Bloomia Holdings, Inc.: Form 10-Q for the period ended Sep 30, 2015

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, 2014, 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”) is a developer and marketer of innovative in-store products, programs and services that help consumer packaged goods (“CPG”) manufacturers and retail partners drive sales at the point of purchase. The Company was incorporated in 1990, and since 1998, the Company has been focused on managing a retail network for the primary purpose of providing turn-key at-shelf market access for CPG manufacturers’ marketing programs. Insignia provides participating retailers with benefits including incremental revenue, incremental sales opportunities, increased shopper engagement in-store, and custom creative development and other in-kind services.

Insignia’s primary product is the Point-Of-Purchase Services (POPS®) in-store advertising program. Insignia POPS® is a national, account-specific, shelf-edge advertising and promotion tactic. Internal testing has indicated the program can deliver significant sales impact for the featured brand. The program allows manufacturers to deliver vital product information to consumers at the point-of-purchase, and to leverage the local retailer brand and store-specific prices to provide a unique “call to action” that draws attention to the featured brand and triggers a purchase decision. CPG customers benefit from Insignia’s nimble operational capabilities, which include short lead times, in-house graphic design capabilities, post-program analytics, and micro-marketing capabilities such as variable or bilingual messaging.

In October 2014, the Company announced the introduction of a new product, The Like MachineTM, which is an innovative new media that harnesses the power of social media, consumer engagement, and word-of-mouth recommendation at the point of purchase. The Like Machine is currently in the pilot phase of its launch. Revenues generated from The Like Machine are included in service revenue on the Company’s statements of comprehensive income. 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.

2015 Business Overview

Summary of Financial Results

For the quarter ended September 30, 2015, the Company generated total net sales of $7,548,000, as compared with total net sales of $7,520,000 for the quarter ended September 30, 2014. For the nine months ended September 30, 2015, we generated total net sales of $20,762,000, as compared with total net sales of $20,267,000 in the nine months ended September 30, 2014. Net income for the quarter ended September 30, 2015 was $561,000, as compared to $424,000 for the quarter ended September 30, 2014. Net income for the nine months ended September 30, 2015 was $907,000, compared to $609,000 for the nine months ended September 30, 2014.

At September 30, 2015, our cash, cash equivalents and available for sale investments balance was $19,005,000, as compared to $16,935,000 at December 31, 2014. We had no debt as of September 30, 2015.

Results of Operations

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

Three Months and Nine Months Ended September 30, 2015 Compared to Three Months and Nine Months Ended September 30, 2014

Total Net Sales. Total net sales for the three months ended September 30, 2015 increased 0.4% to $7,548,000 compared to $7,520,000 for the three months ended September 30, 2014. Total net sales for the nine months ended September 30, 2015 increased 2.4% to $20,762,000 compared to $20,267,000 for the nine months ended September 30, 2014.

Service revenues for the three months ended September 30, 2015 decreased 0.1% to $7,098,000 compared to $7,104,000 for the three months ended September 30, 2014. The decrease was primarily due to an 8.2% decrease in average price per sign, partially offset by a 7.9% increase in the number of signs placed, which was a result of changes in program and customer mixes. Service revenues for the nine months ended September 30, 2015 increased 2.4% to $19,356,000 compared to $18,902,000 for the nine months ended September 30, 2014. The increase was primarily due to a 7% increase in the number of signs placed, partially offset by a 5% decrease in average price per sign, which was a result of changes in program and customer mixes.

Product revenues for the three months ended September 30, 2015 increased 8.2% to $450,000 compared to $416,000 for the three months ended September 30, 2014. Product revenues for the nine months ended September 30, 2015 increased 3.0% to $1,406,000 compared to $1,365,000 for the nine months ended September 30, 2014. The increases for both periods were primarily due to higher sales of sign card supplies.

Gross Profit. Gross profit for the three months ended September 30, 2015 decreased 5.7% to $3,499,000 compared to $3,709,000 for the three months ended September 30, 2014. Gross profit for the nine months ended September 30, 2015 decreased 0.1% to $9,287,000 compared to $9,295,000 for the nine months ended September 30, 2014. Gross profit as a percentage of total net sales decreased to 46.3% for the three months ended September 30, 2015, compared to 49.3% for the three months ended September 30, 2014. Gross profit as a percentage of total net sales was 44.8% for the nine months ended September 30, 2014, compared to 45.9% for the nine months ended September 30, 2014.

Service revenues: Gross profit from our service revenues for the three months ended September 30, 2015 decreased 6.8% to $3,364,000 compared to $3,610,000 for the three months ended September 30, 2014. The decrease was primarily due to a decrease in the average price per POPS sign as well as increased costs associated with the launch of our new service offering, The Like Machine. Gross profit from our service revenues for the nine months ended September 30, 2015 increased 0.1% to $8,862,000 compared to $8,854,000 for the nine months ended September 30, 2014. The increase was primarily due to increased sales.

Gross profit as a percentage of service revenues for the three months ended September 30, 2015 decreased to 47.4% compared to 50.8% for the three months ended September 30, 2014. The decrease was primarily due to a decrease in the average price per POPS sign combined with increased costs associated with the launch of The Like Machine. Gross profit as a percentage of service revenues for the nine months ended September 30, 2015 decreased to 45.8% compared to 46.8% for the nine months ended September 30, 2014. The decrease was primarily due to the factors described above.

Product revenues: Gross profit from our product revenues for the three months ended September 30, 2015 increased 36.4% to $135,000 compared to $99,000 for the three months ended September 30, 2014. The increase was primarily due to higher sales of sign card supplies and the sale of unused equipment. Gross profit from our product revenues for the nine months ended September 30, 2015 decreased 3.6% to $425,000 compared to $441,000 for the nine months ended September 30, 2014. The decrease was primarily due to increased production costs, partially offset by the sale of unused equipment.

Gross profit as a percentage of product revenues was 30.0% for the three months ended September 30, 2015 compared to 23.8% for the three months ended September 30, 2014. The increase was primarily due to the factors described above. Gross profit as a percentage of product revenues was 30.2% for the nine months ended September 30, 2015 compared to 32.3% for the nine months ended September 30, 2014. The decrease was primarily due to the factors described above.

Operating Expenses

Selling. Selling expenses for the three months ended September 30, 2015 decreased 32.9% to $962,000 compared to $1,433,000 for the three months ended September 30, 2014. The decrease was primarily due to decreased staffing and staffing-related costs. Selling expenses for the nine months ended September 30, 2015 decreased 17.0% to $3,451,000 compared to $4,160,000 for the nine months ended September 30, 2014. The decrease was primarily due to the factors described above.

Selling expenses as a percentage of total net sales decreased to 12.7% for the three months ended September 30, 2015 compared to 19.1% for the three months ended September 30, 2014. The decrease was primarily due to decreased staffing and staffing-related costs. Selling expenses as a percentage of total net sales decreased to 16.6% for the nine months ended September 30, 2015 compared to 20.6% for the nine months ended September 30, 2014. The decrease was primarily due to factors described above and increased sales.

Marketing. Marketing expenses for the three months ended September 30, 2015 increased 12.5% to $468,000 compared to $416,000 for the three months ended September 30, 2014. Increased marketing expense was primarily the result of increased staffing-related costs and other marketing initiatives. Marketing expenses for the nine months ended September 30, 2015 increased 28.2% to $1,254,000 compared to $978,000 for the nine months ended September 30, 2014. The increase was primarily due to the factors described above.

Marketing expenses as a percentage of total net sales increased to 6.2% for the three months ended September 30, 2015 compared to 5.5% for the three months ended September 30, 2014. The increase was primarily the result of increased staffing-related costs and other marketing initiatives. Marketing expenses as a percentage of total net sales increased to 6.0% for the nine months ended September 30, 2015 compared to 4.8% for the nine months ended September 30, 2014. The increase was primarily due to the factors described above, partially offset by increased sales.

General and administrative. General and administrative expenses for the three months ended September 30, 2015 increased 12.0% to $1,145,000 compared to $1,022,000 for the three months ended September 30, 2014. The increase was primarily due to costs associated with the resignation of the Company’s Chief Executive Officer, partially offset by decreased staffing and legal costs. General and administrative expenses for the nine months ended September 30, 2015 increased 2.3% to $3,110,000 compared to $3,040,000 for the nine months ended September 30, 2014. The increase was primarily due to costs associated with the resignation of the Company’s Chief Executive Officer, partially offset by decreased legal and other administrative service costs.

General and administrative expenses as a percentage of total net sales increased to 15.1% for the three months ended September 30, 2015 compared to 13.6% for the three months ended September 30, 2014. The increase was primarily due to costs associated with the resignation of the Company’s Chief Executive Officer, partially offset by decreased staffing and legal costs. General and administrative expenses as a percentage of total net sales was 15.0% for the nine months ended September 30, 2015 and September 30, 2014.

Other Income. Other income for the three months ended September 30, 2015 was $19,000 compared to $13,000 for the three months ended September 30, 2014. Other income for the nine months ended September 30, 2015 was $56,000 compared to $25,000 for the nine months ended September 30, 2014. Other income is comprised of interest earned on cash, cash equivalents, and available for sale investment balances.

Income Taxes. For the three and nine months ended September 30, 2015, the Company recorded income tax expense of $382,000 and $621,000, or 40.5% and 40.6% of income before taxes, respectively. 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. The income tax provision for the three and nine months ended September 30, 2015 and 2014 is comprised of federal and state taxes. The primary differences between the Company’s September 30, 2015 and 2014 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.

Other Comprehensive Income. Other comprehensive income is composed 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 and sales of its products and services. At September 30, 2015, working capital was $21,077,000 compared to $20,744,000 at December 31, 2014. During the nine months ended September 30, 2015, cash and cash equivalents increased $1,858,000 from $7,237,000 at December 31, 2014, to $9,095,000 at September 30, 2015.

Operating Activities: Net cash provided by operating activities during the nine months ended September 30, 2015, was $3,737,000. Net income of $907,000, plus non-cash adjustments of $1,193,000 and changes in operating assets and liabilities of $1,637,000 resulted in the $3,737,000 of cash provided by operating activities. The largest component of the change in operating assets and liabilities was accrued liabilities which increased $498,000, and will fluctuate based on normal business conditions. The non-cash adjustments consisted of depreciation and amortization expense, changes in allowance for doubtful accounts, deferred income tax expense, stock-based compensation expense, and gain on 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, 2015 was $317,000. This was related to the net purchases of available for sale investments of $205,000 and purchase of property and equipment of $137,000, partially offset by gain on sale of property and equipment of $25,000.

Financing Activities: Net cash used in financing activities during the nine months ended September 30, 2015 was $1,562,000, which related to the repurchase of common stock under the Company’s share repurchase plan of $1,614,000, partially offset by proceeds received from issuance of common stock under the employee stock purchase plan and stock option exercises of $48,000, as well as an excess tax benefit from stock option exercises of $4,000.

The Company believes that based upon current business conditions and plans, its existing cash and investment balances 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 maintains a $7,500,000 line of credit, collateralized by its available for sale investments. Amounts borrowed, if any, would bear interest at the 30-day LIBOR rate plus 2% (effective rate of 2.19% as of September 30, 2015).

On September 14, 2015, we amended the lease for our headquarters to extend the term for five years, through March 31, 2021, and to reduce our square footage and rental rate per square foot effective January 1, 2016. Minimum future lease obligations under this amended lease, excluding operating costs, are approximately as follows for the years ending December 31:

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, 2014, included in our Form 10-K filed with the Securities and Exchange Commission on March 4, 2015. 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 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. The words “believes,” “expects,” “anticipates,” “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; (ii) that we expect fluctuations in accounts receivable and payable, accrued liabilities, and deferred revenue; and (iii) 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 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.

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 2015 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 consumer packaged goods manufacturer, retailer, 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 our Annual Report on Form 10-K for the year ended December 31, 2014, 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 principal executive and financial 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 report, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Company’s principal executive and financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report. Disclosure controls and procedures 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 are designed to ensure that information required to be disclosed by us in these reports is accumulated and communicated to the Company’s management, including its principal executive and 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 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, 2014. We believe there have been no material changes from the risk factors disclosed in that Form 10-K.