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ISIG > SEC Filings for ISIG > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for INSIGNIA SYSTEMS INC/MN

Form 10-Q for INSIGNIA SYSTEMS INC/MN


5-Nov-2012

Quarterly Report


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 in this Quarterly Report on Form 10-Q and the "Risk Factors" described in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.


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Company Overview

Insignia Systems, Inc. ("Insignia," "Company," "we," "us," or "our") is a Minnesota corporation that has been in business since 1990. We market in-store advertising programs, services and products to retailers and consumer packaged goods ("CPG") manufacturers (collectively, "customers"). Our services and products primarily include the Insignia Point-of-Purchase Services (POPS) in-store advertising program which features Insignia POPS signs and related enhancements and in which we produce signs promoting customer products for installation at retail locations. The Insignia POPS program is a national, account-specific, shelf-edge advertising program, and signs sold under this program represent approximately 95% of our revenue. Our services and products also include "custom print" retail signage for retail customers promoting their private label products, thermal sign card supplies for the Company's Impulse systems, Stylus software and laser printable cardstock and label supplies for retailers to print their own in-store signs.

In our POPS business, we sell our POPS signs to over 200 major CPG customers to produce in-store signs promoting their products and arrange for the installation of those signs at shelf in retailer locations. While most of our in-store signs are placed in supermarket retail stores, we also place promotional signs in drug, mass and dollar store retail locations.

In order to place these promotional signs at retailer locations, we have entered into direct contractual relationships with retailers to rent space at their shelves for placement of the signs in over 6,000 stores. In addition, we have access to additional retail shelf space through agreements with News America and Valassis Communications Inc. ("Valassis"). In 2011, as part of our settlement with News America, we entered into a selling agreement for the placement of sales with price at retailers with whom News America has direct contractual arrangements. Our agreement with Valassis also allows for placement of in-store advertising programs at-shelf at retailers with whom Valassis has direct contractual relationships.

2012 Business Overview

2012 Strategic Plan

Our primary goal for fiscal 2012 was to attain profitability in either the third or fourth quarter of 2012. To that end, in March 2012, we implemented a plan to restructure our operations in March 2012, including workforce reductions, salary adjustments and other cost-saving initiatives. As part of this restructuring plan, approximately 29% of our workforce was reduced. A pre-tax restructuring charge of $373,000 was recorded during the quarter ended March 31, 2012.

Business Developments and Other Significant Events

On May 23, 2012, our Board of Directors appointed Glen P. Dall as President and Chief Operating Officer. Previously, Mr. Dall had served as our as Executive Vice President and Chief Operating Officer since March 2012 and as our Vice President of Corporate Development since September 2009.

Summary of Financial Results

For the three months ended September 30, 2012, we generated revenues of $6,074,000, as compared with revenues of $3,060,000 in the three months ended September 30, 2011. For the nine months ended September 30, 2012, we generated revenues of $14,844,000, as compared with revenues of $13,033,000 in the nine months ended September 30, 2011. Net income for the three months ended September 30, 2012 was $380,000, as compared to a net loss of $(1,721,000) in the three months ended September 30, 2011. The net loss for the nine months ended September 30, 2012 was $(1,693,000), compared to net income of $51,477,000 for the nine months ended September 30, 2011. Net income for the nine months ended September 30, 2011 included a gain from the settlement of litigation, net of tax, of $55,062,000.

Our balance sheet continues to be strong. At September 30, 2012, our cash and cash equivalents balance was $19,774,000, as compared to $23,202,000 at December 31, 2011. We have no debt and believe we have adequate liquidity to fund operations for at least the next 12 months.


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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.


                                         Three Months Ended        Nine Months Ended
                                            September 30             September 30
                                          2012         2011        2012         2011
Net sales                                   100.0 %     100.0 %      100.0 %     100.0 %
Cost of sales                                57.9        94.4         66.6        68.2
Gross profit                                 42.1         5.6         33.4        31.8
Operating expenses:
Selling                                      18.0        43.5         26.1        33.0
Marketing                                     3.8        13.9          6.2         9.7
General and administrative                   12.5        40.6         17.9        34.6
Gain from litigation settlement, net          0.0         0.0          0.0      (688.7 )
Total operating expenses                     34.3        98.0         50.2      (611.4 )
Operating income (loss)                       7.8       (92.4 )      (16.8 )     643.2
Other income                                  0.1         0.4          0.1         0.4
Income (loss) before taxes                    7.9       (92.0 )      (16.7 )     643.6
Income tax expense (benefit)                  1.6       (35.8 )       (5.3 )     248.6
Net income (loss)                             6.3 %     (56.2 )%     (11.4 )%    395.0 %

See the non-GAAP financial measures information which follows later in this section for a comparison of the 2012 and 2011 periods' non-GAAP net income (loss).

Three and Nine Months ended September 30, 2012 Compared to Three and Nine Months Ended September 30, 2011

Net Sales. Net sales for the three months ended September 30, 2012 increased 98.5% to $6,074,000 compared to $3,060,000 for the three months ended September 30, 2011. Net sales for the nine months ended September 30, 2012 increased 13.9% to $14,844,000 compared to $13,033,000 for the nine months ended September 30, 2011.

Service revenues from our POPSign programs for the three months ended September 30, 2012, increased 122.8% to $5,710,000 compared to $2,563,000 for the three months ended September 30, 2011. The increase was due to a 105% increase in the number of signs placed as well as a 9% increase in the average sign price. Service revenues from our POPSign programs for the nine months ended September 30, 3012 increased 18.5% to $13,489,000 compared to $11,383,000 for the nine months ended September 30, 2011. The increase in service revenues for the nine-month period was due primarily to a 20% increase in the number of signs placed, partially offset by a 1% decrease in the average sign price.

Product sales for the three months ended September 30, 2012, decreased 26.8% to $364,000 compared to $497,000 for the three months ended September 30, 2011. Product sales for the nine months ended September 30, 2012 decreased 17.9% to $1,355,000 compared to $1,650,000 for the nine months ended September 30, 2011. The decreases in both 2012 periods were primarily due to lower sales of Stylus software and thermal sign card supplies.

Gross Profit. Gross profit for the three months ended September 30, 2012, increased 1405.9% to $2,560,000 compared to $170,000 for the three months ended September 30, 2011. Gross profit for the nine months ended September 30, 2012 increased 19.5% to $4,954,000 compared to $4,144,000 for the nine months ended September 30, 2011. Gross profit as a percentage of total net sales increased to 42.1% for the three months ended September 30, 2012, compared to 5.6% for the three months ended September 30, 2011. Gross profit as a percentage of total net sales increased to 33.4% for the nine months ended September 30, 2012, compared to 31.8% for the nine months ended September 30, 2011.


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POPSign program: Gross profit from our POPSign program revenues for the three months ended September 30, 2012, increased 7787.1% to $2,445,000 compared to $31,000 for the three months ended September 30, 2011. Gross profit from our POPSign program revenues for the nine months ended September 30, 2012, increased 26.3% to $4,549,000 compared to $3,603,000 for the nine months ended September 30, 2011. The increases in both 2012 periods were primarily due to increased sales. Gross profit as a percentage of POPSign program revenues for the three months ended September 30, 2012, increased to 42.8% compared to 1.2% for the three months ended September 30, 2011. Gross profit as a percentage of POPSign program revenues for the nine months ended September 30, 2012, increased to 33.7% compared to 31.7% for the nine months ended September 30, 2011. The increases in gross profit as a percentage of POPSign program revenues in both 2012 periods were due to increased sales.

Product sales: Gross profit from our product sales for the three months ended September 30, 2012, decreased 17.3% to $115,000 compared to $139,000 for the three months ended September 30, 2011. Gross profit from our product sales for the nine months ended September 30, 2012, decreased 25.1% to $405,000 compared to $541,000 for the nine months ended September 30, 2011. The decreases in both 2012 periods were primarily due to decreased sales. Gross profit as a percentage of product sales was 31.6% for the three months ended September 30, 2012, compared to 28.0% for the three months ended September 30, 2011. Gross profit as a percentage of product sales was 29.9% for the nine months ended September 30, 2012, compared to 32.8% for the nine months ended September 30, 2011. The increase in gross profit in the three months ended September 30, 2012 was primarily due to decreased staffing levels, partially offset by the effect of fixed costs on lower sales. The decrease in the nine months ended September 30, 2012 was primarily the result of product mix and the effect of fixed costs on decreased sales, partially offset by decreased staffing levels.

Operating Expenses

Selling. Selling expenses for the three months ended September 30, 2012, decreased 17.6% to $1,097,000 compared to $1,332,000 for the three months ended September 30, 2011. Selling expenses for the nine months ended September 30, 2012, decreased 9.9% to $3,871,000, compared to $4,295,000 for the nine months ended September 30, 2011. The decreases in the 2012 periods were primarily due to decreased staffing levels and related travel expenses, as compared to the 2011 periods.

Selling expenses as a percentage of total net sales decreased to 18.0% for the three months ended September 30, 2012, compared to 43.5% for the three months ended September 30, 2011. Selling expenses as a percentage of total net sales decreased to 26.1% for the nine months ended September 30, 2012, compared to 33.0% for the nine months ended September 30, 2011. The fluctuations in selling expenses as a percentage of total net sales in the 2012 periods were primarily due to decreased staffing levels and related travel expenses, as well as increased sales in the 2012 periods.

Marketing. Marketing expenses for the three months ended September 30, 2012, decreased 46.0% to $230,000 compared to $426,000 for the three months ended September 30, 2011. Marketing expenses for the nine months ended September 30, 2012, decreased 27.8% to $919,000 compared to $1,273,000 for the nine months ended September 30, 2011. Decreased expenses in the 2012 periods were primarily the result of decreased staffing levels.

Marketing expenses as a percentage of total net sales decreased to 3.8% for the three months ended September 30, 2012, compared to 13.9% for the three months ended September 30, 2011. Marketing expenses as a percentage of total net sales decreased to 6.2% for the nine months ended September 30, 2012, compared to 9.7% for the nine months ended September 30, 2011. The decreases in marketing expenses as a percentage of total net sales in the 2012 periods were primarily the result of decreased staffing levels, as well as increased sales in the 2012 periods.

General and administrative. General and administrative expenses for the three months ended September 30, 2012 decreased 39.0% to $757,000 compared to $1,242,000 for the three months ended September 30, 2011. General and administrative expenses for the nine months ended September 30, 2012 decreased 41.0% to $2,656,000 compared to $4,505,000 for the nine months ended September 30, 2011. The decreases in the 2012 periods were primarily due to reduced staffing levels and legal fees.


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General and administrative expenses as a percentage of total net sales decreased to 12.5% for the three months ended September 30, 2012, compared to 40.6% for the three months ended September 30, 2011. General and administrative expenses as a percentage of total net sales decreased to 17.9% for the nine months ended September 30, 2012, compared to 34.6% for the nine months ended September 30, 2011. Decreased percentages in the 2012 periods were primarily the result of higher sales in the 2012 periods, in addition to the factors described above.

Legal fees and expenses were $8,000 for the three months ended September 30, 2012, compared to $159,000 for the three months ended September 30, 2011. Legal fees and expenses were $112,000 for the nine months ended September 30, 2012 compared to $1,453,000 for the nine months ended September 30, 2011. Management does not expect significant legal fees in future periods.

Gain from litigation settlement. In February 2011, the Company entered into a Settlement Agreement in its lawsuit against News America. As part of the Settlement Agreement, News America paid the Company $125,000,000, and the Company paid 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. Netted against this settlement was a contingent fee payment of $31,250,000 to the Company's lead trial counsel as well as performance bonus payments of $3,988,000 to certain employees in connection with the settlement, resulting in a net pre-tax gain of $89,762,000.

Other Income. Other income for the three months ended September 30, 2012, was $6,000 compared to $13,000 for the three months ended September 30, 2011. Other income for the nine months ended September 30, 2012, was $20,000 compared to $55,000 for the nine months ended September 30, 2011. The decreases in other income in the 2012 periods were primarily due to interest earned on lower cash and cash equivalents balances.

Income Taxes. For the three months ended September 30, 2012, income tax expense was $102,000, or 21.1% of income before taxes, compared to an income tax benefit of $1,096,000 or 38.9% of loss before taxes for the three months ended September 30, 2011. For the nine months ended September 30, 2012, the income tax benefit was $779,000, or 31.5% of loss before income taxes, compared to income tax expense of $32,411,000 or 38.6% of income before income taxes. The income tax expense (benefit) during the three and nine months ended September 30, 2012 and 2011 is comprised of federal and state taxes. The primary differences between the Company's effective tax rates and the statutory federal rate are nondeductible meals and entertainment and expense related to equity compensation.

Net Income (Loss). Net income for the three months ended September 30, 2012, was $380,000 compared to a net loss of $(1,721,000) for the three months ended September 30, 2011. The net loss for the nine months ended September 30, 2012 was $(1,693,000) compared to net income of $51,477,000 for the nine months ended September 30, 2011.

Non-GAAP Financial Measures

To supplement the Company's financial statements presented in accordance with accounting principles generally accepted in the United States (GAAP), the Company has provided certain non-GAAP financial measures of financial performance in prior public announcements. These non-GAAP measures are:

net loss before gain from litigation settlement (net of tax), and
net loss before gain from litigation settlement (net of tax) and restructuring charge (net of tax)


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The Company's reference to these non-GAAP measures should be considered in addition to results prepared under current accounting standards and are not a substitute for, or superior to, GAAP results. These non-GAAP measures are provided to enhance investors' overall understanding of the Company's current financial performance and ability to generate cash flows. In many cases, non-GAAP financial measures are used by analysts and investors to evaluate the Company's performance. Reconciliation to the nearest GAAP measure can be found in the financial table included below.

Reconciliation of non-GAAP Financial Measures

(Unaudited)

                                         Three Months Ended              Nine Months Ended
                                            September 30                   September 30
                                        2012           2011            2012            2011
Net income (loss)                    $  380,000    $ (1,721,000 )  $ (1,693,000 )  $  51,477,000
Adjustment:
Gain from litigation settlement
(net of tax)                                  -               -               -      (55,062,000 )
Non-GAAP net income (loss) before
gain from litigation settlement
(net of
tax)                                    380,000      (1,721,000 )    (1,693,000 )     (3,585,000 )
Adjustment:
Restructuring charge (net of tax)             -               -         261,000                -
Non-GAAP net income (loss) before
gain from litigation settlement
(net of
tax) and restructuring charge
(net of
tax)                                 $  380,000    $ (1,721,000 )  $ (1,432,000 )  $  (3,585,000 )

Liquidity and Capital Resources

The Company has financed its operations with proceeds from public and private stock sales, sales of its services and products and legal settlement proceeds. At September 30, 2012, working capital was $21,345,000 compared to $22,671,000 at December 31, 2011. During the nine months ended September 30, 2012, cash and cash equivalents decreased $3,428,000 from $23,202,000 at December 31, 2011, to $19,774,000 at September 30, 2012.

Operating Activities: Net cash used in operating activities during the nine months ended September 30, 2012, was $3,296,000. The net loss of $(1,693,000), plus non-cash adjustments of $1,139,000 and changes in operating assets and liabilities of $(2,742,000) resulted in the $3,296,000 of cash used in operating activities. The non-cash adjustments consisted of depreciation and amortization expense and stock-based compensation expense. The Company expects accounts receivable, accounts payable, accrued liabilities and deferred revenue to fluctuate during future periods depending on the level of POPSign 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 nine months ended September 30, 2012 was $50,000, related to purchases of property and equipment. The Company does not currently expect significant capital expenditures in the remainder of 2012.

Financing Activities: Net cash used in financing activities during the nine months ended September 30, 2012 was $82,000. The repurchase of common stock of $213,000, pursuant to a plan adopted on February 22, 2011, and further amended May 25, 2011, was partially offset by $131,000 of proceeds from the issuance of common stock under the employee stock purchase plan. The Company does not expect to repurchase any further shares of common stock during 2012, as the plan expired on January 31, 2012.

The Company believes that based upon current business conditions, its existing cash balance and future cash generated from operations will be sufficient for its cash requirements for at least the next 12 months. However, there can be no assurances that this will occur or that the Company will be able to secure additional financing from public or private stock sales or from other financing agreements if needed.

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.


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Our significant accounting policies are described in Note 1 to the annual financial statements as of and for the year ended December 31, 2011, included in our Form 10-K filed with the Securities and Exchange Commission on March 7, 2012. We believe our most critical accounting policies and estimates include the following:

revenue recognition;

allowance for doubtful accounts;

impairment of long-lived assets;

income taxes; and

stock-based compensation.

Cautionary Statement Regarding Forward-Looking Statements

Certain statements made in this Quarterly Report on Form 10-Q, in the Company's other SEC filings, in press releases and in oral statements to shareholders and securities analysts, which 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 which 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 "believes," "expects," "anticipates," "seeks" 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 2012 and beyond; (ii) our expectation that we will not incur significant legal fees or capital expenditures in future periods; (iii) that we expect fluctuations in accounts receivable and payable, accrued liabilities, and deferred revenue; and (iv) that there is no plan to re-purchase company stock. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this statement was made. 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.

Among the factors that could cause our estimates and assumptions as to future performance, and our actual results to differ materially, including: (i) the risk that management may be unable to fully or successfully implement its business plan to achieve and maintain increased sales and resultant profitability in the future; (ii) the risk that the Company will not be able to develop and implement new product offerings, including mobile or digital offerings, in a successful manner; (iii) prevailing market conditions, including pricing and other competitive pressures, in the in-store advertising industry and, intense competition for agreements with retailers and consumer packaged goods manufacturers; (iv) potentially incorrect assumptions by management with respect to the financial effect of cost reduction initiatives, current strategic decisions, the effect of current sales trends on fiscal year 2012 results and the benefit of our relationships with News America and Valassis; (v) loss of all or a major portion of, or a significant change in terms and conditions of, a material agreement with a retailer or consumer packaged goods manufacturer; and
(vi) other economic, business, market, financial, competitive and/or regulatory factors affecting the Company's business generally. 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, 2011, any additional risks presented in this Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 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 to reflect events or circumstances after the date of this Form 10-Q or to update reasons why actual results would differ from those anticipated in any such forward-looking statements, other than as required by law.


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