Bloomia Holdings, Inc.: Form 10-Q for the period ended Sep 30, 2014

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, 2013, our Current Reports on Form 8-K and our other SEC filings.

Company Overview

Insignia Systems, Inc. (referred to in this Quarterly Report on Form 10-Q as “Insignia,” “we,” “us,” “our” and the “Company”) markets in-store advertising products, programs and services to consumer packaged goods manufacturers (customers) and retailers. The Company was incorporated in 1990. Since 1998, the Company has been focusing on providing in-store advertising services through the Insignia Point-Of-Purchase Services (POPS) in-store advertising program. Insignia POPS® includes the Insignia POPSign® program.

Insignia’s POPSign is a national, account-specific, in-store, shelf-edge advertising program that we believe delivers significant sales increases. Funded by consumer packaged goods manufacturers, the program allows manufacturers to deliver vital product information to consumers at the point-of-purchase. The brand information is combined with each retailer’s store-specific prices and is displayed on the retailer’s unique sign format. We believe that combining manufacturer and retailer information provides consumers the information they want and need to make purchasing decisions, while building store and brand equity.

For retailers, Insignia’s POPSign program is a source of incremental revenue and is an in-store advertising program that delivers a complete “call to action” on a product-specific and store-specific basis. For consumer packaged goods manufacturers, Insignia’s POPSign program provides access to what we believe is the optimum retail advertising site for their products — the retail shelf-edge. In addition, we believe manufacturers benefit from significant sales increases, short lead times, micro-marketing capabilities, such as store-specific and multiple language options, and a wide variety of program features and enhancements that provide unique advertising advantages.

Additionally, in October 2014, the Company announced the introduction of a new product, The Like MachineTM, which is an in-store consumer approval device. The Company expects to roll out this product fully during 2015. The Company licenses this product from TLM Holdings, LLC, a company in which Insignia’s Chief Sales and Marketing Officer, Tim Halfmann, serves as a non-operating principal.

The Company’s internet address is www.insigniasystems.com (http://www.insigniasystems.com). The Company has made all of the reports it files with the SEC available free of charge on its web site. The Company’s web site is not incorporated by reference into this Report on Form 10-Q. Copies of reports can also be obtained free of charge by requesting them from Insignia Systems, Inc., Attention: CFO, 8799 Brooklyn Boulevard, Minneapolis, Minnesota 55445; telephone 763-392-6200.

Business Overview

Summary of Financial Results

For the quarter ended September 30, 2014, the Company generated total net sales of $7,520,000, as compared with total net sales of $7,320,000 for the quarter ended September 30, 2013. For the nine months ended September 30, 2014, we generated total net sales of $20,267,000, as compared with total net sales of $20,849,000 in the nine months ended September 30, 2013. Net income for the quarter ended September 30, 2014 was $424,000, as compared to $354,000 for the quarter ended September 30, 2013. The net income for the nine months ended September 30, 2014 was $609,000, compared to $938,000 for the nine months ended September 30, 2013.

At September 30, 2014, our cash, cash equivalents and available for sale investments balance was $17,476,000, as compared to $21,763,000 at December 31, 2013. This decrease in cash and cash equivalents was due primarily to the repurchase of approximately $1.9 million of common stock, as well as an increase in accounts receivable of approximately $3.4 million. We have no debt and believe we have adequate liquidity to fund operations for at least the next twelve months.

Results of Operations

The following table sets forth, for the periods indicated, certain items in the Company’s Statements of Operations and Comprehensive Income as a percentage of total net sales.

Three and Nine months Ended September 30, 2014 Compared to Three and Nine months Ended September 30, 2013

Total Net Sales. Total net sales for the three months ended September 30, 2014 increased 2.7% to $7,520,000 compared to $7,320,000 for the three months ended September 30, 2013. Total net sales for the nine months ended September 30, 2014 decreased 2.8% to $20,267,000 compared to $20,849,000 for the nine months ended September 30, 2013.

Services revenues from our POPSign programs for the three months ended September 30, 2014 increased 2.6% to $7,104,000 compared to $6,927,000 for the three months ended September 30, 2013. The increase was primarily due to an increase of 10% in average price per sign, which was a result of favorable shifts in program and customer mix, partially offset by a 6% decrease in the number of signs placed, which we believe was due to program mix. Services revenues from our POPSign programs for the nine months ended September 30, 2014 decreased 3.8% to $18,902,000 compared to $19,642,000 for the nine months ended September 30, 2013. The decrease was due to a decrease of 4% in the number of signs placed, resulting from a change in program mix between years.

Product revenues for the three months ended September 30, 2014 increased 5.9% to $416,000 compared to $393,000 for the three months ended September 30, 2013. Product revenues for the nine months ended September 30, 2014 increased 13.1% to $1,365,000 compared to $1,207,000 for the nine months ended September 30, 2013. The increase was primarily due to higher sales of laser sign card supplies.

Gross Profit. Gross profit for the three months ended September 30, 2014 increased 11.7% to $3,709,000 compared to $3,320,000 for the three months ended September 30, 2013. Gross profit for the nine months ended September 30, 2014 decreased 1.1% to $9,295,000 compared to $9,397,000 for the nine months ended September 30, 2013. Gross profit as a percentage of total net sales increased to 49.3% for the three months ended September 30, 2014, compared to 45.3% for the three months ended September 30, 2013. Gross profit as a percentage of total net sales increased to 45.9% for the nine months ended September 30, 2014, compared to 45.0% for the nine months ended September 30, 2013.

POPSign program: Gross profit from our POPSign program revenues for the three months ended September 30, 2014 increased 12.4% to $3,610,000 compared to $3,211,000 for the three months ended September 30, 2013. The increase was primarily due to increased sign rates and decreased retailer costs. Gross profit from our POPSign program revenues for the nine months ended September 30, 2014 decreased 2.0% to $8,854,000 compared to $9,038,000 for the nine months ended September 30, 2013. The decrease for the nine-month period was primarily due to a 2.8% decrease in sales, as our gross profit percentage is highly dependent on sales volume.

Gross profit as a percentage of POPSign program revenues for the three months ended September 30, 2014 increased to 50.8% compared to 46.4% for the three months ended September 30, 2013. The increase was primarily due higher sales volume, as described above, coupled with a decrease in retailer costs. Gross profit as a percentage of POPS program revenues for the nine months ended September 30, 2014 increased to 46.8% compared to 46.0% for the nine months ended September 30, 2013. The increase was primarily due to the factors described above.

Product sales: Gross profit from our product sales for the three months ended September 30, 2014 decreased 9.2% to $99,000 compared to $109,000 for the three months ended September 30, 2013. The decrease was primarily due to decreases in average product pricing. Gross profit from our product sales for the nine months ended September 30, 2014 increased 22.8% to $441,000 compared to $359,000 for the nine months ended September 30, 2013. The increase was primarily due to the impact of higher sales on fixed costs.

Gross profit as a percentage of product sales was 23.8% for the three months ended September 30, 2014 compared to 27.7% for the three months ended September 30, 2013. The decrease was primarily due to the factors described above. Gross profit as a percentage of product sales was 32.3% for the nine months ended September 30, 2014 compared to 29.7% for the nine months ended September 30, 2013. The increase was primarily due to the impact of higher sales on fixed costs.

Operating Expenses

Selling. Selling expenses for the three months ended September 30, 2014 decreased 9.6% to $1,433,000 compared to $1,586,000 for the three months ended September 30, 2013. The decrease was primarily due to reductions in staffing-related expense. Selling expenses for the nine months ended September 30, 2014 increased 0.5% to $4,160,000 compared to $4,138,000 for the nine months ended September 30, 2013. The increase in the nine-month period was due to an increase in staffing during the 2014 period.

Selling expenses as a percentage of total net sales decreased to 19.1% for the three months ended September 30, 2014 compared to 21.7% for the three months ended September 30, 2013. The decrease was primarily due the factors described above coupled with an increase in revenue. Selling expenses as a percentage of total net sales increased to 20.6% for the nine months ended September 30, 2014 compared to 19.8% for the nine months ended September 30, 2013. The increase in selling expenses as a percentage of total net sales in the nine-month 2014 period was primarily due an increase in staffing coupled with decreased sales.

Marketing. Marketing expenses for the three months ended September 30, 2014 increased 89.1% to $416,000 compared to $220,000 for the three months ended September 30, 2013. Increased marketing expense was primarily the result of increased staffing, new product introductions and other marketing initiatives. Marketing expenses for the nine months ended September 30, 2014 increased 50.7% to $978,000 compared to $649,000 for the nine months ended September 30, 2013. The increase was primarily due to the factors described above.

Marketing expenses as a percentage of total net sales increased to 5.5% for the three months ended September 30, 2014 compared to 3.0% for the three months ended September 30, 2013. The increase was primarily due to the factors described above. Marketing expenses as a percentage of total net sales increased to 4.8% for the nine months ended September 30, 2014 compared to 3.1% for the nine months ended September 30, 2013. The increases in selling expenses as a percentage of total net sales in the 2014 period was primarily due to the factors described above, combined with decreased sales.

General and administrative. General and administrative expenses for the three months ended September 30, 2014 increased 5.4% to $1,022,000 compared to $970,000 for the three months ended September 30, 2013. General and administrative expenses for the nine months ended September 30, 2014 increased 4.1% to $3,040,000 compared to $2,921,000 for the nine months ended September 30, 2013. The increases in the three- and nine-month periods were primarily due to increased legal costs resulting from new business arrangements.

General and administrative expenses as a percentage of total net sales increased to 13.6% for the three months ended September 30, 2014 compared to 13.3% for the three months ended September 30, 2013. The increase was primarily due to the factors described above, partially offset by an increase in total net sales. General and administrative expenses as a percentage of total net sales increased to 15.0% for the nine months ended September 30, 2014 compared to 14.0% for the nine months ended September 30, 2013. Increased expense as a percentage of total net sales in the 2014 period was primarily due to the factors described above, combined with decreased sales.

Other Income. Other income for the three months ended September 30, 2014 was $13,000 compared to $6,000 for the three months ended September 30, 2013. Other income for the nine months ended September 30, 2014 was $25,000 compared to $20,000 for the nine months ended September 30, 2013. Other income is comprised of interest earned on cash and cash equivalents balances and returns generated from available for sale investments.

Income Taxes. For the three and nine months ended September 30, 2014, the Company recorded income tax expense of $427,000 and $533,000, or 50.2% and 46.7% of income before taxes, respectively. For the three and nine months ended September 30, 2013, the Company recorded income tax expense of $196,000 and $771,000, or 35.6% and 45.1% of income before taxes, respectively. The income tax provision for the three and nine months ended September 30, 2014 and 2013 is comprised of federal and state taxes. The primary differences between the Company’s September 30, 2014 and 2013 effective tax rates and the statutory federal rate are expenses related to stock-based compensation and nondeductible meals and entertainment. The Company reassesses its effective rate each reporting period and adjusts the annual effective rate if deemed necessary, based on projected annual taxable income. The result of that reassessment as of September 30, 2014 caused the Company’s effective tax rate for the three months ended September 30, 2014 to be higher than the effective tax rate for the nine months ended September 30, 2013.

Net Income. For the reasons stated above, net income for the three months ended September 30, 2014 was $424,000 compared to $354,000 for the three months ended September 30, 2013. For the reasons stated above, net income for the nine months ended September 30, 2014 was $609,000 compared to $938,000 for the nine months ended September 30, 2013.

Other Comprehensive Income. Other comprehensive income is comprised of unrealized gains and losses, net of tax, from available for sale investments.

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, 2014, working capital was $21,362,000 compared to $22,203,000 at December 31, 2013. During the nine months ended September 30, 2014, cash and cash equivalents decreased $13,583,000 from $21,763,000 at December 31, 2013, to $8,180,000 at September 30, 2014.

Operating Activities: Net cash used in operating activities during the nine months ended September 30, 2014 was $1,760,000. Net income of $609,000, plus non-cash adjustments of $1,144,000, less changes in operating assets and liabilities of $3,513,000 resulted in the $1,760,000 of cash used in operating activities. The largest component of the change in operating assets and liabilities was accounts receivable, which increased as a result of the timing of collections on these accounts. The non-cash adjustments consisted of depreciation and amortization expense, changes in allowance for doubtful accounts, stock-based compensation expense, and gain on the sale of property and equipment. 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 nine months ended September 30, 2014 was $10,147,000. This was primarily related to the net purchase of available for sale investments of $9,300,000, in addition to the acquisition of selling rights under the New Valassis Agreement and acquisition of other business arrangements of $542,000, purchases of property and equipment of $319,000, and proceeds from the sale of property and equipment of $14,000. The Company expects a consistent level of capital expenditures in the remainder of 2014.

Financing Activities: Net cash used in financing activities during the nine months ended September 30, 2014 was $1,676,000, which related to the repurchase of common stock under the Company’s share repurchase plan of $1,886,000, partially offset by an excess tax benefit from stock options of $11,000 and proceeds received from the issuance of common stock under our employee stock purchase plan and stock option exercises of $199,000.

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 twelve months. In the event additional financing is needed, the Company opened a $7,500,000 line of credit during the three months ended September 30, 2014.

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, 2013, included in our Form 10-K filed with the Securities and Exchange Commission on March 5, 2014. We believe our most critical accounting policies and estimates, which are described in more detail in such Note to the annual financial statements, 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 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 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. These statements are often identified by the words “believes,” “expects,” “anticipates,” “seeks,” “will,” “estimate,” “may,” “would,” “could,” “trend,” and similar expressions identifying 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; (ii) that we are currently focused on maximizing opportunities available to us as a result of the termination of all material portions of the New Valassis Agreement to minimize whatever financial impact may result from it, and potentially have a positive impact on the Company; (iii) that we expect fluctuations in accounts receivable and payable, accrued liabilities, and deferred revenue; and (iv) plans to repurchase Company stock. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of the 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.

The factors that could cause our estimates and assumptions as to future performance, and our actual results, to differ materially include the following: (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, digital or other new 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 current strategic decisions, the effect of current sales trends on fiscal year 2014 results and the benefit of our relationship with News America; (v) termination of all or a major portion of, or a significant change in terms and conditions of, a material agreement with a retailer, consumer packaged goods manufacturer, or News America; 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 Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2013, 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 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.

(a) Evaluation of Disclosure Controls and Procedures

The Company’s management carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer (principal executive officer) and the Company’s Chief Financial Officer (principal financial officer), of the effectiveness 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 (the “Exchange Act”)) as of the end of the period covered by this report, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s Chief Executive Officer and the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of the end of the period covered by this report. Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosures.

(b) Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during the fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

We described the most significant risk factors applicable to the Company in Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2013. We believe there have been no material changes from the risk factors disclosed on such Form 10-K.