1. Summary of Significant Accounting Policies.

Description of Business. Insignia Systems, Inc. (the “Company”) markets in-store advertising products, programs and services to consumer packaged goods manufacturers and retailers. The Company’s products include the Insignia Point-of-Purchase Services (POPS) in-store advertising program, thermal sign card supplies for the Company’s Impulse Retail systems, laser printable cardstock and label supplies. Additionally, in October 2014, the Company announced the introduction of a new product, The Like MachineTM, which is an in-store consumer approval device. The Company obtained a licensing agreement to sell this product and it is expected to be fully rolled out during 2015.

Basis of Presentation. Financial statements for the interim periods included herein are unaudited; however, they contain all adjustments, including normal recurring accruals, which in the opinion of management, are necessary to present fairly the financial position of the Company at September 30, 2014, its results of operations for the three and nine months ended September 30, 2014 and 2013, and its cash flows for the nine months ended September 30, 2014 and 2013. Results of operations for the periods presented are not necessarily indicative of the results to be expected for the full year.

The financial statements do not include certain footnote disclosures and financial information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America and, therefore, should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

The Summary of Significant Accounting Policies in the Company’s 2013 Annual Report on Form 10-K describes the Company’s accounting policies.

Inventories. Inventories are primarily comprised of parts and supplies for Impulse Retail systems, sign cards, and rollstock. Inventory is valued at the lower of cost or market using the first-in, first-out (FIFO) method, and consists of the following:

	September 30,		December 31,
	2014		2013
Raw materials	$	94,000	$	71,000
Work-in-process	15,000		12,000
Finished goods	287,000		224,000
	$	396,000	$	307,000

Property and Equipment. Property and equipment consists of the following:

	September 30,			December 31,
	2014			2013
Property and Equipment:
Production tooling, machinery and equipment	$	3,848,000		$	3,826,000
Office furniture and fixtures	260,000			260,000
Computer equipment and software	1,075,000			896,000
Web site	65,000			65,000
Leasehold improvements	616,000			616,000
Construction in-progress	60,000			34,000
	5,924,000			5,697,000
Accumulated depreciation and amortization	(4,323,000		)	(3,944,000		)
Net Property and Equipment	$	1,601,000		$	1,753,000

Depreciation expense was approximately $159,000 and $471,000 in the three and nine months ended September 30, 2014, respectively, and $158,000 and $506,000 in the three and nine months ended September 30, 2013, respectively.

Stock-Based Compensation. The Company measures and recognizes compensation expense for all stock-based awards at fair value using the Black-Scholes option pricing model to determine the weighted average fair value of options and employee stock purchase plan rights. The Company recognizes stock-based compensation expense on a straight-line method over the requisite service period of the award.

There were 406,000 stock option awards, with a weighted average exercise price of $3.02, granted during the nine months ended September 30, 2014, and the Company estimated the fair value of these awards using the following weighted average assumptions: expected life of 3.7 years, expected volatility of 50%, dividend yield of 0% and risk-free interest rate of 1.1%.

The Company estimated the fair value of stock-based rights granted during the nine months ended September 30, 2014, under the Company’s employee stock purchase plan using the following weighted average assumptions: expected life of 1.0 years, expected volatility of 50%, dividend yield of 0% and risk-free interest rate of 0.13%.

There were 25,000 restricted stock units granted during the nine months ended September 30, 2014. The shares were granted at $3.03 per share, based on the stock price on the date of the grant and vest over three years. Stock-based compensation expense for the restricted stock units during the three and nine months ended September 30, 2014 was $11,000 and $15,000, respectively, which is included in stock-based compensation expense.

In May 2014, equity grants were made by the Company to the Board of Directors, pursuant to the 2013 Omnibus Stock and Incentive Plan, as amended, in the form of fully vested shares of common stock. The total number of shares granted to the Board of Directors was 29,701. The shares were issued at $3.03 per share, based on the stock price on the date of grant, for a total value of $90,000, which is included in stock-based compensation expense.

Total stock-based compensation expense recorded for the three and nine months ended September 30, 2014 was $83,000 and $300,000, respectively, and for the three and nine months ended September 30, 2013 was $108,000 and $324,000, respectively.

Total options exercised in the three and nine months ended September 30, 2014 were for approximately 26,000 shares and 95,000 shares, for which the Company received proceeds of $24,000 and $125,000, respectively. During the three and nine months ended September 30, 2013, there were approximately 24,000 and 37,000 stock options exercised, for which the Company received proceeds of $10,000 and $23,000, respectively. A portion of the stock option exercises in the three and nine months ended September 30, 2014 and 2013 were done on a cashless basis.

Net Income per Share. Basic net income per share is computed by dividing net income by the weighted average shares outstanding and excludes any potential dilutive effects of stock options. Diluted net income per share gives effect to all diluted potential common shares outstanding during the period.

Options to purchase approximately 695,000 and 578,000 shares of common stock with a weighted average exercise price of $4.20 and $4.27, respectively, were outstanding at September 30, 2014 and were not included in the computation of common stock equivalents for the three and nine months ended September 30, 2014 because their exercise prices were higher than the average fair market value of the common shares during the reporting period. Options to purchase approximately 538,000 and 1,005,000 shares of common stock with a weighted average exercise price of $4.20 and $3.48, respectively, were outstanding at September 30, 2013 and were not included in the computation of common stock equivalents for the three and nine months ended September 30, 2013 because their exercise prices were higher than the average fair market value of the common shares during the reporting period.

Weighted average common shares outstanding for the three and nine months ended September 30, 2014 and 2013 were as follows:

	Three Months Ended		Nine Months Ended
	September 30		September 30
	2014	2013	2014	2013
Denominator for basic net income per share - weighted average shares	12,593,000	13,230,000	12,767,000	13,515,000

Effect of dilutive securities:
Stock options and restricted stock units	231,000	140,000	236,000	66,000

Denominator for diluted net income per share - weighted average shares	12,824,000	13,370,000	13,003,000	13,581,000