N
otes to Financial Statements
1.
Summary of Significant Accounting
Policies
.
Description of
Business.
Insignia Systems,
Inc. (the “Company”) markets in-store advertising
products, programs and services to retailers and consumer packaged
goods manufacturers. The Company operates in a single reportable
segment. The Company’s primary products include the Insignia
Point-of-Purchase Services (POPS
®
), and other
retailer approved promotional services, in-store marketing
solutions, and custom adhesive and non-adhesive signage materials
directly to our retail customers.
Revenue Recognition
.
The Company recognizes revenue from its In-Store Signage Solutions
ratably over the period of service. Other service revenue from
innovation initiatives or
other
retailer approved promotional services and sign solutions is
recognized with a mix of over-time and point in time recognition
dependent on type of service performed.
The Company
recognizes revenue related to equipment and sign card sales at the
time the products are shipped to customers. Revenue associated with
maintenance agreements is recognized ratably over the life of the
contract. Revenue that has been billed and not yet earned is
reflected as deferred revenue on the balance sheet. We account for
taxes collected for customers on a net basis.
Cash and Cash
Equivalents
. The Company considers all highly liquid
investments with an original maturity date of three months or less
to be cash equivalents. Cash equivalents are stated at cost, which
approximates fair value. At December 31, 2018 and 2017, $9,393,000
and $4,846,000 was invested in an insured sweep account,
respectively. The balances in cash accounts, at times, may exceed
federally insured limits. The Company has not experienced any
losses in such accounts and believes it is not exposed to any
significant credit risk on cash and cash equivalents. Amounts held
in checking accounts and in insured cash sweep accounts during the
years ended December 31, 2018 and 2017 were fully insured under the
Federal Deposit Insurance Corporation.
Fair Value of Financial
Measurements
.
Fair
value is defined as the exit price, or the amount that would be
received to sell an asset, or paid to transfer a liability, in an
orderly transaction between market participants as of the
measurement date. Accounting Standards Codification
(“ASC”) 820-10 also establishes a hierarchy for inputs
used in measuring fair value that maximizes the use of observable
inputs and minimizes the use of unobservable inputs by requiring
that the most observable inputs be used when
available. Observable inputs are inputs market participants
would use in valuing the asset or liability, developed based on
market data obtained from sources independent of the
Company. Unobservable inputs are inputs that reflect
management’s assumptions about the factors market
participants would use in valuing the asset or liability developed
based upon the best information available in the
circumstances.
The
hierarchy is divided into three levels. Level 1 inputs are
quoted prices (unadjusted) in active markets for identical assets
or liabilities. Level 2 inputs include quoted prices for
similar assets or liabilities in active markets, quoted prices for
identical or similar assets or liabilities in markets that are not
active and inputs (other than quoted prices) that are observable
for the asset or liability, either directly or
indirectly. Level 3 inputs are unobservable inputs for the
asset or liability. Categorization within the valuation hierarchy
is based upon the lowest level of input that is significant to the
fair value measurement.
The
Company records certain financial assets and liabilities at their
carrying amounts that approximate fair value, based on their
short-term nature. These financial assets and liabilities
included cash and cash equivalents, accounts receivable and
accounts payable.
Accounts
Receivable
.
The majority
of the Company’s accounts receivable is due from companies in
the consumer-packaged goods industry. Credit is extended based on
evaluation of a customer’s financial condition and,
generally, collateral is not required. Accounts receivable are due
within 30-150 days and are stated at amounts due from customers,
net of an allowance for doubtful accounts. Accounts receivable
outstanding longer than the contractual payment terms are
considered past due. The Company determines its allowance by
considering a number of factors, including the length of time trade
accounts receivable are past due, the Company’s previous loss
history, the customer’s current ability to pay its obligation
to the Company, and the condition of the general economy and the
industry as a whole. The Company writes-off accounts receivable
when they become uncollectible, and payments subsequently received
on such receivables are credited to the allowance for doubtful
accounts.
Changes
in the Company’s allowance for doubtful accounts are as
follows:
December 31
|
|
|
Beginning
balance
|
$
213,000
|
$
141,000
|
Bad
debt provision
|
6,000
|
72,000
|
Accounts
written-off
|
(197,000
)
|
-
|
Ending
balance
|
$
22,000
|
$
213,000
|
Inventories
.
Inventories are primarily comprised of sign cards, hardware and
roll stock. Inventory is valued at the lower of cost or net
realizable value using the first-in, first-out (FIFO) method, and
consists of the following:
December 31
|
|
|
Raw
materials
|
$
80,000
|
$
68,000
|
Work-in-process
|
12,000
|
10,000
|
Finished
goods
|
261,000
|
223,000
|
|
$
353,000
|
$
301,000
|
Property and
Equipment
. Property and equipment is recorded at cost.
Significant additions or improvements extending asset lives are
capitalized, while repairs and maintenance are charged to expense
when incurred. Internally developed software is capitalized upon
completion of preliminary project stage and when it is probable the
project will be completed. Expenditures are capitalized for all
development activities, while expenditures related to planning,
training, and maintenance are expensed. Depreciation is provided in
amounts sufficient to relate the cost of assets to operations over
their estimated useful lives. The straight-line method of
depreciation is used for financial reporting purposes and
accelerated methods are used for tax purposes. Estimated useful
lives of the assets are as follows:
Production
tooling, machinery and equipment
|
1 - 6
years
|
Office
furniture and fixtures
|
3
years
|
Computer
equipment and software
|
3 - 5
years
|
Leasehold
improvements are amortized over the shorter of the remaining term
of the lease or estimated life of the asset. Internally developed
software is amortized over the estimated life of the asset, which
is five years.
Impairment of Long-Lived
Assets
. The Company records impairment losses on long-lived
assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those
assets are less than the assets’ carrying amount. Impaired
assets are then recorded at their estimated fair value. There were
no material impairment losses during the years ended December 31,
2018 and 2017.
Income Taxes
. Income
taxes are accounted for under the liability method. Deferred income
taxes are provided for temporary differences between the financial
reporting and tax basis of assets and liabilities. Deferred taxes
are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or the
entire deferred tax asset will not be realized. Deferred tax assets
and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of the enactment. It is the Company’s
policy to provide for uncertain tax positions and the related
interest and penalties based upon management’s assessment of
whether a tax benefit is more likely than not to be sustained upon
examination by tax authorities. The Company recognizes interest and
penalties accrued on any unrecognized tax benefits as a component
of income tax expense (benefit).
Stock-Based
Compensation
.
The
Company measures and recognizes compensation expense for all
stock-based awards at fair value. Restricted stock units and awards
are valued at the closing market price of the Company’s stock
on the date of the grant. The Company uses the Black-Scholes option
pricing model to determine the weighted average fair value of
options and employee stock purchase plan rights. The determination
of fair value of share-based payment awards on the date of grant
using an option-pricing model is affected by our stock price as
well as by assumptions regarding a number of complex and subjective
variables. These variables include, but are not limited to, the
expected stock price volatility over the term of the awards, and
actual and projected employee stock option exercise
behaviors.
The expected lives of the options and employee
stock purchase plan rights are based on evaluations of historical
and expected future employee exercise behavior. The risk-free
interest rate is based on the U.S. Treasury rates at the date of
grant with maturity dates approximately equal to the expected term
at grant date.
Volatility is based on historical and
expected future volatility of the Company’s stock. The
Company has not historically issued any dividends beyond one-time
dividends declared in 2011 and 2016 and does not expect to in the
future. Forfeitures are estimated at the time of the grant and
revised, if necessary, in subsequent periods if actual forfeitures
differ from estimates.
Advertising Costs
.
Advertising costs are charged to operations as incurred.
Advertising expenses were approximately $207,000 and $59,000 during
the years ended December 31, 2018 and 2017,
respectively.
Net Income (Loss) Per
Share
. Basic net income (loss) per share is computed by
dividing net income (loss) by the weighted average shares
outstanding and excludes any dilutive effects of stock options and
restricted stock units and awards. Diluted net income (loss) per
share gives effect to all diluted potential common shares
outstanding during the year.
Weighted average
common shares outstanding for the years ended December 31, 2018 and
2017 were as follows:
Year ended December 31
|
|
|
Denominator
for basic net income (loss) per share - weighted average
shares
|
11,776,000
|
11,717,000
|
Effect
of dilutive securities:
|
|
|
Stock
options, restricted stock units and restricted stock
awards
|
231,000
|
-
|
Denominator
for diluted net income (loss) per share - weighted average
shares
|
12,007,000
|
11,717,000
|
Options
to purchase approximately 284,000 shares of common stock
outstanding for the year ended December 31, 2018 were not included
in the computation of common stock equivalents because their
exercise prices were higher than the average fair market value of
the common shares during the year. Restricted stock units of
approximately 45,000 shares for the year ended December 31, 2018
are antidilutive due to the amount of weighted-average unrecognized
compensation related to these grants. Due to the net loss incurred
during the year ended December 31, 2017, all stock awards were
anti-dilutive for this period.
Use of Estimates
.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from these
estimates.
Recently Adopted Accounting Pronouncement
.
Effective
January 1, 2018, the Company adopted Financial Accounting Standards
Board (“FASB”) Accounting Standards Update
(“ASU”) 2014-09
Revenue from Contracts with Customers
(“Topic 606”). Topic 606 supersedes the revenue
recognition requirements in Topic 605 “
Revenue
Recognition,
” and requires entities to recognize
revenue when control of the promised goods or services is
transferred to customers at an amount that reflects the
consideration to which the entity expects to be entitled to in
exchange for those goods or services. The adoption of ASU 2014-09,
using the modified retrospective approach, had no significant
impact on the Company’s results of operations, cash flows, or
financial position. Revenue continues to be recognized for In-Store
Signage Solutions ratably over the period of service, which is
typically a two-week display cycle, and for sign card sales, at the
time the products are shipped to customers. Additional information
and disclosures required by this new standard are contained in Note
2, “Revenue.”
Recently
Issued Accounting Pronouncement.
In February 2016, the FASB
issued ASU 2016-02,
Leases
,
under which lessees will recognize most leases on the balance
sheet. The Company will adopt this ASU for its annual and interim
periods beginning January 1, 2019, and elected not to restate
comparative periods in transition. The Company performed a review
of the requirements of the new guidance and identified which of its
leases will be within the scope of ASU 2016-02. The Company
completed its adoption plan which included a review of lease
contracts, applying the new standard to the lease contracts and
comparing the results to our current accounting. As part of
this plan, the Company determined no significant changes were
necessary to processes and internal controls to capture new data
and address changes in financial reporting. Effective for our
quarter ending March 31, 2019, the Company will revise its lease
accounting policy disclosures to reflect the requirements of ASU
2016-02. The Company estimates the impact of the adoption will be
an increase of approximately $305,000 to both assets and
liabilities on the balance sheet, with no net impact to the
statements of operations or cash flows. The Company also expects
additional qualitative and quantitative disclosures will be
required upon adoption.
2.
Revenue Recognition.
Under 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 our performance obligations included in our
primary revenue streams and the timing or method of revenue
recognition for each:
In-Store
Signage Solution Services.
Our
primary source of revenue is from executing in-store advertising
solutions and services primarily to CPG manufacturers. We provide a
service of displaying promotional signs in close proximity to the
manufacturer’s product in participating stores, which we
maintain in two-to-four-week cycle increments.
Each of the individual activities under our
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 us and we have an enforceable
right to payment for services performed to date. As a result, we
recognize the transaction price for our POPSign service performance
obligations as revenue over time. Given the nature of our
performance obligations is to provide a display service over the
duration of a specified period or periods, we recognize revenue on
a straight-line basis over the display service period as it best
reflects the timing of transfer of our POPSign
services
.
Other
Service Revenues
. The Company
also supplies CPG manufacturers with other retailer approved
promotional services and sign solutions. These services are more
customized than the POPS solutions program, consisting of variable
durations and variable specifications. Due to the variable nature
of these services, revenue recognition is a mix of amortized and
point in time recognition.
Products
.
We also sell custom adhesive and
non-adhesive signage materials directly to our customers. Each such
product is a distinct performance obligation. Revenue is recognized
at a point in time upon shipment, when control of the goods
transfers to the customer.
Disaggregation of Revenue
In the
following table, revenue is disaggregated by major revenue stream
and timing of revenue recognition.
|
Year ended December 31, 2018
|
|
|
|
|
Timing of revenue recognition:
|
|
|
|
Products
and services transferred over time
|
$
28,598,000
|
—
|
$
28,598,000
|
Products
and services transferred at a point in time
|
$
3,025,000
|
$
1,613,000
|
$
4,638,000
|
Total
|
$
31,623,000
|
$
1,613,000
|
$
33,236,000
|
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, 2017
|
$
372,000
|
Reclassification
of beginning deferred revenue to revenue, as a result of
performance obligations satisfied
|
( 372,000
)
|
Cash
received in advance and not recognized as revenue
|
302,000
|
Balance
at December 31, 2018
|
$
302,000
|
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 our performance obligations.
This practical expedient is being applied to arrangements for
certain incomplete services and unshipped custom signage materials.
Of those contracts with an expected duration of greater than one
year, we estimate that revenue of $1,984,000 related to performance
obligations that are unsatisfied (or partially unsatisfied) as of
December 31, 2018 will be recognized in fiscal 2020 or
beyond.
3.
Selling
Arrangement
.
In 2011, the
Company paid News America Marketing In-Store, LLC (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 is being amortized
over the 10-year term of the arrangement. Amortization expense was
$400,000 for each of the years ended December 31, 2018 and 2017
based on straight-line amortization over the term of the
arrangement and is recorded within cost of services in the
Company’s statement of operations. Amortization expense is
expected to be $600,000 in 2019, $262,000 in 2020 and $55,000 in
the year ending December 31, 2021, respectively. The acceleration
of amortization in 2019 is based on the anticipated recovery period
over the remaining term of the contract due to the loss of a
significant retailer. The net carrying amount of the selling
arrangement is recorded within other assets on the Company’s
balance sheet. A summary of the carrying amount of this selling
arrangement is as follows as of December 31:
|
|
|
Gross
cost
|
$
4,000,000
|
$
4,000,000
|
Accumulated
amortization
|
(3,083,000
)
|
(2,683,000
)
|
Net
carrying amount
|
$
917,000
|
$
1,317,000
|
5.
Retail Access and Distribution
Agreement.
On February 21,
2014, the Company and Valassis Sales and Marketing Services, Inc.
(“Valassis”) entered into the Retail Access and
Distribution Agreement (the “New Valassis Agreement”)
that replaced all prior agreements. As a result of this new
agreement, Valassis was no longer a reseller of the Company’s
services and the Company regained access to all CPG manufacturers
for the sale of in-store signage. The net amount paid to Valassis
by the Company was $250,000, which was being amortized over the
original term of the New Valassis Agreement, which was
approximately four years. As of December 31, 2017, this agreement
has been fully amortized. Amortization expense related to this
agreement was approximately $64,000 during the year ended December
31, 2017
.
6.
Pr
operty and Equipment.
Property and
equipment consists of the following at December 31:
Year ended December 31
|
|
|
Property and Equipment:
|
|
|
Production
tooling, machinery and equipment
|
$
3,694,000
|
$
4,003,000
|
Office
furniture and fixtures
|
385,000
|
325,000
|
Computer
equipment and software
|
2,743,000
|
2,680,000
|
Leasehold
improvements
|
577,000
|
577,000
|
Construction
in-progress
|
1,179,000
|
206,000
|
|
8,578,000
|
7,791,000
|
Accumulated
depreciation and amortization
|
(5,310,000
)
|
(5,121,000
)
|
Net
Property and Equipment
|
$
3,268,000
|
$
2,670,000
|
Depreciation
expense for the years ended December 31, 2018 and 2017 was $761,000
and $868,000, respectively.
7.
Commitments
and Contingencies.
Operating Leases.
The Company’s lease for its headquarters is through
March 31, 2021. Rent expense under this lease, excluding
operating costs, was approximately $150,000 for the years ended
December 31, 2018 and December 31, 2017.
The
Company’s lease agreement for additional office space was
entered into in April 2018, which is a 12-month lease agreement.
Rent expense under this lease was approximately $34,000 for the
year ended December 31, 2018.
Minimum
future lease obligations under the Company’s headquarters
lease, excluding operating costs, are approximately as follows for
the years ending December 31:
2019
|
$
217,000
|
2020
|
222,000
|
2021
|
57,000
|
Retailer
Agreements
. The Company has
contracts in the normal course of business with various retailers,
some of which provide for fixed or store-based payments rather than
sign placement-based payments resulting in minimum commitments each
year in order to maintain the agreements. During the years ended
December 31, 2018 and 2017, the Company incurred $4,846,000 and
$5,203,000 of costs related to fixed and store-based payments,
respectively. The amounts are recorded in cost of services in the
Company’s statements of operations.
Aggregate
commitment amounts under agreements with retailers are
approximately as follows for the years ending December
31:
2019
|
$
2,907,000
|
2020
|
2,614,000
|
2021
|
1,871,000
|
2022
|
525,000
|
2023
|
279,000
|
On an
ongoing basis the Company negotiates renewals of various agreements
with retailers, r
etailer contracts
generally have terms of one to three years.
To the extent
contracts with existing retailers are renewed the annual commitment
amounts for 2019 and thereafter are expected to be in excess of the
amounts above.
Legal
.
The Company is
subject to various legal matters in the normal course of business.
The outcome of these matters is not expected to have a material
effect on the Company’s financial position or results of
operations.
8.
Shareholders’ Equity
.
Stock-Based
Compensation
. The Company’s stock-based compensation
plans are administered by the Compensation Committee of the Board
of Directors, which, subject to approval by the Board of Directors,
selects persons to receive awards and determines the number of
shares subject to each award and the terms, conditions, performance
measures and other provisions of the award.
The
following table summarizes the stock-based compensation expense
that was recognized in the Company’s statements of operations
and comprehensive loss for the years ended December 31, 2018 and
2017:
Year ended December 31
|
|
|
Cost
of sales
|
$
11,000
|
$
52,000
|
Selling
|
102,000
|
75,000
|
Marketing
|
71,000
|
51,000
|
General
and administrative
|
226,000
|
209,000
|
|
$
410,000
|
$
387,000
|
The
Company uses the Black-Scholes option pricing model to estimate
fair value of stock-based awards with the following weighted
average assumptions:
|
|
|
Stock Options:
|
|
|
Expected
life (years)
|
6.5
|
2.0
|
Expected
volatility
|
51
%
|
46
%
|
Dividend
yield
|
0
%
|
0
%
|
Risk-free
interest rate
|
2.8
%
|
1.0
%
|
|
|
|
Stock Purchase Plan Options:
|
|
|
Expected
life (years)
|
1.0
|
1.0
|
Expected
volatility
|
66
%
|
51
%
|
Dividend
yield
|
0
%
|
0
%
|
Risk-free
interest rate
|
1.8
%
|
0.9
%
|
The
Company uses the graded attribution method to recognize expense for
unvested stock-based awards. The amount of stock-based compensation
recognized during a period is based on the value of the awards that
are ultimately expected to vest. Forfeitures are estimated at the
time of grant and revised, if necessary, in subsequent periods if
actual forfeitures differ from those estimates. The Company
re-evaluates the forfeiture rate annually and adjusts it as
necessary.
Stock Options, Restricted
Stock, Restricted Stock Units, and Other Stock-Based Compensation
Awards
. The Company maintains the 2003 Incentive Stock
Option Plan (the “2003 Plan”), the 2013 Omnibus Stock
and Incentive Plan (the “2013 Plan”) and the 2018
Equity Incentive Plan (the “2018 Plan”). The 2018 Plan
replaced the 2013 Plan upon its ratification by shareholders in
July 2018. The 2013 Plan had replaced the 2003 Plan upon its
ratification by shareholders in 2013. Awards granted under the 2003
Plan and 2013 Plan will remain in effect until they are exercised
or expire according to their terms.
Under
the terms of the 2018 Plan, the number of shares of our common
stock that may be the subject of awards and issued under the 2018
Plan was initially 900,000 plus any shares remaining available for
future grants under the 2013 Plan on the effective date of the 2018
Plan. Since August 2018, all equity awards have been made under the
2018 Plan.
Under
the terms of the 2018 Plan, the Company may grant awards in a
variety of instruments including stock options, restricted stock
and restricted stock units to employees, consultants and directors
generally at an exercise price at or above 100% of fair market
value at the close of business on the date of grant. Stock options
expire 10 years after the date of grant and generally vest over
three years. The Company issues new shares of common stock upon
grant of restricted stock, when stock options are exercised, and
when restricted stock units are vested and/or settled.
On November 28, 2016, our Board of Directors
amended the 2003 Plan and the 2013 Plan to permit equitable
adjustments to outstanding awards in the event of an extraordinary
cash dividend.
On March 28, 2017, the Board of Directors
approved the modification of all outstanding stock option awards to
provide option holders with substantially equivalent economic value
after the effect of the dividend. The modification resulted in the
issuance of options to purchase 150,476 additional shares. Total
stock-based compensation expense for the modifications was
approximately $79,000, which was recorded during the 12 months
ended December 31, 2017.
The
following table summarizes activity under the 2003, 2013 and 2018
Plans:
|
Plan Shares Available for Grant
|
|
Weighted Average Exercise Price Per Share
|
Aggregate
Intrinsic Value
|
Balance
at January 1, 2017
|
501,622
|
419,162
|
$
3.18
|
|
Shares
reserved
|
—
|
—
|
|
|
Options
granted for modification
|
( 61,814
)
|
150,474
|
|
|
Stock
awards granted
|
( 72,115
)
|
—
|
|
|
Restricted
stock units and awards granted
|
( 203,424
)
|
—
|
|
|
Stock
options granted
|
—
|
—
|
|
|
Stock
options exercised
|
—
|
—
|
|
|
Cancelled
or forfeited - 2013 Plan options
|
103,349
|
( 103,349
)
|
2.20
|
|
Cancelled
or forfeited - 2013 Plan
restricted stock and restricted stock units
|
29,382
|
—
|
2.01
|
|
Cancelled
or forfeited - 2003 Plan options
|
—
|
( 99,941
)
|
2.20
|
|
|
|
|
|
|
Balance
at December 31, 2017
|
297,000
|
366,346
|
2.41
|
|
|
|
|
|
|
Shares
reserved
|
900,000
|
—
|
|
|
Restricted
stock units and awards granted - 2013 Plan
|
( 178,000
)
|
—
|
|
|
Restricted
stock units and awards granted - 2018 Plan
|
( 165,667
)
|
—
|
|
|
Stock
options granted - 2018 Plan
|
( 119,515
)
|
119,515
|
1.95
|
|
Stock
options exercised
|
—
|
( 2,276
)
|
1.18
|
$
705
|
Cancelled
or forfeited - 2013 Plan options
|
51,230
|
( 51,230
)
|
2.17
|
|
Cancelled
or forfeited - 2013 Plan
restricted stock and restricted stock units
|
39,884
|
—
|
1.22
|
|
Cancelled
or forfeited - 2003 Plan options
|
—
|
( 59,428
)
|
2.09
|
|
|
|
|
|
|
Balance
at December 31, 2018
|
824,932
|
372,927
|
2.36
|
|
The
number of options exercisable under the Plans was:
December
31, 2018
|
253,412
|
December
31, 2017
|
366,346
|
The
following table summarizes information about the stock options
outstanding at December 31, 2018:
|
|
|
Ranges of Exercise Prices
|
|
Weighted Average Remaining Contractual Life
|
Weighted Average Exercise Price Per Share
|
|
Weighted Average Exercise Price Per Share
|
$
1.18 - $2.04
|
179,620
|
7.73 years
|
$
1.77
|
60,105
|
$
1.40
|
$
2.05 - $3.09
|
144,125
|
3.43 years
|
2.52
|
144,125
|
2.52
|
$
4.02
|
49,182
|
1.4 years
|
4.02
|
49,182
|
4.02
|
|
372,927
|
5.23 years
|
$
2.36
|
253,412
|
$
2.55
|
Options
outstanding under the Plans expire at various dates during the
period from May 2019 through August 2028. Options outstanding at
December 31, 2018 had an aggregate intrinsic value of $12,779.
Options exercisable at December 31, 2018 had a weighted average
remaining life of 3.15 years and an aggregate intrinsic value of
$12,779. The weighted average grant-date fair value of options
granted during the year ended December 31, 2018 was $1.04. No
options were granted in 2017.
During
the year ended December 31, 2018, the Company issued 297,515
restricted stock units under the 2013 Plan and the 2018 Plan. The
shares underlying the awards were assigned a weighted average value
of $1.84 per share, which was the closing price of our common stock
on the date of grants. These awards are scheduled to vest over
three years or four years with the first vesting at the end of year
two.
During the year ended December
31, 2017, the Company issued 143,424 restricted stock units under
the 2013 Plan. The shares underlying the awards made in 2017 were
assigned weighted average values of $1.13 per share based on the
closing price of our common stock on the applicable dates of grant
and are scheduled to vest over two years.
During
the year ended December 31, 2018, no restricted stock was issued.
During the year ended December 31, 2017, the Company issued 60,000
shares of restricted stock under the 2013 Plan.
The shares underlying the awards were assigned a
value of $1.09 per share, which was the closing price of our common
stock on the date of grant and are scheduled to vest over the two
years.
During
July 2018, non-employee members of the Board of Directors received
restricted stock grants totaling 46,152 shares pursuant to the 2018
Plan. The shares underlying the awards were assigned a value of
$1.95 per share, which was the closing price of our common stock on
the date of grants, for a total value of $90,000, and are scheduled
to vest the day immediately preceding the date of the next annual
shareholder meeting. During June 2017, non-employee members of the
Board of Directors received grants totaling 72,115 fully vested
shares of common stock pursuant to the 2013 Plan. The shares were
assigned a value of $1.04 per share, based on the closing price on
the grant date, for a total value of $75,000, which is included in
stock-based compensation expense for the year ended December 31,
2018.
Restricted stock
and restricted stock unit transactions during the years ended
December 31, 2018 and 2017 are summarized as follows:
|
|
Weighted average
grant date fair value
|
Unvested
shares at January 1, 2017
|
204,875
|
$
2.16
|
Granted
|
203,424
|
1.12
|
Vested
|
(56,438
)
|
1.05
|
Forfeited
or surrendered
|
(29,382
)
|
2.01
|
Unvested
shares at December 31, 2017
|
322,479
|
$
1.69
|
Granted
|
343,667
|
1.86
|
Vested
|
(132,940
)
|
1.47
|
Forfeited
or surrendered
|
(39,884
)
|
1.22
|
Unvested
shares at December 31, 2018
|
493,322
|
$
1.90
|
As
of December 31, 2018, there was approximately $107,000 of total
unrecognized compensation costs related to outstanding stock
options, which is expected to be recognized over a weighted average
period of 3.61 years.
As
of December 31, 2018, there was approximately $549,000 of total
unrecognized compensation costs related to restricted stock and
restricted stock units, which is expected to be recognized over a
weighted average period of 1.89 years.
Employee Stock Purchase
Plan.
The Company has an Employee Stock Purchase Plan (the
“ESPP”) that enables employees to contribute up to 10%
of their base compensation toward the purchase of the
Company’s common stock at 85% of its market value on the
first or last day of the year. As of the most recent amendment and
restatement of the ESPP approved by shareholders on July 20, 2018,
300,000 shares were added to the total pool of shares available
under the ESPP. During the year ended December 31, 2018, employees
purchased 107,341 shares under the ESPP. During the year ended
December 31, 2017, employees purchased 48,320 shares under the
ESPP. At December 31, 2018, 278,380 shares were reserved for future
employee purchases of common stock under the ESPP. For the years
ended December 31, 2018 and 2017, the Company recognized $58,000
and $29,000, respectively, of stock-based compensation expense
related to the ESPP.
Share Repurchase
Programs.
On April 5, 2018, the Board authorized the
repurchase of up to $3,000,000 of the Company’s common stock
on or before March 31, 2020. The plan allowed the repurchases to be
made in open market or privately negotiated transactions. The plan
did not obligate the Company to repurchase any particular number of
shares and may be suspended at any time at the Company’s
discretion.
For the
year ended December 31, 2018, the Company repurchased approximately
164,000 shares at a total cost of approximately
$298,000.
Dividends.
We have
not historically paid dividends, other than one-time dividends
declared in 2011 and 2016. On November 28, 2016, the Board declared
a one-time special dividend of $0.70 per share to shareholders of
record as of December 16, 2016, paid on January 6, 2017. Outside of
these special dividends, the Board of Directors intends to retain
earnings for use in the Company’s business and does not
anticipate paying cash dividends in the foreseeable
future.
9.
Income Taxes
. Income tax expense (benefit) consists of the
following:
Year Ended December 31
|
|
|
Current
taxes - Federal
|
$
177,000
|
$
(316,000
)
|
Current
taxes - State
|
48,000
|
6,000
|
Deferred
taxes - Federal
|
227,000
|
(23,000
)
|
Deferred
taxes - State
|
32,000
|
63,000
|
|
|
|
Income
tax expense (benefit)
|
$
484,000
|
$
(270,000
)
|
The
actual tax expense (benefit) attributable to income (loss) before
taxes differs from the expected tax expense (benefit) computed by
applying the U.S. federal corporate income tax rate of 21% for 2018
or 34% for 2017 as follows:
Year Ended December 31
|
|
|
Federal
statutory rate
|
21.0
%
|
(34.0
)%
|
|
|
|
Stock-based
awards
|
0.6
|
7.0
|
State
taxes
|
2.8
|
(1.5
)
|
Other
permanent differences
|
0.7
|
1.8
|
Impact
of uncertain tax positions
|
1.7
|
3.0
|
Valuation
allowance
|
(1.6
)
|
8.5
|
Tax
rate change
|
0.0
|
(14.7
)
|
Other
|
0.5
|
0.2
|
|
|
|
Effective
federal income tax rate
|
25.7
%
|
(29.7
)%
|
Components of
resulting noncurrent deferred tax assets (liabilities) are as
follows:
As of December 31
|
|
|
Deferred tax assets
|
|
|
Accrued
expenses
|
$
129,000
|
$
183,000
|
Inventory
reserve
|
3,000
|
42,000
|
Stock-based
awards
|
78,000
|
52,000
|
Reserve
for bad debts
|
5,000
|
50,000
|
Net
operating loss and credit carryforwards
|
39,000
|
61,000
|
Other
|
23,000
|
25,000
|
Valuation
allowance
|
(79,000
)
|
(108,000
)
|
|
|
|
Total
deferred tax assets
|
$
198,000
|
$
305,000
|
|
|
|
Deferred tax liabilities
|
|
|
Depreciation
|
$
(635,000
)
|
$
(465,000
)
|
Prepaid
expenses
|
(67,000
)
|
(85,000
)
|
|
|
|
Total
deferred tax liabilities
|
(702,000
)
|
(550,000
)
|
|
|
|
Net
deferred income tax liabilities
|
$
(504,000
)
|
$
(245,000
)
|
The
Company evaluates all significant available positive and negative
evidence, including the existence of losses in prior years and its
forecast of future taxable income, in assessing the need for a
valuation allowance. The underlying assumptions the Company uses in
forecasting future taxable income require significant judgment and
take into account the Company’s recent performance. The
change in the valuation allowance for the years ended December 31,
2018 and 2017 was $(29,000) and $77,000, respectively. The
valuation allowance as of December 31, 2018 and 2017 was the result
of certain capital losses, state income tax credits, and state net
operating losses carried forward which the Company does not believe
are more likely than not to be realized.
The
Company has recorded a liability of $613,000 and $581,000 for
uncertain tax positions taken in tax returns in previous years as
of December 31, 2018 and 2017, respectively. This liability is
reflected as accrued income taxes on the Company’s balance
sheets. The Company files income tax returns in the United States
and numerous state and local tax jurisdictions. Tax years 2015 and
forward are open for examination and assessment by the Internal
Revenue Service. With limited exceptions, tax years prior to 2015
are no longer open in major state and local tax jurisdictions. The
Company does not anticipate that the total unrecognized tax
benefits will change significantly prior to December 31,
2019.
A
reconciliation of the beginning and ending amount of the liability
for uncertain tax positions is as follows:
Balance
at January 1, 2017
|
$
554,000
|
Increases
due to interest
|
27,000
|
Balance
at December 31, 2017
|
581,000
|
Increases
due to interest and state tax
|
32,000
|
Balance
at December 31, 2018
|
$
613,000
|
10.
Employee Benefit Plans
. The Company
sponsors a Retirement Profit Sharing and Savings Plan under Section
401(k) of the Internal Revenue Code. The plan allows employees to
defer up to 50% of their wages, subject to Federal limitations, on
a pre-tax basis through contributions to the plan. During the years
ended December 31, 2018 and 2017, the Company made matching
contributions of $68,000 and $58,000, respectively.
Major
Customers
.
During the
year ended December 31, 2018, two customers accounted for 24% and
20% of the Company’s total net sales. At December 31, 2018,
two customers represented 31% and 16% of the Company’s total
accounts receivable. During the year ended December 31, 2017, one
customer accounted for 26% of the Company’s total net sales.
At December 31, 2017, three customers represented 29%, 12% and 11%
of the Company’s total accounts receivable.
Although there are
a number of customers that the Company sells to, the loss of a
major customer could adversely affect operating results.
Additionally, the loss of a major retailer from the Company’s
retail network could adversely affect operating results
.
Export Sales
. Export
sales accounted for less than 1% of total net sales during the
years ended December 31, 2018 and 2017.
12.
Quarterly Financial Data
.
(Unaudited)
Quarterly data for
the years ended December 31, 2018 and 2017 was as
follows:
Year Ended December 31, 2018
|
|
|
|
|
Net
sales
|
$
7,419,000
|
$
8,245,000
|
$
9,455,000
|
$
8,117,000
|
Gross
profit
|
2,746,000
|
3,005,000
|
3,563,000
|
3,247,000
|
Net
income
|
164,000
|
184,000
|
645,000
|
406,000
|
Net
income per share:
|
|
|
|
|
Basic
|
$
0.01
|
$
0.02
|
$
0.05
|
$
0.04
|
Diluted
|
$
0.01
|
$
0.02
|
$
0.05
|
$
0.04
|
Year Ended December 31, 2017
|
|
|
|
|
Net
sales
|
$
4,767,000
|
$
5,849,000
|
$
7,723,000
|
$
8,091,000
|
Gross
profit
|
629,000
|
1,498,000
|
2,743,000
|
3,531,000
|
Net
income (loss)
|
(1,191,000
)
|
(534,000
)
|
451,000
|
635,000
|
Net
income (loss) per share:
|
|
|
|
|
Basic
|
$
(0.10
)
|
$
(0.05
)
|
$
0.04
|
$
0.05
|
Diluted
|
$
(0.10
)
|
$
(0.05
)
|
$
0.04
|
$
0.05
|