Quarterly Report (10-q)

Date : 08/13/2019 @ 4:02PM
Source : Edgar (US Regulatory)
Stock : Ikonics Corporation (IKNX)
Quote : 5.6  0.0 (0.00%) @ 9:00AM
Ikonics share price Chart

Quarterly Report (10-q)

 

 



 

U.S. SECURITIES AND EXCHANGE COMMISSION  

WASHINGTON, D.C. 20549  

  

FORM 10-Q  

(Mark One)  

  

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

  

For the Quarterly Period Ended June 30, 2019

  

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  

(Exact name of registrant as specified in its charter)

  

Minnesota

 

41-0730027

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. employer

identification no.)

 

 

 

4832 Grand Avenue

Duluth, Minnesota

 

55807

(Address of principal executive offices)

 

(Zip code)

  

(218) 628-2217  

(Registrant’s telephone number, including area code)

  

Not Applicable  

(Former name, former address and former fiscal year, if changed since last report)

  

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $.10 per share

IKNX

Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 ☒  No ☐

  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files.)  Yes ☒  No ☐

    

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

  

Large accelerated filer ☐

 

Accelerated filer ☐

Non-accelerated filer ☐

 

Smaller reporting company ☒

 

 

Emerging growth company  ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $.10 par value - 1,980,811 shares outstanding as of August 1, 2019.

  



  

    

 

 

IKONICS CORPORATION  

  

QUARTERLY REPORT ON FORM 10-Q

  

 

 

PAGE NO.

PART I. 

FINANCIAL INFORMATION

 

 

 

 

Item 1. 

 

Condensed Financial Statements:

3

 

 

 

 

 

 

Condensed Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018

3

 

 

 

 

 

 

Condensed Statements of Operations for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited)

4

 

 

 

 

    Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018 (unaudited) 5
       

 

 

Condensed Statements of Cash Flows for the Six Months Ended June 30, 2019 and 2018 (unaudited)

6

 

 

 

 

 

 

Notes to Condensed Financial Statements (unaudited)

7

 

 

 

 

Item 2. 

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

11

 

 

 

 

Item 3. 

 

Quantitative and Qualitative Disclosures about Market Risk

16

 

 

 

 

Item 4. 

 

Controls and Procedures

16

 

 

 

PART II. 

OTHER INFORMATION

17

 

 

 

 

SIGNATURES

18

  

  

 

 

PART I - FINANCIAL INFORMATION

  

ITEM 1.  Condensed Financial Statements

  

IKONICS CORPORATION  

CONDENSED BALANCE SHEETS  

 

   

June 30,

   

December 31,

 
   

2019

   

2018

 

ASSETS

 

(unaudited)

         
                 

CURRENT ASSETS:

               

Cash and cash equivalents

  $ 297,186     $ 1,623,137  

Short-term investments

    2,940,000       2,695,000  

Trade receivables, less allowance of $53,000 in 2019 and 2018

    2,223,445       2,215,215  

Inventories

    2,512,249       2,046,588  

Prepaid expenses and other assets

    262,325       375,362  

Income taxes receivable

    185,219       2,768  

Total current assets

    8,420,424       8,958,070  
                 

PROPERTY, PLANT, AND EQUIPMENT, at cost:

               

Land and building

    9,500,429       9,500,429  

Machinery and equipment

    5,132,719       4,964,816  

Office equipment

    1,565,456       1,559,728  

Vehicles

    245,674       245,679  
      16,444,278       16,270,652  

Less accumulated depreciation

    (8,457,143 )     (8,185,910 )

Total property, plant and equipment at cost, net

    7,987,135       8,084,742  
                 

INTANGIBLE ASSETS, less accumulated amortization of $168,488 in 2019 and $149,740 in 2018

    292,380       376,406  

Total assets

  $ 16,699,939     $ 17,419,218  
                 

LIABILITIES AND STOCKHOLDERS' EQUITY

               
                 

CURRENT LIABILITIES

               

Current portion of long-term debt

  $ 131,385     $ 129,282  

Accounts payable

    533,424       647,528  

Accrued compensation

    331,334       366,900  

Other accrued liabilities

    242,284       159,821  

Total current liabilities

    1,238,427       1,303,531  
                 

LONG-TERM LIABILITIES

               

Long-term debt, less current portion

    2,755,353       2,821,657  

Deferred income taxes

    183,000       183,000  

Total long-term liabilities

    2,938,353       3,004,657  

Total liabilities

    4,176,780       4,308,188  

COMMITMENTS AND CONTINGENCIES

               
                 

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 1,980,811 shares in 2019 and 1,983,553 in 2018.

    198,081       198,355  

Additional paid-in-capital

    2,723,099       2,723,024  

Retained earnings

    9,601,979       10,189,651  

Total stockholders' equity

    12,523,159       13,111,030  

Total liabilities and stockholders' equity

  $ 16,699,939     $ 17,419,218  

 

 See notes to condensed financial statements.

  

 

 

IKONICS CORPORATION  

CONDENSED STATEMENTS OF OPERATIONS (Unaudited)  

  

   

Three Months Ended

   

Six Months Ended

 
   

June 30,

   

June 30,

 
   

2019

   

2018

   

2019

   

2018

 
                                 

NET SALES

  $ 4,596,411     $ 4,634,177     $ 8,125,102     $ 8,705,655  
                                 

COST OF GOODS SOLD

    3,167,982       2,971,862       5,687,554       5,680,921  
                                 

GROSS PROFIT

    1,428,429       1,662,315       2,437,548       3,024,734  
                                 

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

    1,338,861       1,308,963       2,720,826       2,657,946  
                                 

RESEARCH AND DEVELOPMENT EXPENSES

    270,465       156,472       449,307       310,548  
                                 

(LOSS) INCOME FROM OPERATIONS

    (180,897 )     196,880       (732,585 )     56,240  
                                 

INTEREST EXPENSE

    (22,515 )     (23,807 )     (44,790 )     (43,742 )
                                 

OTHER

    17,303       11,805       33,497       21,226  
                                 

(LOSS) INCOME BEFORE INCOME TAXES

    (186,109 )     184,878       (743,878 )     33,724  
                                 

INCOME TAX (BENEFIT) EXPENSE

    (70,398 )     39,542       (173,136 )     19,126  
                                 

NET (LOSS) INCOME

  $ (115,711 )   $ 145,336     $ (570,742 )   $ 14,598  
                                 

(LOSS) INCOME PER COMMON SHARE

                               

Basic

  $ (0.06 )   $ 0.07     $ (0.29 )   $ 0.01  

Diluted

  $ (0.06 )   $ 0.07     $ (0.29 )   $ 0.01  
                                 

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

                               

Basic

    1,982,275       1,983,553       1,982,910       1,983,553  

Diluted

    1,982,275       1,983,553       1,982,910       1,983,553  

  

See notes to condensed financial statements.

 

 

 

IKONICS CORPORATION  

  

STATEMENTS OF STOCKHOLDERS’ EQUITY

THREE AND SIX MONTHS ENDED JUNE 30, 2019 and 2018 (unaudited)

 

 

For the three months ended June 30, 2019:  

 

                                 

Total

 
                   

Additional

           

Stock-

 
   

Common Stock

   

Paid-in

   

Retained

   

holders’

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Equity

 
                                         

BALANCE AT MARCH 31, 2019

    1,983,553     $ 198,355     $ 2,724,944     $ 9,734,620     $ 12,657,919  
                                         

Net loss

                      (115,711 )     (115,711 )
Common stock repurchased     (2,742 )     (274 )     (3,765 )     (16,930 )     (20,969 )

Stock based compensation

                1,920             1,920  
                                         

BALANCE AT JUNE 30, 2019

    1,980,811     $ 198,081     $ 2,723,099     $ 9,601,979     $ 12,523,159  

 

 

For the three months ended June 30, 2018:  

                                   

Total

 
                   

Additional

           

Stock-

 
   

Common Stock

   

Paid-in

   

Retained

   

holders’

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Equity

 
                                         

BALANCE AT MARCH 31, 2018

    1,983,553     $ 198,355     $ 2,712,283     $ 9,919,448     $ 12,830,086  
                                         

Net income

                      145,336       145,336  

Stock based compensation

                3,580             3,580  
                                         

BALANCE AT JUNE 30, 2018

    1,983,553     $ 198,355     $ 2,715,863     $ 10,064,784     $ 12,979,002  

 

 

For the six months ended June 30, 2019:  

                                   

Total

 
                   

Additional

           

Stock-

 
   

Common Stock

   

Paid-in

   

Retained

   

holders’

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Equity

 
                                         

BALANCE AT DECEMBER 31, 2018

    1,983,553     $ 198,355     $ 2,723,024     $ 10,189,651     $ 13,111,030  
                                         

Net loss

                      (570,742 )     (570,742 )
Common stock repurchased     (2,742 )     (274 )     (3,765 )     (16,930 )     (20,969 )

Stock based compensation

                3,840             3,840  
                                         

BALANCE AT JUNE 30, 2019

    1,980,811     $ 198,081     $ 2,723,099     $ 9,601,979     $ 12,523,159  

 

 

For the six months ended June 30, 2018:  

                                   

Total

 
                   

Additional

           

Stock-

 
   

Common Stock

   

Paid-in

   

Retained

   

holders’

 
   

Shares

   

Amount

   

Capital

   

Earnings

   

Equity

 
                                         

BALANCE AT DECEMBER 31, 2017

    1,983,553     $ 198,355     $ 2,709,390     $ 10,050,186     $ 12,957,931  
                                         

Net income

                      14,598       14,598  

Stock based compensation

                6,473             6,473  
                                         

BALANCE AT JUNE 30, 2018

    1,983,553     $ 198,355     $ 2,715,863     $ 10,064,784     $ 12,979,002  

 

 

 

IKONICS CORPORATION  

CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)  

 

   

Six Months Ended

 
   

June 30,

 
   

2019

   

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

               

Net (loss) income

  $ (570,742 )   $ 14,598  

Adjustments to reconcile net loss to net cash (used in) provided by operating activities:

               

Depreciation

    321,062       395,787  

Amortization

    24,308       18,615  

Stock based compensation

    3,840       6,473  

Net gain on sale and disposal of property and equipment

    (8,481 )      

Deferred income taxes

          12,839  

Loss on intangible asset abandonment

    71,600        

Changes in working capital components:

               

Trade receivables

    (8,230 )     321,347  

Inventories

    (465,661 )     (385,481 )

Prepaid expenses and other assets

    113,037       (16,184 )

Income tax receivable

    (182,451 )     (1,365 )

Accounts payable

    (114,104 )     508,323  

Accrued expenses

    46,897       2,962  

Net cash (used in) provided by operating activities

    (768,925 )     877,914  
                 

CASH FLOWS FROM INVESTING ACTIVITIES:

               

Purchases of property and equipment

    (230,570 )     (324,392 )

Proceeds from sales of property and equipment

    15,596        

Purchases of intangibles assets

    (6,322 )     (32,354 )

Purchases of short-term investments

    (3,185,000 )     (2,920,000 )

Proceeds on sale of short-term investments

    2,940,000       2,895,000  

Net cash used in investing activities

    (466,296 )     (381,746 )
                 

CASH FLOWS FROM FINANCING ACTIVITIES:

               

Payment on long-term debt

    (69,761 )     (70,040 )

Repurchase of common stock

    (20,969 )      

Net cash used in financing activities

    (90,730 )     (70,040 )
                 

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS

    (1,325,951 )     426,128  
                 

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD

    1,623,137       929,700  
                 

CASH AND CASH EQUIVALENTS AT END OF PERIOD

  $ 297,186     $ 1,355,828  
                 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

               

Cash paid for interest

  $ 39,812     $ 36,711  

Cash paid for income taxes, net

  $ 9,315     $ 7,652  

  

See notes to condensed financial statements.

  

 

IKONICS CORPORATION

  

NOTES TO CONDENSED FINANCIAL STATEMENTS  

  

(Unaudited)

  

 

1.

Basis of Presentation

  

The condensed balance sheet of IKONICS Corporation (the “Company”) as of June 30, 2019, and the related condensed statements of operations for the three and six months ended June 30, 2019 and 2018, the condensed statements of stockholders' equity for the three and six months ended June 30, 2019 and 2018, and condensed cash flows for the six months ended June 30, 2019 and 2018, 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 June 30, 2019, and the results of 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-K for the year ended December 31, 2018.

  

The results of operations for interim periods are not necessarily indicative of results that will be realized for the full fiscal year.

  

 

2.

Short-Term Investments

  

The Company’s $2.9 million of short-term investments at June 30, 2019 is comprised of 12 fully insured certificates of deposit with original maturities ranging from five to six months and interest rates ranging from 2.25% to 2.40%

  

 

3.

Inventories

  

The major components of inventories are as follows:

  

   

Jun 30, 2019

   

Dec 31, 2018

 
                 

Raw materials

  $ 1,794,771     $ 1,767,458  

Work-in-progress

    449,081       370,075  

Finished goods

    1,596,497       1,196,516  

Reduction to LIFO cost

    (1,328,100 )     (1,287,461 )
                 

Total Inventories

  $ 2,512,249     $ 2,046,588  

  

  

 

4.

Earnings Per Common Share (EPS)

  

Basic EPS is calculated using net income (loss) divided by the weighted average of common shares outstanding.  Diluted EPS is calculated similarly 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 potential dilutive common shares, such as those shares subject to options, had been issued.  The options disclosed in Note 5 have been excluded from the computation because of their antidilutive effect. 

 

Shares used in the calculation of diluted EPS are summarized below:

  

   

Three Months Ended

 
   

Jun 30, 2019

   

Jun 30, 2018

 
                 

Weighted average common shares outstanding

    1,982,275       1,983,553  

Dilutive effect of stock options

           

Weighted average common and common equivalent shares outstanding

    1,982,275       1,983,553  

  

  

 

    Six Months Ended  
   

Jun 30, 2019

   

Jun 30, 2018

 
                 

Weighted average common shares outstanding

    1,982,910       1,983,553  

Dilutive effect of stock options

           

Weighted average common and common equivalent shares outstanding

    1,982,910       1,983,553  

 

If the Company was in a net income position for the three and six months ended June 30, 2019, all 16,000 options outstanding with a weighted average exercise price of $12.17 would have remained excluded from the computation of common share equivalents as the options were anti-dilutive. 

 

For the three and six months ended June 30, 2018, options to purchase all 18,000 shares of common stock with a weighted average exercise price of $13.22 were outstanding but were excluded from the computation of common shares equivalent because they were anti-dilutive. 

 

 

IKONICS CORPORATION

  

NOTES TO CONDENSED FINANCIAL STATEMENTS  

  

(Unaudited)

  

 

5.

Stock-Based Compensation

  

The Company maintains a 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan replaced the 1995 Incentive Stock Option Plan (the "1995 Plan) upon its ratification by shareholders in April 2019.   The 1995 plan authorized the issuance of up to 442,750 shares of common stock.  Of those shares, 16,000 were subject to outstanding options as of June 30, 2019.  Awards granted under the 1995 Plan will remain in effect until they are exercised or expire according to their terms.    At the time the 2019 Plan was approved, there were 102,157 shares reserved for future grants under the 1995 Plan which will no longer be available for future grants.  

 

Under the terms of the 2019 Plan, the number of shares of common stock that may be the subject of awards and issued under the 2019 Plan was initially set at 102,157.  Subsequent to the approval of the 2019 Plan, 750 outstanding options granted under the 1995 were forfeited.  Under the terms of the 2019 Plan, those forfeited options are added back to the 2019 Plan reserve pool bringing the number of shares of common stock available for future awards under the 2019 Plan to 102,907.  As of June 30, 2019 no awards have been granted under the 2019 Plan.

 

The Company charged compensation cost of approximately $1,900 against income for the three months ended June 30, 2019 and approximately $3,600 for the three months ended June 30, 2018.  For the first six months of 2019, the Company charged compensation cost of approximately $3,800 and approximately $6,500 for the same period in 2018.  As of June 30, 2019, there was approximately $8,800 of unrecognized compensation cost related to unvested share-based compensation awards. 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, which increases additional paid in capital and reduces income taxes payable.

 

 No stock options were exercised during the six months ended June 30, 2019  or June 30, 2018.

 

There were no options granted during the six months ended June 30, 2019.  During the six months ended June 30, 2018, 2,750 options were granted.  The fair value of options granted during the six months ended June 30, 2018 was estimated using the Black Scholes option pricing model with the following assumptions:

 

   

2018

 

Dividend yield

    0  

Expected volatility

    40.0%  
Expected life of option (years)     5  

Risk-free interest rate

    2.8%  

Fair value of each option on grant date

    $3.38  

 

 

  

Stock option activity during the six months ended June 30, 2019 was as follows:

 

           

Weighted

 
           

Average

 
           

Exercise

 
   

Shares

   

Price

 

Outstanding at January 1, 2019

    18,000     $ 13.22  

Granted

           

Exercised

           

Expired and forfeited

    (2,000 )     21.69  

Outstanding at June 30, 2019

    16,000     $ 12.17  

Exercisable at June 30, 2019

    13,415     $ 12.83  

  

The aggregate intrinsic value of all options outstanding and exercisable at June 30, 2019 was $0.

  

 

IKONICS CORPORATION

  

NOTES TO CONDENSED FINANCIAL STATEMENTS  

  

(Unaudited)

 

 

6.

Segment Information

  

The Company’s reportable segments are strategic business units that offer different products and have varied customer bases.  There are four reportable segments:  Chromaline, IKONICS Imaging, Digital Texturing (DTX) and Advanced Material Solutions (AMS).  Chromaline sells screen printing film, emulsions, and inkjet receptive film primarily to distributors and some end users.  IKONICS Imaging sells photo resistant film, art supplies, glass, metal medium and related abrasive etching equipment to both end users and distributors.  AMS provides sound deadening and weight reduction technology to the aerospace industry along with products and services for etched composites, ceramics, glass and silicon wafers.  DTX includes products and customers related to patented and proprietary inkjet technology used for mold texturing and prototyping. Prior to 2019, the Company had one additional business segment called Export.  Export was primarily responsible for both Chromaline and IKONICS Imaging sales outside of the United States and Canada.  Chromaline products sold within the United States and Canada prior to 2019 were included in a segment called Domestic.  To better reflect how the Company manages these businesses, beginning in 2019, the Export segment was eliminated.  Sales previously recorded in the Export segment are now included in either the Chromaline or IKONICS Imaging segments, respectively.  Both the 2019 and 2018 financial information reflect the new reportable segments.   The accounting policies applied to determine the segment information are the same as those described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

  

Management evaluates the performance of each segment based on the components of divisional income (loss).  Assets and liabilities are not allocated to segments, except for trade receivables which are allocated based on the previous segmentation.  Financial information with respect to the reportable segments follows:

  

For the three months ended June 30, 2019:  

   

IKONICS

 
           

IKONICS

                                 
   

Chromaline

   

Imaging

   

DTX

   

AMS

   

Unalloc.

   

Total

 

Net sales

  $ 3,107,116     $ 958,128     $ 112,601     $ 418,566     $     $ 4,596,411  

Cost of goods sold

    2,280,224       501,006       51,547       335,205             3,167,982  

Gross profit

    826,892       457,122       61,054       83,361             1,428,429  

Selling general and administrative*

    467,091       248,050       34,761       88,362       500,597       1,338,861  

Research and development*

                            270,465       270,465  

Income (loss) from operations

  $ 359,801     $ 209,072     $ 26,293     $ (5,001 )   $ (771,062 )   $ (180,897 )

    

For the three months ended June 30, 2018:  

   

IKONICS

 
           

IKONICS

                                 
   

Chromaline

   

Imaging

   

DTX

   

AMS

   

Unalloc.

   

Total

 

Net sales

  $ 3,099,892     $ 968,933     $ 94,322     $ 471,030     $     $ 4,634,177  

Cost of goods sold

    2,037,949       509,613       33,612       390,688             2,971,862  

Gross profit

    1,061,943       459,320       60,710       80,342             1,662,315  

Selling general and administrative*

    441,393       244,633       32,596       97,477       492,864       1,308,963  

Research and development*

                            156,472       156,472  

Income (loss) from operations

  $ 620,550     $ 214,687     $ 28,114     $ (17,135 )   $ (649,336 )   $ 196,880  

 

For the six months ended June 30, 2019:  

   

IKONICS

 
           

IKONICS

                                 
   

Chromaline

   

Imaging

   

DTX

   

AMS

   

Unalloc.

   

Total

 

Net sales

  $ 5,136,457     $ 2,046,934     $ 205,361     $ 736,350     $     $ 8,125,102  

Cost of goods sold

    3,833,834       1,086,510       85,593       681,617             5,687,554  

Gross profit

    1,302,623       960,424       119,768       54,733             2,437,548  

Selling general and administrative*

    912,094       570,503       69,366       176,510       992,353       2,720,826  

Research and development*

                            449,307       449,307  

Income (loss) from operations

  $ 390,529     $ 389,921     $ 50,402     $ (121,777 )   $ (1,441,660 )   $ (732,585 )

 

For the six months ended June 30, 2018:  

   

IKONICS

 
           

IKONICS

                                 
   

Chromaline

   

Imaging

   

DTX

   

AMS

   

Unalloc.

   

Total

 

Net sales

  $ 5,440,702     $ 2,188,281     $ 182,988     $ 893,684     $     $ 8,705,655  

Cost of goods sold

    3,702,827       1,133,224       59,004       785,866             5,680,921  

Gross profit

    1,737,875       1,055,057       123,984       107,818             3,024,734  

Selling general and administrative*

    866,722       529,658       67,448       182,260       1,011,858       2,657,946  

Research and development*

                            310,548       310,548  

Income (loss) from operations

  $ 871,153     $ 525,399     $ 56,536     $ (74,442 )   $ (1,322,406 )   $ 56,240  

 


*The Company does not allocate all selling, general and administrative expenses or any research and development expenses to its operating segments for internal reporting.

 

 

IKONICS CORPORATION

  

NOTES TO CONDENSED FINANCIAL STATEMENTS  

  

(Unaudited)

  

Trade receivables by segment as of June 30, 2019 and December 31, 2018 were as follows:

  

   

Jun 30, 2019

   

Dec 31, 2018

 
                 

Chromaline

  $ 1,568,512     $ 1,550,411  

IKONICS Imaging

    323,741       360,551  

DTX

    26,559       15,692  

AMS

    298,714       331,708  

Unallocated

    5,919       (43,147 )
                 

Total

  $ 2,223,445     $ 2,215,215  

  

  

 

7.

Income Taxes

  

The Company recorded its interim provision for income taxes by applying the estimated annual effective tax rate to the year-to-date pre-tax income (loss) and adjusting for discrete tax items recorded in the period. Deferred income taxes result from temporary differences between the reporting of amounts for financial statement purposes and income tax purposes. These differences relate primarily to different methods used for income tax reporting purposes, including for depreciation, amortization, and vacation accruals, and deductions related to allowances for doubtful accounts receivable and inventory reserves. The provision for income taxes (benefits) included current federal and state income tax expense (benefit), as well as deferred federal and state income tax expense.

               

The effective tax rate for the three months ended June 30, 2019 is a benefit of 37.8%, compared to expense of 21.4% for the three months ended June 30, 2018. The primary driver of the increase in the effective tax rate is the quarterly loss as compared to income for the same period last year. The Company recorded an income tax benefit of $70,000 and an income tax expense of $40,000 for the three months ended June 30, 2019 and 2018, respectively.

 

The effective tax rate for the six months ended June 30, 2019 is a benefit of 23.3%, compared to expense of 56.7% for the six months ended June 30, 2018. The primary driver of the decrease in our effective tax rate is the year-to-date loss as compared to income for the same period last year. We recorded an income tax benefit of $173,000 and an income tax expense of $19,000 for the six months ended June 30, 2019 and 2018, respectively. 

 

The income tax provision for the 2019 and 2018 periods differ from the expected tax benefit due to unfavorable non-deductible items and generation of research and development credits.

 

The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority is more-likely-than-not to sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the condensed consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. As of June 30, 2019 the Company has no unrecognized tax benefits.

 

The Company is not currently under examination in any jurisdiction. In the event of any future tax assessments, the Company has elected to record the income taxes and any related interest and penalties as income tax expense on the statement of operations.  The federal Tax Cut and Jobs Act of 2017 (the “Tax Reform Act”) was enacted December 22, 2017.  Effective January 1, 2018, the Tax Reform Act reduced statutory corporate income tax rates from 35% to 21% in addition to other tax changes.  

 

 

 

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.  Statements that are not historical or current facts, including statements about beliefs and expectations, are forward-looking statements. These forward-looking statements include statements relating to our future plans and objectives and results. Such statements are subject to risks and uncertainties, including those discussed elsewhere in this report and under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018, as updated in our subsequent reports filed with the SEC, which 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.

  

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 second quarter of 2019 and first six months of 2019, as well as the same periods of 2018.  It should be read in connection with the Company’s condensed unaudited financial statements and notes thereto included in this Form 10-Q.

  

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:

  

Trade Receivables.  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 trade receivables 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-end spot rate in accordance with FASB ASC 830, Foreign Currency Matters .  The Company also maintains a provision for any customer related returns based upon historical experience of actual returns and any specifically identified product issues, refunds or credits.

  

Inventories.  Inventories are valued at the lower of cost or net realizable value using the last in, first out (LIFO) method.  The Company monitors its inventory for obsolescence and records reductions from cost when required.

  

Income Taxes.  Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences.  Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases.  Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.  Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.  Deferred tax assets and liabilities are presented as long-term on a net basis.  The Company follows the accounting standard on accounting for uncertainty in income taxes, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.  Under this guidance, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement.  The guidance on accounting for uncertainty in income taxes also addresses derecognition, classification, interest and penalties on income taxes, and accounting in interim periods.

 

Revenue recognition .  Revenue is measured based on consideration specified in the contract with a customer, adjusted for any applicable estimates of variable consideration and other factors affecting the transaction price, including noncash consideration, consideration paid or payable to customers and significant financing components.  While most of the Company’s revenue is contracted with customers through one-time purchase orders and short-term contracts, the Company does have long-term arrangements with certain customers.  Revenue from all customers is recognized when a performance obligation is satisfied by transferring control of a distinct good or service to a customer. 

  

Individually promised goods and services in a contract are considered a distinct performance obligation and accounted for separately if the customer can benefit from the individual good or service on its own or with other resources that are readily available to the customer and the good or service is separately identifiable from other promises in the arrangement.  When an arrangement includes multiple performance obligations, the consideration is allocated between the performance obligations in proportion to their estimated standalone selling price.  Costs related to products delivered are recognized in the period incurred, unless criteria for capitalization of costs are met. Costs of revenues consist primarily of direct labor, manufacturing overhead, materials and components.  The Company does not incur significant upfront costs to obtain a contract.  If costs to obtain a contract were to become material, the costs would be recorded as an asset and amortized to expense in a manner consistent with the related recognition of revenue.

  

 

The Company excludes governmental assessed and imposed taxes on revenue transactions that are invoiced to customers from revenue.  The Company includes freight billed to customers in revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.

  

The timing of revenue recognition, billings and cash collections results in accounts receivable on the balance sheet.

  

Performance obligations .  A performance obligation is a promise in a contract to transfer a distinct good or service to the customer.  A contract’s transaction price is allocated to each distinct performance obligation in proportion to its standalone selling price and recognized as revenue when, or as, the performance obligation is satisfied.  The Company’s various performance obligations and the timing or method of revenue recognition are discussed below: 

  

The Company sells its products to both distributors and end-users. Each unit of product delivered under a customer order represents a distinct and separate performance obligation as the customer can benefit from each unit on its own or with other resources that are readily available to the customer and each unit of product is separately identifiable from other products in the arrangement.

  

The transaction price for the Company’s products is the invoiced amount.  The Company does not have variable consideration in the form of refunds, credits, rebates, price concessions, pricing incentives or other items impacting transaction price.  The purchase order pricing in arrangements with customers is deemed to approximate standalone selling price; therefore, the Company does not need to allocate proceeds on a relative standalone selling price allocation between performance obligations.  The Company applies the practical expedient in paragraph 606-10-50-14 and does not disclose information about remaining performance obligations that have original expected durations of one year or less. There are no material obligations that extend beyond one year. 

  

Revenue is recognized when transfer of control occurs as defined by the terms in the customer agreement. The Company immediately recognizes incidental items that are immaterial in the context of the contract.  The Company has also applied the practical expedient in paragraph 606-10-32-18 regarding the adjustment of the promised amount of consideration for the effects of a significant financing component when the customer pays for that good or service within one year or less, as the Company does not have any significant financing components in its customer arrangements as payment is received at or shortly after the point of sale, generally thirty to ninety days.

  

The Company estimates returns based on an analysis of historical experience if the right to return products is granted to its customers.  The Company does not record a return asset as non-conforming products are generally not returned.  The Company’s return policy does not vary by geography.  The customer has no rotation or price protection rights, and the Company is not under a warranty obligation.

  

Trade receivables.  Trade receivables include amounts invoiced and currently due from customers. The amounts due are stated at their net estimated realizable value.  The Company records an allowance for doubtful accounts to provide for the estimated amount of receivables that will not be collected. The allowance is based on a review of all outstanding amounts on an on-going basis. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and considers a customer’s financial condition, credit history, and current economic conditions. Trade receivables are written off when deemed uncollectible. Recoveries of trade receivables previously written off are recorded when received. Accounts are considered past due if payment is not received according to agreed-upon terms.

  

Sales commissions.  Sales commissions paid to sales representatives are eligible for capitalization as they are incremental costs that would not have been incurred without entering into a specific sales arrangement and are recoverable through the expected margin on the transaction.  The Company has elected to apply the practical expedient provided by ASC 340-40-25-4 and recognize the incremental costs of obtaining contracts as an expense when incurred, as the amortization period of the assets that would have otherwise been recognized is one year or less.  The Company records these costs in selling, general, and administrative expense.

  

Product warranty.   The Company offers warranties on various products and services. These warranties are assurance type warranties that are not sold on a standalone basis; therefore, they are not considered distinct performance obligations.  The Company estimates the costs that may be incurred under its warranties and records a liability in the amount of such costs at the time the revenue is recognized for the product sale. 

  

International revenue.  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 29% of total sales during the first six months of 2019 compared to 28% for the first six months of 2018.

 

Results of Operations  

  

Quarter Ended June 30, 2019 Compared to Quarter Ended June 30, 2018  

  

Sales.  The Company’s 2019 second quarter sales of $4.6 million were $38,000, or 0.8%, lower than the 2018 second quarter sales of $4.6 million.  AMS second quarter 2019 sales of $419,000 decreased by 11.1% from second quarter 2018 sales of $471,000 due to lower sales to its two largest customers.  2019 second quarter IKONICS Imaging sales of $958,000 were $11,000, or 1.1%, lower than the sales for the same period in 2018 as equipment sales continue to lag behind 2018.  Partially offsetting these sales decreases, DTX had improved film sales, increasing from $94,000 in the second quarter of 2018 to $113,000 in the second quarter of 2019, a 19.4% increase.  Chromaline sales for the second quarter of 2019 were similar to the same period last year at $3.1 million.    

 

 

Gross Profit .  Gross profit was $1.4 million, or 31.1% of sales, in the second quarter of 2019 compared to $1.7 million, or 35.9% of sales, for the same period in 2018.  The Chromaline gross margin decrease from 34.3% in the second quarter of 2018 to 26.6% for the second quarter of 2019 was due to a less favorable sales mix as an increase in lower margin sales into Asia were offset by a decrease in higher margin domestic sales.  An increase in certain raw material pricing also unfavorably impacted the gross margin for some Chromaline emulsion products.  The DTX gross margin for the second quarter of 2019 was also lower at 54.2% compared to 64.4% for the same period in 2018.  Despite lower sales volumes, the AMS gross margin improved to 19.9% in the second quarter of 2019, up from 17.1% in the second quarter of 2018 as a result of lower costs in 2019.  The IKONICS Imaging 2019 second quarter margin of 47.7% was similar to the second quarter 2018 gross margin of 47.4%

 

Selling, General and Administrative Expenses .  Selling, general and administrative expenses were $1.3 million, or 29.1% of sales, in the second quarter of 2019 compared to $1.3 million, or 28.2% of sales, for the same period in 2018.  Selling, general and administrative expenses for the second quarter of 2019 increased primarily due to higher medical insurance expenses.

  

Research and Development Expenses .  Research and development expenses during the second quarter of 2019 were $270,000, or 5.9% of sales, versus $156,000, or 3.4%, of sales for the same period in 2018.  The 2019 second quarter increase is related to additional research and development staffing expenses.  Additionally, legal and patent expenses in the second quarter of 2019 increased due to the write off of patent application costs of $72,000 that were previously recorded as an asset, as the Company determined that it would no longer continue to pursue those patent applications.

  

Interest Expense.  Interest expense for the second quarter of 2019 was $23,000 compared to interest expense of $24,000 during the second quarter of 2018.  

  

Income Taxes.  For the second quarter of 2019, the Company realized an income tax benefit of $70,000, or an effective rate of 37.8%, compared to expense of $40,000, or an effective tax of 21.4% for the three months ended June 30, 2018.  The primary driver of the change in the Company's effective tax rate is the quarterly loss as compared to income for the same period last year.  The income tax provision for the 2019 and 2018 periods differ from the expected tax benefit due to unfavorable non-deductible items and generation of research and development tax credits.

 

 

Six Months Ended June 30, 2019 Compared to Six Months Ended June 30, 2018  

Sales.   The Company’s 2019 first half sales of $8.1 million were 6.7% lower than the 2018 first half sales of $8.7 million.  Chromaline sales for the first six months of 2019 decreased by $304,000, or 5.6%, compared to the same period last year.  Chromaline 2019 first half sales were adversely affected by cold weather shipping constraints in the first quarter since its emulsion products are not freeze-thaw stable.  AMS sales for the first six months of 2019 decreased from $894,000 during the same period in 2018 to $736,000, a 17.6% decrease resulting from a decrease in sales to its two largest customers.  IKONICS Imaging sales for the first six months of 2019 were $2.0 million, $141,000, or 6.5%, lower than the sales for the first half of 2018 mainly due to lower equipment and film sales.    Partially offsetting these sales decreases, DTX sales increased from $183,000 in the first half of 2018 to $205,000 in the first half of 2019, a 12.2% increase resulting from increased film sales.  

Gross Profit .  Gross profit was $2.4 million, or 30.0% of sales, in the first half of 2019 compared to $3.0 million, or 34.7% of sales, for the same period in 2018. The Chromaline gross margin decreased from 31.9% in the first half of 2018 to 25.4% for the first six months of 2019 due to a decrease in higher margins sales in the United States which were partially offset by an increase in lower margin sales into Asia.  The Chromaline gross margin in the first half of 2019 was also unfavorably impacted by an increase in certain raw material pricing for some emulsion products along with higher manufacturing costs.  Lower sales volumes negatively impacted the 2019 first half AMS gross margin which decreased from 12.1% in first half of 2018 to 7.4% for the first six months of 2019.  A large portion of the AMS cost structure is fixed, causing sales volumes to have a significant impact on its gross margin.  The 2019 AMS margin decrease due to lower sales volumes was partially mitigated by overall lower costs in 2019.  For the first six months of 2019, the IKONICS Imaging gross margin was 46.9% compared to 48.2% for the same period in 2018 while the DTX gross margin for the first six months of 2019 was 58.3% versus 67.8% for the same period last year.

Selling, General and Administrative Expenses .  Selling, general and administrative expenses were $2.7 million, or 33.5% of sales, in the first half of 2019 compared to $2.7 million, or 30.5% of sales, for the same period in 2018.  Selling, general and administrative expenses for the first six months of 2019 increased primarily due to higher health insurance costs.   Additionally, the increase in the percentage of expense as it relates to sales increased in 2019 versus 2018 for the first six months due to lower sales in 2019.

Research and Development Expenses .  Research and development expenses during the first six months of 2019 were $449,000, or 5.5% of sales, versus $311,000, or 3.6%, of sales for the same period in 2018.  The increase for the first half of 2019 is related to additional research and development staffing expenses.  Additionally, legal and patent expenses in the first half of 2019 increased due to the write off of patent application costs that were previously recorded as an asset as the Company determined that it would no longer continue to pursue those patent applications.

 

Interest Expense.  Interest expense for the first six months of 2019 was $45,000 compared to interest expense of $44,000 during the first six months of 2018.  

 

Income Taxes.  
For the first six months of 2019, the Company realized an income tax benefit of $173,000, or an effective rate of 23.3%, compared to expense of $19,000, or an effective tax of 56.7% for the six months ended June 30, 2018.  The primary driver of the decrease in our effective tax rate is the year-to-date loss as compared to income for the same period last year.  The income tax provision for the 2019 and 2018 periods differ from the expected tax benefit due to unfavorable non-deductible items and generation of research and development tax credits.
 

 

Liquidity and Capital Resources  

  

Outside of the building expansion, for which $3.4 million in financing was obtained during 2016, 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 and cash equivalents were $297,000 and $1.6 million at June 30, 2019 and December 31, 2018, respectively.  Operating activities used $769,000 in cash during the first six months of 2019 compared to providing $878,000 of cash used in operating activities during the same period in 2018.  Cash provided by (used in) operating activities is primarily the result of net income (losses) adjusted for non-cash depreciation, amortization, and certain changes in working capital components discussed in the following paragraph.

 

During the first six months of 2019, trade receivables increased $8,000.  The Company believes that the quality of its receivables is high and that strong internal controls are in place to maintain proper collections.  Inventories increased by $466,000 due to higher finished goods and raw material levels as the Company is ramping up inventory levels to meet demand for the remainder of 2019 in addition to lower than expected sales for the first half of 2019.  Prepaid expenses and other assets decreased by $113,000, reflecting a decrease in a receivable related to the reimbursement of 2018 medical insurance costs that the Company received from its stop-loss insurance carrier.   Accounts payable decreased by $114,000 due to the timing of vendor payments.  Accrued expenses increased by $47,000, reflecting the timing of compensation payments while income taxes receivable increased by $182,000 due to the recognition of the 2019 first six month tax benefit.

 

During the first six months of 2018, the timing of collections resulted in a $321,000 decrease in trade receivables.  The Company believes that the quality of its receivables is high and that strong internal controls are in place to maintain proper collections.  Inventories increased by $385,000 due to higher raw material and finished goods levels.  Prepaid expenses and other assets increased by $16,000, reflecting prepayments on inventory items which were not received by the Company until the third quarter of 2018.  Accounts payable increased by $508,000 due to the timing of vendor payments for large raw materials purchases.  Accrued expenses increased by $3,000, reflecting the timing of compensation payments while income taxes receivable increased by $1,000 due to the timing of estimated tax payments compared to the calculated 2018 tax liability.

 

During the first six months of 2019, cash used in investing activities was $466,000.  Twelve certificates of deposits totaling $2.9 million matured during the first six months of 2019.  The Company purchased thirteen certificates of deposits totaling $3.2 million.  The Company’s purchases of property and equipment of $231,000 were mainly for improvements to production and process capabilities and to replace two vehicles.  The Company received $16,000 in proceeds from the sale of two vehicles and equipment.  Also, during the first six months of 2019, the Company incurred $6,000 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 2018, cash used in investing activities was $382,000.  Twelve certificates of deposits totaling $2.9 million matured during the first six months of 2018.  The Company purchased twelve certificates of deposits totaling $2.9 million.  The Company’s purchases of property and equipment of $324,000 were mainly for building upgrades and improvements to production and process capabilities. Also, during the first six months of 2018, the Company incurred $32,000 in patent application costs that the Company records as an asset and amortizes upon successful completion of the application process.

  

Related to the Company’s loan, the Company made principal payments of $70,000 during the first six months of 2019 and 2018.  During the first six months of 2019, Company repurchased 2,742 shares of its own stock for $21,000. 

    

A bank line of credit providing for borrowings of up to $2,050,000 expired on June 30, 2019.  The line of credit was renewed and will expire on August 30, 2021.  The new line of credit is collateralized by the Company’s assets and bears interest at 1.8 percentage points over the 30-day LIBOR rate.  The Company did not utilize this line of credit during the first six months of 2019 or 2018, and there were no borrowings outstanding as of June 30, 2019 or December 31, 2018.  There are no financial covenants related to the line of credit. 

  

The Company believes that current financial resources, its line of credit, cash generated from operations and secured through debt financing, and short-term investments, along with the Company’s capacity for additional debt and/or equity financing will be sufficient to fund current and anticipated business operations.  The Company also believes that it is unlikely that a decrease in demand for the Company’s products would impair the Company’s ability to fund operations given its excess cash and available line of credit which it expects to renew once the existing line of credit expires.

  

Capital Expenditures  

  

Through the first six months of 2019, the Company incurred $231,000 of capital expenditures mainly for improvements to production and process capabilities and to replace two vehicles.

  

The Company expects additional capital expenditures in 2019 of approximately $346,000 including improvements to the Company's coating capabilities, process improvements and information technology upgrades.  Currently, the Company expects to fund its capital expenditures with existing cash and 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 29% of total sales during the first six months of 2019 compared to 28% of total sales during the first six months of 2018.  The fluctuations of certain foreign currencies have not significantly impacted the Company’s operations, as the Company’s foreign sales are not concentrated in any one region of the world, although a strong U.S. dollar does make the Company’s products less competitive internationally.  The Company believes its vulnerability due to uncertainties in 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.  The Company has not implemented an economic hedging strategy to reduce the risk of foreign currency translation or transaction exposures, as management does not believe this to be a significant risk based on the scope and geographic diversity of the Company’s foreign operations as of June 30, 2019.  Furthermore, the impact of foreign exchange on the Company’s balance sheet and operating results was not material in either 2019 or 2018.

  

Future Outlook  

  

IKONICS has spent an average of approximately 4.0% of annual sales in research and development and has made capital expenditures related to new products and programs.  The Company plans to maintain its efforts in these areas to expedite internal product development as well as to form technological alliances with outside entities to commercialize new product opportunities.

  

Despite lower sales for the first half of 2019, the Company continues to make progress on its AMS business.  The Company has three long-term sales agreements in place for its technology with major aerospace companies.  

  

The Company is also continuing to pursue DTX-related business initiatives.  In addition to making efforts towards growing the inkjet technology business, the Company offers a range of products for creating texture surfaces and has introduced a fluid for use in prototyping.  The Company is currently working on production improvements as part of its joint development agreement with AKK, a German manufacturer of high quality printers, to enhance its customer offerings.  The Company has been awarded European, Japanese, and United States patents on its DTX technologies.  The Company has also modified its DTX technology to facilitate entry into the market for prototyping. 

 

Both the Chromaline and IKONICS Imaging units remain profitable in mature markets. Although these business units require aggressive strategies to grow market share, both are developing new products and business relationships that the Company believes will contribute to growth.  In October 2017, the Company introduced SubTHAT!™, a patent-pending product for the dye-sublimation market.  Early in 2019 the Company introduced its new IKONART™ product to positive reviews and is generating sales.  IKONART™ provides a new way to make custom reusable stencils for the creative arts markets.  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. However, the strong U.S. dollar has made this challenging.

  

Other future activities undertaken to expand the Company’s business may include strategic partnerships, acquisitions, building improvements, equipment additions, new product development and marketing opportunities.

  

  

Recent Accounting Pronouncements  

 

During February 2016, the FASB issued ASU No. 2016-02, Leases. ASU No. 2016-02 was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined). ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with earlier application permitted. Upon adoption, the lessee will apply the new standard retrospectively to all periods presented or retrospectively using a cumulative effect adjustment in the year of adoption. The Company adopted ASU No. 2016-02 as of January 1, 2019.  The adoption of this standard did not have a material impact on its financial statements.

 

  

Off Balance Sheet Arrangements  

  

The Company has no off-balance sheet arrangements.  

  

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 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 were no changes to the Company's internal control over financial reporting that occurred during the first six months of 2019 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 

 

 

PART II. OTHER INFORMATION

  

ITEM 1.

Legal Proceedings

  

None

  

ITEM 1A.

Risk Factors

  

Not applicable

  

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

The Company repurchased shares as indicated in the table below during the second quarter of 2019 (1)

 

                   

(c) Total Number of

         
                   

Shares Purchased

         
                   

as

   

(d) Maximum Number

 
   

(a) Total Number

   

(b) Average

   

Part of Publicly

   

of Shares that May

 
   

of

   

Price

   

Announced Plans

   

Yet Be Purchased Under

 
   

Shares Purchased

   

Paid per Share

   

or Programs

   

The Plans or Programs

 

April 1, 2019 through April 30, 2019…………

        $              

May 1, 2019 through May 31, 2019…………

    2,189     $ 7.62       2,189       97,811  

June 1, 2019 through June 30, 2019………..

    553     $ 7.76       553       97,258  

 

 

(1) In 2017, the Company’s board of directors had authorized the repurchase of 100,000 shares of common stock.   A total of 33,500 shares have been repurchased under this program in prior years.  On April 29, 2019 the Company' board of directors approved an additional repurchase authorization of 33,500 shares of the Company's common stock bringing the total repurchase authorization to 100,000 shares of common.  A total of 36,242 shares have been repurchased under this program including the 2,742 share repurchased during the second quarter of 2019.  The plan allows for an additional 97,258 share to be repurchased.  The share repurchase authorizations do not have an expiration date.

 

 

  

ITEM 3.

Defaults upon Senior Securities

  

Not applicable

  

ITEM 4.

Mine Safety Disclosures

  

Not applicable

  

ITEM 5.

Other Information

  

None

  

ITEM 6.

Exhibits

  

The following exhibits are filed as part of this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019:

  

Exhibit

 

Description

 

3.1

 

Restated Articles of Incorporation of Company, as amended. (Incorporated by reference to the like numbered Exhibit to the Company’s Registration Statement on Form 10-SB filed with the Commission on April 7, 1999 (File No. 000-25727).)

 

3.2

 

Amended and Restated By-Laws of the Company, as amended. (Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 30, 2018 (File No. 000-25757).)

 

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

 

101

 

Interactive Data Files Pursuant to Rule 405 of Regulation S-T

  

 

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: August 13, 2019

By:

/s/ Jon Gerlach

 

 

Jon Gerlach,

 

 

Chief Financial Officer, and

 

 

Vice President of Finance

  

18

  

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