TeraWulf (WULF) - 2020 Q4 - Annual Report

PART I Item 1. Business IKONICS develops photosensitive liquids and films across four business units: Chromaline, IKONICS Imaging, AMS, and DTX, leveraging core UV chemistry and inkjet technologies globally General Business Overview IKONICS operates traditional Chromaline and IKONICS Imaging businesses, alongside industrial AMS (aerospace/electronics) and DTX (automotive mold texturing) units - IKONICS operates four main business units: Chromaline (screen printing), IKONICS Imaging (awards/recognition), Advanced Material Solutions (AMS) for aerospace/electronics, and Digital Texturing (DTX) for automotive mold texturing[12] Products and Technology The company's products are built upon four core technology platforms: UV chemistry, film coating, abrasive etching, and industrial inkjet printing - Core technology platforms include UV chemistry, film coating, technical abrasive etching, and industrial inkjet printing, which are combined across its product lines[13] Distribution, Customers, and Sales IKONICS distributes screen printing products via 200 distributors, sells industrial products directly, with international sales significant and no single customer exceeding 10% of net sales International Sales (% of Total) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | International Sales (% of Total) | 29.7% | 29.4% | - The company has a diverse customer base with no single customer representing more than 10% of net sales in 2020 or 2019[15] Research and Development and Intellectual Property The company invested 5.0% of sales in R&D in 2020, focusing on UV chemistry and inkjet technologies, protecting innovations through patents and trademarks R&D Expense | Year | R&D Expense | % of Sales | | :--- | :--- | :--- | | 2020 | $671,000 | 5.0% | | 2019 | $870,000 | 4.9% | - The company holds numerous patents and trademarks, including "IKONICS®," "Chromaline®," "DTX®," and "IKONART®"[19] Competition IKONICS faces competition from larger entities in screen printing, leads in abrasive etching for awards, and competes with established and new technologies for AMS and DTX - The company competes with larger entities in the screen printing market but considers itself the leader in the abrasive etching market for awards and recognition[22] - Competition for AMS is primarily from other established machining methods, while DTX competes with traditional wax/screen printing and newer laser technologies[22] Employees As of February 28, 2021, the company employed 58 full-time employees in Duluth, Minnesota, none of whom are unionized - The company employed 58 full-time employees as of February 28, 2021[26] Item 1A. Risk Factors The company faces risks from COVID-19 impacts, potential PPP loan review, new technology market acceptance, intense competition, regulatory compliance, intellectual property disputes, and reliance on key industries and suppliers Covid-19 Related Risks The COVID-19 pandemic continues to adversely affect operations, supply chain, and demand, with a risk of PPP loan forgiveness reversal - The COVID-19 pandemic is expected to continue to have a material adverse impact on the company's financial condition, results of operations, and cash flows due to business disruptions and decreased demand[27][28] - The company received a $1,214,500 PPP loan which was fully forgiven in 2020, but this forgiveness could be subject to further examination and potential reversal[29][30] Strategic and Competitive Related Risks New DTX and AMS technologies may fail to achieve market acceptance, and the company faces intense competition from larger, better-capitalized firms - The DTX and AMS initiatives involve new technologies that might not be successfully executed or achieve market acceptance, posing a risk to the company's investment in these areas[31][32] - The company faces significant competition from larger, better-capitalized firms, particularly in its AMS and DTX businesses, which could cause operating results to suffer[34] General Economic and Operational Risks The company is vulnerable to global economic downturns, especially in aerospace and automotive sectors, and faces risks from international operations, raw material prices, and single-source supplier dependency - The company's AMS and DTX segments are highly dependent on the aerospace and automotive industries, respectively, making them vulnerable to industry-specific volatility[44] - Reliance on a single manufacturer for DTX printers creates a significant operational risk; if this manufacturer ceases production or fails to meet quality standards, the DTX business would be adversely affected[51][52] - The company is exposed to risks from price increases and availability declines of raw materials, many of which are petroleum-based and sourced from a limited number of suppliers[48][49] Risks Related to Our Common Stock The company's common stock faces limited trading volume and price volatility, with directors and officers holding significant influence due to their 14.2% ownership - The company's common stock has historically had limited trading volume, which may negatively impact its price and liquidity[57] - As of December 31, 2020, directors and officers beneficially owned approximately 14.2% of the company's common stock, giving them significant influence over shareholder votes[58] Item 2. Property The company owns two primary facilities in Duluth, Minnesota: a 60,000 sq-ft administrative/manufacturing building and a 62,300 sq-ft manufacturing/warehouse facility collateralizing a $3.4 million loan - The company owns two main facilities in Duluth, Minnesota: a 60,000 sq-ft primary building and a 62,300 sq-ft manufacturing/warehouse facility on an 11-acre property[60] - The 62,300 sq-ft facility serves as collateral on the company's $3.4 million loan[60] PART II Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "IKNX," with 54 record holders as of February 26, 2021, and no cash dividends paid or planned - The company's common stock is traded on the Nasdaq Capital Market under the symbol "IKNX"[65] - No cash dividends have been declared in the past two years, and there are no current plans to pay any in the future[65] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2020, sales decreased by 23.8% to $13.4 million due to COVID-19, resulting in a $439,000 net loss, mitigated by a $1.2 million PPP loan forgiveness and improved liquidity to $3.7 million cash Impact of the COVID-19 Pandemic The COVID-19 pandemic caused decreased product demand in 2020, expected to continue, prompting a 30% workforce reduction and other cost-cutting measures - The company experienced decreased demand for its products and services during 2020 due to the COVID-19 pandemic and anticipates this trend will continue in 2021[69] - Cost reduction measures included reducing the workforce by approximately 30%, temporary cuts in board and officer compensation, and suspending the company's 401(k) contribution[69] Results of Operations In 2020, net sales decreased by 23.8% to $13.4 million, leading to a gross profit decline, but a net loss of $439,000 was mitigated by a $1.2 million PPP loan forgiveness Financial Performance Comparison (2020 vs. 2019) | Metric | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $13.4M | $17.6M | -23.8% | | Gross Profit | $3.9M | $5.4M | -27.8% | | Gross Margin | 29.1% | 30.6% | -1.5 p.p. | | SG&A Expenses | $5.0M | $5.5M | -9.1% | | R&D Expenses | $0.67M | $0.87M | -22.9% | | Other Income | $1.2M | $61k | +1899% | | Net Loss | ($439k) | ($814k) | +46.0% | - The significant increase in 'Other Income' for 2020 is attributed to the $1.2 million forgiveness of the company's Paycheck Protection Program (PPP) loan[90] - SG&A expenses decreased in 2020 due to cost reduction initiatives, but were partially offset by a one-time expense of $365,000 related to the CEO transition[88] Liquidity and Capital Resources Cash and cash equivalents increased to $3.7 million in 2020, driven by financing and investing activities, despite a $2.7 million loan recall due April 2021, which management believes is manageable Cash and Liquidity Position (Year-End) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $3.7 million | $964,000 | | Short-term investments | $0 | $2.2 million | | Working Capital Changes | Decrease in receivables and inventories | Increase in receivables and inventories | - The company received a $1,214,500 PPP loan in April 2020, which was fully forgiven by the SBA and the lender in the fourth quarter of 2020[100][101] - The bank will recall the company's outstanding loan on April 1, 2021. The company believes its $3.7 million in cash and $2.0 million available line of credit mitigate the adverse effect of this recall[103] Future Outlook The company plans continued R&D, DTX development, and international expansion, while anticipating reduced AMS orders in 2021 due to the pandemic - The company continues to pursue DTX-related initiatives, including a joint development agreement with German printer manufacturer AKK and expansion into the prototyping market[113] - While the AMS business has three long-term sales agreements with major aerospace companies, it anticipates reduced order volume in 2021 due to the COVID-19 pandemic[114] - The company's traditional business units are developing new products, like IKONART®, to drive growth in mature markets and will continue efforts to expand internationally[115] Item 8. Financial Statements This section presents the audited financial statements for 2020 and 2019, including the auditor's report, core statements, and detailed notes explaining accounting policies and financial items Report of Independent Registered Public Accounting Firm The auditor issued a clean opinion on the financial statements but identified liquidity as a Critical Audit Matter due to COVID-19 impacts and management's subjective assumptions - The auditor's report expresses a clean opinion on the financial statements[121] - Liquidity was identified as a Critical Audit Matter due to the impact of COVID-19 and the significant management assumptions involved in projecting future sales, margins, and expenses[126][127] Financial Statements Data Total assets decreased to $15.4 million in 2020, liabilities to $3.6 million, and stockholders' equity to $11.8 million, with a net loss of $439,000 and operating cash outflow of $399,000 Key Balance Sheet Items (As of Dec 31) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Total Assets | $15,435,399 | $16,879,541 | | Total Liabilities | $3,596,053 | $4,622,843 | | Total Stockholders' Equity | $11,839,346 | $12,256,698 | Key Income Statement Items (Year Ended Dec 31) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Net Sales | $13,432,220 | $17,618,559 | | Gross Profit | $3,905,077 | $5,397,189 | | Loss from Operations | ($1,786,020) | ($956,676) | | Net Loss | ($439,320) | ($813,558) | | Loss Per Share (Basic) | ($0.22) | ($0.41) | Key Cash Flow Items (Year Ended Dec 31) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash Used in Operating Activities | ($398,828) | ($477,031) | | Net Cash Provided by Investing Activities | $2,058,471 | $7,578 | | Net Cash Provided by (Used in) Financing Activities | $1,070,553 | ($190,035) | Notes to Financial Statements The notes detail accounting policies, income taxes, segment performance, debt agreements, stock-based compensation, the $1.2 million PPP loan forgiveness, and the $2.7 million DEDA loan reclassification - Inventories are valued using the last-in, first-out (LIFO) method. A LIFO decrement of approximately $116,000 occurred in 2020 due to reduced inventory quantities[141] - The company's $2.7 million loan from the Duluth Economic Development Authority was reclassified from long-term to a current liability as of Dec 31, 2020, because the bank will recall the loan on April 1, 2021[188] - The company's $1,214,500 PPP loan was fully forgiven in the fourth quarter of 2020, and the amount was recorded as a gain on extinguishment of debt[191][192] PART III Items 10, 11, 12, 13, and 14 Information for Items 10-14, covering directors, executive compensation, security ownership, related transactions, and accountant fees, is incorporated by reference from the 2021 proxy statement - Information regarding directors, executive officers, compensation, security ownership, and accountant fees is incorporated by reference from the 2021 Annual Meeting of Shareholders proxy statement[206][208][209][210][211] - The company has adopted a code of ethics applicable to its CEO, CFO, and other senior financial officers, which is available on its website[207] PART IV Item 15. Exhibits and Financial Statement Schedules This section lists all financial statements and exhibits filed with the Form 10-K, including the auditor's report, core financial statements, and various organizational and contractual documents - This section provides a list of all financial statements and exhibits filed with the annual report, including organizational documents, material contracts, and required certifications[215][216]