IKONICS Corporation — Form 10-Q Summary
Important filing-identity discrepancy: The request identifies TERAWULF INC., but the supplied Form 10-Q is for IKONICS CORPORATION, a Minnesota company (Nasdaq: IKNX), for the quarter ended September 30, 2020. The summary below reflects the supplied filing, not TeraWulf. The financial statements are unaudited.
Business context and reporting period
IKONICS reported results for the three and nine months ended September 30, 2020, compared with the same 2019 periods. Its businesses include Chromaline, IKONICS Imaging, Digital Texturing (DTX), and Advanced Material Solutions (AMS). Management attributed lower demand and operating performance primarily to COVID-19-related economic disruption.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $3.135 million | $4.530 million | $9.205 million | $12.655 million |
| Gross profit / margin | $874,000 / 27.9% | $1.412 million / 31.2% | $2.412 million / 26.2% | $3.850 million / 30.4% |
| Operating loss | $243,000 | $154,000 | $2.073 million | $886,000 |
| Net loss | $274,000 | $163,000 | $1.903 million | $733,000 |
| Basic and diluted loss per share | $0.14 | $0.08 | $0.96 | $0.37 |
- For the nine-month period, operating cash outflow was $630,000, versus $620,000 in 2019. Investing activities provided $2.060 million, principally reflecting maturities of short-term investments; financing activities provided $1.107 million, including the PPP loan.
- Cash and cash equivalents were $3.501 million at September 30, 2020, up from $964,000 at December 31, 2019. The company had no borrowings outstanding on its $2.05 million credit line, which expires August 30, 2021.
- Total debt was approximately $3.94 million. The $3.415 million Duluth Economic Development Authority financing was classified as current at quarter-end; the balance sheet reports $3.459 million current debt and $478,000 long-term debt. The current classification followed bondholder redemption rights and the company’s covenant situation.
- Working capital was approximately $3.04 million, based on reported current assets of $7.476 million and current liabilities of $4.432 million.
Material changes versus the prior comparable period
- Sales fell 30.8% in Q3 and 27.3% for the first nine months. Each division reported lower sales year over year. AMS was particularly weak, with Q3 sales of $129,000 versus $459,000 and a negative gross margin of 96.7%.
- Nine-month gross margin declined to 26.2% from 30.4%. Lower sales and production volumes affected margins; AMS’s nine-month gross margin was negative 15.0%, compared with positive 14.3% in 2019.
- Q3 SG&A declined to $980,000 from $1.347 million; nine-month SG&A was $3.963 million versus $4.068 million. The 2020 nine-month amount included $365,000 of one-time CEO transition costs.
- Nine-month R&D expense decreased to $521,000 from $668,000, partly due to staffing reductions; the 2019 comparison included an $87,000 patent-cost write-off.
- Management recorded a full valuation allowance against deferred tax assets. The nine-month 2020 tax benefit of $232,000 included recognition of eligible NOL carryback claims under the CARES Act.
Outlook, risks, contingencies, and unusual items
- Management expected COVID-19 to continue materially reducing demand, sales, and gross margins in Q4 2020 and beyond; it said the duration and financial impact could not be reasonably estimated. Management also stated that 2020 results would be adversely affected.
- Cost responses included furloughing approximately 40% of the workforce, reducing board and officer compensation, suspending the company’s 401(k) contribution, and eliminating nonessential spending. Additional 2020 capital expenditures were expected to be minimal.
- The company had previously failed its debt-service-coverage covenant at December 31, 2019, received a waiver, and amended the calculation in February 2020. Management believed it would be in violation of the covenant and could not assure a future waiver. An uncured violation could materially harm liquidity.
- The company received a $1.2145 million unsecured PPP loan at 1% interest, due in April 2022. After quarter-end, it applied for 100% forgiveness; approval is not assured. The filing also notes possible repayment and penalties if the company is found ineligible or forgiveness is denied.
- Despite operating cash outflows and pandemic uncertainty, management believed existing cash and expected future cash flows would fund operations for more than twelve months from issuance of the statements.
- The filing reports no legal proceedings, no off-balance-sheet arrangements, and no material changes to previously disclosed risks other than the added COVID-19 risk. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Confirm the intended issuer: the supplied filing is IKONICS Corporation’s 2020 Q3 10-Q, not a TERAWULF INC. filing.
- Review the debt covenant calculation, any subsequent waiver or breach, and the basis for classifying the bond financing as current.
- Check the outcome of the PPP forgiveness application and any resulting repayment obligation or gain.
- Assess subsequent sales, cash usage, and customer and supplier conditions against management’s COVID-19 outlook.
- Review the one-time $365,000 CEO transition expense and the assumptions underlying the full deferred-tax-asset valuation allowance.