U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended March 31, 2009
or
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Transition Period From to .
Commission file number 000-25727
IKONICS CORPORATION
(Exact name of registrant as specified in its charter)
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Minnesota
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41-0730027 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. employer
identification no.) |
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4832 Grand Avenue |
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Duluth, Minnesota
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55807 |
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(Address of principal executive offices)
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(Zip code) |
Issuers telephone number
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit
and post such files.) Yes o No o
Indicate by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
State the number of shares outstanding of each of the issuers classes of common
equity, as of the latest practical date: Common Stock, $.10 par value 1,977,656 shares
outstanding as of April 24, 2009.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o |
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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IKONICS Corporation
QUARTERLY REPORT ON FORM 10-Q
PART I FINANCIAL INFORMATION
ITEM 1. Condensed Financial Statements
IKONICS CORPORATION
CONDENSED BALANCE SHEETS
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March 31 |
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December 31 |
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2009 |
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2008 |
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(unaudited) |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
1,233,887 |
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$ |
901,738 |
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Trade receivables, less allowance of $77,000 in 2009 and
$56,000 in 2008 |
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1,860,617 |
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2,077,158 |
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Inventories |
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1,857,302 |
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2,109,164 |
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Deposits, prepaid expenses and other assets |
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228,233 |
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192,201 |
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Income tax refund receivable |
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196,145 |
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185,869 |
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Deferred income taxes |
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96,000 |
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96,000 |
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Total current assets |
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5,472,184 |
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5,562,130 |
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PROPERTY, PLANT, AND EQUIPMENT, at cost: |
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Land and building |
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5,931,854 |
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5,928,275 |
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Machinery and equipment |
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2,475,268 |
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2,430,857 |
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Office equipment |
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763,595 |
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763,595 |
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Vehicles |
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241,905 |
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241,905 |
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9,412,622 |
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9,364,632 |
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Less accumulated depreciation |
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(3,869,238 |
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(3,762,569 |
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5,543,384 |
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5,602,063 |
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INTANGIBLE ASSETS, less accumulated amortization of $284,137 in
2009 and $270,325 in 2008 |
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378,561 |
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403,285 |
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INVESTMENTS IN NON-MARKETABLE EQUITY SECURITIES |
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918,951 |
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918,951 |
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$ |
12,313,080 |
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$ |
12,486,429 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable
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Trade |
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$ |
417,579 |
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$ |
344,783 |
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Construction |
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120,000 |
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Accrued compensation |
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192,217 |
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335,126 |
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Other accrued expenses |
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103,953 |
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109,880 |
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Total current liabilities |
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713,749 |
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909,789 |
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DEFERRED INCOME TAXES |
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178,000 |
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143,000 |
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Total liabilities |
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891,749 |
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1,052,789 |
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STOCKHOLDERS EQUITY: |
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Preferred stock, par value $.10 per share; authorized 250,000 shares; issued none
Common stock, par value $.10 per share; authorized 4,750,000 shares;
issued and outstanding 1,977,656 shares in 2009 and 1,993,983 in 2008 |
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197,766 |
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199,398 |
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Additional paid-in capital |
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2,189,528 |
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2,202,888 |
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Retained earnings |
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9,034,037 |
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9,031,354 |
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Total stockholders equity |
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11,421,331 |
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11,433,640 |
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$ |
12,313,080 |
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$ |
12,486,429 |
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See notes to condensed financial statements.
3
IKONICS CORPORATION
CONDENSED STATEMENTS OF OPERATIONS (Unaudited)
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Three Months |
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Ended March 31 |
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2009 |
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2008 |
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NET SALES |
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$ |
3,563,212 |
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$ |
3,780,848 |
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COST OF GOODS SOLD |
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2,157,898 |
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2,151,793 |
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GROSS PROFIT |
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1,405,314 |
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1,629,055 |
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
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1,221,581 |
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1,367,080 |
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RESEARCH AND DEVELOPMENT EXPENSES |
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167,283 |
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214,855 |
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INCOME FROM OPERATIONS |
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16,450 |
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47,120 |
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GAIN ON SALE OF NON-MARKETABLE EQUITY SECURITIES |
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20,131 |
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INTEREST INCOME |
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70 |
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43,675 |
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INCOME BEFORE INCOME TAXES |
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36,651 |
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90,765 |
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INCOME TAX BENEFIT |
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(16,484 |
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(14,843 |
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NET INCOME |
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$ |
53,135 |
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$ |
105,638 |
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EARNINGS PER COMMON SHARE: |
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Basic |
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$ |
0.03 |
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$ |
0.05 |
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Diluted |
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$ |
0.03 |
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$ |
0.05 |
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WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING : |
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Basic |
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1,989,222 |
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2,051,605 |
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Diluted |
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1,989,866 |
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2,069,129 |
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See notes to condensed financial statements.
4
IKONICS CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)
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Three Months |
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Ended March 31 |
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2009 |
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2008 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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$ |
53,135 |
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$ |
105,638 |
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Adjustments to reconcile net income to net cash provided by
operating activities: |
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Depreciation |
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106,669 |
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70,096 |
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Amortization |
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13,812 |
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13,428 |
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Excess tax benefit from share-based payment arrangement |
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(29,636 |
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Stock based compensation |
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3,769 |
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3,279 |
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Tax benefit from stock option exercise |
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3,008 |
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Gain on sale of vehicles |
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(1,725 |
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Loss on intangible asset abandonment |
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12,701 |
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Gain on sale of non-marketable equity securities |
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(20,131 |
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Deferred income taxes |
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35,000 |
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Changes in working capital components: |
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Trade receivables |
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216,541 |
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(101,546 |
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Inventories |
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251,862 |
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143,055 |
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Prepaid expenses and other assets |
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(36,032 |
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(172,014 |
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Income taxes receivable |
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(10,276 |
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(6,207 |
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Accounts payable |
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(47,204 |
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132,789 |
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Accrued liabilities |
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(148,836 |
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(141,427 |
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Income taxes payable |
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24,345 |
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Net cash provided by operating activities |
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431,010 |
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43,083 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchases of property, equipment and construction in progress |
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(47,990 |
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(159,653 |
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Proceeds from sale of vehicles |
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8,500 |
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Purchase of intangibles |
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(1,789 |
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(26,365 |
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Proceeds from sale of non-marketable equity securities |
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20,131 |
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Proceeds from sale of short-term investments |
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2,875,000 |
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Net cash (used in) provided by investing activities |
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(29,648 |
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2,697,482 |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Excess tax benefit from share-based payment arrangement |
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29,636 |
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Repurchase of common stock |
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(69,213 |
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Proceeds from exercise of stock options |
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49,985 |
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Net cash (used in) provided by financing activities |
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(69,213 |
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79,621 |
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
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332,149 |
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2,820,186 |
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CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
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901,738 |
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1,230,020 |
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CASH AND CASH EQUIVALENTS AT END OF PERIOD |
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$ |
1,233,887 |
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$ |
4,050,206 |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
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Cash paid for income taxes |
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$ |
5,640 |
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$ |
7,861 |
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See notes to condensed financial statements.
5
IKONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. |
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Basis of Presentation |
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The balance sheet of IKONICS Corporation (the Company) as of March 31, 2009, and the
related statements of operations and cash flows for the three months ended March 31, 2009
and 2008 have been prepared without being audited. |
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In the opinion of management, these statements reflect all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the financial position of IKONICS
Corporation as of March 31, 2009, and the results of operations and cash flows for all
periods presented. |
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Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of
America, have been condensed or omitted. Therefore, these statements should be read in
conjunction with the financial statements and notes thereto included in the Companys Annual
Report on Form 10-K for the year ended December 31, 2008. |
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The results of operations for interim periods are not necessarily indicative of results that
will be realized for the full fiscal year. |
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Inventory |
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The major components of inventory are as follows: |
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Mar 31, 2009 |
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Dec 31, 2008 |
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Raw materials |
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$ |
1,302,169 |
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$ |
1,447,063 |
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Work-in-progress |
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296,879 |
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324,361 |
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Finished goods |
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1,123,952 |
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1,194,148 |
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Reduction to LIFO cost |
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(865,698 |
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(856,408 |
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Total Inventory |
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$ |
1,857,302 |
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$ |
2,109,164 |
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3. |
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Earnings Per Common Share (EPS) |
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Basic EPS is calculated using net income divided by the weighted average of common shares
outstanding. Diluted EPS is similar to Basic EPS except that the weighted average number of
common shares outstanding is increased to include the number of additional common shares
that would have been outstanding if the dilutive potential common shares, such as those
shares subject to options, had been issued. |
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Shares used in the calculation of diluted EPS are summarized below: |
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Three Months Ended |
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Mar 31, 2009 |
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Mar 31, 2008 |
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Weighted average common shares outstanding |
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1,989,222 |
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2,051,605 |
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Dilutive effect of stock options |
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644 |
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17,524 |
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Weighted average common and common equivalent shares outstanding |
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1,989,866 |
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2,069,129 |
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6
IKONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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Options to purchase 19,000 shares of common stock with a weighted average price of $7.60
were outstanding during the quarter ended March 31, 2009, but were excluded from the
computation of common share equivalents because they were anti-dilutive. There were no anti-dilutive options in
the quarter ended March 31, 2008. |
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4. |
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Stock-based Compensation |
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The Company has a stock incentive plan for the issuance of up to 342,750 shares of common
stock. The plan provides for granting eligible participants stock options or other stock
awards, as described by the plan, at option prices ranging from 85% to 110% of fair market
value at date of grant. Options granted expire up to seven years after the date of grant.
Such options generally become exercisable over a one to three year period. A total of
46,673 shares of common stock are reserved for additional grants of options under the plan
at March 31, 2009. |
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The Company charged compensation cost of approximately $3,800 and $3,300 against income for
the three months ended March 31, 2009 and 2008, respectively. As of March 31, 2009 there
was approximately $30,000 of unrecognized compensation cost related to unvested share-based
compensation awards granted. That cost is expected to be recognized over the next three
years. |
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The Company receives a tax deduction for certain stock option exercises during the period in
which the options are exercised, generally for the excess of the market price at the time
the stock options are exercised over the exercise price of the options, which increased the
APIC pool, which is the amount that represents the pool of excess tax benefits available to
absorb tax shortages. There were no excess tax benefits recognized during the three month
period ending March 31, 2009. For the three months ended March 31, 2008, $29,636 of excess
tax benefits were reported as operating and financing cash flows. The Companys APIC pool
totaled $111,029 at March 31, 2009 and December 31, 2008. |
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There were no stock options grants, exercises, expirations, or forfeitures during the three
months ended March 31, 2009. The weighted average exercise price for the 26,250 options
outstanding was $6.69 at December 31, 2008 and March 31, 2009. Proceeds from the exercise
of stock options were $49,985 for the three months ended March 31, 2008. The aggregate
intrinsic value of all options outstanding and for those exercisable at March 31, 2009 was
$3,000. |
7
IKONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
5. |
|
Segment Information |
|
|
|
The Companys reportable segments are strategic business units that offer different products
and have varied customer bases. There are three reportable segments: Domestic, Export,
and IKONICS Imaging. Domestic sells screen printing film, emulsions, and inkjet receptive film to distributors
located in the United States and Canada. IKONICS Imaging sells photo resistant film, art
supplies, glass, metal medium and related abrasive etching equipment to end user customers
located in the United States and Canada. It is also entering the market for etched
ceramics, glass and silicon wafers; and is developing and selling proprietary inkjet
technology. Export sells primarily the same products as Domestic and IKONICS Imaging to
foreign customers. The accounting policies applied to determine the segment information are
the same as those described in the summary of significant accounting policies included in
the Companys Annual Report on Form 10-K for the year ended December 31, 2008. |
|
|
|
Management evaluates the performance of each segment based on the components of divisional
income, and with the exception of accounts receivable, does not allocate assets and
liabilities to segments. Financial information with respect to the reportable segments
follows: |
|
|
|
For the three months ended March 31, 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IKONICS |
|
|
|
|
|
|
|
|
|
Domestic |
|
|
Export |
|
|
Imaging |
|
|
Other |
|
|
Total |
|
Net Sales |
|
$ |
1,647,870 |
|
|
$ |
953,604 |
|
|
$ |
961,738 |
|
|
$ |
|
|
|
$ |
3,563,212 |
|
Cost of goods sold |
|
|
883,527 |
|
|
|
714,689 |
|
|
|
559,682 |
|
|
|
|
|
|
|
2,157,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
764,343 |
|
|
|
238,915 |
|
|
|
402,056 |
|
|
|
|
|
|
|
1,405,314 |
|
Selling, general and
administrative* |
|
|
272,187 |
|
|
|
139,313 |
|
|
|
291,908 |
|
|
|
518,173 |
|
|
|
1,221,581 |
|
Research and
Development* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
167,283 |
|
|
|
167,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
operations |
|
$ |
492,156 |
|
|
$ |
99,602 |
|
|
$ |
110,148 |
|
|
$ |
(685,456 |
) |
|
$ |
16,450 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2008: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IKONICS |
|
|
|
|
|
|
|
|
|
Domestic |
|
|
Export |
|
|
Imaging |
|
|
Other |
|
|
Total |
|
Net Sales |
|
$ |
1,392,226 |
|
|
$ |
1,228,945 |
|
|
$ |
1,159,677 |
|
|
$ |
|
|
|
$ |
3,780,848 |
|
Cost of goods sold |
|
|
783,955 |
|
|
|
806,826 |
|
|
|
561,012 |
|
|
|
|
|
|
|
2,151,793 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
608,271 |
|
|
|
422,119 |
|
|
|
598,665 |
|
|
|
|
|
|
|
1,629,055 |
|
Selling, general and
administrative* |
|
|
291,684 |
|
|
|
111,898 |
|
|
|
349,198 |
|
|
|
614,300 |
|
|
|
1,367,080 |
|
Research and
Development* |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
214,855 |
|
|
|
214,855 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
operations |
|
$ |
316,587 |
|
|
$ |
310,221 |
|
|
$ |
249,467 |
|
|
$ |
(829,155 |
) |
|
$ |
47,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
The Company does not allocate all general and administrative expenses or any research and
development expenses to its operating segments for internal reporting. |
8
IKONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
|
|
Accounts receivable by segment as of March 31, 2009 and December 31, 2008 were as follows: |
|
|
|
|
|
|
|
|
|
|
|
Mar 31, 2009 |
|
|
Dec 31, 2008 |
|
Domestic |
|
$ |
977,964 |
|
|
$ |
957,617 |
|
Export |
|
|
593,847 |
|
|
|
874,068 |
|
IKONICS Imaging |
|
|
320,128 |
|
|
|
276,718 |
|
Other |
|
|
(31,322 |
) |
|
|
(31,245 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,860,617 |
|
|
$ |
2,077,158 |
|
|
|
|
|
|
|
|
7. |
|
Sale of Non-Marketable Equity Securities |
|
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|
The Company received $20,131 during the first quarter of 2009 related to the 2007 sale of
its equity investment in Apprise Technologies, Inc. (Apprise). The Company realized a gain
of approximately $55,000 on the $253,000 cash payment received in 2007. During 2008 the
Company received an additional $25,000 related to the Apprise sale. The Company received
the final payment of approximately $9,000 from the Apprise sale in the second quarter of
2009. |
9
IKONICS CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
8. |
|
Income Taxes |
|
|
|
The Company accounts for its uncertain tax positions under the provisions of Financial
Standards Accounting Board Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48). During the first quarter of 2009 and 2008, the statute of limitations for the
relevant taxing authority to examine and challenge the tax position for an open year
expired, resulting in decreases in income tax expense of $21,000 for the first quarter of
2009 and $44,000 for the first quarter of 2008. As of March 31, 2009, the liability for
unrecognized tax benefits totaled $27,000 compared to a liability of $48,000 as of March 31,
2008. The liability for unrecognized tax benefits is included in other accrued expenses. |
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|
The Company is subject to taxation in the United States and various states. The material
jurisdictions that are subject to examination by tax authorities primarily include Minnesota
and the United States, for tax years 2006, 2007, and 2008. |
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|
It has been the Companys policy to recognize interest and penalties related to uncertain
tax positions in income tax expense. The Company had accrued approximately $5,000 of
interest related to uncertain tax positions at March 31, 2009. The unrecognized tax
benefits at March 31, 2009 relate to taxation of foreign export sales. |
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|
A reconciliation of the beginning and ending amounts of unrecognized tax benefit for the
first quarter of 2009 is as follows: |
|
|
|
|
|
Balance at December 31, 2008 |
|
$ |
48,000 |
|
Expiration of the statute of limitations for the
assessment of taxes |
|
|
(21,000 |
) |
|
|
|
|
Balance at March 31, 2009 |
|
$ |
27,000 |
|
|
|
|
|
|
|
The balance of unrecognized tax benefits totaling $27,000 at March 31, 2009, if reversed,
would decrease the provision for income taxes and increase net income by the same amount and
reduce the Companys effective tax rate. We expect our unrecognized tax benefit to be
reduced by approximately $27,000 during the next twelve months as a result of the expiration
of the statutes of limitations for the assessment of taxes. |
10
IKONICS CORPORATION
The information presented below in Managements Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements within the meaning of the safe harbor
provisions of Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are
subject to risks and uncertainties, including those discussed under Factors that May Affect Future
Results below, that could cause actual results to differ materially from those projected. Because
actual results may differ, readers are cautioned not to place undue reliance on these
forward-looking statements. Certain forward-looking statements are indicated by italics.
ITEM 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
The following managements discussion and analysis focuses on those factors that had a
material effect on the Companys financial results of operations during the first quarter of 2009
and for the same period of 2008. It should be read in connection with the Companys condensed
unaudited financial statements and notes thereto included in this
Form 10-Q.
Factors that May Affect Future Results
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The Companys expectation that its effective tax rate will return to 35% to 36% of
pretax income for the remainder of 2009 compared to the tax benefit of 45.0% recorded
in the first three month of 2009The effective tax rate for the final nine months of
2009 may be affected by changes in federal and state tax law, unanticipated changes in
the Companys financial position or the Companys operating activities and/or
management decisions could increase or decrease its effective tax rate. |
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|
The Companys belief that the quality of its receivables is high and that strong
internal controls are in place to maintain proper collectionsThis belief may be
impacted by domestic economic conditions, by economic, political, regulatory or social
conditions in foreign markets, or by the failure of the Company to properly implement
or maintain internal controls. |
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|
The belief that the Companys current financial resources, cash generated from
operations and the Companys capacity for debt and/or equity financing will be
sufficient to fund current and anticipated business operations and capital
expenditures. The belief that the Companys low debt levels and available line of
credit make it unlikely that a decrease in product demand would impair the Companys
ability to fund operationsChanges in anticipated operating results, credit
availability, equity market conditions or the Companys debt levels may further enhance
or inhibit the Companys ability to maintain or raise appropriate levels of cash. |
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The Companys expectation that it will obtain a new line of credit similar to its
current line of credit when the current line of credit expiresThis expectation may be
impacted by factors such as changes in capital markets, general economic conditions,
the Companys financial results and condition, and the Companys anticipated need for
capital to fund business operations and capital expenditures. |
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The Companys expectations as to the level and use of planned capital expenditures
and that capital expenditures will be funded with cash on hand and cash generated from
operating activitiesThis expectation may be affected by changes in the Companys
anticipated capital expenditure requirements resulting from unforeseen required
maintenance, repairs, or capital asset additions. The funding of planned or unforeseen
expenditures may also be affected by changes in anticipated operating results resulting
from decreased sales, lack of acceptance of new products or increased operating
expenses or by other unexpected events affecting the Companys financial position. |
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The Companys belief that its vulnerability to foreign currency fluctuations and
general economic conditions in foreign countries is not significantThis belief may be
impacted by economic, political and social conditions in foreign markets, changes in
regulatory and competitive conditions, a change in |
11
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|
|
the amount or geographic focus of the Companys international sales, or changes in
purchase or sales terms. |
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|
The Companys plans to continue to invest in research and development efforts,
expedite internal product development and invest in technological alliances, as well as
the expected focus and results of such investmentsThese plans and expectations may be
impacted by general market conditions, unanticipated changes in expenses or sales,
delays in the development of new products, technological advances, the ability to find
suitable and willing technology partners or other changes in competitive or market
conditions. |
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|
The Companys efforts to grow its international businessThese efforts may be
impacted by economic, political and social conditions in current and anticipated
foreign markets, regulatory conditions in such markets, unanticipated changes in
expenses or sales, changes in competitive conditions or other barriers to entry or
expansion. |
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|
The Companys belief as to future activities that may be undertaken to expand the
Companys businessActual activities undertaken may be impacted by general market
conditions, competitive conditions in the Companys industry, unanticipated changes in
the Companys financial position, lack of acceptance of new products or the inability
to identify attractive acquisition targets or other business opportunities. |
Critical Accounting Estimates
The Company prepares its financial statements in conformity with accounting principles
generally accepted in the United States of America. Therefore, the Company is required to make
certain estimates, judgments and assumptions that the Company believes are reasonable based upon
the information available. These estimates and assumptions affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. The accounting estimates, which IKONICS believes are the
most critical to aid in fully understanding and evaluating its reported financial results, include
the following:
Accounts Receivable. The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customers current credit worthiness, as
determined by review of the current credit information. The Company continuously monitors
collections and payments from its customers and maintains a provision for estimated credit losses
based upon historical experience and any specific customer collection issues that have been
identified. While such credit losses have historically been within expectations and the provisions
established, the Company cannot guarantee that it will continue to experience the same collection
history that has occurred in the past. The general payment terms are net 30-45 days for domestic
customers and net 30-90 days for foreign customers
Inventories. Inventories are valued at the lower of cost or market value using the last in,
first out (LIFO) method. The Company monitors its inventory for obsolescence and records
reductions in cost when required.
Income Taxes. At March 31, 2009, the Company had net current deferred tax assets of $96,000
and net noncurrent deferred tax liabilities of $178,000. The deferred tax assets and liabilities
result primarily from temporary differences in property and equipment, accrued expenses, and
inventory reserves. The Company has determined that it is more likely than not that the deferred
tax asset will be realized and that a valuation allowance for such assets is not currently
required. The Company accounts for its uncertain tax positions under FIN 48 and the related
liability of $27,000 as of March 31, 2009 will be adjusted as the statute of limitations expires or
these positions are reassessed.
Investments in Non-Marketable Equity Securities. Investments in non-marketable equity
securities consist of a $919,000 investment in imaging Technology international (iTi). The
Company accounts for this investment by the cost method because iTis common stock is unlisted and
the criteria for using the equity method of accounting
are not satisfied. Under the cost method, the investment is assessed for other-than-temporary
12
impairment and recorded at the lower of cost or market value which requires significant judgment
since there are no readily available market values for this investment. In assessing the fair
value of this investment the Company considers recent equity transactions that iTi has entered
into, the status of iTis technology and strategies in place to achieve its objectives, as well as
iTis financial condition, results of operations, and ability to achieve its forecasted results.
To the extent there are changes in the assessment, an adjustment may need to be recorded to reduce
this investment.
Revenue Recognition. The Company recognizes revenue on sales of products when title passes
which can occur at the time of shipment or when the goods arrive at the customer location. Freight
billed to customers is included in sales. Shipping costs are included in cost of goods sold.
Results of Operations
Quarter Ended March 31, 2009 Compared to Quarter Ended March 31, 2008
Sales. The Company realized a 5.8% sales decrease during the first quarter of 2009 with sales
of $3.6 million, compared to $3.8 million in sales during the same period in 2008. Export sales
were 22.4% lower during the first quarter of 2009 versus the same period in 2008 due to lower
shipments to both Europe and China resulting from the global economic slowdown. IKONICS Imaging
sales for the first quarter of 2009 were also down 17.1% versus the first quarter of 2008 as film
and glass shipments fell short of 2008 levels. Partially offsetting these sales shortfalls,
Domestic Chromaline shipments increased 18.4% during the first quarter of 2009 over the same period
in 2008 due to increased private label shipments.
Gross Profit. Gross Profit was $1.4 million, or 39.4% of sales, in first quarter of 2009
compared to $1.6 million, or 43.1% of sales, for the same period in 2008. IKONICS Imaging gross
profit percentage decreased to 41.8% during the first three months of 2009 compared to 51.6% in
first quarter of 2008. The IKONICS Imaging gross profit percentage was unfavorably impacted by
additional manufacturing expenses related to startup and development of new business initiatives
discussed below in Future Outlook as well as higher raw material costs. Export gross profit
percentage decreased from 34.3% in first quarter of 2008 to 25.1% in the first quarter of 2009 due
to higher raw material prices and lower sales levels. The Domestic Chromaline gross profit
percentage benefited from a more favorable sales mix as it improved from 43.7% in the first quarter
of 2008 to 46.4% in the first quarter of 2009.
Selling, General and Administrative Expenses. Selling, general and administrative expenses
were $1.2 million, or 34.3% of sales, in the first quarter of 2009 compared to $1.4 million, or
36.2% of sales, for the same period in 2008. The decrease reflects lower personnel, travel, and
advertising expenses.
Research and Development Expenses. Research and development expenses during the first quarter
of 2009 were $167,000, or 4.7% of sales, versus $215,000, or 5.7% of sales, for the same period in
2008. The decrease is due to lower personnel and travel costs.
Gain on Sale of Non-Marketable Equity Securities. The Company realized a gain of $20,000 in
the first quarter of 2009 on the sale of its investment in the common and preferred stock of
Apprise Technologies, Inc. The original sale took place during 2007 and an additional $20,000 was
received in the first quarter of 2009 related to a portion of the original sales price that was
placed in escrow at the time of the sale for indemnification obligations as part of the agreement
between Apprise and its purchaser. The final payment of $9,000 related to the Apprise sale was
received in the second quarter of 2009.
Interest Income. The Company earned negligible interest income in the first quarter of 2009.
The interest income decrease from the prior years period is due to lower investment balances in
the first quarter of 2009 resulting from the Companys use of cash to finance construction of its
new facility and repurchase Company stock. A large portion of the Companys cash is currently
maintained in an insured checking account that does not provide for interest. Instead, the account
earns credits which offset banking fees. During the first quarter of 2008 interest income was
$44,000.
13
Income Taxes. For the first quarter of 2009, the Company realized an income tax benefit of
$16,000 compared to income tax benefit of $15,000 for the same quarter in 2008. The 2009 first
quarter benefit primarily relates to derecognizing a liability of $21,000 for unrecognized tax
benefits in accordance with FIN 48 relating to a tax year where the statute of limitations expired
during the first quarter and the benefits of the domestic manufacturing deduction, research and
development credits, and state income taxes. The 2008 first quarter benefit primarily relates to
derecognizing a liability of $44,000 for unrecognized tax benefits relating to a tax year where the
statute of limitations expired during the first quarter of that year. The Company expects that
for the remainder of 2009, the Company will have recorded income taxes at an effective tax rate of
35% to 36%.
Liquidity and Capital Resources
The Company has financed its operations principally with funds generated from operations.
These funds have been sufficient to cover the Companys normal operating expenditures, annual
capital requirements, and research and development expenditures.
Cash and cash equivalents were $1,234,000 and $4,050,000 at March 31, 2009 and 2008,
respectively. The Company generated $431,000 in cash from operating activities during the three
months ended March 31, 2009, compared to generating $43,000 of cash from operating activities
during the same period in 2008. Cash provided by operating activities is primarily the result
of net income adjusted for non-cash depreciation, amortization, gain on sale of nonmarketable
equity securities, loss on intangible asset abandonment, deferred taxes, and certain changes in
working capital components discussed in the following paragraph.
During the first three months of 2009, trade receivables decreased by $217,000. The decrease
in receivables was driven by lower sales volumes. The Company believes that the quality of its
receivables is high and that strong internal controls are in place to maintain proper collections.
Inventory levels decreased $252,000 due to lower finished goods and raw material levels as the
Company is managing its inventories to match lower sales levels. Deposits, prepaid expenses and
other assets increased $36,000, reflecting insurance premiums prepaid in the first quarter of 2009.
Income tax refund receivable increased $10,000 due to the accrual of 2009 taxes. Accounts payable
decreased $47,000 due to of the timing of payments to and purchases from vendors and payments made
to contractors associated with the new building. Accrued expenses decreased $148,000, reflecting
the timing of compensation payments.
During the first quarter of 2009, investing activities used $30,000. Purchases of property
and equipment were $48,000 mainly for new equipment to support the Companys new business
initiatives and research activities. Also during the first quarter of 2009, the Company incurred
$2,000 in patent application costs that the Company records as an asset and amortizes upon
successful completion of the application process. The Company received proceeds of approximately
$20,000 in the first quarter of 2009 on the 2007 sale of its investment in the common and preferred
stock of Apprise Technologies, Inc.,
For the first three months of 2008, investing activities provided $2,697,000 to the Company.
The Company sold $2,875,000 of short-term investments during 2008 at no gain or loss. These
proceeds were partially offset by $160,000 of property and equipment purchases along with $26,000
in patent application costs.
The Company used $69,000 in financing activities in the first quarter of 2009 to purchase
16,327 shares of its own stock. During the first three months of 2008 the Company received $80,000
from financing activities. The Company received $50,000 from the issuance of 17,524 shares of
common stock upon the exercise of stock options. The Company also realized $30,000 during the
first quarter of 2008 related to the excess tax benefit.
A bank line of credit exists providing for borrowings of up to $1,250,000. Outstanding debt
under this line of credit is collateralized by accounts receivable and inventory and bears interest
at 2.00 percentage points over the 30-day LIBOR rate. The Company did not utilize this line of
credit during the first three months of 2009 and there were no borrowings outstanding as of March
31, 2009. The line of credit was also not utilized during 2008, and
there were no borrowings outstanding under this line as of March 31, 2008. The line of credit
expires on October 30, 2009, at which time the Company expects to obtain a new line of credit
similar to the current credit line.
14
The Company believes that current financial resources, its line of credit, cash generated from
operations and the Companys capacity for debt and/or equity financing will be sufficient to fund
current and anticipated business operations. The Company also believes that its low debt levels
and available line of credit make it unlikely that a decrease in demand for the Companys products
would impair the Companys ability to fund operations.
Capital Expenditures
Through March 31, 2009, the Company had $48,000 in capital expenditures for 2009. Capital
expenditures during the first three months were mainly for new equipment to support the Companys
new business initiatives and research activities. The Company plans for other capital expenditures
during 2009 to include ongoing manufacturing equipment upgrades, development equipment to modernize
the capabilities and processes of the Companys research and development laboratory to improve
measurement and quality control processes. Capital expenditures are expected to be approximately
$150,000 for the remaining nine months of the year and will be funded with cash generated from
operating activities.
International Activity
The Company markets its products to numerous countries in North America, Europe, Latin
America, Asia and other parts of the world. Foreign sales were approximately 27% of total sales
during the first three months of 2009 compared to 33% of sales in the first quarter of 2008. Lower
volumes in Europe and China negatively impacted 2009 first quarter sales volumes. Fluctuations of
certain foreign currencies have not significantly impacted the Companys operations because the
Companys foreign sales are not concentrated in any one region of the world. The Company believes
its vulnerability to uncertainties due to foreign currency fluctuations and general economic
conditions in foreign countries is not significant.
The Companys foreign transactions are primarily negotiated, invoiced and paid in U.S.
dollars, while a portion is transacted in Euros. IKONICS has not implemented an economic hedging
strategy to reduce the risk of foreign currency translation exposures, which management does not
believe to be significant based on the scope and geographic diversity of the Companys foreign
operations as of March 31, 2009. Furthermore, the impact of foreign exchange on the Companys
balance sheet and operating results was not material in either 2008 or, to date, 2009.
Future Outlook
IKONICS has spent on average over 4% of its sales dollars for the past few years in research
and development and in addition has made capital expenditures related to its digital technology
program. The Company plans to maintain its efforts in this area and expedite internal product
development as well as form technological alliances with outside experts to ensure
commercialization of new product opportunities.
The Company achieved commercial acceptance of several new business initiatives, including its
photo-machining process, sound deadening technology, digital texturing and IKONICS Industrial
Solutions, which creates custom products to meet the needs of specific users. The Company
anticipates that these new business initiatives will contribute an increasing amount of the
Companys sales in the later part of 2009. The Companys anticipated sales from these new
initiatives for 2009 includes sales of an improved sound-deadening product that is expected to
expand the Companys customer base and sales of the Companys next-generation DTX printer, which is
planned to be available for sale in the second quarter of 2009.
In addition to its traditional emphasis on domestic markets, the Company will continue efforts
to grow its business internationally by attempting to develop new markets and expanding market
share where it has already established a presence.
Other future activities undertaken to expand the Companys business may include acquisitions,
building improvements, equipment additions, new product development and marketing opportunities.
In addition to its traditional emphasis on domestic markets, the Company will continue efforts to grow its
business internationally by attempting to develop new markets and expanding market share where it
has already established a presence.
15
Recent Accounting Pronouncements
SFAS 157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements. This
Statement applies under other accounting pronouncements that require or permit fair value
measurements, the FASB having previously concluded in those accounting pronouncements that fair
value is the relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair
value measurements. SFAS 157 was adopted by the Company on January 1, 2008 for financial assets
and liabilities and deferred for nonfinancial assets until January 1, 2009. The Companys only
financial instruments measured at fair value on a recurring basis were its auction rate securities,
which were sold during the second quarter of 2008 at cost. The Companys nonfinancial assets
include property, plant and equipment and intangible assets comprised of patents and goodwill.
SFAS 157 affects how the fair value of these assets is determined when determining if the assets
are impaired. None of the Companys non-financial assets was considered to be impaired as of March
31, 2009. Accordingly, the adoption of SFAS 157 in 2009 for financial and nonfinancial assets had
no impact on the Companys financial condition or results of operations.
In December 2007, the FASB issued SFAS No. 141 (Revised), Business Combinations (SFAS
141(R)). SFAS 141 (R) establishes principles and requirements for how the acquirer of a business
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides
guidance for recognizing and measuring the goodwill acquired in the business combination and
determines what information to disclose to enable users of the financial statements to evaluate the
nature and financial effects of the business combination. The Company adopted SFAS 141(R) on
January 1, 2009. The adoption of SFAS 141(R) had no impact on the Companys current financial
condition or results of operations, as the Company did not enter into any business combinations.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated
Financial Statements (SFAS 160). SFAS 160 requires all entities to report minority interests in
subsidiaries as equity in the consolidated financial statements, and requires that transactions
between entities and noncontrolling interests be treated as equity. The Company adopted SFAS 160
on January 1, 2009. The adoption of SFAS 160 had no impact on the Companys financial condition or
results of operations.
Off Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
16
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable
ITEM 4. Controls and Procedures
As of the end of the period covered by this report, the Company conducted an evaluation, under
the supervision and with the participation of the principal executive officer and principal
financial officer, of the Companys disclosure control and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)). Based on
this evaluation, the principal executive officer and principal financial officer concluded that the
Companys disclosure controls and procedures are effective to ensure that information required to
be disclosed by the Company in reports that it files or submits under the Exchange Act is (i)
recorded, processed, summarized and reported within the time periods specified in SEC rules and
forms and (ii) accumulated and communicated to the Companys management, including its principal
executive officer and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure.
There was no change in the Companys internal control over financial reporting identified in
connection with the evaluation required by Rule 13a-15(d) and Rule 15d-15(d) of the Exchange Act
that occurred during the period covered by this report that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting.
17
PART II. OTHER INFORMATION
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|
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ITEM 1.
|
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Legal Proceedings |
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None |
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ITEM 1A.
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Risk Factors |
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|
|
|
Not applicable |
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ITEM 2.
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Unregistered Sales of Equity Securities and Use of Proceeds |
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Issuer Purchases of Equity Securities (1) |
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(c) Total Number of |
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Shares Purchased as |
|
(d) Maximum Number of |
|
|
(a) Total Number |
|
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|
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Part of Publicly |
|
Shares that May |
|
|
of |
|
(b) Average Price |
|
Announced Plans |
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Yet Be Purchased Under |
|
|
Shares Purchased |
|
Paid per Share |
|
or Programs |
|
The Plans or Programs |
January 1, 2009 through January 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1, 2009 through February 28, 2009 |
|
|
6,226 |
|
|
$ |
4.29 |
|
|
|
6,226 |
|
|
|
55,931 |
|
March 1, 2009 through March 31, 2009 |
|
|
10,101 |
|
|
$ |
4.21 |
|
|
|
10,101 |
|
|
|
45,830 |
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,327 |
|
|
$ |
4.24 |
|
|
|
16,327 |
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|
|
|
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(1) |
|
In prior years, the Companys board of directors had authorized the repurchase of
150,000 shares of common stock. In August 2008, the Companys Board of Directors approved
the repurchase of an additional 100,000 shares of common stock bringing the total shares
eligible for repurchase to 250,000. A total of 204,170 shares have been repurchased under
this program including 16,327 shares repurchased during the first quarter of 2009. The
plan allows for an additional 45,830 shares to be repurchased. |
|
|
|
ITEM 3.
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|
Defaults upon Senior Securities |
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|
|
|
|
Not applicable |
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ITEM 4.
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Submission of Matters to a Vote of Security Holders |
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|
|
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None |
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|
ITEM 5.
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|
Other Information |
|
|
|
|
|
None |
18
The following exhibits are filed as part of this Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2009:
|
|
|
Exhibit |
|
Description |
3.1
|
|
Restated Articles of Incorporation of Company, as amended.1 |
|
|
3.2
|
|
By-Laws of the Company, as amended.2 |
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certifications of CEO |
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certifications of CFO |
|
|
32
|
|
Section 1350 Certifications |
Copies of Exhibits will be furnished upon request and payment of the Companys reasonable
expenses in furnishing the Exhibits.
|
|
|
1 |
|
Incorporated by reference to the like numbered Exhibit
to the Companys Registration Statement on Form 10-SB (File No.
000-25727). |
|
2 |
|
Incorporated by reference to the like numbered Exhibit to the
Companys Current Report on Form 8-K filed with the Commission on February
22, 2007 (File No. 000-25727). |
19
IKONICS CORPORATION
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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|
IKONICS CORPORATION
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|
DATE: May 13, 2009 |
By: |
/s/ Jon Gerlach
|
|
|
|
Jon Gerlach, |
|
|
|
Chief Financial Officer, and
Vice President of Finance |
|
|
20
INDEX TO EXHIBITS
|
|
|
|
|
Exhibit |
|
Description |
|
Page |
3.1
|
|
Restated Articles of Incorporation of Company, as amended
|
|
Incorporated by reference |
|
|
|
|
|
3.2
|
|
By-Laws of the Company, as amended.
|
|
Incorporated by reference |
|
|
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certifications of CEO.
|
|
Filed Electronically |
|
|
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certifications of CFO.
|
|
Filed Electronically |
|
|
|
|
|
32
|
|
Section 1350 Certifications.
|
|
Filed Electronically |