(b)
delivery and performance (evidenced by proof of delivery, e.g. the shipment of film and substrates with bill of lading used for proof of delivery for FOB shipping point terms, and the carrier booking confirmation report used for FOB destination terms). Once the finished product is shipped and physically delivered under the terms of the invoice and sales order, the Company has no additional performance or service obligations to complete;
(c)
a fixed and determinable sales price (the Company’s pricing is established and is not based on variable terms, as evidenced in either the Company’s invoices or the limited number of distribution agreements; the Company rarely grants extended payment terms and has no history of concessions); and
(d)
a reasonable likelihood of payment (the Company’s terms are standard, and the Company does not have a substantial history of customer defaults or non-payment).
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.
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. The Company also maintains a provision based upon historical experience and any specifically identified issues for any customer related returns, 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 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.
Results of Operations
Year Ended December 31, 2016 Compared to Year Ended December 31, 2015
Sales.
The Company’s net sales in 2016 of $17.6 million were consistent with 2015 sales. Sales in 2016 were favorably impacted by an AMS sales increase due to growth from its composite machining. AMS sales in 2016
increased by 65.8%, from $628,000 in 2015 to $1.0 million in 2016. IKONICS Imaging sales also increased by 7.6% for the period from $4.0 million in 2015 to $4.3 million in 2016, mainly related to the acquisition of a new customer. Partially offsetting these sales increases was a drop in Export sales. Compared to 2015, Export sales in 2016 decreased $388,000, or 7.9%, as the strong U.S. dollar continues to dampen sales. Compared to the prior year, 2016 sales were down across all regions with the exception of Europe. Domestic also realized lower sales for 2016 with a $247,000, or 3.2%, sales decrease versus 2015 as sales were down across all product groups. DTX sales decreased 15.0% from $476,000 in 2015 to $405,000 in 2016 primarily due to a decrease in demand for film from its largest customer during the first half of the year.
Gross Profit.
Gross profit was $6.2 million, or 35.5% of sales, in 2016 compared to $6.1 million, or 35.0% of sales in 2015. IKONICS Imaging gross margin for 2016 was favorably impacted by higher sales volumes, and an increase in higher margin film sales as gross margin percentage increased from 53.1% in 2015 to 55.2% in 2016. Despite lower volumes, the DTX gross margin improved to 59.9% in 2016 from 46.5% in 2015 due to lower personnel and depreciation expenses. Higher AMS sales volumes resulted in the AMS gross margin improving from a negative 81.2% in 2015 to a negative 49.6% in 2016. Lower raw material costs improved the Domestic gross margin percentage from 42.1% in 2015 to 42.9% in 2016, while lower volumes resulted in the Export gross margin decreasing from 23.1% in 2015 to 22.3% in 2016.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses were $5.6 million, or 31.9% of sales, in 2016 compared to $5.3 million, or 30.0% of sales, in 2015. The increase in selling, general and administrative expenses reflects higher health insurance expenses in 2016. IKONICS utilizes a self-funded medical insurance plan and can experience fluctuations in medical insurance costs. The Company mitigates part of the risk under this self-funded plan by purchasing both specific and aggregate stop-loss insurance coverage. The increase in selling, general and administrative expenses also reflects additional promotional and trade show expenses for both Domestic and AMS markets in addition to higher Exports sales expenses related to Asia.
Research and Development Expenses.
Research and development expenses in 2016 were $647,000, or 3.7% of sales, versus $660,000, or 3.8% of sales in 2015. In 2015 the Company incurred a $46,000 expense related to the abandonment of patent applications. The Company records patent application costs as an asset and amortizes those costs upon successful completion of the application process or expenses those costs when an application is abandoned. There was no patent abandonment in 2016.
Income Taxes.
During 2016, the Company realized an income tax benefit of $4,000, or an effective rate of 5.8%, compared to income tax expense of $90,000, or an effective rate of 40.0%, for the same period in 2015. The change to income tax benefit in 2016 from income tax expense from 2015 is primarily due to the pre-tax book loss generated in 2016 compared to the pre-tax book income generated in 2015. The decrease in the effective tax rate for 2016 from 2015 is primarily due to the pre-tax book loss generated in 2016 and unfavorable non-deductible items. In 2016, the unfavorable non-deductible items decreased the effective tax rate due to pre-tax book losses, while they increased the effective tax rate in 2015 due to pre-tax book income. The effective tax rates in 2016 and 2015 primarily differ from the expected tax rate due to the benefits of the domestic manufacturing deduction in 2015, credits for research and development, and other non-deductible items.
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 $1.0 million and $2.2 million at December 31, 2016 and 2015, respectively. In addition to its cash, the Company also held $3.2 million of short-term investments as of December 31, 2016. The Company held no short-term investments as of December 31, 2015. The Company generated $917,000 in cash from operating activities during 2016, compared to generating $1.5 million of cash from operating activities in 2015. Cash provided by operating activities is primarily the result of the net income (loss) adjusted for non-cash depreciation and amortization, deferred taxes, and certain changes in working capital components discussed in the following paragraph.
During 2016, inventories decreased by $134,000 related to a decrease in raw material inventories compared to 2015. The timing of collections resulted in a $171,000 trade receivables increase in 2016 versus 2015. Accounts
payable increased from 2015 to 2016 by $310,000 due to the timing of payments to and purchases from vendors. Prepaid expenses and other assets increased $276,000 from 2015 to 2016. The increase is mainly related to prepayments on equipment being manufactured with the expectation that it will be completed and sold in 2017. Compared to 2015, accrued expenses increased $74,000 reflecting the timing of compensation payments and an increase in the accrual for medical expenses. Income taxes receivables decreased $37,000 due to the timing of estimated 2016 tax payments compared to the calculated 2016 tax liability.
During 2015, inventories decreased by $511,000. The lower inventory balance reflects efforts to tighten inventory levels on hand along with the timing of raw material purchases. Trade receivables increased $69,000 related to increased fourth quarter sales. Accounts payable increased $49,000 due to the timing of payments to and purchases from vendors while accrued liabilities increased $8,000. Income taxes receivable decreased $61,000 due to the timing of estimated 2015 tax payments compared to the calculated 2015 tax liability.
During 2016, cash used in investing activities was $5.3 million. The Company purchased 19 certificates of deposits totaling $4.4 million. Five certificates of deposits totaling $1.1 million matured during 2016. The Company’s cash purchases of property and equipment were $2.1 million in 2016. Total building expansion expenditures for 2016 were $1,393,000. Expenditures on the new ERP system in 2016 were $281,000. The remaining capital expenditures were mainly for upgrades to improve AMS production and process capabilities. Also during 2016, the Company incurred $27,000 in patent application costs that the Company records as an asset and amortizes upon successful completion of the application process. In addition, the Company sold equipment for $21,000.
During 2015, cash used by investing activities was $1.2 million. Fifteen certificates of deposits totaling $2.4 million matured during 2015. The Company purchased three certificates of deposits totaling $650,000 during the same period. The Company’s purchases of property and equipment were $3.2 million in 2015. Total building expansion expenditures were $2.3 million, but $315,000 of the expenditures were included as part of construction payable and not as cash used in investing activities. Similarly, expenditures on the new ERP system in 2015 were $208,000 of which $18,000 was included as part of construction payable and not as cash used in investing activities. The remaining capital expenditures were mainly for upgrades to improve AMS production and process capabilities and costs associated with mandatory elevator upgrades. Also during 2015, the Company incurred $53,000 in patent application costs that the Company records as an asset and amortizes upon successful completion of the application process.
During 2016, the Company received $3.2 million from financing activities. The Company secured a loan of $3.4 million to finance the expansion of its AMS facility. Related to securing the loan, the Company paid $139,000 in debt issuance costs and made principal payments of $79,000. During 2016, the Company received $4,000 from the issuance of 500 shares of common stock pursuant to the exercise of stock options. There were no financing activities during 2015.
On April 1, 2016, the Company entered into a financing agreement to borrow $3.4 million. The proceeds from the loan were used to finance the construction of a 27,300-square foot building, as well as related equipment for use in the Company’s manufacture of sound deadening technology used in the aerospace industry and products consisting of etched composites, ceramics, glass and silicon wafers, to be located in Duluth, Minnesota. The Loan requires monthly payments of approximately $18,000, including interest. The Loan bears interest at a rate of 2.14% per year, payable monthly, and matures on April 1, 2041. The Loan is subject to mandatory purchase provisions, under which any owners of the Bonds (the “Owners”) may tender the Bonds to the Issuer on April 1, 2021, which would result in the Company repaying the outstanding loan principal and any outstanding accrued and unpaid interest to the Issuer at that time. If in the event the Bonds are not repurchased on April 1, 2021, the Bonds shall be subject to the interest rate and redemption provisions set forth in the associated covenant agreement. Including debt costs of approximately $139,000, the Loan’s effective annual interest rate is 2.77%. The Company is subject to certain customary covenants set forth in the associated covenant agreement, including a requirement that the Company maintain a debt service coverage ratio as of the end of each calendar quarter of not less than 1.25 to 1.00 on a rolling four-quarter basis.
A bank line of credit exists providing for borrowings of up to $2.1 million and expires on May 31, 2017. The Company expects to obtain a similar line of credit when the current line of credit expires. 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 2016 or 2015 and there were no borrowings outstanding as of December 31, 2016 and December 31, 2015. 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.
Capital Expenditures
In 2016, the Company incurred $1.7 million of capital expenditures. A majority of the expenditures were related to the AMS building expansion. The remaining capital expenditures were for upgrades to improve AMS production and process capabilities, as well as for a new ERP system.
In 2015, the Company incurred $3.2 million of capital expenditures, of which $2.3 million was related to the building expansion, including the $315,000 in construction accounts payable. The remaining capital expenditures were mainly for upgrades to improve production and process capabilities for both AMS and the Company’s traditional businesses, a new ERP system which was completed in 2016, data center equipment, and costs associated with mandatory elevator upgrades, including $18,000 in construction accounts payable.
The Company expects capital expenditures in 2017 of approximately $600,000. The planned expenditures primarily will be for manufacturing equipment to improve processes and capabilities for AMS, other manufacturing equipment upgrades and vehicles for sales personnel. These commitments are expected to be funded with cash generated from operating activities.
International Activity
The Company markets its products in numerous countries in various regions of the world, including North America, Europe, Latin America, and Asia. The Company’s 2016 foreign sales of $4.5 million were approximately 25.7% of total sales, compared to the 2015 foreign sales of $4.9 million, which were 27.9% of total sales. The Company experienced a decrease in foreign sales across all geographic regions in 2016 except Europe as the strong U.S. dollar continues to negatively impact foreign sales.
The Company’s foreign transactions are primarily negotiated, invoiced and paid in U.S. dollars, though a portion is transacted in Euros. IKONICS has not implemented an economic hedging strategy to reduce the risk of foreign currency translation exposures, which management does not believe to be significant based on the scope and geographic diversity of the Company’s foreign operations. Furthermore, the impact of foreign exchange on the Company’s balance sheet and operating results was not material in either 2016 or 2015.
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.
The Company continues to make progress on its AMS business initiative, which is now experiencing strong growth. The Company has two long-term agreements in place for its technology with major aerospace companies and is negotiating a third. In anticipation of this growing business, the Company increased its AMS capacity with a 27,300 square foot expansion at its Morgan Park site.
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 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 enter the market for prototyping.
Both the Domestic 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 we believe will contribute to growth. 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 acquisitions, building improvements, equipment additions, new product development and marketing opportunities.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Recent Accounting Pronouncements
In 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
, intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for the Company in the year ended December 31, 2016, and interim periods beginning March 31, 2017, with early application permitted. The adoption of ASU 2014-15 did not have a material impact to the financial statements when implemented.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers.
ASU 2014‑09 supersedes the revenue recognition requirements in
Revenue Recognition (Topic 605
), and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers: Deferral of the Effective Date,
which defers the adoption of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
The standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The standard also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. While the Company is still in the process of evaluating the effect of adoption on its financial statements and is currently assessing its contracts with customers, the Company anticipates that it will expand its financial statement disclosures in order to comply with the new standard. The Company has established a timeline and process to evaluate the impact, transition and disclosure requirements of the ASU and believes the timeline is sufficient to allow the Company to effectively implement the new standard. The Company has not yet concluded on a transition method upon adoption, but plans to select a transition method by the fourth quarter of 2017.
In 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes
, now requiring that deferred tax assets and liabilities be classified as noncurrent in a classified balance sheet. The amendment takes effect for public entities for fiscal years beginning after December 15, 2016, with early adoption available. The Company adopted this guidance for the quarter ended March 31, 2016 with retrospective application and reclassified comparative periods for consistency. For 2015, a long-term deferred tax liability of $580,000 has been netted with the current deferred tax asset of $195,000 for a net long-term deferred tax liability of $385,000.
In April 2015, the FASB issued ASU No. 2015-03
, Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.
ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability rather than as an asset. The standard is effective for fiscal periods beginning after December 15, 2015, and interim periods therein and early application is permitted. Companies are required to adopt the standard retrospectively. The standard will result in all deferred financing costs, excluding transaction costs incurred in connection with securing revolving credit facilities,
Item 8. Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
IKONICS Corporation
We have audited the accompanying balance sheets of IKONICS Corporation as of December 31, 2016 and 2015, and the related statements of operations, stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of IKONICS Corporation as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
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/s/ RSM US LLP
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Duluth, Minnesota
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March 3, 2017
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IKONICS CORPORATION
BALANCE SHEETS
DECEMBER 31, 2016 AND 2015
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|
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2016
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2015
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|
|
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ASSETS
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CURRENT ASSETS:
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Cash and cash equivalents
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$
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1,048,713
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$
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2,248,466
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Short-term investments
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|
|
3,246,000
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|
|
—
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Trade receivables, less allowance of $54,000 in 2016 and $122,000 in 2015
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2,336,501
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|
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2,165,194
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Inventories
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1,986,172
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|
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2,119,805
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Prepaid expenses and other assets
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361,905
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85,648
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Income taxes receivable
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66,181
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102,778
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Total current assets
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9,045,472
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6,721,891
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PROPERTY, PLANT, AND EQUIPMENT, at cost:
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Land and building
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9,189,743
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6,391,555
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Machinery and equipment
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4,884,814
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4,275,910
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Office equipment
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1,566,856
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933,596
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Vehicles
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272,144
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272,141
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Construction in progress
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|
—
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2,491,432
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15,913,557
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14,364,634
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Less accumulated depreciation
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(7,001,162)
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(6,407,304)
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8,912,395
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7,957,330
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INTANGIBLE ASSETS, less accumulated amortization of $149,072 in 2016 and $123,957 in 2015
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338,127
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336,096
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$
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18,295,994
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|
$
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15,015,317
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LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES
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Current portion of long-term debt, net
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$
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127,303
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$
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—
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Accounts payable
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|
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Trade
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730,386
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420,245
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Construction
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—
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333,339
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Accrued compensation
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388,600
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350,518
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Other accrued liabilities
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67,088
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31,000
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Total current liabilities
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1,313,377
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1,135,102
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LONG-TERM LIABILITIES
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Long-term debt, less current portion, net
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3,077,457
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—
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Deferred income taxes
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446,000
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|
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385,000
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Total long-term liabilities
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|
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3,523,457
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|
|
385,000
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Total liabilities
|
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4,836,834
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|
|
1,520,102
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COMMITMENTS AND CONTINGENCIES
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STOCKHOLDERS’ EQUITY
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Preferred stock, par value $.10 per share; authorized 250,000 shares; none issued
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|
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—
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|
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—
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|
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Common stock, par value $.10 per share; authorized 4,750,000 shares; issued and outstanding 2,018,753 shares in 2016 and 2,018,253 in 2015
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201,875
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201,825
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Additional paid-in-capital
|
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2,732,006
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|
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2,703,050
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Retained earnings
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10,525,279
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10,590,340
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Total stockholders’ equity
|
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13,459,160
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|
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13,495,215
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|
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$
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18,295,994
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$
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15,015,317
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See notes to financial statements.
IKONICS CORPORATION
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2016 AND 2015
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Year Ended
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December 31,
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2016
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2015
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NET SALES
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$
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17,569,901
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$
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17,562,066
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COST OF GOODS SOLD
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11,332,991
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11,417,474
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GROSS PROFIT
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6,236,910
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|
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6,144,592
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
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5,611,849
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5,263,372
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RESEARCH AND DEVELOPMENT EXPENSES
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647,065
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660,402
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INCOME (LOSS) FROM OPERATIONS
|
|
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(22,004)
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|
|
220,818
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INTEREST EXPENSE
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|
|
(58,222)
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|
|
—
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|
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OTHER
|
|
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11,165
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|
|
4,189
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE INCOME TAXES
|
|
|
(69,061)
|
|
|
225,007
|
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE (BENEFIT)
|
|
|
(4,000)
|
|
|
90,000
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
(65,061)
|
|
$
|
135,007
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.03)
|
|
$
|
0.07
|
|
|
Diluted
|
|
$
|
(0.03)
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,018,649
|
|
|
2,018,253
|
|
|
Diluted
|
|
|
2,018,649
|
|
|
2,018,591
|
|
See notes to financial statements.
IKONICS CORPORATION
STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2016 AND 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
Stock-
|
|
|
|
|
Common Stock
|
|
Paid-in
|
|
Retained
|
|
holders’
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
Earnings
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2014
|
|
2,018,253
|
|
$
|
201,825
|
|
$
|
2,681,307
|
|
$
|
10,455,333
|
|
$
|
13,338,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
135,007
|
|
|
135,007
|
|
|
Stock based compensation and related tax benefit
|
|
—
|
|
|
—
|
|
|
21,743
|
|
|
—
|
|
|
21,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2015
|
|
2,018,253
|
|
|
201,825
|
|
|
2,703,050
|
|
|
10,590,340
|
|
|
13,495,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(65,061)
|
|
|
(65,061)
|
|
|
Exercise of stock options and related tax benefit
|
|
500
|
|
|
50
|
|
|
3,949
|
|
|
—
|
|
|
3,999
|
|
|
Stock based compensation and related tax benefit
|
|
—
|
|
|
—
|
|
|
25,007
|
|
|
—
|
|
|
25,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2016
|
|
2,018,753
|
|
$
|
201,875
|
|
$
|
2,732,006
|
|
$
|
10,525,279
|
|
$
|
13,459,160
|
|
See notes to financial statements.
IKONICS CORPORATION
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2016 AND 2015
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
December 31,
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(65,061)
|
|
$
|
135,007
|
|
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
760,772
|
|
|
659,528
|
|
|
Amortization
|
|
|
33,768
|
|
|
25,040
|
|
|
Stock based compensation
|
|
|
25,007
|
|
|
21,743
|
|
|
Net gain on sale of property, plant and equipment
|
|
|
(5,750)
|
|
|
—
|
|
|
Deferred income taxes
|
|
|
61,000
|
|
|
18,000
|
|
|
Loss on intangible asset abandonment
|
|
|
—
|
|
|
45,873
|
|
|
Changes in working capital components:
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
(171,307)
|
|
|
(68,866)
|
|
|
Inventories
|
|
|
133,633
|
|
|
510,845
|
|
|
Prepaid expenses and other assets
|
|
|
(276,257)
|
|
|
752
|
|
|
Income tax receivable
|
|
|
36,831
|
|
|
60,873
|
|
|
Accounts payable
|
|
|
310,141
|
|
|
49,064
|
|
|
Accrued expenses
|
|
|
74,170
|
|
|
8,202
|
|
|
Net cash provided by operating activities
|
|
|
916,947
|
|
|
1,466,061
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases of property, plant, equipment and construction in progress
|
|
|
(2,064,426)
|
|
|
(2,866,671)
|
|
|
Proceeds from sale of equipment
|
|
|
21,000
|
|
|
—
|
|
|
Purchases of intangibles
|
|
|
(27,146)
|
|
|
(53,138)
|
|
|
Purchases of short-term investments
|
|
|
(4,379,000)
|
|
|
(650,000)
|
|
|
Proceeds on sale of short-term investments
|
|
|
1,133,000
|
|
|
2,416,000
|
|
|
Net cash used in investing activities
|
|
|
(5,316,572)
|
|
|
(1,153,809)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
3,415,000
|
|
|
—
|
|
|
Payment of debt issuance costs
|
|
|
(139,418)
|
|
|
—
|
|
|
Payments on long-term debt
|
|
|
(79,475)
|
|
|
—
|
|
|
Proceeds from exercise of stock options
|
|
|
3,765
|
|
|
—
|
|
|
Net cash provided by financing activities
|
|
|
3,199,872
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(1,199,753)
|
|
|
312,252
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
2,248,466
|
|
|
1,936,214
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
1,048,713
|
|
$
|
2,248,466
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Construction in progress included in construction accounts payable
|
|
$
|
—
|
|
$
|
333,339
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
43,421
|
|
$
|
—
|
|
|
Cash received for tax refunds, net of $11,059 taxes paid in 2016
|
|
$
|
102,234
|
|
$
|
11,127
|
|
See notes to financial statements.
IKONICS CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2016 AND 2015
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Foreign Export Sales
- IKONICS Corporation’s (the Company or IKONICS) traditional business has been the development and manufacturing of high-quality photochemical imaging systems for sale primarily to a wide range of printers and decorators of surfaces. Customers’ applications are primarily screen printing and abrasive etching. These sales have been augmented with inkjet receptive films, ancillary chemicals and related equipment to provide a full line of products and services to its customers. Leveraging these technologies the Company is also diversifying and expanding its business to industrial markets. These efforts now include the Company’s Advanced Material Solutions (AMS) business unit which uses the Company’s proprietary process and photoresist film for the abrasive etching of composite materials, industrial ceramics, silicon wafers, and glass wafers. The customer base for AMS is primarily the aerospace and electronics industries. Based on its expertise in ultraviolet curable fluids and inkjet receptive substrates, the Company has also developed a patented digital texturing technology (DTX) for putting patterns and textures into steel molds for the plastic injection molding industry. The original equipment manufacturer (“OEM”) for the Company’s DTX technology is primarily the automotive industry. Industrial inkjet printers, which are integral to the DTX system, are manufactured and sold by a strategic partner. The Company’s business plan is to sell a suite of products including consumable fluids and transfer films. For most markets these sales are direct to the mold maker. The DTX technology is being expanded to prototyping where the Company’s technology offers a unique combination of high definition and large format prints. The Company’s principal markets are throughout the United States. In addition, the Company sells to Europe, Latin America, Asia, and other parts of the world. The Company extends credit to its customers, all on an unsecured basis, on terms that it establishes for individual customers.
Foreign export sales approximated 25.7% of net sales in 2016 and 27.9% of net sales in 2015. The Company’s trade receivables at December 31, 2016 and 2015 due from foreign customers were 23.6% and 21.4% of total trade receivables, respectively. The foreign export receivables are comprised primarily of open credit arrangements with terms ranging from 30 to 90 days. No single customer or foreign country represented greater than 10% of net sales in 2016 or in 2015.
The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure.
A summary of the Company’s significant accounting policies follows:
Cash Equivalents
- The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Cash equivalents consist of money market funds in which the carrying value approximates fair value because of the short maturity of these instruments. The money market fund invests in United States dollar denominated securities that present minimal credit risk and consist of investments in debt securities issued or guaranteed by the United States government or by United States government agencies or instrumentalities, repurchase agreements fully collateralized by the United States Treasury, and United States government securities.
Short-Term Investments
- Short-term investments consist of fully insured certificates of deposit with original maturities ranging from six to twelve months as of December 31, 2016. There were no short-term investments as of December 31, 2015.
Trade Receivables
— Trade receivables are carried at original invoice amount less an estimate made for doubtful receivables 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 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. Accounts are considered past due if payment is not received according to agreed-upon terms.
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 Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) No. 830, Foreign Currency Matters. Foreign currency transactions and translation adjustments did not have a significant effect on the Balance Sheets or the Statements of Operations, Stockholders’ Equity and Cash Flows for 2016 and 2015.
Inventories
- Inventories are stated at the lower of cost or market using the last-in, first-out (LIFO) method. If the first-in, first-out (FIFO) cost method had been used, inventories would have been approximately $1,127,000 and $1,232,000 higher than reported at December 31, 2016 and 2015, respectively. The inventory reserve for obsolescence was $5,000 and $7,000 at December 31, 2016 and 2015, respectively. The major components of inventories are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Dec 31, 2016
|
|
Dec 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
1,438,471
|
|
$
|
1,640,098
|
|
|
Work-in-progress
|
|
|
355,208
|
|
|
375,229
|
|
|
Finished goods
|
|
|
1,319,856
|
|
|
1,336,707
|
|
|
Reduction to LIFO cost
|
|
|
(1,127,363)
|
|
|
(1,232,229)
|
|
|
|
|
|
|
|
|
|
|
|
Total Inventories
|
|
$
|
1,986,172
|
|
$
|
2,119,805
|
|
Property, Plant and Equipment -
Major expenditures extending the life of the property, plant and equipment are capitalized. Repair and maintenance costs are expensed in the period in which they are incurred. Depreciation of property, plant and equipment is computed using the straight-line method over the following estimated useful lives:
|
|
|
|
|
|
|
|
Years
|
|
|
|
|
|
|
|
Buildings
|
|
15-40
|
|
|
Machinery and equipment
|
|
5-10
|
|
|
Office equipment
|
|
3-10
|
|
|
Vehicles
|
|
3
|
|
Intangible Assets —
Intangible assets consist of patents and licenses. Intangible assets are amortized on a straight-line basis over their estimated useful lives or agreement terms.
As of December 31, 2016, the remaining estimated weighted average useful lives of intangible assets are as follows:
|
|
|
|
|
|
|
|
Years
|
|
|
|
|
|
|
|
Patents
|
|
12.0
|
|
|
Licenses
|
|
1.3
|
|
|
|
|
|
|
Impairment of Long-lived Assets —
The Company reviews its long-lived assets, including property, plant and equipment and intangible assets, for impairment when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amount. Any impairment loss recorded is measured as the amount by which the carrying value of the assets exceeds the fair value of the assets. The Company recognized a loss on abandonment of patents applied for of $46,000 in 2015. To date, the Company has determined that no other loss of long-lived assets exists.
Fair Value of Financial Instruments
— The carrying amounts of financial instruments, including cash and cash equivalents, short-term investments, trade receivables, accounts payable, and accrued liabilities approximate fair value due to the short maturities of these instruments. T
he fair value of long-term debt approximates carrying
value and has been estimated based on interest rates being offered for similar debt having the same or similar remaining maturities and collateral requirements
.
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:
|
|
(a)
|
|
persuasive evidence of an arrangement (principally in the form of customer sales orders and the Company’s sales invoices, as generally there is no other formal agreement underlying the sale transactions);
|
|
|
(b)
|
|
delivery and performance (evidenced by proof of delivery, e.g. the shipment of film and substrates with bill of lading used for proof of delivery for FOB shipping point terms, and the carrier booking confirmation report used for FOB destination terms. Once the finished product is shipped and physically delivered under the terms of the invoice and sales order, the Company has no additional performance or service obligations to complete);
|
|
|
(c)
|
|
a fixed and determinable sales price (the Company’s pricing is established and is not based on variable terms, as evidenced in either the Company’s invoices or the limited number of distribution agreements; the Company rarely grants extended payment terms and has no history of concessions); and
|
|
|
(d)
|
|
a reasonable likelihood of payment (the Company’s terms are standard, and the Company does not have a history of significant customer defaults or non-payment).
|
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.
Deferred 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. The Company classifies deferred tax assets and liabilities as noncurrent. 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 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.
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, when dilutive, that would have been outstanding if the potential dilutive common shares, such as those shares subject to options, had been issued.
Shares used in the calculation of diluted EPS are summarized below:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
2,018,649
|
|
2,018,253
|
|
|
Dilutive effect of stock options
|
|
-
|
|
338
|
|
|
Weighted average common and common equivalent shares outstanding
|
|
2,018,649
|
|
2,018,591
|
|
At December 31, 2015, options to purchase 8,500 shares of common stock with a weighted average exercise price of $17.16 were outstanding, but were excluded from the computation of common share equivalents because they were anti-dilutive.
If the Company was in a net income position at December 31, 2016, 4,750 options with a weighted average exercise price of $10.58 would have been included as part of the weighted average common and common equivalent shares outstanding as the options would have been dilutive, while 11,418 options with a weighted average exercise price of $15.99 would have remained excluded as the options were anti-dilutive.
Employee Stock Plan -
The Company accounts for employee stock options under the provision of ASC 718, Compensation — Stock Compensation.
Reclassification –
For comparability, certain 2015 amounts related to deferred tax assets and liabilities have been reclassified to conform with classifications adopted in 2016. The reclassification had no impact on net income or stockholders’ equity.
Recent Accounting Pronouncements
-
In 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
, intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for the Company in the year ended December 31, 2016, and interim periods beginning March 31, 2017, with early application permitted. The adoption of ASU 2014-15 did not have a material impact to the financial statements when implemented.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers.
ASU 2014‑09 supersedes the revenue recognition requirements in
Revenue Recognition (Topic 605
), and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers: Deferral of the Effective Date,
which defers the adoption of ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period.
The standard permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The standard also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally, qualitative and quantitative disclosures are required about customer contracts, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. While the Company is still in the process of evaluating the effect of adoption on its financial statements and is currently assessing its contracts with customers, the Company anticipates that it will expand its financial statement disclosures in order to comply with the new standard. The Company has established a timeline and process to evaluate the impact, transition and disclosure requirements of the ASU and believes the timeline is sufficient to allow the Company to effectively implement the new standard. The Company has not yet concluded on a transition method upon adoption, but plans to select a transition method by the fourth quarter of 2017.
In 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740) Balance Sheet Classification of Deferred Taxes
, now requiring that deferred tax assets and liabilities be classified as noncurrent in a classified balance sheet. The amendment takes effect for public entities for fiscal years beginning after December 15, 2016, with
early adoption available. The Company adopted this guidance for the quarter ended March 31, 2016 with retrospective application and reclassified comparative periods for consistency. For 2015, a long-term deferred tax liability of $580,000 has been netted with the current deferred tax asset of $195,000 for a net deferred tax liability of $385,000.
In April 2015, the FASB issued ASU No. 2015-03
, Interest-Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs.
ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability rather than as an asset. The standard is effective for fiscal periods beginning after December 15, 2015, and interim periods therein and early application is permitted. Companies are required to adopt the standard retrospectively. The standard will result in all deferred financing costs, excluding transaction costs incurred in connection with securing revolving credit facilities, being deducted from long-term debt obligations in the Company’s balance sheets. The Company adopted the provisions of ASU No. 2015-03 during 2016. The effect of the adoption did not result in a change to equity or net income.
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 is currently assessing the effect that ASU No. 2016-02 will have on its financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation—Stock Compensation (Topic 718)
. This standard makes several modifications to Topic 718 related to the accounting for forfeitures, employer tax withholding on share-based compensation and the financial statement presentation of excess tax benefits or deficiencies. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective for interim and annual reporting periods beginning after December 15, 2016, although early adoption is permitted. The Company is currently assessing the effect that ASU No. 2016-09 will have on its financial statements.
Use of Estimates
- The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include the allowance for doubtful trade receivables, the reserve for inventory obsolescence, and the valuation allowance for deferred tax assets.
2.
INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 2016 and 2015 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(72,000)
|
|
$
|
62,000
|
|
|
State
|
|
|
7,000
|
|
|
10,000
|
|
|
|
|
|
(65,000)
|
|
|
72,000
|
|
|
Deferred - Federal
|
|
|
61,000
|
|
|
18,000
|
|
|
|
|
$
|
(4,000)
|
|
$
|
90,000
|
|
The expected provision for income taxes, computed by applying the U.S. federal income tax rate of 34% in 2016 and 2015 to income (loss) before taxes, is reconciled to income tax expense as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Expected provision for federal income taxes
|
|
$
|
(23,000)
|
|
$
|
77,000
|
|
|
State income taxes, net of federal benefit
|
|
|
7,000
|
|
|
7,000
|
|
|
Domestic manufacturers deduction
|
|
|
-
|
|
|
(6,000)
|
|
|
Non-deductible meals, entertainment, and life insurance
|
|
|
27,000
|
|
|
29,000
|
|
|
Research and development credit
|
|
|
(32,000)
|
|
|
(30,000)
|
|
|
Change in valuation allowance
|
|
|
15,000
|
|
|
15,000
|
|
|
Other
|
|
|
2,000
|
|
|
(2,000)
|
|
|
|
|
$
|
(4,000)
|
|
$
|
90,000
|
|
Net deferred tax liabilities consist of the following as of December 31, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Accrued vacation
|
|
$
|
32,000
|
|
$
|
26,000
|
|
|
Inventories reserve
|
|
|
66,000
|
|
|
126,000
|
|
|
Allowance for doubtful accounts
|
|
|
4,000
|
|
|
5,000
|
|
|
Allowance for sales returns
|
|
|
15,000
|
|
|
37,000
|
|
|
Research and development credit carryforward
|
|
|
77,000
|
|
|
45,000
|
|
|
Accrued self-insured medical
|
|
|
3,000
|
|
|
1,000
|
|
|
Property and equipment
|
|
|
(499,000)
|
|
|
(494,000)
|
|
|
Intangible assets
|
|
|
(92,000)
|
|
|
(86,000)
|
|
|
Net operating loss
|
|
|
3,000
|
|
|
-
|
|
|
Other
|
|
|
5,000
|
|
|
-
|
|
|
Valuation allowance
|
|
|
(60,000)
|
|
|
(45,000)
|
|
|
Net deferred tax liabilities
|
|
$
|
(446,000)
|
|
$
|
(385,000)
|
|
At December 31, 2016, the Company generated a federal credit carryforward for increasing research and development costs of $17,000 which expires in 2036. The Company does not have any federal net operating loss carryforwards due to current carryback potential to previous tax years. The Company generated state net operating loss carryforwards in 2016 of $729,000 which begin expiring in 2026. The Company had state credit carryforwards for increasing research and development costs as of December 31, 2016 and 2015 of $60,000 and $45,000, respectively.
The valuation allowance balance of $60,000 and $45,000 at December 31, 2016 and 2015, respectively relates entirely to Minnesota research and development credit carryforwards that the Company does not expect to utilize and begin to expire in 2028. The change in the valuation allowance was $15,000 in 2016 and 2015, respectively.
It has been the Company’s policy to recognize interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2016 and 2015, there was no liability for unrecognized tax benefits.
The Company is subject to federal and state taxation. The material jurisdictions that are subject to examination by tax authorities primarily include Minnesota and the United States, for tax years 2013, 2014, 2015, and 2016.
3.
INTANGIBLE ASSETS
Intangible assets consist of patents, patent applications, and licenses. Capitalized patent application costs are included with patents. Intangible assets are amortized on a straight-line basis over their estimated useful lives or terms of their agreement, whichever is shorter. The Company wrote off costs related to abandoned patent applications of $46,000 in 2015. There were no abandonments or impairment adjustments to intangible assets during the year ended December 31, 2016.
Intangible assets at December 31, 2016 and 2015 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
|
|
|
Gross Carrying
|
|
Accumulated
|
|
Gross Carrying
|
|
Accumulated
|
|
|
|
|
Amount
|
|
Amortization
|
|
Amount
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
437,199
|
|
$
|
(103,238)
|
|
$
|
410,053
|
|
$
|
(81,248)
|
|
|
License
|
|
|
50,000
|
|
|
(45,834)
|
|
|
50,000
|
|
|
(42,709)
|
|
|
|
|
$
|
487,199
|
|
$
|
(149,072)
|
|
$
|
460,053
|
|
$
|
(123,957)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
Aggregate amortization expense:
|
|
|
|
|
|
|
|
|
For the years ended December 31
|
|
$
|
25,115
|
|
$
|
25,040
|
|
Estimated amortization expense for the years ending December 31:
|
|
|
|
|
|
|
2017
|
|
$
|
26,000
|
|
|
2018
|
|
|
24,000
|
|
|
2019
|
|
|
22,000
|
|
|
2020
|
|
|
22,000
|
|
|
2021
|
|
|
22,000
|
|
In connection with the license agreement, the Company has agreed to pay royalties ranging from 3% to 5% on the sales of products subject to the agreements. The Company incurred $12,000 of expense under these agreements during 2016, and $15,000 during 2015 which are included in selling, general and administrative expenses in the Statements of Operations.
4.
RETIREMENT PLAN
The Company has established a salary deferral plan under Section 401(k) of the Internal Revenue Code. Such deferrals accumulate on a tax-deferred basis until the employee withdraws the funds. The Company contributes up to 5% of each eligible employee’s compensation. Total retirement expense for the years ended December 31, 2016 and 2015 was approximately $236,000 and $202,000, respectively.
5.
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, DTX and 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 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 of the segments are the same as those described in the summary of significant accounting policies included in Note 1.
Management evaluates the performance of each segment based on the components of divisional income, and does not allocate assets and liabilities to segments except for trade receivables. Financial information with respect to the reportable segments follows:
For the year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IKONICS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
Export
|
|
Imaging
|
|
DTX
|
|
AMS
|
|
Unalloc.
|
|
Total
|
|
|
Net sales
|
|
$
|
7,361,222
|
|
$
|
4,508,577
|
|
$
|
4,253,249
|
|
$
|
404,898
|
|
$
|
1,041,955
|
|
$
|
—
|
|
$
|
17,569,901
|
|
|
Cost of goods sold
|
|
|
4,203,125
|
|
|
3,501,769
|
|
|
1,906,664
|
|
|
162,376
|
|
|
1,559,057
|
|
|
—
|
|
|
11,332,991
|
|
|
Gross profit (loss)
|
|
|
3,158,097
|
|
|
1,006,808
|
|
|
2,346,585
|
|
|
242,522
|
|
|
(517,102)
|
|
|
—
|
|
|
6,236,910
|
|
|
Selling, general, and administrative*
|
|
|
1,396,266
|
|
|
650,513
|
|
|
1,052,823
|
|
|
144,970
|
|
|
419,469
|
|
|
1,947,808
|
|
|
5,611,849
|
|
|
Research and development*
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
647,065
|
|
|
647,065
|
|
|
Income (loss) from operations
|
|
$
|
1,761,831
|
|
$
|
356,295
|
|
$
|
1,293,762
|
|
$
|
97,552
|
|
$
|
(936,571)
|
|
$
|
(2,594,873)
|
|
$
|
(22,004)
|
|
For the year ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
IKONICS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
Export
|
|
Imaging
|
|
DTX
|
|
AMS
|
|
Unalloc.
|
|
Total
|
|
|
Net sales
|
|
$
|
7,607,832
|
|
$
|
4,896,736
|
|
$
|
3,952,929
|
|
$
|
476,286
|
|
$
|
628,283
|
|
$
|
—
|
|
$
|
17,562,066
|
|
|
Cost of goods sold
|
|
|
4,402,356
|
|
|
3,767,589
|
|
|
1,854,519
|
|
|
254,863
|
|
|
1,138,147
|
|
|
—
|
|
|
11,417,474
|
|
|
Gross profit (loss)
|
|
|
3,205,476
|
|
|
1,129,147
|
|
|
2,098,410
|
|
|
221,423
|
|
|
(509,864)
|
|
|
—
|
|
|
6,144,592
|
|
|
Selling, general, and administrative*
|
|
|
1,337,069
|
|
|
580,173
|
|
|
988,823
|
|
|
174,525
|
|
|
347,298
|
|
|
1,835,484
|
|
|
5,263,372
|
|
|
Research and development*
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
660,402
|
|
|
660,402
|
|
|
Income (loss) from operations
|
|
$
|
1,868,407
|
|
$
|
548,974
|
|
$
|
1,109,587
|
|
$
|
46,898
|
|
$
|
(857,162)
|
|
$
|
(2,495,886)
|
|
$
|
220,818
|
|
*
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 December 31, 2016 and December 31, 2015 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Dec 31, 2016
|
|
Dec 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
1,206,866
|
|
$
|
1,206,077
|
|
|
Export
|
|
|
551,803
|
|
|
528,372
|
|
|
IKONICS Imaging
|
|
|
363,602
|
|
|
341,980
|
|
|
DTX
|
|
|
52,935
|
|
|
26,314
|
|
|
AMS
|
|
|
177,374
|
|
|
164,639
|
|
|
Unallocated
|
|
|
(16,079)
|
|
|
(102,188)
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,336,501
|
|
$
|
2,165,194
|
|
6.
STOCK OPTIONS
The Company has a stock incentive plan for the issuance of up to 442,750 shares of common stock. The plan provides for granting eligible participants stock options or other stock awards, as described by the plan, at prices ranging from 85% to 110% of fair market value at date of grant. Options granted expire up to seven years after the date of grant. Such options generally become exercisable over a three year period. A total of 104,239 shares of common stock are reserved for additional grants of options under the plan as of December 31, 2016.
Under the plan, the Company charged compensation expense of $25,007 and $21,743 against income in 2016 and 2015, respectively.
As of December 31, 2016, there was approximately $33,000 of unrecognized compensation expense related to unvested share-based compensation awards granted which is expected to be recognized over the next three years.
Proceeds from the exercise of stock options were approximately $3,800 for 2016. There was no exercise of stock options in 2015.
The fair value of options granted during 2016 and 2015 was estimated using the Black-Scholes option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
Dividend yield
|
|
0%
|
|
0%
|
|
|
Expected volatility
|
|
42.4%
|
|
42.3% - 42.4%
|
|
|
Expected life of option
|
|
Five Years
|
|
Five Years
|
|
|
Risk-free interest rate
|
|
1.3%
|
|
1.4% - 1.5%
|
|
|
Fair value of each option on grant date
|
|
$ 4.02
|
|
$5.43 - $6.14
|
|
There were 4,500 options and 7,250 options granted during 2016 and 2015, respectively.
FASB ASC 718, Compensation — Stock Compensation specifies that initial accruals be based on the estimated number of instruments for which the requisite service is expected to be rendered. Therefore, the Company is required to incorporate a preexisting forfeiture rate based on the historical forfeiture experience and prospective actuarial analysis, estimated at 3%.
A summary of the status of the Company’s stock option plan as of December 31, 2016 and changes during the year then ended is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
Shares
|
|
Price
|
|
|
Outstanding at January 1, 2016
|
|
12,168
|
|
$
|
15.47
|
|
|
Granted
|
|
4,500
|
|
|
10.75
|
|
|
Exercised
|
|
(500)
|
|
|
7.53
|
|
|
Outstanding at December 31, 2016
|
|
16,168
|
|
$
|
14.40
|
|
|
Exercisable at December 31, 2016
|
|
6,417
|
|
$
|
15.41
|
|
The weighted-average grant date fair value of options granted was $4.02 and $5.92 for the years ended December 31, 2016 and 2015, respectively. The total intrinsic value of stock options exercised was $2,160 for the year ended December 31, 2016. No stock options were exercised in 2015.
7.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances primarily in two financial institutions. As of December 31, 2016, the balance at one of the institutions exceeded the Federal Deposit Insurance Corporation coverage.
Trade receivables are financial instruments that also expose the Company to concentration of credit risk. The large number of customers comprising the Company’s customer base and their dispersion across different geographic areas limits such exposure. In addition, the Company routinely assesses the financial strength of its customers and maintains an allowance for doubtful accounts that management believes will adequately provide for credit losses.
8.
LONG-TERM DEBT
On April 1, 2016, the Company entered into a financing agreement (the “Financing Agreement”) under which the Duluth Economic Development Authority (the “Issuer”) agreed to sell $3,415,000 of its Tax Exempt Industrial Revenue Bonds, Series 2016 (IKONICS Project) (the “Bonds”) to Wells Fargo Bank, National Association (the “Bank”), and the Bank agreed to lend to the Company the proceeds received from the sale of the Bonds (the “Loan”).
The closing of the sale of the Bonds occurred on April 29, 2016. The proceeds from the Loan were used to finance the construction of a 27,300-square foot building as well as related equipment for use in the Company’s manufacture of sound deadening technology used in the aerospace industry and products consisting of etched composites, ceramics, glass and silicon wafers, to be located in Duluth, Minnesota (the “Project”).
The Loan requires monthly payments of approximately $18,000, including interest. The Loan bears interest at a rate of 2.14% per year, payable monthly, and matures on April 1, 2041. Including debt costs of approximately $139,000, the Loan’s effective interest rate is 2.77% per year.
The Loan is subject to mandatory purchase provisions, under which any owners of the Bonds (the “Owners”) may tender the Bonds to the Issuer on April 1, 2021, which would result in the Company repaying the outstanding loan principal and any outstanding accrued and unpaid interest to the Issuer at that time. If in the event the Bonds are not repurchased on April 1, 2021, the Bonds shall be subject to the interest rate and redemption provisions set forth in the associated covenant agreement.
Subject to limitations in the associated covenant agreement, the Company may cause a redemption of the Bonds, in whole or in part, in authorized denominations at the redemption prices set forth in the Financing Agreement, together with any accrued or unpaid interest to the date of redemption. The Bonds are also subject to redemption in whole in the event of certain extraordinary events related to the Project.
The Company is subject to certain customary covenants set forth in the associated covenant agreement, including a requirement that the Company maintain a debt service coverage ratio as of the end of each calendar quarter of not less than 1.25 to 1.00 on a rolling four-quarter basis.
The remaining principal payments required under the agreement for years ended December 31, and the current and long‑term portion of the principal, are as follows:
|
|
|
|
|
|
|
2017
|
|
$
|
140,000
|
|
|
2018
|
|
|
143,000
|
|
|
2019
|
|
|
146,000
|
|
|
2020
|
|
|
149,000
|
|
|
2021
|
|
|
152,000
|
|
|
Thereafter
|
|
|
2,605,000
|
|
|
Total Principal
|
|
|
3,335,000
|
|
|
Less: Unamortized debt issuance costs
|
|
|
131,000
|
|
|
Less: Current portion
|
|
|
127,000
|
|
|
Long-term portion
|
|
$
|
3,077,000
|
|
In connection with the agreement, the Company incurred debt issuance costs of approximately $139,000 during 2016, which were deferred and are being amortized over the term of the Financing Agreement. Amortization of debt issuance costs was approximately $9,000 for 2016 and is included in interest expense. Debt issuance costs of $118,000 and $13,000 are netted against long-term debt and current portion of long‑term debt, respectively as of December 31, 2016. Amortization of debt costs is expected to be approximately $12,000 annually for each of the next five years.
In addition to the $3,415,000 in indebtedness pursuant to the Loan, the Company has a bank line of credit providing for borrowings of up to $2,050,000, expiring on May 31, 2017 that bears interest at 1.8 percentage
points over the 30‑day LIBOR rate. The Company did not utilize this line of credit during 2016 or 2015 and there were no borrowings outstanding as of December 31, 2016 and 2015. There are no financial covenants related to the line of credit and the Company expects to obtain a similar line of credit when the current line of credit expires.
Both the $3,415,000 financing pursuant to the Loan and the line of credit are collateralized by substantially all assets of the Company.