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Summary of Significant Accounting Policies

3 Months Ended

Mar. 31, 2017

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 products include the Insignia Point-of-Purchase Services (POPS®) in-store marketing program, thermal sign card supplies for the Company’s Impulse Retail System, and laser printable cardstock and label supplies.

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 March 31, 2017, and its results of operations and its cash flows for the three months ended March 31, 2017 and 2016. 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, 2016.

The Summary of Significant Accounting Policies in the Company’s 2016 Annual Report on Form 10-K describes the Company’s accounting policies.

Inventories. Inventories are primarily comprised of sign cards and roll stock. Inventory is valued at the lower of cost or market using the first-in, first-out (FIFO) method, and consisted of the following as of the dates indicated:

	March 31,		December 31,
	2017		2016
Raw materials	$	73,000	$	123,000
Work-in-process		26,000		27,000
Finished goods		233,000		175,000
	$	332,000	$	325,000

Property and Equipment. Property and equipment consisted of the following as of the dates indicated:

	March 31,			December 31,
	2017			2016
Property and Equipment:
Production tooling, machinery and equipment	$	4,000,000		$	4,000,000
Office furniture and fixtures		322,000			322,000
Computer equipment and software		1,313,000			1,301,000
Leasehold improvements		577,000			577,000
Construction in-progress		823,000			523,000
		7,035,000			6,723,000
Accumulated depreciation and amortization		(4,472,000	)		(4,293,000	)
Net Property and Equipment	$	2,563,000		$	2,430,000

Depreciation expense was approximately $219,000 and $194,000 in the three months ended March 31, 2017 and 2016, 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 graded-attribution method over the requisite service period of the award.

On November 28, 2016, our Board of Directors amended the 2003 Incentive Stock Option Plan (the “2003 Plan”) and the 2013 Omnibus Stock and Incentive Plan (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 up to 150,476 additional shares. Total stock-based compensation expense for the modifications was approximately $79,000 of which $78,000 was recorded during the three months ended March 31, 2017.

During the three months ended March 31, 2017 no other stock option awards were granted by the Company beyond the modification discussed above. During the three months ended March 31, 2016, the Company issued options to purchase an aggregate of 20,000 shares of common stock under its 2013 Omnibus Stock and Incentive Plan, as amended, with a weighted average exercise price of $2.90. The Company estimated the fair value of these awards using the following weighted average assumptions: expected life of 2.5 years, expected volatility of 41%, dividend yield of 0% and risk-free interest rate of 1.00%.

During the three months ended March 31, 2017, the Company issued 8,424 restricted stock units under the 2013 Plan. The shares underlying the awards were assigned a value of $1.51per share, which was the closing price of our common stock on the date of grant, and are scheduled to vest over a weighted average of 1.5 years following the date of grant. No restricted stock units were issued during the three months ended March 31, 2016.

The Company estimated the fair value of stock-based awards granted during the three months ended March, 31, 2017, under the Company’s employee stock purchase plan using the following weighted average assumptions: expected life of 1.0 years, expected volatility of 51%, dividend yield of 0% and risk-free interest rate of 0.89%.

Total stock-based compensation expense recorded for the three months ended March 31, 2017 and 2016, was $147,000 and $26,000, respectively.

During the three months ended March 31, 2017 and 2016, there were no options exercised.

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

Due to the net loss incurred during the three months ended March 31, 2017 and March 31, 2016, all stock awards were anti-dilutive for both periods.

Weighted average common shares outstanding for the three months ended March 31, 2017 and 2016 were as follows:

Three months ended March 31	2017		2016
Denominator for basic net loss per share - weighted average shares		11,661,000		11,624,000
Effect of dilutive securities:
Stock options, restricted stock and restricted stock units		—		—
Denominator for diluted net loss per share - weighted average shares		11,661,000		11,624,000

Dividends. 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 of $8,233,000, of which $8,163,000 was paid on January 6, 2017.