U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended June 30, 2003
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
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IKONICS CORPORATION
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(Exact name of small business issuer as specified in its charter)
Minnesota 41-0730027
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
4832 Grand Avenue
Duluth, Minnesota 55807
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(Address of principal executive offices) (Zip code)
(218) 628-2217
-------------------------
Issuer's telephone number
Not Applicable
--------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes [X] No [ ]
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 - 1,248,127 shares outstanding as of July 18, 2003.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
1
IKONICS CORPORATION
QUARTERLY REPORT ON FORM 10-QSB
PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets
as of June 30, 2003 (unaudited) and December 31, 2002 3
Statements of Operations
for the Three Months and Six Months Ended June 30, 2003
and 2002 (unaudited) 4
Statements of Cash Flows
for the Six Months Ended June 30, 2003 and 2002 (unaudited) 5
Notes to Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9
Item 3. Controls and Procedures 13
PART II. OTHER INFORMATION 14
SIGNATURES 16
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IKONICS CORPORATION
BALANCE SHEETS
-------------------------------------------------------------------------------
JUNE 30 DECEMBER 31
2003 2002
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 821,853 $ 384,107
Marketable securities 251,531 246,094
Trade receivables, less allowance for doubtful accounts of
$150,000 and $100,000, respectively 2,063,497 1,933,769
Inventories 1,924,240 1,771,905
Prepaid expenses and other assets 66,259 89,937
Income tax refund receivable - 122,469
Deferred taxes 82,000 82,000
------------ -----------
Total current assets 5,209,380 4,630,281
PROPERTY, PLANT, AND EQUIPMENT, at cost:
Land, building and leasehold improvements 1,370,243 1,355,588
Machinery and equipment 2,281,818 2,231,478
Office equipment 1,171,033 1,144,564
Vehicles 167,783 167,102
------------ -----------
4,990,877 4,898,732
Less accumulated depreciation 3,837,980 3,694,105
------------ -----------
1,152,897 1,204,627
PATENTS, net of amortization of $46,306 and $41,800 respectively 113,530 90,917
NONCOMPETE AGREEMENT, net of amortization of $20,000 and $16,666
respectively 80,000 83,334
LICENSE AGREEMENTS, net of amortization of $6,562 and $2,500
respectively 93,438 97,500
OTHER ASSETS 112,834 187,500
DEFERRED TAXES 118,000 118,000
------------ -----------
$ 6,880,079 $ 6,412,159
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 605,674 $ 317,229
Accrued compensation 186,539 204,624
Accrued corporate income taxes 4,614 -
Other accrued expenses 30,430 23,643
------------ -----------
Total current liabilities 827,257 545,496
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 1,248,127 shares in 2003 and 2002 124,813 124,813
Additional paid-in capital 1,269,489 1,269,489
Retained earnings 4,670,052 4,483,895
Accumulated other comprehensive income (loss) (11,532) (11,534)
------------ -----------
Total stockholders' equity 6,052,822 5,866,663
------------ -----------
$ 6,880,079 $ 6,412,159
============ ===========
See notes to financial statements.
3
IKONICS CORPORATION
STATEMENTS OF OPERATIONS (UNAUDITED)
-------------------------------------------------------------------------------
THREE MONTHS SIX MONTHS
ENDED JUNE 30 ENDED JUNE 30
------------------------------ -------------------------------
2003 2002 2003 2002
SALES $3,161,731 $ 3,164,255 $5,992,378 $5,946,627
COSTS AND EXPENSES:
Cost of goods sold 1,689,079 1,771,311 3,314,937 3,394,998
Selling, general, and administrative 1,050,256 1,015,296 2,053,951 1,965,857
Research and development 174,898 187,263 343,222 366,585
---------- ----------- ------------- --------------
2,914,233 2,973,870 5,712,110 5,727,440
---------- ----------- ------------- --------------
INCOME FROM OPERATIONS 247,498 190,385 280,268 219,187
INTEREST EXPENSE - (170) - (170)
LOSS ON INVESTMENT (74,666) - (74,666) -
INTEREST INCOME 2,778 9,997 15,666 18,346
---------- ----------- ------------- --------------
INCOME BEFORE INCOME TAXES 175,610 200,212 221,268 237,363
FEDERAL AND STATE INCOME
TAX EXPENSE 19,131 68,971 35,111 83,075
---------- ----------- ------------- --------------
NET INCOME $ 156,479 $ 131,241 $ 186,157 $ 154,288
========== =========== ============= ==============
EARNINGS PER SHARE:
Basic $ 0.13 $ 0.11 $ 0.15 $ 0.12
========== =========== ============= =============
Diluted $ 0.13 $ 0.11 $ 0.15 $ 0.12
========== =========== ============= =============
WEIGHTED AVERAGE COMMON SHARES
ASSUMED OUTSTANDING:
Basic 1,248,127 1,248,127 1,248,127 1,256,002
========== ========== ============= ==============
Diluted 1,254,299 1,248,127 1,253,071 1,256,002
========== ========== ============= ==============
See notes to financial statements.
4
IKONICS CORPORATION
STATEMENTS OF CASH FLOWS (UNAUDITED)
-------------------------------------------------------------------------------
SIX MONTHS
ENDED JUNE 30
-----------------------------
2003 2002
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 186,157 $ 154,288
Adjustments to reconcile net income to net
cash provided by/(used in) operating
activities:
Depreciation 143,875 151,445
Amortization 11,902 8,360
(Gain) on sale of property and equipment (5,500) (19,632)
Loss on investment 74,666 -
Provision for doubtful accounts 50,000 22,600
Changes in working capital components:
Decrease (increase) in:
Trade receivables (179,728) (649,013)
Inventories (152,335) (132,304)
Prepaid expenses and other assets 23,678 (114,993)
(Decrease) increase in:
Accounts payable 288,445 124,559
Accrued expenses (11,298) 3,126
Income taxes payable 127,083 188,975
--------- ---------
Net cash provided by/(used in) 556,945 (262,587)
operating activities
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of property and equipment (92,145) (94,169)
Proceeds on sale of plant and equipment 5,500 -
Purchase of intangibles (27,119) (50,000)
Purchases of marketable securities (4,235) (4,176)
--------- ---------
Net cash (used in) (119,199) (148,345)
investing activities
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from revolving credit agreement - 150,000
Re-purchase of company stock - (72,492)
--------- ---------
- 77,508
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS 437,746 (333,426)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 384,107 543,679
--------- ---------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 821,853 $ 210,253
========= =========
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION:
Income taxes paid (refunded) $ 21,480 $(105,900)
========= =========
See notes to financial statements.
5
IKONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Notes to Financial Statements
The balance sheet of IKONICS Corporation (the "Company") as of June 30,
2003, and the related statements of operations for the three and six
months ended June 30, 2003 and 2002, and cash flows for the six months
ended June 30, 2003 and 2002, 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,
2003, 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 Form 10-KSB for the year ended December 31, 2002.
The results of operations for interim periods are not necessarily
indicative of results that will be realized for the full fiscal year.
2. Inventory
The major components of inventory at June 30, 2003 and December 31,
2002 are as follows:
Jun 30, 2003 Dec 31, 2002
------------ ------------
Raw materials $1,079,196 $ 735,006
Work-in-progress 269,753 257,813
Finished goods 814,547 1,003,342
Reduction to LIFO cost (239,256) (224,256)
---------- ----------
Total Inventory $1,924,240 $1,771,905
========== ==========
3. Stockholders' Equity
Six Months Ended
June 30, 2003
----------------
Total Stockholders' Equity-December 31, 2002 $ 5,866,663
Net income $ 186,157
Unrealized gain on available-
for-sale investments 2
----------
Comprehensive income 186,159
-----------
Total Stockholders' Equity-June 30, 2003 $ 6,052,822
===========
4. Earnings Per Common Share (EPS)
Basic EPS is calculated using net income divided by the weighted
average of common shares outstanding during the quarter. Diluted EPS
is similar to Basic except that the weighted average of common shares
6
outstanding is increased to include the number of additional common
shares that would have been outstanding if the dilutive potential
common shares, such as options, had been issued.
Shares used in the calculation of diluted EPS are summarized below:
Three Months Ended
Jun 30, 2003 June 30, 2002
------------ -------------
Weighted average common shares outstanding 1,248,127 1,248,127
Dilutive effect of stock options 6,172 0
------------ ------------
Weighted average common and common equivalent shares outstanding 1,254,299 1,248,127
============ ============
Six Months Ended
Jun 30, 2003 June 30, 2002
------------ ------------
Weighted average common shares outstanding 1,248,127 1,256,002
Dilutive effect of stock options 4,945 0
------------ ------------
Weighted average common and common equivalent shares outstanding 1,253,071 1,256,002
============ ============
Options to purchase 161,608 and 150,029 shares of common stock were
outstanding during the quarter ended June 30, 2003 and 2002,
respectively. The options to purchase were excluded from the
computation of common stock equivalents because they were anti-dilutive
for the quarter ended June 30, 2002.
5. Employee Stock Plans
The Company has a stock-based compensation plan. The Company accounts
for those plans under the recognition and measurement principles of APB
Opinion No. 25, Accounting for Stock Issued to Employees, and related
interpretations. Accordingly, no stock-based employee compensation cost
has been recognized, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock
on the date of grant. The following table illustrates the effect on net
income and earnings per share had compensation cost for all of the
stock-based compensation plans been determined based on the grant date
fair values of awards (the method described in FASB Statement No. 123,
Accounting for Stock-Based Compensation):
Six Months Ended Three Months Ended
Jun 30, Jun 30, Jun 30, Jun 30,
2003 2002 2003 2002
--------- --------- --------- ---------
Net income:
As reported $ 186,157 $ 154,288 $ 156,479 $ 131,241
Deduct total stock-based employee compensation
expense determined under fair value based
method for all awards, net of tax 32,939 55,182 18,560 34,655
--------- --------- --------- ---------
Pro forma $ 153,218 $ 99,106 $ 137,919 $ 96,586
========= ========= ========= =========
Basic earnings per share:
As reported $ 0.15 $ 0.12 $ 0.13 $ 0.11
Pro forma $ 0.12 $ 0.08 $ 0.11 $ 0.08
Diluted earnings per share:
As reported $ 0.15 $ 0.12 $ 0.13 $ 0.11
Pro forma $ 0.12 $ 0.08 $ 0.11 $ 0.08
7
6. Intangible Assets
Intangible assets consist primarily of patents, licenses and covenants
not to compete arising from business combinations. Intangible assets
are amortized on a straight-line basis over their estimated useful
lives or terms of their agreement. Estimated amortization expense for
each of the next five years is $24,000 annually. In connection with
license agreements, the Company has agreed to pay royalties ranging
from 3% to 5% on the future sales of products subject to the
agreements.
7. New Accounting Standards
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities" (FAS 149). FAS
149 amends and clarifies financial accounting and reporting for
derivative instruments including certain derivative instruments
embedded in other contracts and for hedging activities under FAS 133.
FAS 149 is effective for contracts entered into or modified after June
30, 2003 and for hedging relationships designated after June 30, 2003.
The adoption of FAS 149 is not expected to have a material impact on
our financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity" (FAS 150). FAS 150 clarifies the accounting for certain
financial instruments and characteristics of both liabilities and
equity and requires that those instruments be classified as liabilities
in statements of financial position. Previously, many of these
financial instruments were classified as equity. FAS 150 is effective
for all financial instruments entered into or modified after May 31,
2003 and is otherwise effective at the beginning of the first interim
period after June 15, 2003. We do not expect the adoption of FAS 150 to
have a material effect on our financial statements.
8
IKONICS CORPORATION
The information presented below in Management's Discussion and Analysis
of Financial Condition and Results of Operations contains forward-looking
statements within the meaning of the safe harbor provisions of Section 21E of
the Securities Exchange Act of 1934, as amended. Such statements are subject to
risks and uncertainties, including those discussed under "Factors that May
Affect Future Results" below, that could cause actual results to differ
materially from those projected. Because actual results may differ, readers are
cautioned not to place undue reliance on these forward-looking statements.
Certain forward-looking statements are indicated by italics.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following management's discussion and analysis focuses on those
factors that had a material effect on the Company's financial results of
operations during the second quarter of 2003, the six months ended June 30, 2003
and the same periods of 2002. It should be read in connection with the Company's
unaudited financial statements and notes thereto included in this Form 10-QSB.
FACTORS THAT MAY AFFECT FUTURE RESULTS
Certain statements made in this Quarterly Report on Form 10-QSB,
including those summarized below, are forward-looking statements within the
meaning of the safe harbor provisions of Section 21E of the Securities Exchange
Act of 1934, as amended, that involve risks and uncertainties, and actual
results may differ. Factors that could cause actual results to differ include
those identified below.
o The Company's belief that the quality of its receivables is high
and that strong internal controls are in place to maintain proper
collections--This belief may be impacted by domestic economic
conditions, by economic, political, regulatory or social
conditions in foreign markets, or by the failure of the Company to
properly implement or maintain internal controls.
o The Company's expectation that capital expenditures during the
remainder of 2003 will be funded with cash generated from
operating activities--This expectation may be affected by changes
in the Company's anticipated capital expenditure requirements
resulting from unforeseen required maintenance or repairs. The
funding of planned or unforeseen expenditures may also be affected
by changes in anticipated operating results resulting from
decreased sales or increased operating expenses.
o The belief that the Company's current financial resources, 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 and capital expenditures. The
belief that the Company's low debt levels and available line of
credit make it unlikely that a decrease in product demand would
impair the Company's ability to fund operations--Changes in
anticipated operating results, credit availability, equity market
conditions or the Company's debt levels may further enhance or
inhibit the Company's ability to maintain or raise appropriate
levels of cash.
o The Company's belief that its vulnerability to foreign currency
fluctuations and general economic conditions in foreign countries
is not significant--This belief may be impacted by economic,
political and social conditions in foreign markets and changes in
regulatory and competitive conditions or a change in the amount or
geographic focus of the Company's international sales.
o The Company's plans to continue to invest in research and
development efforts, expedite internal product development and
invest in technological alliances, as well as the expected focus
and results of such investments--These plans and expectations may
be impacted by general market conditions, unanticipated changes in
expenses or sales, delays in the development of new products,
technological
9
advances, the ability to find suitable and willing technology
partners or other changes in competitive or market conditions.
o The Company's efforts to grow its international business--These
efforts may be impacted by economic, political and social
conditions in current and anticipated foreign markets, regulatory
conditions in such markets, unanticipated changes in expenses or
sales, changes in competitive conditions or other barriers to
entry or expansion.
o The Company's belief as to future activities that may be
undertaken to expand the Company's business--Actual activities
undertaken may be impacted by general market conditions,
competitive conditions in the Company's industry, unanticipated
changes in the Company's financial position or the inability to
identify attractive acquisition targets or other business
opportunities.
CRITICAL ACCOUNTING POLICIES
The Company prepares the financial statements in conformity with
accounting principles generally accepted in the United States of America.
Therefore, the Company is required to make certain estimates, judgments and
assumptions that the Company believes are reasonable based upon the information
available. These estimates and assumptions affect the reported amounts of assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the periods presented. The accounting policies,
which IKONICS believes are the most critical to aid in fully understanding and
evaluating its reported financial results, include the following:
Accounts Receivable. Trade receivables are carried at original invoice
amount less an estimate made for doubtful receivables based on a review of all
outstanding amounts on a monthly basis. Management determines the allowance for
doubtful accounts by regularly evaluating individual customer receivables and
considering 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.
A trade receivable is considered to be past due if any portion of the
receivable balance is outstanding for more than 90 days. While 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 60-90 days for foreign customers. The
concentration of credit risk is not significant except for a receivable from one
of the Company's larger customers, which accounted for 9.5% of total receivables
as of June 30, 2003.
Inventory. Inventories are valued at the lower of cost or market value
using the last in, first out (LIFO) method. The Company monitors its inventory
for obsolescence and records reductions in cost when required.
Deferred Tax Assets. At June 30, 2003, the Company had approximately
$200,000 of net deferred tax assets. The deferred tax assets result primarily
due to timing differences in intangible assets and property and equipment. The
Company has recorded a $50,000 valuation allowance to reserve for capital loss
carryforwards that will more likely than not be realized. The Company has
determined that it 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.
Revenue Recognition. The Company recognizes revenue on products when
title passes, which is usually upon shipment. Freight billed to customers is
included in sales. Shipping costs are included in cost of goods sold.
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 2003 COMPARED TO QUARTER ENDED JUNE 30, 2002
Sales. The Company's sales during the second quarter of 2003 were $3.16
million, which was essentially flat with the sales in the second quarter of
2002. Sales were higher domestically and in Europe offset by lower sales
10
to Asia. A container shipment previously scheduled for China in the second
quarter is now scheduled to be shipped and will be recorded in the third quarter
of 2003.
Cost of Goods Sold. Cost of goods sold during the second quarter of
2003 was $1.69 million, or 53.4% of sales, compared to $1.77 million, or 56.0%
of sales, during the same period in 2002. The reduction in the cost of sales in
the first quarter of 2003 as a percentage of sales reflects an improved product
mix across all geographic areas and lower costs for some of the raw materials.
The Company also ended sales to certain marginally profitable customers at the
beginning of the year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $1,050,000, or 33.2% of sales, in the
second quarter of 2003, from $1,015,000, or 32.1% of sales, for the same period
in 2002. The second quarter of 2003 reflected higher sales and marketing
expenses including costs to set up a training facility in Singapore and other
trade show costs.
Loss on Investment. The Company wrote down the value of its investment
in Apprise Technologies ("Apprise") by $75,000 in the second quarter of 2003.
The latest offering price for shares of Apprise was below the value carried on
the Company's books.
Research and Development Expenses. Research and development expenses
during the second quarter of 2003 were $175,000, or 5.5% of sales, versus
$187,000, or 5.9% of sales, for the same period in 2002. The reduction was due
to lower costs for production trials and patent-related legal fees.
Interest Income. Interest income for the second quarter of 2003 was
$3,000 compared to $10,000 for the same period in 2002. Interest is earned
primarily from government obligation revenue bonds of various municipalities and
school districts in the State of Minnesota.
Income Taxes. Income taxes were $19,000, or an effective rate of 12%,
for the second quarter of 2003, versus income taxes of $69,000, or an effective
rate of 35%, for the first quarter of 2002. The lower effective tax rate during
the second quarter of 2003 relates to an increase in tax benefits of the
extraterritorial income exclusion on foreign sales in prior years.
SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2002
Sales. The Company's sales during the first six months of 2003
increased moderately to $5.99 million, or less than 1.0%, from $5.95 million in
sales during the same period in 2002. Domestic sales and European sales were
higher but were offset by lower sales to Asia. A container shipment to China
scheduled for the second quarter of 2003 is now scheduled to be shipped and will
be recorded in the third quarter of 2003.
Cost of Goods Sold. Cost of goods sold during the first half of 2003
was $3.31 million, or 55.3% of sales, compared to $3.39 million, or 57.1% of
sales, during the same period in 2002. The reduction in the cost of sales in the
first six months of 2003 as a percentage of sales reflects an improved product
mix across all geographic areas and lower costs for some raw materials. The
Company also ended sales to certain marginally profitable customers at the
beginning of the year.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $2,054,000, or 35.5% of sales, in the first
half of 2003, from $1,966,000, or 33.1% of sales, for the same period in 2002.
The first half of 2003 reflected higher sales and marketing expenses including
costs to set up a training facility in Singapore, trade show costs and
consulting. The Company also experienced higher public reporting costs related
to new SEC regulations arising out of the Sarbanes-Oxley Act of 2002.
Loss on Investment. The Company wrote down the value of its investment
in Apprise by $75,000. The latest offering price for shares of Apprise was below
the value carried on the Company's books.
11
Research and Development Expenses. Research and development expenses
during the first half of 2003 were $343,000, or 5.7% of sales, versus $367,000,
or 6.2% of sales, for the same period in 2002. The reduction was due to lower
costs for production trials and patent-related legal fees.
Interest Income. Interest income was $16,000 for the first half of 2003
compared to $18,000 for the same period in 2002. Interest is earned primarily
from government obligation revenue bonds of various municipalities and school
districts in the State of Minnesota.
Income Taxes. Income taxes were $35,000, or an effective rate of 16%,
for the first half of 2003 compared to $83,000, or an effective rate of 35%, for
the first half of 2002.
LIQUIDITY AND CAPITAL RESOURCES
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 $822,000 and $210,000 at June 30, 2003
and June 30, 2002, respectively. The Company generated $557,000 in cash from
operating activities during the three months ended June 30, 2003 and used
$263,000 in cash from operating activities during the same period in 2002. Cash
provided by operating activities is primarily the result of adjusting net income
for non-cash depreciation, amortization, loss on investment provision for
doubtful accounts, and certain changes in working capital components.
During the first six months of 2003, trade receivables increased by
$180,000. The increase in receivables was driven by moderately higher sales and
a temporary slowdown in domestic screen print customer payments due to economic
conditions. The Company believes that the quality of its receivables is high and
that strong internal controls are in place to maintain proper collections. The
allowance for doubtful accounts was increased by $50,000 during the period to
reflect the increase in trade receivables and the aging of these accounts
related to the economic condition of the screen printing industry. Inventory
levels increased by $152,000 reflecting increased stocks of AccuArt related
products due to strong market acceptance. Accounts payable increased by
$288,000, reflecting timing of payments for inventory to suppliers.
The Company used $119,000 and $148,000, in cash for investing
activities during the six months ended June 30, 2003 and June 30, 2002,
respectively. During the first six months of 2003, the Company purchased $92,000
in plant equipment upgrades to improve efficiency and reduce operating costs,
additions to the Company's business software, improvements to the Company's
trade show booths and construction costs on the leased training facility in
Singapore. It also incurred $27,000 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 2002, the Company purchased $94,000 in
capital equipment and business software. During the first half of 2002, the
Company purchased, for $50,000, a license for technology applicable to its
abrasive etching business.
Plans for additional capital expenditures of $100,000 during 2003
include ongoing manufacturing equipment upgrades, development equipment to
modernize the capabilities and processes of the Company's research and
development laboratory to improve measurement and quality control processes.
Total 2003 planned expenditures are expected to be less than 2002 capital
expenditures and are expected to be funded with cash generated from operating
activities.
During the first quarter of 2002, the Company repurchased 23,500 shares
of its outstanding Common Stock for $72,000.
A bank line of credit exists providing for borrowings of up to
$1,250,000. Outstanding debt under this line of credit is collateralized by
accounts receivable and inventory and bears interest at 2.25 percentage points
over the 30-day LIBOR rate. The Company did not utilize this line of credit
during the quarter ended June 30, 2003 and there was no debt outstanding under
this line as of June 30, 2003. The Company made a $150,000 draw on this line of
credit on June 20, 2002, primarily to cover a royalty payment to Aicello. The
Company repaid this draw within a short period of time, utilizing cash from
operations.
12
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.
INTERNATIONAL ACTIVITY
The Company markets its products to over 60 countries in North America,
Europe, Latin America, Asia and other parts of the world. Foreign sales were
approximately 30% of total sales for the three months ended June 30, 2003 and
31% of total sales for the three months ended June 30, 2002. Sales to foreign
markets were 30% for the six months ended June 30, 2003 and 32% for the same
period in 2002. Foreign sales in 2002 reflected higher sales to India and China.
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 and are made primarily in dollars and Eurodollars.
The Company believes its vulnerability to uncertainties due to foreign currency
fluctuations and general economic conditions in foreign countries is not
significant.
Substantially all of the Company's foreign transactions are negotiated,
invoiced and paid in U.S. dollars or Eurodollars. IKONICS has not implemented a
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, 2003.
FUTURE OUTLOOK
IKONICS has invested over 6% of its sales dollars for the past several
years in research and development. The Company plans to maintain its efforts in
this area and expedite internal product development as well as form
technological alliances with outside experts to ensure commercialization of new
product opportunities.
In addition to its traditional emphasis on domestic markets, the
Company will continue efforts to grow its business internationally by attempting
to develop new markets and expanding market share where it has already
established a presence. In June, the Company opened a training center in
Singapore.
Other future activities undertaken to expand the Company's business may
include acquisitions, building expansion and additions, equipment additions, new
product development and pursuit of marketing opportunities.
ITEM 3. 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 controls 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 recorded, processed, summarized
and reported within the time periods specified in SEC rules and forms. There was
no change in the Company's internal control over financial reporting during the
Company's most recently completed fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting. However, the Company has found that certain internal
control procedures were not being performed in a timely manner. When these
deficiencies were discovered by supervising personnel, corrective actions were
taken by the Company.
13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's Annual Meeting was held April 24, 2003. The shareholders
took the following action:
The shareholders elected six directors to hold office until the next
annual meeting of shareholders. The shareholders present in person or
by proxy cast the following numbers of votes in connection with the
election of directors, resulting in the election of all nominees:
Votes For Votes Against
--------- -------------
Charles H. Andresen 1,064,696 42,765
David O. Harris 1,064,696 42,765
Gerald W. Simonson 1,064,696 42,765
William C. Ulland 1,064,696 42,765
Rondi Erickson 1,064,696 42,765
H. Leigh Severance 1,064,696 42,765
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are filed as part of this Quarterly Report on
Form 10-QSB for the quarterly period ended June 30, 2003:
Exhibit Description
------- -----------
3.1 Restated Articles of Incorporation of Company, as amended.(1)
3.2 By-Laws of the Company, as amended.(1)
11 Computation of Net Earnings per Common Share.
31 Certifications pursuant to Rule 13a-14(a) of the Exchange Act.
32 Certifications pursuant to Rule 13a-14(b) of the Exchange Act.
--------
(1) Incorporated by reference to the like numbered Exhibit to the Company's
Registration Statement on Form 10-SB (File No. 000-25727).
Copies of Exhibits will be furnished upon request and payment of the
Company's reasonable expenses in furnishing the Exhibits.
14
(b) REPORTS ON FORM 8-K
On April 30, 2003, the Company filed a Current Report on Form 8-K
including a press release announcing the Company's financial results for the
three months ended March 31, 2003.
15
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 14, 2003 By: /s/ William C. Ulland
----------------------------------
William C. Ulland,
Acting Chief Financial Officer,
Chairman, Chief Executive Officer,
and President
16
INDEX TO EXHIBITS
Exhibit Description Page
------- ----------- ----
3.1 Restated Articles of Incorporation of Company, as amended........... Incorporated by Reference
3.2 By-Laws of the Company, as amended.................................. Incorporated by Reference
11 Computation of Net Earnings per Common Share........................ Filed Electronically
31 Certifications pursuant to Rule 13a-14(a) of the Exchange Act....... Filed Electronically
32 Certifications pursuant to Rule 13a-14(b) of the Exchange Act....... Filed Electronically
17