1,748,000 
 $17,000 
 $16,238,000 
 $(8,561,000)
 $7,694,000 
Cumulative restatement adjustments
   
   
   
  (1,026,000)
  (1,026,000)
Issuance of common stock, net
  6,000 
  1,000 
  25,000 
   
  26,000 
Value of stock-based compensation
   
   
  56,000 
   
  56,000 
Net loss
   
   
   
  (737,000)
  (737,000)
Balance at March 31, 2021, as restated
  1,754,000 
 $18,000 
 $16,319,000 
 $(10,324,000)
 $6,013,000 
 
    
    
    
    
    
 
    
    
    
    
    
Balance at December 31, 2019, as previously reported
  1,725,000 
 $16,000 
 $16,039,000 
 $(4,261,000)
 $11,794,000 
Cumulative restatement adjustments
   
   
   
  (711,000)
  (711,000)
Issuance of common stock, net
  5,000 
   
  20,000 
   
  20,000 
Value of stock-based compensation
   
   
  49,000 
   
  49,000 
Net loss
   
   
   
  (925,000)
  (925,000)
Balance at March 31, 2020, as restated
  1,730,000 
 $16,000 
 $16,108,000 
 $(5,897,000)
 $10,227,000 
 
See accompanying notes to financial statements.
 
 
3
 
 
Insignia Systems, Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
 
 As Restated
 
 
 As Restated
 
Three Months Ended March 31
 
2021
 
 
2020
 
Operating activities:
 
 
 
 
 
 
Net loss
 $(737,000)
 $(925,000)
Adjustments to reconcile net loss to net cash used in operating activities:
    
    
Depreciation and amortization
  21,000 
  148,000 
Impairment loss
   
  159,000 
Gain on sale of property and equipment
  (7,000)
   
Changes in allowance for doubtful accounts
  24,000 
  38,000 
Stock-based compensation expense
  56,000 
  49,000 
Gain on forgiveness of debt and accrued interest
  (1,062,000)
   
Changes in operating assets and liabilities:
    
    
Accounts receivable
  758,000 
  1,272,000 
Inventories
  (17,000)
  9,000 
Income tax receivable
  3,000 
  (119,000)
Prepaid expenses and other
  108,000 
  4,000 
Accounts payable
  (568,000)
  (208,000)
Accrued liabilities
  590,000 
  (389,000)
Accrued income taxes
  8,000 
  9,000 
Deferred revenue
  520,000 
  210,000 
Net cash provided by (used in) operating activities
  (303,000)
  257,000 
 
    
    
Investing activities:
    
    
Purchases of property and equipment
  (29,000)
  (32,000)
Sale of property and equipment
  16,000 
   
Net cash used in investing activities
  (13,000)
  (32,000)
 
    
    
Financing activities:
    
    
Proceeds from issuance of common stock, net
  26,000 
  20,000 
Net cash provided by financing activities
  26,000 
  20,000 
 
    
    
Decrease in cash and cash equivalents
  (290,000)
  245,000 
 
    
    
Cash and cash equivalents at beginning of year
  7,128,000 
  7,510,000 
Cash and cash equivalents at end of year
 $6,838,000 
 $7,755,000 
 
    
    
Supplemental disclosures for cash flow information:
    
    
Cash refunded (paid) during the year for income taxes
 $(1,000)
 $112,000 
 
    
    
Non-cash investing and financing activities:
    
    
Operating lease right-of-use asset obtained in exchange for lease obligation
 $33,000 
 $- 
Foregiveness of debt and accrued interest
 $1,062,000 
 $- 
 
See accompanying notes to financial statements.
 

 
4
 
 
Insignia Systems, Inc.
Notes To Financial Statements
(Unaudited)
 
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 three months ended March 31, 2021 and 2020, 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 including the value of Common Stock and Additional Paid-In Capital as of December 31, 2020.
 
Sale of Custom Print Business. In August 2020, the Company sold its custom print business to an existing strategic partner. This divestiture 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. On the date of the sale, the Company received $200,000 of cash and recorded a short-term receivable of $75,000 and a long-term receivable of $25,000.
 
Basis of Presentation. The accompanying unaudited financial statements of the Company have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information. They do not include all information and footnotes required by U.S. GAAP for complete financial statements. However, except as described herein, there has been no material change in the information disclosed in the notes to financial statements included in the Company’s financial statements as of and for the year ended December 31, 2020 included in the Company’s Annual Report on Form 10-K/A. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year. 
 
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 consisted of the following as of the dates indicated:
 
 
 
March 31, 2021
 
 
December 31, 2020
 
Raw materials
 $- 
 $32,000 
Work-in-process
  2,000 
  2,000 
Finished goods
  100,000 
  51,000 
 
 $102,000 
 $85,000 
 
 
5
 
 
Property and Equipment. Property and equipment consisted of the following as of the dates indicated:
 
 
 
March 31, 2021
 
 
Decmeber 31, 2020
 
Property and Equipment:
 
 
 
 
 
 
Production tooling, machinery and equipment
 $27,000 
 $2,349,000 
Office furniture and fixtures
  88,000 
  425,000 
Computer equipment and software
  704,000 
  1,447,000 
Construction in-progress
   
  17,000 
 
  819,000 
  4,238,000 
Accumulated depreciation and amortization
  (745,000)
  (4,163,000)
Net Property and Equipment
 $74,000 
 $75,000 
 
Depreciation expense was approximately $21,000 and $85,000 in the three months ended March 31, 2021 and 2020, respectively.
 
Stock-Based Compensation. The Company measures and recognizes compensation expense for all stock-based payments at fair value. Restricted stock units and awards are valued at the closing market price of the Company’s stock as of 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 the fair value of share-based payment awards on the date of grant using an option-pricing model is affected by the Company’s 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.
 
During the three months ended March 31, 2021 and 2020, no equity awards were issued by the Company.
 
The Company estimated the fair value of stock-based awards granted during the three months ended March 31, 2021, under the Company’s employee stock purchase plan using the following weighted average assumptions: expected life of 1.0 year, expected volatility of 142.2%, dividend yield of 0% and risk-free interest rate of 0.1%.
 
The Company recorded total stock-based compensation expense of $56,000 and $49,000 for the three months ended March 31, 2021 and 2020, respectively.
 
Net Loss per Share. Basic net loss per share is computed by dividing net loss by the weighted average shares outstanding and excludes any potential dilutive effects of stock options and restricted stock units and awards. Diluted net loss per share gives effect to all dilutive potential common shares outstanding during the period.
 
Due to the net loss incurred during the three months ended March 31, 2021 and 2020 all outstanding stock options were anti-dilutive for the periods.
 
Weighted average common shares outstanding for the three months ended March 31, 2021 and 2020 were as follows:
 
Three months ended March 31
 
2021
 
 
2020
 
Denominator for basic net loss per share - weighted average shares
  1,751,000 
  1,724,000 
Effect of dilutive securities:
    
    
Stock options, restricted stock and restricted stock units
   
   
Denominator for diluted net loss per share - weighted average shares
  1,751,000 
  1,724,000 
 
 
6
 
 
2. 
Restatement of Previously Issued Financial Statements. The financial statements for the three months ended March 31, 2021 and 2020 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 three months ended March 31, 2021 and 2020 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 3, 5 and 6 were updated to reflect the restatement.
 
A summary of the impact of the misstatements is as follows:
 
 
 
March 31, 2021    
 
 
March 31, 2020    
 
Three Months Ended
 
As previously reported
 
 
Restated
 
 
As previously reported
 
 
Restated
 
Net Sales
 $5,419,000 
 $5,386,000 
 $4,682,000 
 $4,646,000 
Operating Loss
  (1,708,000)
  (1,759,000)
  (1,109,000)
  (1,156,000)
Net Loss
  (659,000)
  (737,000)
  (863,000)
  (925,000)
 
 
 
March 31, 2021    
 
 
December 31, 2020
 
As of
 
As previously reported
 
 
Restated
 
 
As previously reported
 
 
Restated
 
Shareholder's equity
 $7,117,000 
 $6,013,000 
 $7,694,000 
 $6,668,000 
 
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-The impact on income tax benefit from the impact on loss before taxes due to the correction in (a) above are 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 quarters ended March 31, 2021 and 2020.
 
 
7
 
 
The following table sets forth the corrections in each of the individual line items affected in the statements of operations:
 
 
 
March 31,
 
 
March 31,
 
Three Months Ended
 
2021
 
 
2020
 
Reduction of net sales
 $33,000 
 $36,000 
Increase in general and administrative expense for penalities
  18,000 
  11,000 
Decrease in other income (expense) for interest expense
  27,000 
  15,000 
Total effect of restatement items
 $78,000 
 $62,000 
 
 
 
March 31, 2021    
 
 
March 31, 2020    
 
Three Months Ended
 
As previously reported
 
 
Restated
 
 
As previously reported
 
 
Restated
 
Services revenues
 $5,419,000 
 $5,386,000 
 $4,436,000 
 $4,400,000 
Products revenues
   
   
  246,000 
  246,000 
Total Net Sales
  5,419,000 
  5,386,000 
  4,682,000 
  4,646,000 
 
    
    
    
    
Cost of services
  4,457,000 
  4,457,000 
  3,382,000 
  3,382,000 
Cost of goods sold
   
   
  172,000 
  172,000 
Impairment loss
   
   
  159,000 
  159,000 
Total Cost of Sales
  4,457,000 
  4,457,000 
  3,713,000 
  3,713,000 
Gross Profit
  962,000 
  929,000 
  969,000 
  933,000 
 
    
    
    
    
Operating Expenses:
    
    
    
    
Selling
  516,000 
  516,000 
  720,000 
  720,000 
Marketing
  235,000 
  235,000 
  365,000 
  365,000 
General and administrative
  1,919,000 
  1,937,000 
  993,000 
  1,004,000 
Total Operating Expenses
  2,670,000 
  2,688,000 
  2,078,000 
  2,089,000 
Operating Loss
  (1,708,000)
  (1,759,000)
  (1,109,000)
  (1,156,000)
 
    
    
    
    
Gain on forgiveness of debt and accrued interest
  1,062,000 
  1,062,000 
   
   
Other income (expense)
   
  (27,000)
  24,000 
  9,000 
Loss Before Taxes
  (646,000)
  (724,000)
  (1,085,000)
  (1,147,000)
 
    
    
    
    
Income tax expense (benefit)
  13,000 
  13,000 
  (222,000)
  (222,000)
Net Loss
 $(659,000)
 $(737,000)
 $(863,000)
 $(925,000)
 
    
    
    
    
Net loss per share:
    
    
    
    
Basic
 $(0.38)
 $(0.42)
 $(0.51)
 $(0.54)
Diluted
 $(0.38)
 $(0.42)
 $(0.51)
 $(0.54)
 
    
    
    
    
Shares used in calculation of net loss per share:
    
    
    
    
Basic
  1,751,000 
  1,751,000 
  1,724,000 
  1,724,000 
Diluted
  1,751,000 
  1,751,000 
  1,724,000 
  1,724,000 
 
 
8
 
 
The following table sets forth the corrections in each of the individual line items affected in the balance sheet:
 
 
 
March 31, 2021      
 
 
December 31, 2020    
 
 
 
As previously reported
 
 
Error correction
 
 
Restated
 
 
As previously reported
 
 
Error correction
 
 
Restated
 
Accounts receivable, net
 $4,726,000 
 $349,000 
 $5,075,000 
 $5,628,000 
 $229,000 
 $5,857,000 
Accrued liabilities - sales tax
 $- 
 $1,163,000 
 $1,163,000 
 $- 
 $1,011,000 
 $1,011,000 
Accrued liabilities - other
 $1,280,000 
 $290,000 
 $1,570,000 
 $827,000 
 $244,000 
 $1,071,000 
Accumulated deficit
 $9,220,000 
 $1,104,000 
 $10,324,000 
 $8,561,000 
 $1,026,000 
 $9,587,000 
 
The Company did not present tables for adjustments within the statement of cash flows, since all of the foregoing adjustments were within the operating activities section of the statements of cash flows. These adjustments did not affect total cash flows from operating activities, financing activities or investing activities for any period presented.
 
3. 
Revenue Recognition. Under Accounting Standards Update (“ASU”) 2014-09 Revenue from Contracts with Customers (“Topic 606”), revenue is measured based on consideration specified in the contract with a customer, adjusted for any applicable estimates of variable consideration and other factors affecting the transaction price, including noncash consideration, consideration paid or payable to a customer and significant financing components. Revenue from all customers is recognized when a performance obligation is satisfied by transferring control of a distinct good or service to a customer, as further described below under “Performance Obligations.”
 
Taxes collected from customers and remitted to governmental authorities are excluded from revenue on the net basis of accounting.
 
The Company includes shipping and handling fees in revenues. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.
 
Performance Obligations
 
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account under Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. The following is a description of the Company’s performance obligations included in its primary revenue streams and the timing or method of revenue recognition for each:
 
In-Store Signage Solution Services. The Company provides a service of displaying promotional signs in close proximity to the CPG manufacturer’s product in participating stores, which the Company maintains in two-to-four-week cycle increments.
 
Each of the individual activities under the Company’s services, including production activities, are inputs to an integrated sign display service. Customers receive and consume the benefits from the promotional displays over the duration of the contracted display cycle. Additionally, the display of the signs does not have an alternative use to the Company and the Company has an enforceable right to payment for services performed to date. As a result, the Company recognizes the transaction price for service performance obligations as revenue over time. Given the nature of the Company’s performance obligations is to provide a display service over the duration of a specified period or periods, the Company recognizes revenue on a straight-line basis over the display service period as it best reflects the timing of transfer of its sign solutions.
 
Non-POPS Solutions. The Company also supplies CPG manufacturers with other retailer approved promotional services, such as signage, on-pack, merchandising and digital solutions. These services are more customized than POPS, consisting of variable durations and variable specifications. Due to the variable nature of these services, revenue recognition is a mix of over-time and point-in-time recognition.
 
Products. Prior to the August 2020 sale of the Company’s custom print business, the Company also sold custom print solutions directly to its customers. Each such product was a distinct performance obligation. Revenue was recognized at a point-in-time upon shipment when control of the goods transferred to the customer.
 
 
9
 
 
Disaggregation of Revenue
 
In the following table, revenue is disaggregated by major revenue stream and timing of revenue recognition.
 
 
 
Three months ended March 31, 2021    
 
 
 
 As Restated
 
 
 As Restated  
 
 
 As Restated
 
 
 
Services Revenues
 
 
Products Revenue
 
 
Total Revenue
 
Timing of revenue recognition:
 
 
 
 
   
 
 
 
 
Products and services transferred over time
 $2,025,000 
 $- 
 $2,025,000 
Products and services transferred at a point in time
  3,361,000 
  - 
  3,361,000 
Total
 $5,386,000 
 $- 
 $5,386,000 
 
 
 
Three months ended March 31, 2020    
 
 
 
 As Restated
 
 
 As Restated  
 
 
 As Restated
 
 
 
Services Revenues
 
 
Products Revenue
 
 
Total Revenue
 
Timing of revenue recognition:
 
 
 
 
   
 
 
 
 
Products and services transferred over time
 $3,332,000 
 $- 
 $3,332,000 
Products and services transferred at a point in time
  1,068,000 
  246,000 
  1,314,000 
Total
 $4,400,000 
 $246,000 
 $4,646,000 
 
Contract Costs
 
Sales commissions that are paid to internal or external sales representatives are eligible for capitalization as they are incremental costs that would not have been incurred without entering into a specific sales arrangement and are recoverable through the expected margin on the transaction. The Company is applying the practical expedient in Accounting Standards Codification 340-40-25-4 that allows the incremental costs of obtaining a contract to be recorded as an expense when incurred when the amortization period of the asset that would have otherwise been recognized is one year or less. These costs are included in selling expenses.
 
Deferred Revenue
 
Significant changes in deferred revenue during the period are as follows:
 
Balance at December 31, 2020
 $180,000 
Reclassification of beginning deferred revenue to revenue, as a result of performance obligations satisfied
  (132,000)
Cash received in advance and not recognized as revenue
  652,000 
Balance at March 31, 2021
 $700,000 
 
 
10
 
 
Transaction Price Allocated to Remaining Performance Obligations
 
The Company applies the practical expedient in paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less, which reflect the majority of its performance obligations. This practical expedient is being applied to arrangements for certain incomplete services and unshipped custom signage materials. Among our contracts with an expected duration of greater than one year, we estimate that revenue of $38,000, $116,000 and $60,000 related to performance obligations that are unsatisfied (or partially unsatisfied) as of March 31, 2021 will be recognized during the remainder of fiscal 2021, 2022 and 2023, respectively.
 
4. 
Selling Arrangement. In 2011, the Company paid to 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. 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. The Company 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 $61,000 in the three months ended March 31, 2020. The selling arrangement was fully amortized as of March 31, 2021 and December 31, 2020.
 
5. 
Income Taxes. For the three months ended March 31, 2021, the Company recorded income tax expense of $13,000, or (1.8%) of loss before taxes. For the three months ended March 31, 2020, the Company recorded income tax benefit of $222,000, or 19.4% of loss before taxes. The income tax expense (benefit) for the three months ended March 31, 2021 and 2020 is comprised of federal and state taxes. The primary differences between the Company’s March 31, 2021 and 2020 effective tax rates and the statutory federal rate are nondeductible stock-based compensation, nondeductible meals and entertainment and increases in the Company’s valuation allowance against its deferred tax assets. For the three months ended March 31, 2020, the Company recognized a decrease in its valuation allowance against certain federal net operating losses (“NOLs”), which the Company was able to carry back to prior periods. The Company reassesses its effective rate each reporting period and adjusts the annual effective rate if deemed necessary, based on projected annual taxable income (loss).
 
Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statements and tax basis of assets and liabilities given the provisions of enacted tax laws. 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, adjustment 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. At March 31, 2021 and December 31, 2020, the Company had a valuation allowance of approximately $2,116,000 and $1,946,000, respectively, against its entire deferred tax asset because the Company does not believe it is more likely than not that it will realize its deferred tax asset.
 
As of March 31, 2021, and December 31, 2020, the Company had unrecognized tax benefits totaling $685,000 and $677,000, respectively, including interest, which relates to state nexus issues. The amount of the unrecognized tax benefits, if recognized, that would affect the effective income tax rates of future periods is $685,000. Due to the current statute of limitations regarding the unrecognized tax benefits, the unrecognized tax benefits and associated interest are not expected to change significantly in 2021.
 
In March 2020, Congress passed the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The CARES Act, among other provisions, allows for companies to carry back federal NOLs generated in 2018, 2019 and 2020 for up to five years for refunds of federal taxes paid. This provision created an opportunity for the Company to utilize NOLs not previously expected to be utilized. Thus, in 2020 the Company reversed approximately $215,000 of its valuation allowance against the NOLs in its deferred tax assets which the Company carried back to claim a refund of federal taxes paid. As the Company expects to receive the tax refund from the ability to carry back the NOLs within the next 12 months, this discrete benefit has been recorded within income taxes receivable on the balance sheet. In addition to the $215,000 recognized, $17,000 was included as a discrete tax benefit for 2020 and included in income taxes receivable related to the NOL carry back due to differences in the federal tax rate utilized for the deferred tax asset compared to the rates in effect for the years in which the NOL is being carried back.
 
6. 
Concentrations. During the three months ended March 31, 2021, two customers accounted for 17% and 14%, respectively of the Company’s total net sales. During the three months ended March 31, 2020, one customer accounted for 16% of the Company’s total net sales. At March 31, 2021, two customers accounted for 19% and 10%, respectively of the Company’s total accounts receivable. At December 31, 2020, two customers represented 17% and 10%, respectively of the Company’s total accounts receivable.
 
7. 
Legal Proceedings.  In July 2019, the Company brought suit against News America in the U.S. District Court in Minnesota, alleging violations of federal and state antitrust and tort laws by News America. The complaint alleges that News America has monopolized the national market for third-party in-store advertising and promotion products and services through various wrongful acts designed to harm the Company, its last significant competitor. The suit seeks, among other relief, an injunction sufficient to prevent further antitrust injury and an award of treble damages to be determined at trial for the harm caused to our Company.
 
In August 2019, News America filed an answer and counterclaim. In October 2019, News America moved for a judgment on the pleadings. Management believes that the counterclaim is without merit, and the Company filed a response brief on November 11, 2019. The Company also moved to dismiss the counterclaim against it. The court heard oral arguments from both parties on January 14, 2020, and subsequently denied both motions. On July 10, 2020 the parties cross-moved for summary judgment on the counterclaim. On December 7, 2020, the Court granted News America’s motion for summary judgment on the counterclaim in part, requiring Insignia to strike certain allegations from its complaint and finding News America’s request for attorneys’ fees and costs premature.
 
Discovery is underway and trial has been scheduled for December 2021. At this stage of the proceedings, the Company is unable to determine the likelihood of an unfavorable outcome or estimate any potential resulting liability.
 
 
11
 
 
8. 
Loan.  In April 2020, the Company entered into a promissory note (the “Note”) with Alerus Financial, N.A. The Note evidenced a loan to the Company in the amount of $1,054,000 pursuant to the Paycheck Protection Program (the “PPP”) of the CARES Act administered by the U.S. Small Business Administration (the “SBA”).
 
In accordance with the requirements of the CARES Act, the Company used the proceeds from the loan exclusively for qualified expenses under the PPP, including payroll costs, rent and utility costs, as further detailed in the CARES Act and applicable guidance issued by the SBA. Interest was accrued on the outstanding balance of the Note at a rate of 1.00% per annum. The Note was scheduled to mature on April 22, 2022 and required 18 equal monthly payments of principal and interest.
 
The Company’s application for forgiveness of the entire principal amount and all accrued interest under the Note was approved by the SBA on January 29, 2021. Accordingly, for the quarter ended March 31, 2021 the debt of $1,054,000, plus accrued interest of $8,000, was eliminated with a gain on debt forgiveness and accrued interest included in other income.
 
9.
Subsequent Event. In April 2021, the Company signed a lease for its headquarters space in Minneapolis for a three-year term commencing in July 2021 with monthly payments of approximately $8,300, inclusive of common area maintenance costs. A right-of-use asset and lease liability of approximately $183,000 will be recorded during the second quarter of 2021.
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion should be read in conjunction with the Company’s financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated due to various factors discussed under “Cautionary Statement Regarding Forward-Looking Statements” and elsewhere, including Part II, Item 1A, in this Quarterly Report on Form 10-Q and the “Risk Factors” described in Part I, Item 1A, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, our Current Reports on Form 8-K and our other SEC filings.
 
Restatement
 
The accompanying Management’s Discussion and Analysis (“MD&A”) gives effect to certain adjustments made to the previously reported financial statements for the three months ended March 31, 2021 and 2020. Due to the restatement of the unaudited financial statements for 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 Amendment No. 1 to the Quarterly Report on Form 10-Q/A and Note 2, “Restatement of Previously Issued Financial Statements” in the accompanying financial statements for further details related to the restatement and impact on our financial statements.
 
 
Company Overview
 
Insignia Systems, Inc. (“Insignia,” “we,” “us,” “our” and 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 (“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. Our in-store solutions execute 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.
 
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. 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 diversified our portfolio through a significant expansion of our offered solutions and development of a portfolio designed to more holistically meet the needs of our clients and execution partners. This diversification has resulted in non-POPS solutions revenue growing 99% for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Our non-POPS revenue has grown year over year since we began the expansion of our offered solutions in 2017. We remain committed to further refining and enhancing our solutions and broadening our retailer relationships.
 
 
12
 
 
Impacts and Potential Future Impacts of COVID-19 on Our Business
 
The COVID-19 pandemic has 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 may 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 the three months ended March 31, 2021 was not as significant as it had been in 2020 which is reflected in the increased revenue for the quarter ended March 31, 2021 compared to the quarter ended March 31, 2020. Our future bookings may be negatively impacted due to ongoing changes in the retail landscape and evolution of shoppers’ behavior in response to COVID-19. The permanence of these changes is unknown. 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 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. However, 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.
 
Business Overview
 
Summary of Financial Results
 
For the quarter ended March 31, 2021, the Company generated revenues of $5,386,000, as compared with revenues of $4,646,000 for the quarter ended March 31, 2020. Net loss for the quarter ended March 31, 2021 was $737,000, as compared to a net loss of $925,000 for the quarter ended March 31, 2020, while the operating loss was $1,759,000 for the quarter ended March 31, 2021 compared to $1,156,000 for the comparable quarter in the prior year. Revenue from our non-POPS solutions has increased significantly for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, partially offset by continued declines in our signage business due to competitive pressure. We continue to pursue a variety of efforts designed to drive innovation, client acquisitions and retailer expansions. During the first quarter of 2021, litigation expenses increased significantly compared to prior quarters. We also recognized a gain of $1,062,000 on the forgiveness of our PPP loan during the first quarter.
 
During the quarter ended March 31, 2021, cash and cash equivalents decreased $290,000 from $7,128,000 at December 31, 2020 to $6,838,000 at March 31, 2021. The decrease was primarily driven by the net loss for the quarter ended March 31, 2021. We have no debt other than our lease obligations at March 31, 2021.
 
 
13
 
 
Results of Operations
 
The following table sets forth, for the periods indicated, certain items in our Condensed Statements of Operations as a percentage of total net sales.
 
 
 
As Restated    
 
For theThree Months Ended March 31
 
2021
 
 
2020
 
Net sales
  100.0%
  100.0%
Cost of sales
  82.8 
  79.9 
Gross profit
  17.2 
  20.1 
Operating expenses:
    
    
Selling
  9.6 
  15.5 
Marketing
  4.4 
  7.9 
General and administrative
  35.9 
  21.6 
Total operating expenses
  49.9 
  45.0 
Operating loss
  (32.7)
  (24.9)
Other income
  19.2 
  0.2 
Loss before taxes
  (13.5)
  (24.7)
Income tax benefit
  0.2 
  (4.8)
Net loss
  (13.7) %
  (19.9) %
 
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
 
Net Sales. Net sales for the three months ended March 31, 2021 increased 15.9% to $5,386,000 compared to $4,646,000 for the three months ended March 31, 2020.
 
Service revenues. Service revenues for the three months ended March 31, 2021 increased 22.4% to $5,386,000 compared to $4,400,000 for the three months ended March 31, 2020. The increase was due to 98.7% increase in non-POPS revenue, partially offset by a 40.7% decrease in POPS solutions revenue. For the three months ended March 31, 2021, non-POPS revenue has increased due to both sales to new CPGs and an increase in sales to existing CPGs. Competitive pressures have resulted in decreased POPS solutions revenue for three months ended March 31, 2021 versus the three months ended March 31, 2020. We will continue to have increased pressure on our POPS business in 2021, including the expiration in April 2021 of our 10-year selling agreement with News America Marketing In-Store (“News America”). While the negative impact from COVID-19 has lessened compared to 2020, future impacts are unknown as CPG manufacturers and retailers react to changes in shoppers’ behavior.
 
Product revenues. Due to the August 2020 sale of the custom print business, there were no product sales for the three months ended March 31, 2021 compared to $246,000 for the three months ended March 31, 2020. 
 
Gross Profit. Gross profit for the three months ended March 31, 2021 decreased 0.4% to $929,000 compared to $933,000, inclusive of a $159,000 impairment charge for the three months ended March 31, 2020. Gross profit as a percentage of total net sales decreased to 17.2% for the three months ended March 31, 2021, compared to 20.1% for the three months ended March 31, 2020.
 
 
14
 
 
Service revenues. Gross profit from our service revenues for the three months ended March 31, 2021 decreased 8.7% to $929,000 compared to $1,018,000 for the three months ended March 31, 2020. The decrease in gross profit was primarily due to the decrease in POPS solution sales in addition to the Company’s decision to make an investment in the execution of a large non-POPS program.
 
Gross profit as a percentage of service revenues for the three months ended March 31, 2021 decreased to 17.2% compared to 23.1% for the three months ended March 31, 2020. The decrease was primarily due to mix of revenue as our non-POPS solutions typically have lower margins due to competitive pressures, partially offset by increased gross profit rates from our POPS solutions as the Company reduced guaranteed payment obligations by renegotiating several fixed or store-based retail payment contracts to sign placement-based payment contracts during 2020.
 
Product revenues. Due to the August 2020 sale of the custom print business, there was no gross profit for the three months ended March 31, 2021 compared to $74,000 for the three months ended March 31, 2020. Gross profit as a percentage of product revenues for the three months ended March 31, 2020 was 30.1%.
 
Impairment Loss. Impairment loss for the three months ended March 31, 2020 was $159,000 as a result of the impairment during the first quarter of the Company’s selling agreement with News America, a long-lived asset. The impairment charge is described further in Note 3 of our accompanying unaudited financial statements. There was no impairment loss during the three months ended March 31, 2021.
 
Operating Expenses
 
Selling. Selling expenses for the three months ended March 31, 2021 decreased 28.3% to $516,000 compared to $720,000 for the three months ended March 31, 2020. Decreased selling expense was primarily the result of decreased staff related expenses in addition to a software investment in the three months ended March 31, 2020. Selling expenses as a percentage of total net sales decreased to 9.6% for the three months ended March 31, 2021 compared to 15.5% for the three months ended March 31, 2020. The decrease was primarily due to the factors described above, in addition to increased sales.
 
Marketing. Marketing expenses for the three months ended March 31, 2021 decreased 35.6% to $235,000 compared to $365,000 for the three months ended March 31, 2020. Decreased marketing expense was primarily the result of decreased consulting and staffing expenses. Marketing expenses as a percentage of total net sales decreased to 4.4% for the three months ended March 31, 2021 compared to 7.9% for the three months ended March 31, 2020. The decrease was primarily due to the factors described above, in addition to increased sales.
 
General and administrative. General and administrative expenses for the three months ended March 31, 2021 increased 92.9% to $1,937,000 compared to $1,004,000 for the three months ended March 31, 2020. The increase was primarily due to expenses incurred as a result of the litigation with News America. General and administrative expenses as a percentage of total net sales increased to 36.0% for the three months ended March 31, 2021 compared to 21.6% for the three months ended March 31, 2020. The increase was primarily due to the factors described above, partially offset by increased sales.
 
Other Income. Other income for the three months ended March 31, 2021 was $1,035,000 compared to $9,000 for the three months ended March 31, 2020. The increase was due to the gain on debt extinguishment of $1,062,000 from the SBA forgiving the Company of its Note entered into pursuant to the PPP of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act.
 
Income Taxes.  For the three months ended March 31, 2021, the Company recorded income tax expense of $13,000, or (1.8%) of loss before taxes. For the three months ended March 31, 2020, the Company recorded income tax benefit of $222,000, or 19.4% of loss before taxes. The income tax expense (benefit) for the three months ended March 31, 2021 and 2020 is comprised of federal and state taxes. The primary differences between the Company’s March 31, 2021 and 2020 effective tax rates and the statutory federal rate are nondeductible stock-based compensation, nondeductible meals and entertainment as well as an increase in the Company’s valuation allowance against its deferred tax assets. In addition, for the three months ended March 31, 2020, the Company recognized a decrease in its valuation allowance against certain net operating losses (NOLs) carried forward for federal income tax purposes, which the Company was able to carry back to prior years and request a refund of federal taxes paid.
 
The Company reassesses its effective tax rate each reporting period and adjusts the annual effective rate if deemed necessary, based on projected annual taxable income (loss).
 
Deferred income taxes are determined based on the estimated future tax effects of differences between the financial statements and tax basis of assets and liabilities given the provisions of enacted tax laws. In providing for deferred taxes, we consider tax regulations of the jurisdictions in which we operate, estimates of future taxable income and available tax planning strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustment 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
 
 
As a result of the Company’s future outlook, management has reviewed its deferred tax assets and concluded that the uncertainties related to the realization of its deferred tax assets have become unfavorable. Management has considered positive and negative evidence for the potential utilization of the deferred tax assets and has concluded that it is more likely than not that Company will not realize the full amount of its net deferred tax assets. At March 31, 2021 and December 31, 2020, the Company had a valuation allowance of approximately $2,116,000 and $1,946,000, respectively, against its entire deferred tax asset because the Company does not believe it is more likely than not that it will realize its deferred tax asset.
 
In March 2020, Congress passed the Coronavirus Aid, Relief and Economic Security (“CARES”) Act. The CARES Act, among other provisions, allows for companies to carry back federal NOLs generated in 2018, 2019 and 2020 for up to five years for refunds of federal taxes paid. This provision created an opportunity for the Company to utilize NOLs not previously expected to be utilized. Thus, the Company has reversed approximately $215,000 of its valuation allowance against the NOLs in its deferred tax assets which the Company carried back to claim a refund of federal taxes paid. As the Company expects to receive the tax refund from the ability to carry back the NOLs within the next 12 months, this discrete benefit has been recorded within income taxes receivable on the balance sheet. In addition to the $215,000 recognized, $17,000 was included as a discrete tax benefit for the year and included in income taxes receivable related to the NOL carry back due to differences in the federal tax rate utilized for the deferred tax asset compared to the rates in effect for the years in which the NOL is being carried back.
 
Net Loss. For the reasons stated above, net loss for the three months ended March 31, 2021 was $737,000, compared to a net loss of $925,000 for the three months ending March 31, 2020.
 
Liquidity and Capital Resources
 
The Company has financed its operations with proceeds from stock sales and sales of its services and products. At March 31, 2021, working capital was $6,478,000 (defined as current assets less current liabilities) compared to $7,668,000 at December 31, 2020. During the three months ended March 31, 2021, cash and cash equivalents decreased $290,000 from $7,128,000 at December 31, 2020 to $6,838,000 at March 31, 2021.
 
Operating Activities. Net cash used in operating activities during the three months ended March 31, 2021 was $303,000. Net loss of $737,000, less non-cash adjustments of $968,000, plus changes in operating assets and liabilities of $1,402,000 resulted in the $303,000 of cash used in operating activities. The largest component of the change in operating assets and liabilities was accounts receivable, which decreased $758,000 from December 31, 2020, as a result of normal fluctuations based on business and market conditions. The non-cash adjustments consisted of depreciation and amortization expense, gain on sale of property and equipment, changes in allowance for doubtful accounts, gain on forgiveness of PPP loan and accrued interest and stock-based compensation expense. 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 used in investing activities during the three months ended March 31, 2021 was $13,000. This was related to purchases of property and equipment, partially offset by proceeds from the sale of property and equipment.
 
Financing Activities. Net cash provided by financing activities during the three months ended March 31, 2021 was $26,000, which related to proceeds received from issuance of common stock under the employee stock purchase plan.
 
The Company believes that based upon current business conditions and plans, its existing cash balance and future cash generated from operations will be sufficient for its cash requirements for at least the next twelve months.
 
Critical Accounting Policies
 
The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions or conditions.
 
Our significant accounting policies are described in Note 1 to the annual financial statements as of and for the year ended December 31, 2020, included in our Form 10-K/A filed with the Securities and Exchange Commission on August 23, 2021. We believe our most critical accounting policies and estimates include the following:
 
revenue recognition;
allowance for doubtful accounts;
sales tax;
income taxes; and
stock-based compensation.
 
 
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Cautionary Statement Regarding Forward-Looking Statements
 
Certain statements made in this Amendment No,1 to the Quarterly Report on Form 10-Q/A, in the Company’s other SEC filings, in press releases and in oral statements to shareholders and securities analysts that are not statements of historical or current facts are “forward-looking statements.” Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance of the Company to be materially different from the results or performance expressed or implied by such forward-looking statements. The words “anticipates,” “believes,” “estimates,” “expects,” “future,” “likely,” “may,” “projects,” “seeks,” “will” and similar expressions identify forward-looking statements. Forward-looking statements include statements expressing the intent, belief or current expectations of the Company and members of our management team regarding, for instance: (i) our belief that our cash balance and cash generated by operations will provide adequate liquidity and capital resources for at least the next twelve months; and (ii) that we expect fluctuations in accounts receivable and payable, accrued liabilities, and revenue deferrals. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. These statements are subject to the risks and uncertainties that could cause actual results to differ materially and adversely from the forward-looking statements. These forward-looking statements are based on current information, which we have assessed and which by its nature is dynamic and subject to rapid and even abrupt changes.
 
Factors that could cause our estimates and assumptions as to future performance, and our actual results, to differ materially include the following: (i) the impacts of the COVID-19 pandemic including the duration, spread, severity, and any recurrence of the COVID-19 pandemic, the duration and scope of related government orders and restrictions, the impact on our employees, and the extent of the impact of the COVID-19 pandemic on overall demand for our products and services; (ii) local, regional, national, and international economic conditions that have deteriorated as a result of the COVID-19 pandemic including the risks of a global recession or a recession in one or more of our key markets, and the impact they may have on us and our customers and our assessment of that impact; (iii) management’s ability to fully or successfully implement its business plan to achieve and maintain increased sales and resultant profitability in the future; (iv) the Company’s success in developing and implementing new product offerings, including mobile, digital or other new offerings, in a successful manner; (v) prevailing market conditions, including pricing and other competitive pressures, in the in-store advertising industry and, intense competition for agreements with CPG retailers and manufacturers; (vi) potentially incorrect assumptions by management with respect to the financial effect of current strategic decisions and the effect of current sales trends on fiscal year 2021 results; (vii) termination of all or a major portion of, or a significant change in terms and conditions of, a material agreement with a CPG manufacturer or retailer, ; (viii) other economic, business, market, financial, competitive and/or regulatory factors affecting the Company’s business generally; (ix) our ability to successfully manage our new IT operating infrastructure outsourcing arrangement; (x) our ability to attract and retain highly qualified managerial, operational and sales personnel; and (xi) the final outcome of our litigation with News America. Our risks and uncertainties also include, but are not limited to, the risks presented in our Annual Report on Form 10-K for the year ended December 31, 2020, our Amendment No. 1 to the Annual Report on Form 10-K/A for the year ended December 31, 2020, and this Amendment No. 1 to the Quarterly Report on Form 10-Q/A, and any additional risks presented in our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K. We undertake no obligation (and expressly disclaim any such obligation) to update forward-looking statements made in this Form 10-Q/A to reflect events or circumstances after the date of this Form 10-Q/A or to update reasons why actual results would differ from those anticipated in any such forward-looking statements, other than as required by law.
 
Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
The Company maintains disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
 
The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and interim principal financial officer and its interim principal accounting officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s principal executive officer and the interim principal accounting officer concluded that the Company’s disclosure controls and procedures as of March 31, 2021 were effective. However, subsequent to that assessment, management identified a material weakness in our internal controls as further described in Item 9A in our Form 10K/A. Management re-evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2021 and has concluded that our disclosure controls and procedures were not effective as of that date because of such material weakness.
 
Remediation Plan and Status for Material Weakness
 
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 and services and obtaining of appropriate documentation of exempt status from customers. The Company will further enhance these controls over the remainder of 2021.
 
Changes in Internal Control Over Financial Reporting
 
Except as noted above, no changes in the Company’s internal control over financial reporting occurred during the first quarter of 2021 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.
 
 
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PART II. OTHER INFORMATION
 
Item 1A.
Risk Factors
 
There have been no material changes in our risk factors from those previously disclosed in Item 1A of Part 1 of our Amendment No.1 to the Annual Report on Form 10-K/A for the year ended December 31, 2020.
 
 
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Item 6.
Exhibits
 
Exhibit Number
 
Description
 
Method of Filing
 
 
 
 
 
 
Restated Articles of Incorporation (effective as of January 4, 2021)
 
Exhibit 3.2 to Current Report filed January 6, 2021
 
 
 
 
 
 
Composite Bylaws, as amended through December 5, 2015
 
Exhibit 3.2 to Annual Report on Form 10-K for the year ended December 31, 2015
 
 
 
 
 
 
Certification of Principal Executive and Financial Officer
 
Filed Electronically
 
 
 
 
 
 
Certification of Principal Accounting Officer
 
Filed Electronically
 
 
 
 
 
 
Section 1350 Certification
 
Furnished Electronically
 
 
 
 
 
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The following materials from Insignia Systems, Inc.’s Quarterly Report on Form 10-Q/A Amendment No. 1 to for the quarter ended March 31, 2021, formatted in XBRL (extensible Business Reporting Language): (i) Condensed Balance Sheets; (ii) Condensed Statements of Operations; (iii) Condensed Statements of Shareholders’ Equity; (iv) Condensed Statements of Cash Flows; and (v) Notes to Financial Statements.
 
Filed Electronically
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
INSIGNIA SYSTEMS, INC.
 
 
(Registrant)
 
 
 
 
Dated: August 23, 2021
/s/ Kristine A. Glancy
 
 
Kristine A. Glancy
 
 
President and Chief Executive Officer
 
 
(on behalf of registrant and as interim principal financial officer)
 
 
 
 
Dated:  August 23, 2021
/s/ Zackery A. Weber
 
 
Zackery A. Weber
 
 
Senior Director of Financial Planning and Analysis
 
 
(interim principal accounting officer)
 
 
 
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