What changed in LENDWAY, INC.'s 10-K — 2023 vs 2024

Item 1. Business General Insignia Systems, Inc. (“Insignia,” “we,” “us,” “our” and the “Company”) was incorporated in Minnesota in 1990. We are a leading provider of in-store advertising solutions to brands, retailers, shopper marketing agencies and brokerages (“clients”).

We believe our products and services are attractive to our clients because of our ability to navigate the complex retail landscape, to customize our solutions for both our brand and retail partners, to execute with excellence and the results our solutions deliver.

Our leadership and employees have extensive industry knowledge, including direct experience through former positions at consumer-packaged goods (“CPG”) manufacturers and retailers. We provide marketing solutions to brands spanning from some of the largest multinationals to new and emerging brands.

For retailers and brands working in an environment that is tighter, more competitive, and more complex every day, Insignia positions itself as the shopper marketing ally that combines best-in-class execution with imagination, responsiveness, and hunger to help move business forward.

We take the relationships we have with our clients and vendor partnerships very seriously by having our team stretch the extra mile to ensure flawless execution. We sincerely approach our projects with the same passion as our clients do.

These relationships are built with our brand-led, retailer centric mindset, our ability to be nimble and flexible to the ever-changing industry landscape and our delivery of superior customer service that our clients deserve.

Our in-store solutions are executed in retailers spanning from some of the largest national retailers to regional US wholesalers and independents who are leaders in their respective channels and geographies. Up until 2020, our primary solution had been in-store signage, specifically Point-Of-Purchase Services (POPS®). The Insignia POPS solution is a national, account-specific, shelf-edge advertising and promotion tactic.

Primarily because of competitive pressures, market contraction and reduced spending post the COVID-19 pandemic, our POPS business has declined and will be wound down in 2023. Beginning in 2018 we began developing and offering an expanded portfolio of solutions including on-pack and displays in addition to what was our core business of Insignia POPS.

Our expanded portfolio now allows us to meet the needs of brands, retailers and their agents as their business strategies evolve behind an ever-changing retail landscape. Since expanding our portfolio of solutions in 2018, our business results, investments and overall team capabilities are primarily focused on our display and on-pack solutions.

With our diversification of business, we now recognized over 90% of our revenue from these recently developed solutions in 2022 and expect this percentage to grow in 2023. Over the last two years we have significantly reduced operating costs and retailer commitments.

In 2021 we relocated our headquarters and operations, both to smaller, more efficient leased spaces, and also restructured operations in December 2021. These changes contributed to reduced expenses in 2022 compared to 2021. On July 1, 2022, we entered into a $20 million settlement agreement with News Corporation, News America Marketing FSI L.L.C., and News America Marketing In-Store Services L.L.C.

(collectively, “News America”). The agreement memorializes the amicable settlement of our outstanding lawsuit against News America. The agreement resulted in net proceeds before income tax of $12,000,000, which was recorded as a net pretax gain from litigation settlement in operations. We are also continuing to explore strategic options to maximize shareholder value.

Potential strategic alternatives that may be evaluated include, but are not limited to, an acquisition, merger, business combination, in-licensing, start-up of new business or other strategic transaction. There can be no assurance that this process will result in any transaction or other changes. Our internet address is www.insigniasystems.com.

Our mailing address is 212 Third Avenue N, Suite 356, Minneapolis, MN 55401; telephone 763-392-6200. 3 Table of Contents Industry and Market Background Our industry continues to rapidly evolve in several ways: 1. Shopper Behavior: Even prior to the start of the pandemic, shopper behavior was evolving.

The rise of surrogate shopper services, drive-up pick-up services or pick-up in store have put the shopper in the driver seat to shop when, where and how they want. As a result retailers are competing on convenience more than ever. They are also struggling to manage overall labor needs as a result of the shoppers’ various ways of shopping. 2.

Brand Crossover: While the number of e-commerce and social media led brands has skyrocketed, many of these brands are also fighting for space at retail. Retailers are leveraging these brands as exclusive offerings to stand out from the competition and give shoppers a reason to continue coming back. 3.

Financial Justification: Brands remain diligently focused on top and bottom-line financial metrics, which drives increased pressure to deliver not only breakthrough design and creativity but also at a competitive price that delivers the return on their investment. 4.

Supply Chain Disruptions and Commodity Price Increases: Primarily because of COVID-19 our clients and vendor partners have experienced longer than normal lead-times on shipping and fulfillment as well as overall cost increases on raw materials for inputs. We expect these trends to continue in 2023.

Despite continued rapid growth in e-commerce, both retailers and brands are actively seeking to grow their brands in physical stores. We continue to execute programs for brands who started as direct-to-consumer (DTC) brands and are launching in physical stores, as well as brands launching for the first time.

On the retail side, many of the top US retailers have recently renovated their stores to deliver a multi-service approach, whether their shoppers are coming in-store to shop traditionally, picking up in-store or waiting in the parking lot for their order. Driving traffic to stores and giving shoppers a reason to come into their stores and shop are extremely important.

Retailers are seeking companies with our capabilities and experience to help build in-store solutions that inspire, educate and ultimately convert active shoppers while they are shopping. Retailers are continuing to seek ways to connect their online strategies with their in-store strategies to build shopper loyalty and to develop solutions to enhance the shopper’s in-store experience.

Brands are increasingly looking for opportunities to reinforce their brand equity as close as possible to the point of purchase or to expand the number of locations where they are offered in store to ensure they are selected over competition. We believe emerging brands are looking for ways to get discovered and tell shoppers their story.

These trends are opening opportunities for innovative companies to develop new products and new ways of helping retailers and brands connect with shoppers. Product Solutions Since the Company’s inception in 1990, we have worked closely with our clients to understand their evolving needs and introduce solutions that help them achieve their business strategies.

Historically, our core product has been in-store signage solutions, namely the Insignia Point-of Purchase Services (POPS®).

Over the past several years, our net sales from sign solutions have declined primarily due to competitive pressures, market contraction and reduced spending post the COVID-19 pandemic while our non-POPS solutions have significantly expanded as we have developed our portfolio to meet the needs of our clients and execution partners more holistically.

Due to the shift away from signage our POPS business will be wound down in 2023, we will still have the ability to sell signs into certain retailers in the Mass Merchant and Grocery Channel. 1.

Our Display Solutions are designed to help brands get discovered, build awareness and drive impulse purchases via a secondary or often permanent placement of their products. Our display solutions include a variety of fully customized temporary, semi-permanent and permanent displays, that brands leverage to grow their sales. 2.

Our On-Pack Solutions appear on the individual product package and are designed to drive awareness, impulse purchases, and capture market share within a very short period. On-pack solutions include BoxTalk TM , coupons, recipes, and cross-promotions. 3. Our In-Store Signage Solutions , which include POPS signs, help brands achieve a variety of objectives that include awareness and sales lift.

The in-store signage solutions are placed perpendicular to the shelf and are designed to attract the attention of the shopper even before they arrive in front of the shelf to consider the purchase of a product. 4 Table of Contents Sales and Design Our highly skilled sales and design teams are a major asset for the organization with their deep knowledge of the industry.

Our Sales team is focused on: · Building and sustaining client relationships; · Increasing overall sales pipeline and revenue; and · Expanding our retail footprint.

Our Design team is focused on the following: · Creating innovative stand-out solutions for our brands; · Designing concepts that are fully executable in-stores; and · Collaborating with our production partners to bring their designs to life.

Our in-store signage solutions are available for sale into a network of retailers that is managed and maintained through direct relationships or can be sold to certain retailers in the Mass Merchant and Grocery Channel. During each of the last two most recently completed fiscal years, foreign sales accounted for less than 1% of total net sales each year.

We expect sales to foreign distributors will remain less than 1% of total net sales in 2023. Competition As we have diversified our portfolio, our competition has become more diverse as well. Historically on our in-store signage business, we had one main competitor, News America (which has been sold to Neptune Retail Solutions).

With our expanded display and on-pack solutions, the competitive landscape is much more diverse and broad and our sales results vary based on what the client’s priority is whether that is price, design or execution.

We believe our primary competitive strengths include: · Best-in-class execution results across our portfolio of product solutions; · Broad client-base of brands inclusive of large Fortune 500 companies, e-commerce, and emerging start-ups; · Imagination, responsiveness, and hunger to help move our clients’ business forward; · Our extensive broad retail and brand expertise; · Innovative retailer specific design and creative; and · Seamless end-to-end project management.

Intellectual Property: Patents and Trademarks The Company has developed and uses a number of trademarks, service marks, slogans, logos and other commercial symbols to advertise and sell its products.

The Company owns U.S. registered trademarks for Insignia ® , Insignia POPS ® , Insignia POPSign ® , Insignia ShelfPOPS ® , Stylus ® , freshADS ® , DuraSign ® , I-Care ® , BannerPOPS ® , EquityPOPS ® , ShapePOPS ® , and Boxtalk TM . Certain employees are required to enter into nondisclosure and invention assignment agreements.

Over the past several years, we have significantly expanded our offered solutions and have developed a portfolio designed to meet the needs of our clients and execution partners more holistically.

COMPETITIVE AND REPUTATIONAL RISKS We Face Competition We compete against other providers of advertising, marketing and merchandising products and services, and providers of point-of-purchase and other in-store solutions, as well as other marketing products and services.

Competition is based on, among other things, rates, availability of markets, quality of products and services provided and their effectiveness, store coverage and other factors. We believe our positioning and offering in the marketplace is unique with our end-to-end capabilities, however brands and retailers can single-source their needs by working with others in the industry individually.

We realize that by working with Insignia, we cannot always offer the lowest price in the marketplace versus a direct manufacturer, however, we can provide continuity and consistency along the entire project journey while managing the entire project for our clients, whereas they would need to source out design, production and execution individually.

We Have Been Party to Significant Litigation with a Competitor We were involved in significant litigation with News America Marketing In-Store, Inc. between 2003 and 2011, which ended with a settlement. Again, on July 1, 2022, we entered into a $20 million settlement agreement with News America.

The agreement memorializes the amicable settlement of the Company’s lawsuit against News America, which was initially filed in 2019. While we are not currently party to any significant litigation, the Company is subject to various legal proceedings in the normal course of business.

Further, we could incur significant expenses asserting or defending future claims that could adversely affect our business, financial condition and operating results.

An adverse resolution of any lawsuit or claim in favor of a third party against us, including those we become involved in through mergers and acquisitions transactions, may require us to pay substantial damages or impose restrictions on how we conduct business, either of which could adversely affect our business, financial condition and operating results. 7 Table of Contents STRATEGIC RISKS The Growth of our Business Is Dependent on Our Ability to Successfully Develop and Design Solution Offerings that Meet Client Demands Our ability to retain, increase and engage our customers and to increase our revenues will depend partially on our ability to create successful solutions and the ability to secure and maintain access to retailer locations that are appealing to CPG manufacturers.

We may modify our existing products or develop and introduce new products, including acquired products. If new or enhanced products fail to engage consumers, we may fail to attract or retain customers or to generate sufficient revenues, margins, or other value to justify our investments. As a result, our business may be adversely affected.

In the future, we may invest in new products and initiatives to generate revenue, but there is no guarantee these approaches will be successful or have the necessary scale to be profitable.

We Face a Number of Risks Associated with Potential Strategic Alternatives As announced in December 2021, we are conducting a formal process to explore strategic options to maximize shareholder value. We intend to use reasonable efforts to identify and evaluate potential transactions, and new business opportunities.

Such activities are accompanied by risks commonly encountered in pursuing and completing such transactions, including, but not limited to, increased expenses associated with the process. Failure to manage the process to a desirable outcome could harm our business, our strategy and our operating results in a material way.

We are in a highly competitive market for a small number of business opportunities, which could reduce the likelihood of consummating one or more strategic alternatives. We are and will continue to be one of many participants in the pool of companies exploring strategic alternatives.

A large number of established and well-financed entities, including special purpose acquisition companies, other public companies and venture capital firms, are active in mergers and acquisitions of companies that may be competing for similar opportunities or desirable target candidates as us.

Nearly all these entities have significantly greater financial resources, technical expertise, and managerial capabilities than we do; consequently, we are at a competitive disadvantage in identifying possible business opportunities and successfully completing a business combination. These competitive factors may reduce the likelihood of our identifying and consummating one or more strategic alternatives.

While we are committed to exploring strategic options to maximize shareholder value, our management remains dedicated to operating our existing business and operations. This and other limitations on time and resources may adversely impact our ability to identify and consummate a successful strategic alternative.

No assurances can be given that we will successfully identify and evaluate suitable business opportunities or that we will consummate any transaction. We cannot guarantee that we will be able to negotiate a business combination or other transaction on favorable terms.

RISKS RELATED TO ECONOMY AND MARKET CONDITIONS CPG Manufacturers and Retailers May Be Disproportionately Impacted by Changes in Economic Conditions Our revenues are affected by CPG manufacturers’ and retailers’ marketing and advertising spending. Additionally, our revenues and results of operations may be subject to fluctuations based upon general economic conditions inclusive of the dynamic global trade environment.

Recent inflation has increased our costs and we may be limited in our ability to pass cost increase along in pricing to our customers. Another economic downturn, whether because of the COVID-19 pandemic or otherwise, may reduce demand or depress pricing for our products and services and have an adverse effect on our results of operations.

In addition, if we are unable to successfully anticipate changing economic conditions, we may be unable to effectively plan for and respond to those changes, and our business could be negatively affected. 8 Table of Contents Future Pandemics May Impact Our Business A public health crisis, if sufficiently widespread as to affect economic activity, could negatively impact our business.

To the extent that efforts to mitigate the effects of the crisis result in a reduction in demand, inefficiencies due to workplace accommodations, reduced availability of personnel, supply chain disruption, or constraints on materials availability, among other difficulties, our financial condition could be negatively impacted.

In any such event, the severity, duration, and extent of the crisis can be difficult to predict, which can make it difficult to predict or anticipate the magnitude and length of the impact on our sales, profits, and/or cash flow.

We experienced these effects with the onset of the COVID-19 pandemic in early 2020, when our operations and the operations of our CPG customers and retailers were impacted by quarantines, illnesses, and travel and logistics restrictions.

In 2020, the financial impact of COVID-19 was significant as a significant number of programs originally slated for execution in the second quarter were cancelled, in addition to incremental costs incurred due to reduced levels of staffing with our execution partners. COVID-19 did not have any meaningful direct impact on our financial results in 2022.

However, COVID-19 infections continue, and we cannot predict the severity and duration of additional outbreaks, new variants of the virus, or the future availability of effective medical treatments and vaccines. We also cannot predict the severity or duration of the financial impact of COVID-19 or any other public health event on our operating results.

OPERATIONAL RISKS Our Ability to Attract and Retain Key Employees Is Critical to Our Success Given the unique business we operate and the importance of customer relationships to our business, our future success is dependent, in large part, upon our ability to attract and retain highly qualified managerial, operational and sales personnel.

Competition for talented personnel is intense, and we cannot be certain that we can retain our managerial, operational and sales personnel or that we can attract, assimilate or retain such personnel in the future. Our inability to attract and retain such personnel could have an adverse effect on our business, results of operations and financial condition.

The existence of one or more material weaknesses precludes a conclusion by management that a company’s internal control over financial reporting is effective. For example, the Company previously identified a material weakness at December 31, 2020 related to sales tax accounting that was remediated as of December 31, 2021.

Our Outsourcing Arrangements May Make Us Vulnerable to Third Party Failures We have arrangements with third parties for them to operate certain software applications and significant portions of our information technology infrastructure, as well as most of our production operations that are necessary to conduct our business.

We take steps to monitor and regulate the performance of these third parties, but we may not be successful in managing these relationships to achieve the desired outcomes. These outsourcing arrangements make us reliant on third parties to conduct our operations and to satisfy commitments to customers.

We are vulnerable to third party failures to satisfy their obligations to us, including as a result of their nonperformance, performance at standards that are not acceptable to us or our customers, changes in their methods of operation or financial condition, and other matters outside of our control. 9 Table of Contents RISKS RELATED TO OUR COMMON STOCK Our Results of Operations Have Been and May Be Subject to Significant Fluctuations Our quarterly and annual operating results have fluctuated in the past and may vary in the future due to a wide variety of factors including: · the addition or loss of customers or changes in timing and amount of our customers’ spending with us; · the timing of seasonal events for customers; · costs of evaluating and developing new products, and customers accepting new products; · the timing of additional selling, marketing and general and administrative expenses; · competitive conditions in our industry; · the addition or loss of contracts with retailers; and · the impact of strategic alternatives activities.

TECHNOLOGY AND CYBERSECURITY RISKS We May be Impacted if Our Information Systems Are Attacked We rely upon information technology systems and networks, both internal and outsourced, in connection with a variety of business activities, some of which are managed by third parties.

Additionally, we collect and store data that is sensitive to Insignia and its employees, customers, retailer network and suppliers. The secure operation of these information technology systems and networks, and the processing and maintenance of this data, is critical to our business operations and strategy.

Information technology security threats—from user error to attacks designed to gain unauthorized access to our systems, networks and data—are increasing in frequency and sophistication. Attacks may range from random attempts to coordinated and targeted attacks, including sophisticated computer crime and advanced persistent threats.

These threats, and a failure to maintain security protocols, pose a risk to the security of our systems, networks and products and the confidentiality, availability and integrity of the data we process and maintain. Establishing systems and processes to address these threats and changes in legal requirements relating to data collection and storage may increase our costs.

Should such an attack succeed, it could expose us and our employees, customers, retailer network and suppliers to misuse of information or systems, the compromising of confidential information, theft of assets, manipulation and destruction of data, defective products, production downtimes and operations disruptions, and breach of privacy, which may require notification under data privacy and other applicable laws.

The occurrence of any of these events could have a material adverse effect on our reputation, business, financial condition, results of operations and cash flows. In addition, such breaches in security could result in litigation, regulatory action and potential liability and the costs and operational consequences of implementing further data protection measures.

Item 2. Properties The Company has a lease for its corporate headquarters in downtown Minneapolis, Minnesota which has been renewed through December 31, 2026. The headquarters lease is for 2,850 square feet. The Company also has lease for warehouse space in a suburb of Minneapolis which expires March 31, 2023, for 2,560 square feet.

The warehouse lease has been extended on a month-to-month basis effective April 1, 2023.

We believe our products and services are attractive to our clients because of our ability to navigate the complex retail landscape, customize our solutions down to store level, execute with excellence and the results our solutions deliver. Our leadership and employees have extensive industry knowledge, including direct experience through former positions at CPG manufacturers and retailers.

We provide marketing solutions to brands spanning from some of the largest multinationals to new and emerging brands. New product investments by large and emerging CPG manufacturers give us optimism that our product portfolio is relevant to our clients.

Over the past several years, we have significantly expanded our offered solutions and have developed a portfolio designed to more holistically meet the needs of our clients and execution partners which has diversified our portfolio.

Our focus on portfolio diversification resulted in our 2022 non-POPS solutions revenue growing 22% versus 2021, and also resulted in our POPS signage solutions declining to approximately 5% of our total net sales for 2022, compared to 24% of our total net sales in 2021. In 2023 we will be winding down our POPS signage solution.

We remain committed to further refining and enhancing our solutions and broadening our retailer relationships. We are also continuing to explore strategic options to maximize shareholder value. Potential strategic alternatives that may be evaluated include, but are not limited to, an acquisition, merger, business combination, in-licensing, start-up of new business, or other strategic transaction.

There can be no assurance that this process will result in any transaction. 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.

For the Years Ended December 31 2022 2021 Net sales 100.0 % 100.0 % Cost of sales 82.4 83.5 Gross profit 17.6 16.5 Operating expenses: Selling 7.0 9.9 Marketing 5.6 5.3 General and administrative 17.7 25.9 Total operating expenses 30.3 41.1 Gain from litigation settlement, net 63.8 - Operating income (loss) 51.1 (24.6 ) Other income 1.2 6.7 Income (loss) before taxes 52.3 (17.9 ) Income tax (benefit) expense (1.1 ) 0.2 Net income (loss) 53.4 % (18.1 )% Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 Net Sales.

Net sales for the year ended December 31, 2022 decreased 3.6% to $18,800,000, compared to $19,503,000 for the year ended December 31, 2021. The decrease was due to an 81.5% decrease in POPS solutions revenue, partially offset by an increase in non-POPS revenue of 21.5%.

The increase in non-POPS revenue is due to both new client acquisition as well as repeat business from existing clients. POPS sales for the year ended December 31, 2022 were $880,000.

Competitive pressures, including the expiration in April 2021 of our 10-year selling agreement with News America and management’s decision to prioritize resources to growth opportunities in non-POPS solutions, have resulted in decreased POPS solutions revenue for the year ended December 31, 2022 versus the year ended December 31, 2021.

We expect POPS revenue will continue to decline in 2023 in comparison to 2022. Gross Profit. Gross profit for the year ended December 31, 2022 increased 2.2% to $3,301,000, compared to $3,230,000 for the year ended December 31, 2021. The increase in gross profit was primarily due to decreased fixed costs within gross margin from staff and staff related expenses.

Gross profit as a percentage of total net sales increased to 17.6% for the year ended December 31, 2022, compared to 16.5% for the year ended December 31, 2021. The increase was primarily due to reduction of fixed expense as discussed above, partially offset by decreased net sales. 12 Table of Contents Operating Expenses Selling.

Selling expenses as a percentage of total net sales decreased to 7.0% in 2022, compared to 9.9% in 2021, primarily due to decreased expense described above, partially offset by decreased net sales for the year ended December 31, 2022. Marketing.

Marketing expenses for the year ended December 31, 2022 increased 1.7% to $1,050,000, compared to $1,032,000 for the year ended December 31, 2021. Marketing expenses as a percentage of total net sales increased to 5.6% in 2022, compared to 5.3% in 2021, primarily due to relatively flat expense over decreased sales in 2022. General and Administrative.

General and administrative expenses for the year ended December 31, 2022 decreased 34.4% to $3,320,000, compared to $5,058,000 for the year ended December 31, 2021. The decrease was primarily due to higher expenses incurred in the year ended December 31, 2021 as a result of litigation with News America.

Following the litigation settlement on July 1, 2022, the Company does not expect to incur further expenses related to the legal proceedings with News America. The decrease in litigation expenses was partially offset by increase in expenses related to exploring strategic alternatives.