WULF 10-Q Quarter ended Sept. 30, 2015

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 September 30 , 201 5

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)

(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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)  Yes ☒ No ☐

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

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

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practical date: Common Stock, $.10 par value - 2,018,253 shares outstanding as of November 6 , 2015.

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IKONICS Corporation

QUARTERLY REPORT ON FORM 10-Q

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PART I - FINANCIAL INFORMATIO N

ITEM 1.  Condensed Financial Statement s

IKONICS CORPORATION

CONDENSED BALANCE SHEET S

See notes to condensed financial statements .

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IKONICS CORPORATION

CONDENSED STATEMENTS OF OPERATION S (Unaudited)

See notes to condensed financial statements .

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IKONICS CORPORATION

CONDENSED STATEMENTS OF CASH FLOW S (Unaudited)

See notes to condensed financial statements.

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1. Basis of Presentatio n

The condensed balance sheet of IKONICS Corporation (the “Company”) as of September 30 , 2015, and the related condensed statements of operations for the three and nine months ended September 30 , 2015 and 2014 , and cash flows for the nine months ended September 30 , 2015 and 2014, 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 September 30 , 2015, 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, 2014.

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 25 ,00 0 of short-term investments at September 30 , 2015 is comprised of a fully insured certificate of deposit with an original maturity of n i ne months and an interest rate of 0. 4 % .

3. Inventories

The major components of inventor ies are as follows:

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 similar to Basic EPS except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the potential dilutive common shares, such as those shares subject to options, had been issued.

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

For three months ended September 30 , 2015, options to purchase 8 , 50 0 shares of common stock with a weighted average price of $1 7 . 16 were outstanding but were excluded from the computation of common share equivalents because they were anti-dilutive. Options to purchase 1,250 shares of common stock with a weighted average price of $28.25 were outstanding during the three and nine months ended September 30 , 2014, but were excluded from the computation of common share equivalents because they were anti-dilutive.

If the Company was in a net income position for the first nine months of 2015, 5 , 91 8 options with a weighted average exercise price of $ 1 2 . 49 would have been included as part of the weighted average common and common equivalent shares outstanding as the options would have been dilutive while 6 ,250 options with a weighted average exercise price of $ 1 8 . 28 would have remained excluded as the options were anti-dilutive .

5. Stock-Based Compensation

The Company maintains a stock incentive plan which authorizes the issuance of up to 442,750 shares of common stock. Of those shares, 12,168 were subject to outstanding options and 108,739 were reserved for future grants at September 30, 2015. The plan provides for granting eligible participants stock options or other stock awards, as described by the plan, at option prices ranging from 85% to 110% of fair market value at the date of grant.  Options granted expire up to seven years after the date of grant.  Such options generally become exercisable over a one to three year period.

The Company charged compensation cost of approximately $5,700 against income for the three months ended September 30, 2015 and approximately $3,500 for the three months ended September 30, 2014. For the first nine months of 2015, the Company charged compensation cost of approximately $16, 100 and approximately $15,000 for the same period in 2014.  As of September 30, 2015, there was approximately $45,000 of unrecognized compensation cost related to unvested share-based compensation awards granted. That cost is expected to be recognized over the next three years.

The Company receives a tax deduction for certain stock option exercises during the period in which the options are exercised, generally for the excess of the market price at the time the stock options are exercised over the exercise price of the options, which increases additional paid in capital and reduces income taxes payable.

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Proceeds from the exercise of 5,916 stock options were approximately $45,000 for the nine months ended September 30, 2014. No stock options were exercised during the nine months ended September 30, 2015.

The fair value of options granted during the nine months ended September 30, 2015 and 2014 was estimated using the Black-Scholes option pricing model with the following assumptions:

There were 7,250 and 1,250 options granted during each of the nine months ended September 30, 2015 and 2014, respectively.

Stock option activity during the nine months ended September 30, 2015 was as follows:

The aggregate intrinsic value of all options outstanding and for those exercisable at September 30, 2015 was approximately $ 14 ,000 and $ 9 ,000 , respectively.

6. Commitments

Building:

In third quarter of 2015, the Company committed to proceed with a 27,300 square-foot building expansion project. The new structure will contain a 20,500 square-foot production floor in addition to offices and ancillary facilities and is expected to cost $3.5 million. The expansion will be an addition to the 37,000 square-foot IKONICS building on its Morgan Park site in western Duluth, which currently houses AMS production, warehousing, shipping and film conversion for all IKONICS business units. All AMS activities will relocate to the new facility with an expected project completion date during the second quarter of 2016. Through September 30, 2015, the Company has incurred costs of $964,000 of which $556,000 was included in construction accounts payable.

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ERP System:

During the second quarter of 2015, the Company committed to purchase $140,000 of software related to the implementation of a new Enterprise Resource Planning (ERP) system.  The new ERP system will better support and accommodate IKONICS’ operations and replac e the Company’s existing ERP system.  The total ERP system project is expected to cost approximately $400,000, and is expected to be completed by the second quarter of 2016. Through September 30, 2015, the Company has incurred costs of $146,000 of which $14,000 was included in construction accounts payable.  Costs incurred to date are reflected in construction in progress on the Condensed Balance Sheet.

Line of Credit:

The Company has a bank line of credit providing for borrowings of up to $2,050,000 and expir ing on May 31, 2017.  The 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 nine months of 2015 or 2014 and there were no borrowings outstanding as of September 30, 2015 and 2014.  There are no financial covenants related to the line of credit.

7. Segment Information

The Company’s reportable segments are strategic business units that offer different products and have varied customer bases.  There are five reportable segments:  Domestic, Export, IKONICS Imaging, Digital Texturing (DTX) and Advanced Material Solutions (AMS).  Domestic sells screen printing film, emulsions, and inkjet receptive film to distributors located in the United States and Canada.  IKONICS Imaging sells photo resistant film, art supplies, glass, metal medium and related abrasive etching equipment to end user customers located in the United States and Canada.  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. Export sells primarily the same products as Domestic and the IKONICS Imaging products not related to AMS or DTX.  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, 2014.

Management evaluates the performance of each segment based on the components of divisional income .  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 September 30, 2015:

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For the three months ended September 30, 2014:

For the nine months ended September 30, 2015:

For the nine months ended September 30, 2014:

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

Trade receivables by segment as of September 30, 2015 and December 31, 2014 were as follows:

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8 . Income Taxes

The Company reports a liability for unrecognized tax benefits taken or expected to be taken when they are uncertain.  As of September 30 , 201 5 and 201 4 , there was no liability for unrecognized tax benefits.

The Company is subject to taxation in the United States and various states.  The material jurisdictions that are subject to examination by tax authorities primarily include Minnesota and the U nited States, for tax years 201 2 , 20 1 3 , and 201 4 .

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IKONICS CORPORATION

The information presented below in Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended.  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, 2014, 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 Analysi s 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 third quarter of 2015 and for the same period of 2014.  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 market 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.  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

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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. The Company recognizes revenue on sales of products when title passes which can occur at the time of shipment or when the goods arrive at the customer location depending on the agreement with the customer.  The Company sells its products to both distributors and end-users.  Sales to distributors and end-users are recorded based upon the criteria governed by the sales, delivery, and payment terms stated on the invoices from the Company to the purchaser.  In addition to transfer of title / risk of loss, all revenue is recorded in accordance with the criteria outlined within SAB 104 and FASB ASC 605 Revenue Recognition:

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

Results of Operations

Quarter Ended September 30 , 2015 Compared to Quarter Ended September 30 , 2014

Sales. The Company had sales of $4.5 million in the third q uarter of 2015 and 2014. Third quarter sales in 2015 were favorably impacted by DTX sales which grew from $45,000 in the third quarter of 2014 to $188,000 in the third quarter of 2015.  A significant portion of the DTX sales increase is due to timing of a large film shipment realized in the third quarter of 2015 , while the corresponding shipment in 2014 occurred in the fourth quarter .  Compared to the same period last year , AMS sales also increased from $ 76 ,000 during the third quarter of 2014 to $169,000 in the third quarter of 2015 due to growth in the machining of composite parts for the aerospace industry.  The favorabl e timing of sales to Asia resulted in a 5.2% Export sales increase in the third quarter of 2015 versus the same period last year.  The increased Asian sales more than offset lower European sales due to the weaker European economy and the strong U.S. dollar .  Partially offsetting the sales increases, IKONICS Imaging sales decreased 10.6% from $999,000 in the third quarter of 2014 to $893,000 in the third quarter of 2015 mainly due to lower glass sales as the Company changed its glass supplier in early 2015 .  Domestic also posted lower sales in the third quarter of 2015 with a 6.5 %, or $ 134 ,000, sales decrease versus the third quarter of 2014 as artwork film sales for the quarter lagged behind last year due to competitive pressure.