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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended March 31, 2007
or
[ ] 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
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(Exact name of small business issuer as specified in its charter)
Minnesota 41-0730027
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(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4832 Grand Avenue
Duluth, Minnesota 55807
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(Address of principal executive offices) (Zip code)
(218) 628-2217
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Issuer's telephone number
Not Applicable
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(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 [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practical date: Common Stock, $.10 par value --
2,022,262 shares outstanding as of April 27, 2007.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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IKONICS CORPORATION
QUARTERLY REPORT ON FORM 10-QSB
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of March 31, 2007 (unaudited) and December 31, 2006 3
Statements of Operations for the Three Months Ended March 31, 2007 and 2006 (unaudited) 4
Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006 (unaudited) 5
Condensed Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3A(T). Controls and Procedures 16
PART II. OTHER INFORMATION 17
SIGNATURES 18
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IKONICS CORPORATION
BALANCE SHEETS
MARCH 31 DECEMBER 31
2007 2006
------------- -------------
ASSETS (UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 3,803,062 $ 3,428,186
Trade receivables, less allowances of $70,000 1,785,213 1,976,893
Inventories 2,320,907 2,494,876
Deposits, prepaid expenses and other assets 323,830 232,255
Income tax refund receivable 6,860 --
Deferred income taxes 88,000 97,000
-------------- -------------
Total current assets 8,327,872 8,229,210
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PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land and building 1,500,271 1,500,271
Machinery and equipment 2,411,488 2,396,867
Office equipment 840,390 817,406
Vehicles 223,091 203,816
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4,975,240 4,918,360
Less accumulated depreciation 3,966,822 3,926,440
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1,008,418 991,920
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INTANGIBLE ASSETS, less accumulated amortization of $172,779 in
2007 and $159,351 in 2006 496,155 485,421
DEFERRED INCOME TAXES 48,000 48,000
INVESTMENTS IN NON-MARKETABLE EQUITY SECURITIES 791,451 988,910
-------------- -------------
$ 10,671,896 $ 10,743,461
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 330,933 $ 288,449
Accrued compensation 149,895 324,082
Other accrued expenses 280,967 172,381
Income taxes payable -- 94,450
-------------- -------------
Total current liabilities 761,795 879,362
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STOCKHOLDERS' EQUITY:-
Preferred stock, par value $.10 per share; authorized 250,000
shares; issued none Common stock, par value $.10 per share;
authorized 4,750,000 shares; issued and outstanding 2,022,262
in 2007 and 2,010,861 in 2006 202,226 201,086
Additional paid-in capital 2,021,777 1,979,012
Retained earnings 7,686,098 7,684,001
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Total stockholders' equity 9,910,101 9,864,099
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$ 10,671,896 $ 10,743,461
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See condensed notes to financial statements.
3
IKONICS CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS
ENDED MARCH 31
-------------------------------
2007 2006
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NET SALES $ 3,507,767 $ 3,371,800
COSTS AND EXPENSES:
Cost of goods sold 2,074,070 1,917,343
Selling, general and administrative 1,231,092 1,151,986
Research and development 206,272 180,469
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3,511,434 3,249,798
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INCOME (LOSS) FROM OPERATIONS (3,667) 122,002
GAIN ON SALE OF NON-MARKETABLE EQUITY SECURITIES 55,159 -
INTEREST INCOME 32,907 23,788
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INCOME BEFORE INCOME TAXES 84,399 145,790
INCOME TAX EXPENSE (BENEFIT) (54,698) 47,488
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NET INCOME $ 139,097 $ 98,302
============== =============
EARNINGS PER COMMON SHARE:
Basic $ 0.07 $ 0.05
============== =============
Diluted $ 0.07 $ 0.05
============== =============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic 2,015,570 1,971,417
============== =============
Diluted 2,064,511 2,019,238
============== =============
See condensed notes to financial statements.
4
IKONICS CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS
ENDED MARCH 31
-------------------------------
2007 2006
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 139,097 $ 98,302
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 61,178 61,468
Amortization 13,428 6,177
Excess tax benefits from share-based payment
arrangement (2,785) (12,771)
Tax benefit from stock option exercise 10,793 --
Stock based compensation 4,728 5,817
Gain on sales of vehicles (2,340) --
Gain on sale of non-marketable equity securities (55,159) --
Deferred income taxes 9,000 --
Changes in working capital components:
Trade receivables 191,680 (3,267)
Inventories 173,969 208,688
Deposits, prepaid expenses and other assets (91,575) (80,356)
Income tax refund receivable (6,860) --
Accounts payable 42,484 (76,081)
Accrued liabilities (202,601) (157,436)
Income taxes payable (91,665) (32,178)
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Net cash provided by operating
activities 193,372 18,363
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (81,836) (40,675)
Proceeds on sale of vehicles 6,500 --
Purchase of intangibles (24,162) (10,484)
Purchase of non-marketable equity securities -- (249,998)
Proceeds on sale of non-marketable equity
securities 252,618 --
Proceeds on sale of marketable securities -- 83,979
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Net cash provided by (used in)
investing activities 153,120 (217,178)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Excess tax benefits from share-based payment
arrangement 2,785 12,771
Proceeds from exercise of stock options 25,599 108,450
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Net cash provided by financing
activities 28,384 121,221
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NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 374,876 (77,594)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 3,428,186 3,412,072
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CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 3,803,062 $ 3,334,478
============== =============
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Income taxes paid $ 68,528 $ 79,666
============== =============
See condensed notes to financial statements.
5
IKONICS CORPORATION
CONDENSED NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Notes to Financial Statements
The balance sheet of IKONICS Corporation (the "Company") as of March 31,
2007, and the related statements of operations and cash flows for the
three months ended March 31, 2007 and 2006, have been prepared without
being audited.
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, 2007,
and the results of its operations and cash flows for all periods
presented.
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 Company's
Annual Report on Form 10-KSB for the year ended December 31, 2006.
The results of operations for interim periods are not necessarily
indicative of results that will be realized for the full fiscal year.
2. Inventory
The major components of inventory at March 31, 2007 and December 31, 2006
are as follows:
Mar 31, 2007 Dec 31, 2006
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Raw materials $ 1,285,986 $ 1,577,165
Work-in-progress 305,703 225,033
Finished goods 1,274,682 1,227,806
Reduction to LIFO cost (545,464) (535,128)
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Total Inventory $ 2,320,907 $ 2,494,876
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3. Earnings Per Common Share (EPS)
Basic EPS is calculated using net income divided by the weighted average
of common shares outstanding during the quarter. Diluted EPS is similar to
Basic except that the weighted average 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 stock options, had been issued.
Shares used in the calculation of diluted EPS are summarized below:
Three Months Ended
Mar 31, 2007 Mar 31, 2006
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Weighted average common shares outstanding 2,015,570 1,971,417
Dilutive effect of stock options 48,941 47,821
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Weighted average common and common equivalent shares outstanding 2,064,511 2,019,238
============= ==============
6
Options to purchase 76,321 and 107,567 shares of common stock were
outstanding at March 31, 2007 and 2006, respectively.
4. Stock-based Compensation
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 56,423 shares of common stock are reserved for
additional grants of options under the plan at March 31, 2007.
The Company accounts for this plan under FAS 123(R), "Share-Based Payment"
using the modified-prospective-transition method. Under the
modified-prospective-transition method, FAS 123(R) applies to new awards
and to awards that were outstanding on January 1, 2006 that are
subsequently modified, repurchased, or cancelled. Under this method
compensation cost in 2007 and 2006 includes cost for options granted prior
to but not vested as of December 31, 2005, and options granted in 2007 and
2006.
The Company charged compensation cost of $4,700 against income for the
three months ended March 31, 2007 and $3,700 for the three months ended
March 31, 2006. As of March 31, 2007 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.
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, increased by the APIC pool, which
is the amount that represents the pool of excess tax benefits available to
absorb tax shortages. For the three months ended March 31, 2007, $2,785 of
excess tax benefits was reported as operating and financing cash flows
compared to $12,771 for the three months ended March 31, 2006. The
Company's APIC pool totaled $42,497 and $39,712 at March 31, 2007 and
December 31, 2006, respectively.
Proceeds from the exercise of stock options were $25,599 and $108,450 for
the three months ended March 31, 2007 and 2006, respectively. There were
no options granted during the three months ending March 31, 2007.
Stock option activity during the first three months ending March 31, 2007
was as follows:
Weighted
Average
Exercise
Shares Price
Outstanding at beginning of period 88,222 $ 3.33
Granted -- --
Exercised (11,401) 2.25
Expired and forfeited (500) 4.32
-----------
Outstanding at 3/31/07 76,321 3.49
===========
The aggregate intrinsic value of all options outstanding and for those
exercisable at March 31, 2007 was $389,485 and $360,639, respectively.
7
5. Intangible Assets
Intangible assets consist primarily of patents, licenses and covenants not
to compete arising from business combinations. Intangible assets are
amortized on a straight-line basis over their estimated useful lives or
terms of their agreements. Estimated amortization expense for each of the
next five years is $54,000 annually. In connection with license
agreements, the Company has agreed to pay royalties ranging from 3% to 5%
on the future sales of products subject to the agreements.
6. Comprehensive income
Comprehensive income includes unrealized gains and losses on the Company's
available for sale marketable securities. There were no marketable
securities available for sale at December 31, 2006 or March 31, 2007.
Total comprehensive income was $139,097 and $99,198 for the three months
ended March 31, 2007 and 2006, respectively.
7. Purchase of Assets
On December 29, 2006, the Company acquired certain assets of Franklin
International Inc. related to the image mate(TM) product line. If the
acquisition had occurred on January 1, 2006, the unaudited pro forma
impact on revenues would have been to increase revenues by approximately
$150,000. The unaudited pro forma net income and earnings per common share
would not have been significant to the amounts reported in the Company's
income statement for the three months ended March 31, 2006.
8. Segment Information
The Company's reportable segments are strategic business units that offer
different products and have a varied customer base. There are three
reportable segments: Domestic, Export, and IKONICS Imaging. Domestic sells
screen printing film, emulsions, and inkjet receptive film which is sold
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 Company's
Annual Report on Form 10-KSB for the year ended December 31, 2006.
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:
8
For the three months ended March 31, 2007:
IKONICS
DOMESTIC EXPORT IMAGING OTHER TOTAL
------------- ------------- ------------- ------------- -------------
Net Sales $ 1,379,347 $ 986,950 $ 1,141,470 $ -- $ 3,507,767
Cost of good sold 800,604 723,083 550,383 -- 2,074,070
Selling, general and
administrative* 285,567 123,414 394,204 427,907 1,231,092
Research and
Development* -- -- -- 206,272 206,272
------------- ------------- ------------- ------------- -------------
1,086,171 846,497 944,587 634,179 3,511,434
------------- ------------- ------------- ------------- -------------
Income (loss) from
operations $ 293,176 $ 140,453 $ 196,883 $ (634,179) $ (3,667)
============= ============= ============= ============= =============
For the three months ended March 31, 2006:
IKONICS
DOMESTIC EXPORT IMAGING OTHER TOTAL
------------- ------------- ------------- ------------- -------------
Net Sales $ 1,257,884 $ 962,143 $ 1,151,773 $ -- $ 3,371,800
Cost of good sold 719,810 649,822 547,711 -- 1,917,343
Selling, general and
administrative* 260,429 120,543 425,345 345,669 1,151,986
Research and
Development* -- -- -- 180,469 180,469
------------- ------------- ------------- ------------- -------------
980,239 770,365 973,056 526,138 3,249,798
------------- ------------- ------------- ------------- -------------
Income (loss) from
Operations $ 277,645 $ 191,778 $ 178,717 $ (526,138) $ 122,002
============= ============= ============= ============= =============
Accounts receivable as of March 31, 2007 and December 31, 2006:
Mar 31, 2007 Dec 31, 2006
------------- -------------
Domestic $ 898,519 $ 842,144
Export 497,056 780,599
IKONICS Imaging 383,730 384,748
Other 5,908 (30,598)
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Total $ 1,785,213 $ 1,976,893
============= =============
-------------
* The Company does not allocate all general and administrative expenses or
any research and development expenses to its operating segments for
internal reporting.
9. Income Taxes
On January 1, 2007, the Company adopted the provisions of Financial
Standards Accounting Board Interpretation No. 48, Accounting for
Uncertainty in Income Taxes ("FIN 48"). As a result of the implementation
of FIN 48, the Company recorded a liability for unrecognized tax benefits
of $137,000, which was accounted for as a reduction to retained earnings.
The balance of the unrecognized tax benefits at adoption, exclusive or
interest, is $122,000, all of which would decrease the provision for
income taxes
9
and increase net income by the same amount. During the first quarter of
2007, the statue of limitations for the relevant taxing authority to
examine and challenge the tax position for an open year expired, resulting
in an increase in the income tax benefit of $45,000 for the quarter. As of
March 31, 2007, the liability for unrecognized tax benefits totaled
$92,000 and is included in other accrued expenses.
The Company is subject to taxation in the U.S. and various states. The
material jurisdictions that are subject to examination by tax authorities
primarily include Minnesota and the United States, for tax years after
2002 and 2003 respectively.
It is the Company's policy to recognize interest and penalties related to
uncertain tax positions in income tax expense. The Company had accrued
approximately $15,000 of interest related to uncertain tax positions at
the date of adoption. The accrued interest was reduced to $7,500 during
the first quarter as a result of the statue of limitations expiration on
an earlier year.
10
IKONICS CORPORATION
The information presented below in Management's 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following management's discussion and analysis focuses on those
factors that had a material effect on the Company's financial results of
operations during the first quarter of 2007 and for the same period of 2006. It
should be read in connection with the Company's unaudited financial statements
and notes thereto included in this Form 10-QSB.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements made in this Quarterly Report on Form 10-QSB, including
those summarized below, are forward-looking statements within the meaning of the
safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as
amended, that involve risks and uncertainties, and actual results may differ.
Factors that could cause actual results to differ include those identified
below.
o The Company's belief that additional proceeds will be received from
the sale of Apprise common and preferred stock--Actual proceeds
received may be impacted by unanticipated expenses related to
indemnification clauses as part of the agreement between Apprise and
its purchaser.
o The Company's belief that the quality of its receivables is high and
that strong internal controls are in place to maintain proper
collections--This 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 strong internal controls.
o The belief that the Company's current financial resources, its line
of credit, cash generated from operations and the Company's capacity
for debt and/or equity financing will be sufficient to fund current
and anticipated business operations. The belief that the Company's
low debt levels and available line of credit make it unlikely that a
decrease in product demand would impair the Company's ability to
fund operations--Changes in anticipated operating results,
acceptance of new products, credit availability, equity market
conditions or the Company's debt levels may further enhance or
inhibit the Company's ability to maintain or raise appropriate
levels of cash.
o The Company's expectations as to the level and use of planned
capital expenditures and that capital expenditures will be funded
with cash generated from operating activities--This expectation may
be affected by changes in the Company's 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 Company's financial
position.
o The Company's belief that its vulnerability to foreign currency
fluctuations and general economic conditions in foreign countries is
not significant--This belief may be impacted by economic, political
and social conditions in foreign markets, changes in regulatory and
competitive conditions, a change in
11
the amount or geographic focus of the Company's international sales,
or changes in purchase or sales terms.
o The Company's 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 investments--These 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.
o The Company's efforts to grow its international business--These
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.
o The Company's belief as to future activities that may be undertaken
to expand the Company's business--Actual activities undertaken may
be impacted by general market conditions, competitive conditions in
the Company's industry, unanticipated changes in the Company's
financial position or the inability to identify attractive
acquisition targets, new products or other business opportunities.
CRITICAL ACCOUNTING POLICIES
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 policies,
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
customer's current credit worthiness, as determined by review of the current
credit information. The Company 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 Company's general payment terms are net 30-45 days for domestic
customers and net 60-90 days for foreign customers.
Inventory. 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.
Deferred Tax Assets. At March 31, 2007, the Company had approximately
$136,000 of net deferred tax assets. The net deferred tax assets result
primarily due to timing differences in intangible assets and property and
equipment. The Company has determined that it is more likely than not that the
net deferred tax assets reflected on the balance sheet will be realized and that
a valuation allowance for such assets is not currently required.
Investments in Non-Marketable Equity Securities. Investments in
non-marketable equity securities consist of a $791,450 investment in imaging
Technology international ("iTi"). The Company accounts for this investment by
the cost method because the common stock of the corporation is unlisted and the
criteria for using the equity method of accounting is not satisfied. Under the
lower of cost or market method, the investment is assessed for
other-than-temporary impairment and recorded at the lower of cost or market
value which requires significant judgment since there are no readily available
market values. In assessing the fair value of such investments we consider
recent equity transactions that iTi has entered into, the status of iTi's
technology and strategies in place to
12
achieve its objectives, as well as iTi's financial condition and results of
operations. To the extent there are changes in the assessment, an adjustment may
need to be recorded.
Revenue Recognition. The Company recognizes revenue on products when title
passes, which is usually upon shipment. Freight billed to customers is included
in sales. Shipping costs are included in cost of goods sold.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2007 COMPARED TO QUARTER ENDED MARCH 31, 2006
Sales. Compared to the same period in 2006, the Company's sales increased
4.0% during the first quarter of 2007. Sales during the first quarter of 2007
were $3,508,000 versus sales of $3,372,000 during the first quarter of 2006. The
$136,000 sales increase was mainly due to both domestic and international
shipments from the image mate(TM) line of screen printing products, acquired in
December 2006.
Cost of Goods Sold. Cost of goods sold during the first quarter of 2007
was $2,074,000, or 59.1% of sales, compared to $1,917,000, or 56.9% of sales,
during the same period in 2006. The increase in the cost of sales of 2.2% in the
first quarter of 2007 reflects a less favorable product mix and additional
manufacturing overhead expenses related to the image mate transition.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $1,231,000, or 35.1% of sales, in the first
quarter of 2007, from $1,152,000, or 34.2% of sales, for the same period in
2006. The first three months of 2007 reflect an additional $45,000 for increased
sales personnel, and $24,000 for expenses related to Sarbanes-Oxley compliance
efforts.
Research and Development Expenses. Research and development expenses
during the first quarter of 2007 were $206,000, or 5.9% of sales, versus
$180,000, or 5.4% of sales, for the same period in 2006. The increase was due to
equipment rental, depreciation, and production trial expenses related to the
Company's efforts in the industrial digital inkjet market.
Gain on Sale of Non-Marketable Equity Securities. The Company realized a
gain of $55,000 on the sale of its investment in the common and preferred stock
of Apprise Technologies, Inc. ("Apprise") during the first quarter of 2007. In
addition to the initial proceeds, the Company anticipates receiving additional
proceeds in 2008 from the portion of the total sale price that was placed in
escrow at the time of the sale related to indemnification clauses as part of the
agreement between Apprise and its purchaser. The additional proceeds and gain
recognition is expected to be approximately $40,000.
Interest Income. Interest income for the first quarter of 2007 was
$33,000, compared to $24,000 for the same period in 2006. The interest income
increase is due to an increase in interest rates and a larger average invested
balance of interest earning assets.
Income Taxes. For the first quarter of 2007, the Company realized an
income tax benefit of $55,000 compared to income tax expense of $47,000, or an
effective rate of 32.6%, for the same period in 2006. The benefit primarily
relates to derecognizing a liability of $45,000 for unrecognized tax benefits
relating to a tax year where the statute of limitations expired during the first
quarter. During the first quarter of 2007, the Company also recorded a tax
benefit adjustment of $9,000 relating to the December 31, 2006 tax accrual
estimate. A net benefit of $7,000 was also realized from the reversal of the
valuation allowance offsetting the capital loss carryforward and utilization of
a portion of the carryforward when the initial proceeds were received from the
sale of the Apprise investment. The remaining carryforward is expected to be
fully utilized when the additional anticipated proceeds are received in 2008.
The remaining income tax provision differs from the expected tax expense
primarily due to the benefits of the domestic manufacturing deduction, tax
exempt interest, state income taxes and federal credits for research and
development. For the remainder of 2007, the Company does not expect to realize
additional income tax benefits related to the December 31, 2006 tax accrual
estimate or the valuation allowance reversal.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations principally with funds generated
from operations and employee stock option exercises. These funds have been
sufficient to cover the Company's normal operating expenditures, annual capital
requirements, and research and development expenditures.
Cash and cash equivalents were $3,803,062 and $3,334,478 at March 31, 2007
and March 31, 2006, respectively. The Company generated $193,000 in cash from
operating activities during the three months ended March 31, 2007, compared to
generating $18,000 of cash from operating activities during the same period in
2006. Cash provided by operating activities is primarily the result of net
income adjusted for non-cash depreciation, amortization, and certain changes in
working capital components.
During the first three months of 2007, trade receivables decreased by
$192,000. The decrease in receivables was driven by the timing of collections.
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 $174,000 due to the timing of raw material shipments. Prepaid expenses
increased $92,000, reflecting annual insurance premiums prepaid in the first
quarter of 2007. Accounts payable increased $42,000, primarily as a result of
the timing of payments to and purchases of material from suppliers for
inventory. Accrued expenses decreased $203,000, primarily reflecting the timing
of compensation payments. Income taxes payable decreased $92,000 and the
Company's income tax receivable increased $7,000 due to payment of 2006 taxes
during the first quarter of 2007.
For the first three months of 2007, investing activities provided $153,000
to the Company. The Company received $253,000 from the sale of its Apprise
investment and $6,500 from the sale of a vehicle. The cash received was
partially offset by $82,000 used for the purchase of Company vehicles and
equipment to improve efficiency and reduce operating costs. The Company also
incurred $24,000 in patent application costs that the Company records as an
asset and amortizes upon successful completion of the application process. For
the first three months of 2006, the Company used $217,000 in investing
activities. During the first quarter of 2006, the Company elected to make an
early exercise of its warrants to buy an additional 33,333 shares of stock in
iTi. The price per share was $7.50 per share and as consideration for the early
exercise, the Company was granted warrants to buy an additional 8,333 shares at
$8.50 per share. The Company owns approximately 7% of the outstanding shares of
iTi. Also during the first quarter of 2006, the Company received $84,000 from
the sale of marketable securities and purchased $41,000 of plant equipment to
improve efficiency and reduce operating costs. The Company also incurred $10,000
in patent application costs that the Company records as an asset and amortizes
upon successful completion of the application process.
The Company realized $28,000 from financing activities during the first
three months of 2007 compared to $121,000 received in the same period of 2006.
During the first three months of 2007, the Company received $26,000 for the
issuance of 11,401 shares of common stock upon the exercise of stock options
compared to $108,000 received during the first three months of 2006 for 26,968
shares of common stock issued upon the exercise of stock options. The Company
also realized a $3,000 benefit during the first quarter of 2007 related to the
excess tax benefit from the exercise of stock options compared to $13,000 for
the same period in 2006.
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
quarter ended March 31, 2007 or during the fiscal year 2006. There was no debt
outstanding under this line as of March 31, 2007 or March 31, 2006.
The Company believes that current financial resources, its line of credit,
cash generated from operations and the Company's 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 Company's
products would impair the Company's ability to fund operations.
14
CAPITAL EXPENDITURES
Through March 31, 2007, the Company has spent $82,000 on capital
expenditures during 2007. This spending primarily consists of vehicles and plant
equipment upgrades.
The Company plans for additional capital expenditures during 2007 to
support the Company's efforts in the development of digital inkjettable fluids
and substrates. Capital expenditures in 2007 will also include ongoing
manufacturing equipment upgrades and development equipment to modernize the
capabilities and processes of the Company's research and development laboratory
to improve measurement and quality control processes. Capital expenditures are
expected to be approximately $500,000 for the remaining nine months of the year
and 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 28.1% of total sales during the first quarter 2007 and 28.5% of
total sales for the same period in 2006. Fluctuations of certain foreign
currencies have not significantly impacted the Company's operations because the
Company's 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 Company's foreign transactions are primarily negotiated, invoiced and
paid in U.S. dollars while a portion are transacted in Euros. IKONICS has not
implemented a hedging strategy to reduce the risk of foreign currency
translation exposure, which management does not believe to be significant based
on the scope and geographic diversity of the Company's foreign operations as of
March 31, 2007.
FUTURE OUTLOOK
IKONICS has invested on average over 4% of its sales dollars for the past
several years in research and development. The Company plans to maintain its
efforts in this area and expedite internal product development as well as form
technological alliances with outside sources to ensure commercialization of new
product 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.
Other future activities undertaken to expand the Company's business may
include acquisitions, building expansion and additions, equipment additions, new
product development and marketing opportunities.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes ("FIN 48").
FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. FIN 48 was effective
for the Company as of January 1, 2007. The impact of the adoption on the
Financial Statements as of January 1, 2007, was an increase in total liabilities
of $137,000 and a decrease in stockholders' equity of $137,000.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS 157"). 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
15
pronouncements that fair value is the relevant measurement attribute.
Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157
is effective for the Company beginning in fiscal year 2008. Management is
evaluating the statement to determine the effect, if any, on the financial
statements and related disclosures.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities ("SFAS 159"). SFAS 159 allows
entities to measure at fair value many financial instruments and certain other
assets and liabilities that are not otherwise required to be measured at fair
value. SFAS 159 is effective for fiscal years beginning after November 15, 2007.
We have not determined what impact, if any, that adoption will have on our
results of operations, cash flows or financial position.
OFF BALANCE SHEET ARRANGEMENTS
The Company has no off-balance sheet arrangements.
ITEM 3A(T). 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 Company's 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 Company 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 Company's 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 Company's 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 Company's internal control over financial reporting.
16
PART II. OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
The following exhibits are filed as part of this Quarterly Report on Form
10-QSB for the quarterly period ended March 31, 2007:
Exhibit Description
---------- ----------------------------------------------------------------
3.1 Restated Articles of Incorporation of Company, as amended. (1)
3.2 By-Laws of the Company, as amended. (1)
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
Company's reasonable expenses in furnishing the Exhibits.
----------
(1) Incorporated by reference to the like numbered Exhibit to the Company's
Registration Statement on Form 10-SB (File No. 000-25727).
17
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.
IKONICS CORPORATION
DATE: May 14, 2007 By: /s/ Jon Gerlach
---------------------------------------
Jon Gerlach,
Chief Financial Officer, and
Vice President of Finance
18
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