TeraWulf - 10-Q quarterly report FY

 

(Mark One)

(Exact name of registrant as specified in its charter)

     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.)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

     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.

     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 — 1,974,807 shares outstanding as of August 10, 2010.

QUARTERLY REPORT ON FORM 10-Q

PART I — FINANCIAL INFORMATION

See notes to condensed financial statements.

See notes to condensed financial statements.

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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.

     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 second quarter of 2010, the six months ended June 30, 2010 and the same periods of 2009. It should be read in connection with the Company’s unaudited financial statements and notes thereto included in this Form 10-Q and the Company’s audited financial statements, including related notes, and Management’s Discussion and Analysis of Financials Condition and Results of Operations contained in the Company’s 2009 Annual Report on Form 10-K.

     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 customer’s 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. A small percentage of the accounts receivable balance is denominated in a foreign currency with no concentration in any given country. At the end of each reporting period, the Company analyzes the receivable balance for customers paying in a foreign currency. These balances are adjusted to each quarter or year spot rate in accordance with guidance related to foreign currency matters.

     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 June 30, 2010, the Company had net current deferred tax assets of $163,000 and net noncurrent deferred tax liabilities of $162,000. The deferred tax assets and liabilities result primarily from temporary differences in property and equipment, accrued expenses, and inventory reserves. In connection with the recording of a $919,000 impairment charge in 2009 related to an investment in a non-marketable equity security, the Company has recorded a deferred tax asset and corresponding full valuation allowance in the amount of $331,000

as of June 30, 2010 and December 31, 2009 as it is more likely that this asset will not be realized. The deferred tax asset related to the capital loss can be carried back three years and carried forward five years and must be offset by a capital gain. The Company has determined that is more likely than not that the remaining deferred tax assets will be realized and that an additional valuation allowance for such assets is not currently required. The Company reports a liability for unrecognized tax benefits taken or expected to be taken when they are uncertain. At December 31, 2009 the Company had recorded a liability of $27,000 related to an uncertain tax position which was eliminated during the six months ended June 30, 2010.

     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 depending on the agreement with the customer. The Company sells its products to both distributors and end-users. Sales to distributors and end-users are recorded based upon the criteria governed by the sales, delivery, and payment terms stated on the invoices from the Company to the purchaser. In addition to transfer of title / risk of loss, all revenue is recorded in accordance with the criteria outlined within the provisions regarding revenue recognition including:

Sales are reported on a net basis by deducting credits, estimated normal returns and discounts. The Company’s return policy does not vary by geography. The Company is not under a warranty obligation and the customer has no rotation or price protection rights. Freight billed to customers is included in sales. Shipping costs are included in cost of goods sold.

     Sales. The Company realized a 12.2% sales increase during the second quarter of 2010 with sales of $4.2 million, compared to $3.8 million in sales during the same period in 2009. Export sales for the second quarter of 2010 were up 25.9% versus the second quarter of 2009 due to strong sales to Europe and Latin America. IKONICS Imaging 2010 second quarter sales also increased by 8.0% over the same period in 2009 as the Company realized higher film sales related to both its Digital Texturing initiative and traditional photo resistant film customers. Domestic sales grew 5.0% in second quarter of 2010 as both film and emulsion shipments were higher during the period.

     Gross Profit. Gross profit was $1.8 million, or 43.1% of sales, in the second quarter of 2010 compared to $1.5 million, or 38.5% of sales, for the same period in 2009. Export gross profit percentage increased to 31.8% during the second quarter of 2010 compared to 20.6% in the second quarter of 2009 due to increased volume and an improved sales mix. A more favorable sales mix also improved IKONICS Imaging gross profit percentage from

46.3% in the second quarter of 2009 to 48.1% in the second quarter of 2010. The Domestic Chromaline 2010 second quarter gross profit percentage was 49.6% compared to 46.5% for the same period in 2009.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses were $1.2 million, or 26.4% of sales, in the second quarter of 2010, and $1.1 million, or 28.9% of sales, for the same period in 2009. The increase reflects higher sales personnel and travel expenses.

     Research and Development Expenses. Research and development expenses during the second quarter of 2010 were $204,000, or 4.8% of sales, versus $156,000, or 4.1% of sales, for the same period in 2009. The increase is related to a $30,000 abandonment of patent applications. The Company records patent application costs as an asset and amortizes those costs upon successful completion of the application process or expenses those costs when an application is abandoned.

     Gain on Sale of Non-Marketable Equity Securities. The Company realized a gain of $9,600 in the second 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. The $9,600 was 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 Company did not have any sales of non-marketable equity securities in the second quarter of 2010.

     Interest Income. The Company earned $3,900 of interest income in the second quarter of 2010 compared to $2,000 of interest income in the second quarter of 2009. The interest earned in second quarter of 2010 and 2009 is related to interest received from the Company’s short-term investments, which consisted of fully insured certificates of deposit with maturities ranging from six to twelve months.

     Income Taxes. For the second quarter of 2010, the Company realized income tax expense of $163,000, or an effective rate of 32.3% versus $70,000, or an effective rate of 32.2% for the second quarter of 2009. The income tax provision differs from the expected tax expense primarily due to the benefits of the domestic manufacturing deduction, and state credits for research and development.

     Sales. The Company’s sales increased 7.9% during the first six months of 2010 to $7.9 million versus sales of $7.3 million during the first six months of 2009. Strong sales in Europe and Latin America drove a 23.8% Export sales increase for the first six months. IKONICS Imaging also realized a 7.4% sales increase over 2009 from improved film shipments to the digital texturing and the photo resistant film markets. Partially offsetting these sales increases, Domestic Chromaline shipments decreased 1.8% during the first six months of 2010 over the same period in 2009 due to lower private label film shipments.

     Gross Profit. Gross Profit for the first six months of 2010 was $3.3 million, or 41.8% of sales compared to $2.9 million, or 38.9% of sales, for the same period in 2009. Export gross profit percentage increased to 31.3% during the first six months of 2010 compared to 22.6% in half of 2009 due to higher volumes and an improved sales mix. Improved volumes and sales mix also accounted for IKONICS Imaging gross profit percentage increase from 44.0% in 2009 to 44.7% in 2010. Manufacturing cost reductions resulted in improved Domestic Chromaline gross profit percentages as Domestic’s margin improved from 46.4% in 2009 to 48.3% in 2010.

     Selling, General and Administrative Expenses. Selling, general and administrative expenses were $2.3 million, or 29.3% of sales, in the first half of 2010 compared to $2.3 million, or 31.5% of sales, for the same period in 2009, as higher sales personnel and travel expenses were partially offset by lower bad debt expense.

     Research and Development Expenses. Research and development expenses during the first half of 2010 were $365,000, or 4.6% of sales, versus $323,000, or 4.4% of sales, for the same period in 2009. The increase is related to the $30,000 abandonment of patent applications. The Company records patent application costs as an asset and amortizes those costs upon successful completion of the application process or expenses those costs when an application is abandoned.

     Gain on Sale of Non-Marketable Equity Securities. The Company realized a gain of $29,800 during the first six months 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. The final $29,800 received in the first six months of 2009 was 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.

     Interest Income. The Company earned $7,400 of interest income during the first half of 2010 compared to $2,100 of interest income for the same period in 2009. The interest earned in first six months of 2010 and 2009 is related to interest received from the Company’s short-term investments, which consisted of fully insured certificates of deposit with maturities ranging from six to twelve months.

     Income Taxes. During the first six months of 2010, the Company realized an income tax expense of $141,000, or an effective rate of 22.3%, compared to income tax expense of $53,000, or an effective rate of 21.0%, for the same period in 2009. The effective tax rate for the first six months of 2010 and 2009 was impacted by derecognizing a liability for unrecognized tax benefits relating to a tax year where the statute of limitations expired during the first six months. A $27,000 liability was derecognized in the first half of 2010 while a $21,000 liability was derecognized in the first half of 2009. During the first half of 2010, the Company also recorded an out-of-period tax benefit adjustment of $15,000 relating to December 31, 2009 estimates for tax credits as well as the receipt of interest of approximately $13,000 related to Minnesota state income tax returns. The Company expects that for the remainder of 2010, the Company will record the provision for income taxes at an effective tax rate of 35% to 36%, as it recognizes benefits from the domestic manufacturing deduction, research and development credits, and state income taxes.

     The Company has financed its operations principally with funds generated from operations. These funds have been sufficient to cover the Company’s normal operating expenditures, annual capital requirements, and research and development expenditures.

     Cash on hand was $1,068,000 and $882,000 at June 30, 2010 and 2009, respectively. The Company generated $662,000 in cash from operating activities during the six months ended June 30, 2010, compared to generating $733,000 of cash from operating activities during the same period in 2009. 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, deferred taxes, and certain changes in working capital components discussed in the following paragraph.

     During the first six months of 2010, trade receivables increased by $40,000. The increase in receivables was driven by higher 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 $49,000 due to lower raw material levels. Deposits, prepaid expenses and other assets increased $162,000 as a result of the Company prepaying for printers as part of its digital texturing initiative. Accounts payable increased $61,000 due to of the timing of payments to and purchases from vendors. Accrued liabilities decreased $22,000, reflecting the reversal of a liability for unrecognized tax benefits relating to a tax year where the statute of limitations expired during the first six months.

     During the first half of 2010, investing activities used $933,000. The Company invested $1,207,000 in fully insured certificates of deposits with two $200,000 certificates of deposit maturing during the first six months of 2010. Purchases of property and equipment were $122,000, mainly for three vehicles and equipment purchases. The Company received $19,000 from vehicle sales. Also during the first six months of 2010, the Company incurred $23,000 in patent application costs that the Company records as an asset and amortizes upon successful completion of the application process.

     During the first six months of 2009, investing activities used $629,000. The Company invested $600,000 in fully insured certificates on deposits. Purchases of property and equipment were $73,000, mainly for new equipment to support the Company’s new business initiatives and research activities. Also during the first six months of 2009, the Company incurred $4,000 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 $30,000 in the first six months of 2009 on the 2007 sale of its investment in the common and preferred stock of Apprise Technologies, Inc.

     During the first six months of 2010 the Company received $34,000 from financing activities from the issuance of 7,750 shares of common stock upon the exercise of stock options. The Company used $124,000 in financing activities during the first six months of 2009 to repurchase 26,926 shares of its own stock.

     A bank line of credit provides for borrowings of up to $1,250,000. The line of credit term runs from October 31, 2009 to October 30, 2010. The Company expects to obtain a similar line of credit when the current line of credit expires. Borrowings under this line of credit are collateralized by accounts receivable and inventories and bear interest at 2.5 percentage points over the 30-day LIBOR rate. The Company did not utilize this line of credit during the first six months of 2010 and there were no borrowings outstanding as of June 30, 2010. The line of credit was also not utilized during first six months of 2009, and there were no borrowings outstanding under this line as of June 30, 2009.

     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.

     Through the first six months of 2010, the Company had $122,000 in capital expenditures. Capital expenditures during the first six months were mainly for three vehicles for sales persons and equipment. The Company plans for other capital expenditures during 2010 to include ongoing manufacturing equipment upgrades. Capital expenditures are expected to be approximately $100,000 for the second half of 2010 and will be funded with cash generated from operating activities.

     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 33% of total sales during the first six months of 2010 compared to 29% of sales during the same period in 2009. Higher volumes in Europe and Latin American positively impacted 2010 first half sales volumes. 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 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 Company’s foreign operations as of June 30, 2010. Furthermore, the impact of foreign exchange on the Company’s balance sheet and operating results was not material in either 2010 or 2009.

     IKONICS has spent on average over 4% of its sales dollars for the past few years in research and development and 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 commercialize new product opportunities.

     The Company made substantial progress on its new business initiatives during the first half of 2010. Photomachining and sound deadening are in commercial operation and supplying product to major electronics, defense and aerospace customers. A Digital Texturing printer was placed at a beta site in the fourth quarter of 2009; it is performing to the Company’s expectations and is generating sales of related consumables. The digital texturing program was negatively impacted by the 2009 business failure of the Company’s printer supplier, imaging Technology international. However, the Company has made arrangements with a manufacturer that the Company believes is financially strong and technically adept for sourcing future machines. The Company is producing and selling custom substrates for various inkjet applications and is currently developing, under a research contract, a proprietary film product for a major customer.

     Other future activities undertaken to expand the Company’s 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.

     The Company does not expect that the adoption of other recent accounting pronouncements will have a material impact on its financial statements.

     The Company has no off-balance sheet arrangements.

     Not applicable

     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’s 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.

PART II. OTHER INFORMATION

     None

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     None

     The following exhibits are filed as part of this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2010:

     Copies of Exhibits will be furnished upon request and payment of the Company’s reasonable expenses in furnishing the Exhibits.

IKONICS CORPORATION

     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.