Filing identity and reporting period
The supplied filing is IKONICS Corporation’s unaudited Form 10-Q for the quarter ended June 30, 2021, filed August 12, 2021. It is not a TeraWulf 10-Q; TeraWulf is discussed as the proposed merger partner. The statements cover Q2 and the six months ended June 30, compared with 2020.
Business context and proposed transaction
IKONICS reported four segments: Chromaline, IKONICS Imaging, Digital Texturing (DTX), and Advanced Material Solutions (AMS). On June 25, 2021, IKONICS and TeraWulf announced a proposed combination under a new holding company. Under the disclosed terms, each IKONICS share would receive $5 cash, one non-traded contingent value right (CVR), and one share of the combined company; IKONICS shareholders collectively would own 2% of its pro forma common equity. The CVR would entitle holders to 95% of net proceeds from a sale of the legacy IKONICS business completed within 18 months after closing. Closing was expected in the second half of 2021, subject to approvals and other conditions.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $4.25 million | $2.57 million | $7.32 million | $6.07 million |
| Gross profit / margin | $1.43 million / 33.6% | $0.38 million / 15.0% | $2.43 million / 33.1% | $1.54 million / 25.3% |
| Operating loss | $0.64 million | $1.02 million | $0.97 million | $1.83 million |
| Net loss | $0.72 million | $1.04 million | $1.04 million | $1.63 million |
| Basic and diluted loss per share | $(0.37) | $(0.53) | $(0.53) | $(0.82) |
Q2 sales increased 65.3% year over year; first-half sales rose 20.7%. Management attributed much of the comparison improvement to recovery from COVID-19-related weakness in 2020. Q2 growth was led by Chromaline and IKONICS Imaging, while AMS sales declined 10.9%; first-half AMS sales fell 36.9%. IKONICS Imaging also benefited from improved IKONART sales. First-half DTX sales were nearly flat.
Q2 selling, general and administrative expense increased to $1.94 million, including approximately $703,000 of merger-related professional fees. First-half SG&A was $3.13 million and included approximately $730,000 of transaction fees; the prior-year period included $365,000 of one-time CEO-transition costs. First-half R&D expense decreased to $264,000, which management attributed partly to lower staffing. Q2 interest expense included an $82,000 write-off of deferred financing costs after repayment of the loan.
Cash, debt and liquidity
Cash was $2.26 million at June 30, 2021, down from $3.69 million at December 31, 2020. First-half operating activities provided $1.34 million, versus $1.19 million used in the prior-year period. The 2021 operating cash inflow included a $1.06 million increase in accounts payable, mainly associated with merger-related professional expenses, and improved receivable collections. Investing activities used $27,000; financing activities used $2.75 million, principally to repay debt.
IKONICS repaid its approximately $2.7 million economic-development loan on April 1, 2021, using cash on hand. No debt was reported on the June 30 balance sheet. A secured line of credit of up to $2.05 million had no outstanding borrowings and was due to expire August 30, 2021; management expected to obtain a similar facility. Current assets were $5.71 million and current liabilities $2.09 million. Management stated it expected available resources and anticipated cash flows to fund operations beyond 12 months.
Outlook, risks and unusual items
- Management expected full-year 2021 results to be adversely affected by COVID-19, citing uncertainty around demand, supply chains, customer activity, labor and potential operational disruptions. It also anticipated lower 2021 order volume for AMS.
- Management described ongoing product and market initiatives, including IKONART, DTX prototyping and aerospace-related AMS offerings. The filing provides no numerical earnings or revenue guidance.
- The proposed merger remained conditional. The agreement included termination rights and, in certain circumstances, a $1.2 million termination fee payable by IKONICS or a $10.0 million fee payable by TeraWulf. The filing also describes restrictions on IKONICS’ operations and alternative transaction activity while the deal is pending.
- Two shareholder complaints filed in August 2021 alleged proxy disclosure violations and sought, among other relief, to enjoin the mergers. IKONICS said it believed the suits were without merit but could not assure the outcome; litigation could delay or prevent closing and add costs.
- Due to cumulative losses, IKONICS recorded a full valuation allowance against deferred tax assets. Management noted COVID-19 could materially adversely affect results, financial condition and cash flows.
Most important facts for investors to verify
- Confirm the filing entity: this is IKONICS’ 10-Q, not TeraWulf’s, and review the definitive merger documents for current consideration, ownership, CVR provisions and closing conditions.
- Check subsequent filings for merger completion or termination, the status and outcome of shareholder litigation, and any transaction-related changes to the terms.
- Verify renewal or replacement of the $2.05 million credit line, given its August 30, 2021 expiration, and monitor cash generation and working-capital movements.
- Assess whether sales and margins improved sustainably, especially in AMS, and distinguish underlying operating performance from merger costs and COVID-19 comparison effects.