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| IKNX > SEC Filings for IKNX > Form 10-K on 2-Mar-2009 | All Recent SEC Filings |
2-Mar-2009
Annual Report
• The Company's belief that the quality of its receivables is high and that strong internal controls are in place to maintain proper collections-This belief may be impacted by domestic economic conditions, by economic, political, regulatory or social conditions in foreign markets, or by the failure of the Company to properly implement or maintain internal controls.
• The belief that the Company's current financial resources, cash generated from operations and the Company's capacity for debt and/or equity financing will be sufficient to fund current and anticipated business operations and capital expenditures. The belief that the Company's low debt levels and available line of credit make it unlikely that a decrease in product demand would impair the Company's ability to fund operations-Changes in anticipated operating results, credit availability, equity market conditions or the Company's debt levels may further enhance or inhibit the Company's ability to maintain or raise appropriate levels of cash.
• The Company's belief that depreciation expense will increase by $130,000 annually in connection with the occupancy of its new facility and will be partially offset by a decrease in rental expenses of $70,000 annually-Actual depreciation and rental expense may vary due to changes in accounting rules.
• The Company's expectations as to the level and use of planned capital expenditures and that capital expenditures will be funded with cash generated from operating activities-This expectation may be affected by changes in the Company's anticipated capital expenditure requirements resulting from unforeseen required maintenance, repairs or capital asset additions. The funding of planned or unforeseen expenditures may also be affected by changes in anticipated operating results resulting from decreased sales, lack of acceptance of new products or increased operating expenses or by other unexpected events affecting the Company's financial position.
• The Company's belief that its vulnerability to foreign currency fluctuations and general economic conditions in foreign countries is not significant-This belief may be impacted by economic, political and social conditions in foreign markets, changes in regulatory and competitive conditions, a change in the amount or geographic focus of the Company's international sales, or changes in purchase or sales terms.
• The Company's plans to continue to invest in research and development efforts, expedite internal product development and invest in technological alliances, as well as the expected focus and results of such investments-These plans and expectations may be impacted by general market conditions, unanticipated changes in expenses or sales, delays in the development of new products, technological
advances, the ability to find suitable and willing technology partners or other changes in competitive or market conditions.
• The Company's efforts to grow its international business-These efforts may be impacted by economic, political and social conditions in current and anticipated foreign markets, regulatory conditions in such markets, unanticipated changes in expenses or sales, changes in competitive conditions or other barriers to entry or expansion.
• The Company's belief as to future activities that may be undertaken to expand the Company's business, including sales of new products, and the effect those activities may have on the Company's financial results-Actual activities undertaken and the results those activities have on the Company's financial results may be impacted by general market conditions, competitive conditions in the Company's industry, unanticipated changes in the Company's financial position, delays in new product introductions, lack of acceptance of new products or the inability to identify attractive acquisition targets or other business opportunities.
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:
Accounts Receivable. 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.
Inventory. Inventories are valued at the lower of cost or market value using
the last in, first out (LIFO) method. The Company monitors its inventory for
obsolescence and records reductions from cost when required.
Income Taxes. At December 31, 2008, the Company had net current deferred tax
assets of $96,000 and net noncurrent deferred tax liabilities of $143,000. The
deferred tax assets and liabilities result primarily from temporary differences
in property and equipment, accrued expenses, and inventory reserves. The Company
has determined that it is more likely than not that the deferred tax asset will
be realized and that a valuation allowance for such assets is not currently
required. The Company accounts for its uncertain tax positions under FIN 48 and
the related liability of $48,000 as of December 31, 2008 will be adjusted as the
statute of limitations expires or these positions are reassessed.
Investments in Non-Marketable Equity Securities. Investments in
non-marketable equity securities consist of a $919,000 investment in imaging
Technology international ("iTi"). The Company accounts for this investment by
the cost method because iTi's common stock is unlisted and the criteria for
using the equity method of accounting are not satisfied. Under the cost method,
the investment is assessed for other-than-temporary impairment and recorded at
the lower of cost or market value which requires significant judgment since
there are no readily available market values for this investment. In assessing
the fair value of this investment the Company considers recent equity
transactions that iTi has entered into, the status of iTi's technology and
strategies in place to achieve its objectives, as well as iTi's financial
condition, results of operations, and ability to achieve its forecasted results.
To the extent there are changes in the assessment, an adjustment may need to be
recorded.
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. Freight billed to customers is included in sales.
Shipping costs are included in cost of goods sold.
Results of Operations
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
Sales. The Company's net sales increased 0.1% to $15.9 million in 2008
compared to net sales of $15.8 million in 2007. Export realized a 6.3% sales
increase in 2008 over 2007 due to stronger sales in Europe and the Middle East.
Export sales increases were partially offset by lower domestic shipments.
Domestic Chromaline and IKONICS Imaging shipments were down 1.7% and 3.5%,
respectively, due to weaker market conditions during the later part of 2008.
Gross Profit. Gross Profit was $6.6 million, or 41.8% of sales, in 2008 and
$6.9 million, or 43.8% of sales, in 2007. IKONICS Imaging gross profit
percentage decreased to 48.2% in 2008 compared to 54.2% in 2007, as this
business segment has incurred additional manufacturing expenses related to
startup and development of new business initiatives as well as higher raw
material costs. Export gross profit percentage decreased from 32.8% in 2007 to
31.7% in 2008 due to higher freight and raw material prices partially offset by
manufacturing efficiencies. Manufacturing efficiencies contributed to the
increase in Domestic Chromaline gross profit percentage from 44.6% in 2007 to
45.3% in 2008, although a portion of the gains from these efficiencies was
offset by increasing raw material prices.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to $4.9 million, or 30.8% of sales, in 2008
from $4.7 million, or 29.9% of sales, in 2007. The 2008 increase reflects
additional personnel related expenses for a severance agreement and insurance.
The Company also realized an increase in bad debt expenses related to less
favorable economic conditions.
Research and Development Expenses. Research and development expenses were
$767,000, or 4.8% of sales, in 2008 compared to $775,000, or 4.9% of sales, in
2007. The decrease is related to lower salaries substantially offset by a
$69,000 expense related to 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.
Gain on Sale of Non-Marketable Equity Securities. The Company realized a gain
of $25,000 in 2008 on the sale of its investment in the common and preferred
stock of Apprise Technologies, Inc. The sale took place during the first quarter
of 2007 at which time a $55,000 gain was recognized. The $25,000 gain in 2008 is
related to a portion of the original sales price that was placed in escrow at
the time of the sale for indemnification obligations as part of the agreement
between Apprise and its purchaser. The Company expects to receive additional
proceeds and a related gain in the first quarter of 2009. The amount to be
received in the first quarter of 2009 is expected to be slightly less than
amount received in 2008, however there can be no assurance that this will occur.
Interest Income. Interest income in 2008 was $90,000 compared to $154,000 in
2007. The decrease in interest income is due to a lower investment balance as
the Company used cash to finance the construction of its new facility and a
decrease in interest rates resulting from the Company moving excess cash out of
auction rate securities (ARS). As of December 31, 2008, the Company did not own
any ARS.
Income Taxes. In 2008, the Company realized an income tax expense of
$271,000, or an effective rate of 25.0%, compared to income tax expense of
$466,000, or an effective rate of 28.5%, for the same period in 2007. The
effective tax rate in 2008 was significantly impacted by the recognition of
federal and state research and development credits of $85,000, including a state
refund of $55,000 for tax years 2005, 2006, and 2007. The effective tax rate was
also impacted by derecognizing a liability of $44,000 for unrecognized tax
benefits relating to a tax year where the statute of limitations expired during
the first quarter, as well as the benefits of the domestic manufacturing
deduction, tax exempt interest, and state income taxes. The 2007 effective tax
rate was significantly impacted by derecognizing a liability of $45,000 for
unrecognized tax benefits relating to a tax year where the statute of
limitations expired during the first quarter. During 2007, the Company also
recorded a tax benefit adjustment of $9,000 relating to the December 31, 2006
tax accrual estimate. A net benefit of $27,000 was also
realized from the reversal of the valuation allowance offsetting the capital
loss carryforward and utilization of a portion of the carryforward when the
initial proceeds were received from the sale of the Apprise investment. The
remaining carryforward is expected to be fully utilized when the additional
anticipated proceeds are received in 2009. Compared to 2007, the 2008 effective
tax rate was unfavorably impacted by a decrease in tax exempt interest as a
result of the Company's sale of ARS during the first six months of 2008.
Liquidity and Capital Resources
The Company has financed its operations principally with funds generated from
operations. These funds have been sufficient to cover the Company's normal
operating expenditures, annual capital requirements, and research and
development expenditures.
Cash and cash equivalents were $902,000 and $1,230,000 at December 31, 2008
and 2007, respectively. The Company generated $1,126,000 in cash from operating
activities during 2008 compared to $1,698,000 of cash generated from operating
activities during 2007. Cash provided by operating activities is primarily the
result of net income adjusted for non-cash depreciation, amortization, stock
based compensation, loss on intangible asset abandonment, deferred taxes, and
certain changes in working capital components discussed in the following
paragraph.
During 2008, trade receivables increased by $52,000. The increase in
receivables is primarily related to the timing of collections. Although the
Company realized a $49,000 increase in bad debt expense during 2008, the Company
believes that the quality of its receivables is high and that strong internal
controls are in place to maintain proper collections. Inventory levels decreased
by $247,000 due to lower finished good levels and an increase in the LIFO
reserve. Accounts payable decreased by $91,000, reflecting the timing of
payments to suppliers. Accrued liabilities decreased $51,000 primarily due to a
reduction in the accrual for uncertain tax positions (see Note 2 to the
financial statements). Income taxes payable decreased $38,000 and the Company's
income tax receivable increased $186,000 due to timing of estimated 2008 tax
payments compared to the calculated 2008 tax liability.
During 2008, investing activities used $1,004,000 in cash as the Company
completed construction on its new facility at a total cost of $4.4 million, of
which $120,000 was included in construction accounts payable as of December 31,
2008 and had no effect on cash flows. Partially offsetting the cash used for the
new facility, the Company sold $3,550,000 of short-term investments comprised of
ARS. At December 31, 2008, the Company had no investment in ARS. The Company
also made the final $95,000 payment upon the delivery of its industrial digital
inkjet machine in 2008. The Company incurred $50,000 in patent application costs
during the first nine months of 2008 that the Company recorded as an asset and
will amortize upon successful completion of the application process or expense
if the applications are abandoned. The Company expensed $69,000 during 2008 due
to abandonment of certain patent applications. The Company received proceeds of
$25,000 in 2008 on the sale of its investment in the common and preferred stock
of Apprise Technologies, Inc., and $8,500 from the sale of a vehicle. During the
fourth quarter of 2008, the Company exercised a warrant for 7,500 shares at a
price of $8.50 per share to purchase an additional $63,750 of iTi stock. The
Company owns approximately 8% of the total outstanding common shares of iTi. iTi
is a leader in the development of industrial production systems based on inkjet
technology, and the Company believes iTi's expertise fits strategically with the
Company's expertise in developing substrates for inkjet printing and the
Company's plans to develop proprietary industrial inkjet technologies.
The Company used $833,000 in cash for investing activities in 2007. In 2007,
the Company purchased $610,000 of plant equipment. Over one-half of the plant
and equipment purchases were related to the Company's efforts in industrial
digital inkjet and photo-machining markets. Purchases were also made to improve
facilities, update systems and replace vehicles. The Company also purchased
$375,000 of short-term investments comprised of ARS during 2007, which the
Company sold during 2008 for no gain or loss. During the second quarter of 2007,
the Company exercised a warrant for 7,500 shares at a price of $8.50 per share
to purchase an additional $63,750 of iTi stock. The Company also incurred
$48,000 in patent application costs during 2007. These cash outlays were
partially offset by receipt of $253,000 from the sale of the Company's Apprise
investment and $11,500 from the sale of two vehicles.
The Company used $450,000 of cash in financing activities in 2008 compared to
$112,000 provided by financing activities in 2007. During 2008, the Company
purchased 87,850 shares of its own stock at a cost of $596,000. The Company's
previously announced repurchase plan allows for an additional 62,157 shares to
be
repurchased. The Company received $107,000 for the issuance of 35,872 shares of
common stock upon the exercise of stock options during 2008 compared to $80,000
received in 2007 for 35,100 shares of common stock issued upon the exercise of
stock options. Financing activities also reflect excess tax benefits of $39,000
and $32,000 in 2008 and 2007, respectively, related to the exercise of stock
options.
A bank line of credit provides for borrowings of up to $1,250,000. The line
of credit term runs from October 31, 2008 to October 30, 2009. The Company
expects to obtain a similar line of credit when the current line of credit
expires. Borrowings under this line of credit are collateralized by accounts
receivable and inventories and bear interest at 2.0 percentage points over the
30-day LIBOR rate. The Company did not utilize this line of credit during 2008
or 2007 and there were no borrowings outstanding as of December 31, 2008 and
2007.
The Company believes that current financial resources, its line of credit,
cash generated from operations and the Company's capacity for debt and/or equity
financing will be sufficient to fund current and anticipated business
operations. The Company also believes that, with no debt outstanding and an
available line of credit, it is unlikely that a decrease in demand for the
Company's products would impair the Company's ability to fund operations.
Capital Expenditures
In 2008 the Company had $4.6 million in capital expenditures of which
$120,000 is included in construction accounts payable. This spending primarily
consists of land acquisition and construction costs related to the construction
of a new warehouse and manufacturing facility necessary to accommodate the
Company's new business initiatives and growth plans. The expansion project was
completed and put into operation in 2008. The Company will continue to operate
and maintain its current facility along with the new facility. In 2009,
depreciation expense is expected to increase by $130,000 annually, but will be
partially offset by a decrease in rental expense of approximately $70,000
annually. Both amounts are recorded in cost of sales.
During 2007, the Company spent $610,000 on capital expenditures. This
spending primarily consisted of supporting the Company's efforts in industrial
digital inkjet and photo-machining markets, plant equipment upgrades and
building improvements to improve efficiency and reduce operating costs and
vehicles.
Plans for capital expenditures include ongoing manufacturing equipment
upgrades, development equipment to modernize the capabilities and processes of
IKONICS' laboratory, research and development to improve measurement and quality
control processes and vehicles. These commitments are expected to be funded with
cash generated from operating activities. The Company expects capital
expenditures in 2009 of approximately $200,000.
International Activity
The Company markets its products in numerous countries in all regions of the
world, including North America, Europe, Latin America, and Asia. The Company's
2008 foreign sales of $4,975,000 were approximately 31.4% of total sales,
compared to the 2007 foreign sales of $4,678,000, which were 29.6% of total
sales. Foreign sales growth in 2008 was mainly due to stronger sales in Europe
and the Middle East. The Company anticipates that its sales will increase in
India and Latin America as the Company exploits opportunities in those markets.
Fluctuations in certain foreign currencies have not significantly impacted the
Company's operations because the Company's foreign sales are not concentrated in
any one region of the world. The Company believes its vulnerability to
uncertainties due to foreign currency fluctuations and general economic
conditions in foreign countries is not significant.
The Company's foreign transactions are primarily negotiated, invoiced and
paid in U.S. dollars, while 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 as of
December 31, 2008. Furthermore, the impact of foreign exchange on the Company's
balance sheet and operating results was not material in either 2008 or 2007.
Future Outlook
IKONICS has spent on average over 4% of its sales dollars for the past few
years in research and development and in addition has made capital expenditures
related to its digital technology program. The Company plans to maintain its
efforts in this area and expedite internal product development as well as form
technological alliances with outside experts to ensure commercialization of new
product opportunities.
In 2008, the Company achieved commercial acceptance of several new business
initiatives, including its photo-machining process, sound deadening technology,
digital texturing and IKONICS Industrial Solutions, which creates custom
products to meet the needs of specific users. The Company anticipates that these
new business initiatives will contribute an increasing amount of the Company's
sales in 2009. The Company's anticipated sales from these new initiatives for
2009 includes sales of an improved sound-deadening product that is expected to
expand the Company's customer base and sales of the Company's next-generation
DTX printer, which is planned to be available for sale in the second quarter of
2009.
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.
Other future activities undertaken to expand the Company's business may
include acquisitions, building improvements, equipment additions, new product
development and marketing opportunities. In addition to its traditional emphasis
on domestic markets, the Company will continue efforts to grow its business
internationally by attempting to develop new markets and expanding market share
where it has already established a presence.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS 157"). SFAS 157 defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, SFAS 157 does not require any new
fair value measurements. In February 2008, the FASB issued FASB Staff Position
FAS 157-2, which delayed, for one year, the effective date of SFAS 157 for all
nonfinancial assets and liabilities, except those that are recognized or
disclosed in the financial statements on at least an annual basis. This
statement was effective for the Company beginning January 1, 2008. The deferred
provisions of SFAS 157 will be effective for the Company's fiscal year 2009. The
Company's only financial instruments measured at fair value on a recurring basis
were its ARS, which were sold during the second quarter of 2008 at cost.
Accordingly, the adoption of SFAS 157 did not have a material effect on the
Company's disclosures to the financial statements. The Company's investments in
non-marketable equity securities are tested for other than temporary impairment,
however, to date, there has not been an impairment and accordingly these
investments are carried at cost.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 allows
entities to measure at fair value many financial instruments and certain other
assets and liabilities that are not otherwise required to be measured at fair
value. SFAS 159 was effective for the Company on January 1, 2008, and the
Company elected not to apply the fair market value provision of SFAS 159.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements" ("SFAS 160"). SFAS 160 requires all entities
to report minority interests in subsidiaries as equity in the consolidated
financial statements, and requires that transactions between entities and
noncontrolling interests be treated as equity. SFAS 160 is effective for fiscal
years beginning on or after December 15, 2008. The adoption of this statement
will not have an impact on the Company's financial position or results of
operations.
In December 2007, the FASB issued SFAS No. 141 (Revised), "Business Combinations" ("SFAS 141(R)"). SFAS 141 (R) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the . . .
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