IKONICS Corporation Annual Report 2013

FY2013 Annual Report · IKONICS Corporation

Loading PDF…

2013+
ANNUAL
REPORT

Corporation

NASDAQ LISTED: IKNX

CONTENTS

COMPANY OVERVIEW

IKONICS is a corporation with four important technology platforms: Ultraviolet (UV)
reactive chemistry, film coating and construction, industrial inkjet printing and
technical powder blasting. IKONICS combines these technologies in various ways
to create products and services for screen printers, manufacturers of awards and
trophies, manufacturers of textured molds for plastic injection, and the custom
machining of advanced composite materials and electronic wafers.

IKONICS customer base includes over 25,000 end-users of its screen printing and
awards and trophy products, suppliers to the worldwide automotive industry, and
major civilian and military electronics and aerospace companies. IKONICS products
and services are used to manufacture products that range from T-shirts to the
latest automobiles to the most advanced commercial and military aircraft.

IKONICS key technologies are developed internally, and the Company believes it
has a strong patent and trade secret position. All manufacturing is done in Duluth.

This range of technologies, markets, and the Company’s strong financial
condition makes IKONICS a very robust company, and the Company believes it is
buffered against many of the vagaries of the market and the economy. IKONICS’
commitment to a range of new technologies gives the Company substantial growth
potential.

Letter to Shareholders............................................................................................1

Special Note Regarding Forward-Looking Statements..............................................2

Risk Factors..........................................................................................................2

Management’s Discussion and Analysis of
Financial Condition and Results of Operations.........................................................5

Critical Accounting Policies and Estimates...............................................................5

Results of Operations.............................................................................................6

Market for Common Equity and
Related Stockholder Matters...................................................................................8

Management’s Report............................................................................................8

Management’s Annual Report on
Internal Control Over Financial Reporting.................................................................9

Report of Independent
Registered Public Accounting Firm......................................................................... 9

Balance Sheets....................................................................................................10

Statements of Income..........................................................................................11

Statements of Stockholder’s Equity.......................................................................11

Statements of Cash Flows................................................................................... 12

Notes to Financial Statements..............................................................................13

Board of Directors/Corporate Officers...................................................................19

IKONICS Five-Year History.......................................................................Back Cover

CORPORATE PROFILE

2013 Net Sales...................................................................................$17,491,408

Earnings per common share (diluted)...............................................................$0.34

Company founded...........................................................................................1952

Employees..........................................................................................................75

NASDAQ Symbol..............................................................................................IKNX

Letter to SharehoLderS

Important foundations for growth were laid at IKONICS in 2013.

For the year, sales were $17,491,000. This is a 1% increase over 2012, while earnings fell by 2% to $682,000 or $0.34 per diluted share. I believe 2014 will be a better
year for the following reasons:

•In the first quarter, Ikonics Imaging shipped a very large initial stocking order, which will have a substantial effect on profits and sales for the quarter and the year.

•Our Micro-Machining Aerospace business suffered the loss of a major customer in 2013. The division was also negatively impacted by high costs related to product
development. In 2014, we will be transitioning to more profitable production parts. We are currently producing advanced composite parts for four customers and are
in negotiations with others. This business is being driven primarily by the growth of the civilian aviation sector and its increasing use of composites. We are also in the
development phase of a major defense project. We added technical staff in 2013, and in the first quarter of 2014 brought in a respected veteran of the aerospace industry
to lead this business. Investment in high-quality people and advanced production equipment are costly, but I believe it is a path Ikonics must follow to grow and prosper in
this high technology field.

•Chromaline, our traditional technology for the screen print industry, continues to be a steady source of sales and profits and should benefit in 2014 from new products
aimed at the touch screen and solar panel industries. I am also optimistic about further growth in sales to customers in China, particularly in the consumer electronics
industry.

•Our DTX business has been slow to develop due to technical issues, but we are now making a major effort in the 3D printing and prototyping arena, where our technology

offers higher precision and larger format prints than are available with most other offerings in this market.

Given these developments, in 2014, I anticipate a robust performance from our traditional businesses, a new focus on growth and profits in our aerospace business, and an
exciting entry into the 3D printing market with our DTX technology.

WILLIAM C. ULLAND

Chairman, President & CEO

March 20, 2014

SpeciaL note regarding forward-Looking StatementS

This 2013 Annual Report contains forward looking statements within the meaning
of the safe harbor provisions of Section 21E of the Securities Exchange Act of
1934, as amended, relating to future events or the future financial performance of
the Company. In some cases, you can identify forward-looking statements by the
following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,”
“intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,”
“would,” or the negative of these terms or other comparable terminology, although
not all forward-looking statements contain these words. Forward looking statements
are only predictions or statements of intention subject to risks and uncertainties
and actual events or results could differ materially from those projected. Forward-
looking statements are based on information available at the time the statements
are made and involve known and unknown risks, uncertainties and other factors
that may cause our results, levels of activity, performance or achievements to be
materially different from the information expressed or implied by the forward-looking
statements in this 2013 Annual Report. Factors that could cause actual results to
differ include the risks, uncertainties and other matters set forth below under the
caption “Risk Factors” and the matters set forth under the caption “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” as well
as those discussed in the Company’s filings with the Securities and Exchange
Commission.

riSk factorS

The Company’s DTX and Micro-Machining initiatives involve new
technologies that might not be executed successfully and might not achieve
market acceptance, which would adversely affect the Company’s results of
operation, financial condition and prospects.

The Company’s DTX and Micro-Machining initiatives involve new and unproven
technologies that might never achieve market acceptance. During 2012 and 2013,
the Company generated operating losses in both its DTX and Micro-Machining
segments. The Company’s ability for generating profits from these initiatives will
depend on its products gaining market acceptance among customers, which cannot
be guaranteed. The degree of market acceptance of any new products the Company
develops will depend on a number of factors, including:

•the Company’s ability to successfully develop its technologies and products to
include the capabilities the Company intends;

•the Company’s ability to accurately assess the functions and features customers
desire;

•the perceived effectiveness and price of the Company’s products compared to
alternative products and technologies;

•the development of new products and technologies by current competitors or new
competitors that might enter the Company’s markets; and

•the strength of the Company’s marketing and distribution functions.

If new products that the Company develops do not have the capabilities the
Company expects or fail to achieve an adequate level of acceptance by customers
for any reason, then the Company’s Micro-Machining and DTX business units could
fail to generate the revenues the Company expects and may not become profitable
or sustain profitability.

If the Company’s new products and technologies do not achieve market
acceptance, the Company will not realize a return on its investments in its
new business initiatives.

The Company has invested, and plans to continue to invest, significant resources in
its research and development efforts to develop technology for its Micro-Machining
and DTX business units. The Company spent 3.7% of sales, or $649,000, on
research and development in 2013, and 3.6% of sales, or $630,000, in 2012. A
substantial portion of these investments was in the Company’s Micro-Machining
and DTX initiatives. The Company plans to continue to invest significant resources
in research and development on these initiatives in the foreseeable future. The
Company believes successful execution of these initiatives is important for its
ability to grow its revenues and profits. However, if the Company fails to generate
its projected revenues in these business units, the Company’s investments in
these areas would not generate the profits the Company expects and its results
of operations, financial condition and prospects would be materially and adversely
affected.

Adverse changes to global economic conditions generally, and to the
aerospace and automotive industries in particular, may harm the
Company’s business.

The prospects for economic growth in the United States and other countries remain
uncertain and major economies where the Company conducts business could
continue or return to recessionary conditions. Economic concerns and issues such
as reduced access to capital for businesses may cause the Company’s customers
to delay or reduce purchases of the Company’s products. Given the continued
uncertainty concerning the global economy, the Company also faces risks that may
arise from financial difficulties experienced by suppliers and customers, such as an
inability to collect receivables or the continued operation of suppliers.

The Company’s Micro-Machining segment focuses primarily on customers in the
aerospace industry, and its DTX segment focuses primarily on customers in the
automotive industry. The aerospace and automotive industries have experienced
volatility in recent years in a manner similar to or greater than the global economy
generally. If either or both these industries experiences difficulties that reduce
demand for their products generally, the Company’s results of operations, financial
condition and prospects would suffer.

The Company faces risks related to sales to government subcontractors,
including potential delays or cancellations of planned sales and additional
regulatory compliance costs and obligations.

The Company’s customers for its Micro-Machining business unit manufacture
aerospace products, and the Company derives a portion of its revenue as a
subcontractor to general contractors working for the U.S. government. As a
government subcontractor, demand and payment for the Company’s products may
be adversely affected by public sector budgetary cycles or funding authorizations.
Any cancellation or delay of product orders would adversely affect the Company’s
operating results and financial condition.

In addition, government subcontractors are subject to oversight, including special
rules on accounting, expenses, reviews and security. This additional oversight
could increase the Company’s compliance costs and creates risk of a failure to
comply with applicable rules and regulations. A failure to comply with these rules
and regulations could result in termination of contracts, fines and suspensions,
debarment from future government business or other penalties, any of which could
adversely affect the Company’s business.

IKONICS CORPORATION | 2013 ANNUAL REPORTThe Company faces significant competition and expects to face increasing
competition in many aspects of its businesses, which could cause operating
results to suffer.

The Company operates in highly competitive industries that experience rapid
technological and market developments, changes in customer needs, and frequent
product introductions and improvements, particularly with respect to the Micro-
Machining and DTX businesses. If the Company is unable to anticipate and respond
to these developments, its products or technologies could become uncompetitive or
obsolete. Many of the Company’s competitors in the Micro-Machining and DTX fields
are larger and better capitalized than the Company with longer operating histories.
These advantages could allow the Company’s competitors to invest more in
research and development and sales and marketing than the Company, which could
make the competitive products more attractive or better known to consumers than
the Company’s products. In addition, because there is rapid technological change
in fields in which the Company operates, the Company could face competition from
new sources in the future that customers find more attractive.

The Company also could face increased competition in its traditional Chromaline
Screen Print and IKONICS Imaging units. Capital costs for machinery necessary
to operate in these industries have decreased in recent years, increasing the
possibility that the Company will face new competitors. An increase in the amount
of competition the Company faces, or a loss of competitiveness in any of the
Company’s business units for any reason, could adversely affect its revenues and
gross margins.

The Company’s failure to comply with environmental laws and regulations
could harm its business and results of operations.

The manufacturing of the Company’s products requires the use of hazardous
materials that are subject to a broad array of environmental laws and regulations.
The Company’s failure to comply with these laws or regulations could result in:

•regulatory penalties, fines and legal liabilities;

•suspension of production;

•alteration of manufacturing processes; and

•restrictions on the Company’s operations or sales.

The Company’s failure to manage the use, transportation, emissions, discharge,
storage, recycling or disposal of hazardous materials could lead to increased costs
or future liabilities. Environmental laws and regulations also could require the
Company to acquire pollution abatement or remediation equipment, modify product
designs or incur other expenses.

Third parties may claim the Company infringes their intellectual property
rights, which could harm the Company’s business.

The Company may face claims that it infringes other parties’ intellectual rights.
Regardless of a claim’s merit, claims that the Company’s products or processes
infringe the intellectual property rights of others could cause the Company to incur
large costs to respond to, defend, and resolve the claims, and they may divert the
efforts and attention of management and technical personnel. As a result of any
intellectual property rights infringement claims, the Company could be required to:

•pay infringement claims;

•stop manufacturing, using, or selling products or technology subject to
infringement claims;

•develop other products or technology not subject to infringement claims, which
could be time-consuming, costly or impossible; or

•license technology from the party claiming infringement, which license may not be
available on commercially reasonable terms or at all.

These actions could harm the Company’s competitive position, result in additional
expenses, or require the Company to impair its assets. If the Company alters or
stops production of affected items, its revenue could be harmed.

The Company may be unable to enforce or protect its intellectual property
rights, which may harm its ability to compete and may harm its business.

The Company’s ability to enforce its patents, trademarks and other intellectual
property rights is subject to general litigation risks, as well as uncertainty as to the
enforceability of the Company’s intellectual property rights in various countries. If
the Company seeks to enforce its rights, it could become subject to claims that its
intellectual property rights are invalid, not enforceable, or licensed to the opposing
party. The Company’s assertion of intellectual property rights also could result in
the other party seeking to assert claims against the Company, which could harm
the Company’s business. The Company’s inability to enforce its intellectual property
rights for any reason could harm its competitive position and business.

If the Company is unable to protect the confidentiality of its proprietary
information and know-how, the value of its technology could be adversely
affected.

In addition to patented technology, the Company relies on unpatented proprietary
technology, trade secrets, processes and know-how. The Company generally
seeks to protect this information by confidentiality agreements with employees,
consultants, advisors and third parties. These agreements may be breached, and
the Company may not have adequate remedies for any such breach. In addition,
the Company’s trade secrets may otherwise become known or be independently
developed by competitors. To the extent that the Company’s employees, consultants
or contractors use intellectual property owned by others in their work for the
Company, disputes may arise as to the rights in related or resulting know-how and
inventions.

The Company operates a global business that exposes it to additional risks.

The Company operates throughout the world, including in the United States, Europe
and China. These international operations create a variety of risks and uncertainties,
including:

•rapid changes in government, economic and political policies and conditions,
political or civil unrest or instability, terrorism or epidemics,

•fluctuations in foreign currency exchange rates;

•compliance with and changes in foreign laws and regulations, as well as U.S. laws
affecting the activities of U.S. companies abroad, including the Foreign Corrupt
Practices Act of 1977 (the “FCPA”), as amended;

•different, complex and changing laws governing intellectual property rights,
sometimes affording companies lesser protection in certain areas;

•longer accounts receivable payment cycles and difficulties in collecting accounts
receivable;

•protectionist laws and business practices that favor local producers; and

•potentially adverse tax consequences, including the complexities of foreign value
added tax systems and restrictions on the repatriation of earnings.

The occurrence of any one of these risks could negatively affect the Company’s
international business and, consequently, its results of operations generally.

The Company faces risks related to sales through distributors and other third
parties.

During 2013, approximately 72% of the Company’s sales, including nearly all sales
of its Chromaline products and nearly all of its International sales, were conducted
through third parties. Using third parties for distribution exposes the Company
to many risks, including competitive pressure, concentration, credit risk and
compliance risks. Distributors may sell products that compete with the Company’s
products, and the loss of a distributor could reduce the Company’s revenue.
Distributors may face financial difficulties, including bankruptcy, which could harm
the Company’s collection of accounts receivable and financial results. Violations of
the FCPA or similar laws by distributors or other third-party intermediaries could
have a material impact on the Company’s business. Failing to manage risks related
to the Company’s use of distributors may reduce sales, increase expenses, and
weaken its competitive position.

Increases in prices and declines in the availability of raw materials could
negatively impact the Company’s financial results.

Raw materials needed to manufacture products are obtained from a limited number
of suppliers and many of the raw materials are petroleum-based. Under normal
market conditions, these raw materials are generally available on the open market
from a variety of producers. While alternate supplies of most key raw materials
are available, supplier production outages may lead to strained supply-demand
situations for certain raw materials. The substitution of key raw materials could
require the Company to identify new supply sources, or reformulate and retest
products or processes. From time to time, the prices and availability of these
raw materials may fluctuate, which could impair the Company’s ability to procure
necessary materials, or increase the cost of manufacturing products. If the prices
of raw materials increase in a short period of time, the Company may be unable
to pass these increases on to its customers in a timely manner or at all, which
could reduce its gross margins. Like most companies in the Company’s industries,
the Company does not have long-term supply contracts for most of its key raw
materials, which exacerbates the foregoing risks to the Company.

If any of the Company’s present single or limited source suppliers become
unavailable or inadequate, its customer relationships, results of operations
and financial condition may be adversely affected.

The Company acquires certain of its materials that are critical to its operations
from a limited number of third parties. Should any of the Company’s current single
or limited source suppliers become unavailable or inadequate, or impose terms
unacceptable to the Company such as increased pricing terms, the Company
could be required to spend a significant amount of time and expense to develop
alternate sources of supply, and may not be successful in doing so on acceptable
terms or at all. If the Company is unable to find a suitable supplier for a particular
material, it could be required to modify its existing business processes or offerings
to accommodate the situation. As a result, the loss of a single or limited source
supplier could adversely affect the Company’s relationship with its customers and its
results of operations and financial condition.

The Company depends on two manufacturers to make and sell DTX printers.
If the manufacturers ceased to make or sell DTX printers, or failed to meet
quality standards, the Company’s financial results and prospects would be
adversely affected.

The Company relies on two companies to manufacture and sell DTX printers. If the
manufacturers ceased to produce or devote resources to selling DTX printers, due
to a change in company strategy, to focus on alternative initiatives, or for any other
reason, the Company would need to find an alternative manufacturer and seller of
DTX printers. Finding an alternative manufacturer and seller of DTX printers could
result in additional costs and delays in growing the Company’s DTX business unit,
which would adversely affect the Company’s financial results and prospects.

In addition, if these manufacturers failed to produce DTX printers that satisfy the
Company’s quality standards, the Company’s reputation with end users could be
harmed and the Company could be forced to find a new manufacturer. Either of
these results also would harm the Company’s business and prospects.

The inability to attract and retain qualified personnel could adversely impact
the Company’s business.

Sustaining and growing the Company’s business depends on the recruitment,
development and retention of qualified employees, including management and
research and development personnel. The inability to recruit and retain key
personnel or the unexpected loss of key personnel may adversely affect the
Company’s operations.

An active trading market for the Company’s shares of common stock may not
develop.

The Company’s common stock has been listed for trading on the Nasdaq Capital
Market since 1999 and persistently has experienced limited trading volume. There
can be no assurance that an active public market for the Company’s shares will
develop or be sustained. The lack of an active trading market could adversely affect
the price and liquidity of the Company’s common stock.

The Company’s directors and officers own a large percentage of the
Company’s common stock, which may allow them to collectively exert
significant influence over substantially all matters requiring shareholder
approval.

As of December 31, 2013, the Company’s directors and officers collectively
beneficially owned approximately 35.23% of its common stock outstanding as of
that date. As a result, the Company’s directors and officers could exert significant
influence over all matters requiring a shareholder vote, including the election of
directors, amendments to the Company’s articles of incorporation, and extraordinary
transactions such as mergers or going private transactions. These ownership
positions may have the effect of delaying, deterring or preventing a change in
control or a change in the composition of the Company’s board of directors. In
addition, substantial sales of shares beneficially owned by our directors or officers
could be viewed negatively by third parties and have a negative impact on the
Company’s stock price.

The price of the Company’s common stock may fluctuate significantly.

The price of the Company’s common stock has, and could continue to, fluctuate
substantially in a short period of time. The price of the Company’s common stock
could vary for many reasons, including the following:

IKONICS CORPORATION | 2013 ANNUAL REPORT•future announcements concerning the Company or its competitors;

•introduction of new products by the Company or its competitors, or the failure of
the Company’s new products to meet expectations;

•the commencement of, or developments to, litigation involving the Company;

•quarterly variations in operating results, which the Company has experienced in
the past and expects to experience in the future;

management’S diScuSSion and anaLySiS of
financiaL condition and reSuLtS of operationS

The following management discussion and analysis focuses on those factors
that had a material effect on the Company’s financial results of operations and
financial condition during 2013 and 2012 and should be read in connection with
the Company’s audited financial statements and notes thereto for the years ended
December 31, 2013 and 2012, included herein.

•business acquisitions or divestitures; or

criticaL accounting poLicieS and eStimateS

•changes to the global economy in general, and the aerospace and automotive
markets in particular.

In addition, stock markets in general have experienced price and volume
fluctuations in recent years, fluctuations that sometimes have been unrelated to the
operating performance of the affected companies. These broad market fluctuations
may adversely affect the market price of the Company’s common stock. The market
price of the Company’s common stock could decline below its current price and
the market price of the Company’s shares may fluctuate significantly in the future.
These fluctuations may be unrelated to the Company’s performance.

The Company’s operating results and financial condition may fluctuate on a
quarterly and annual basis.

The Company’s operating results and financial condition may fluctuate from quarter
to quarter and year to year, and could vary due to a number of factors, some of
which are outside of the Company’s control. In addition, the Company’s actual or
projected operating results may fail to match its past performance. The Company’s
operating results and financial condition may fluctuate due to a number of factors,
including those listed below and those identified throughout this “Risk Factors”
section:

•the failure of the Company’s new products to meet expectations;

•changes to the costs of raw materials, especially petroleum-based materials;

•the entry of new competitors into the Company’s markets whether by established
companies or by new companies;

•the geographic distribution of the Company’s sales;

•changes in customer preferences or needs;

•changes in the amount that the Company invests to develop or acquire new
technologies;

•delays between the Company’s expenditures to develop new technologies and
products and the generation of sales related thereto;

•changes in the Company’s pricing policies or those of its competitors;

•changes in accounting rules and tax and other laws; and

•general economic and industry conditions that affect customer demand and
product development trends.

Due to all of the foregoing factors and the other risks discussed in this “Risk
Factors” section, you should not rely on quarter-to-quarter or year-to-year
comparisons of the Company’s operating results as an indicator of future
performance.

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 policies and estimates
which IKONICS believes are the most critical to aid in fully understanding and
evaluating its reported financial results include the following:

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 in accordance with FASB ASC 830, Foreign Currency Matters.

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.

Self-Funded Medical Insurance – Beginning in January 2012, the Company
moved from a fully insured to a self-funded medical insurance plan. The Company
contracted with an administrative service company or a “third party administrator”
to supervise and administer the program and act as the Company’s fiduciary and
representative. The Company has reduced its risk under this self-funded plan by
purchasing both specific and aggregate stop-loss insurance coverage for individual
claims and total annual claims in excess of prescribed limits. The Company records
estimates for claim liabilities based on information provided by the third-party
administrators, historical claims experience, the life cycle of claims, expected
costs of claims incurred but not paid, and expected costs to settle unpaid claims.
The Company regularly monitors its estimated insurance-related liabilities. Actual
claims experience may differ from the Company’s estimates. Costs related to the
administration of the plan and related claims are expensed as incurred. The total
liability for self-funded medical insurance was $55,000 as of December 31, 2013
and is included within other accrued liabilities in the consolidated balance sheet.

Income Taxes – At December 31, 2013, the Company had net current deferred
tax assets of $150,000 and net noncurrent deferred tax liabilities of $527,000.
The deferred tax assets and liabilities result primarily from temporary differences in
property and equipment, accrued expenses, and inventory reserves. At December
31, 2013, the Company recorded a valuation allowance of $326,000, of which
$17,000 is related to a Minnesota research and development credit and $309,000
pertains to a U.S. federal capital loss carryovers. The Company believes it is more
likely than not that these deferred tax assets will not be utilized in future years.
The capital loss carryover is from recording an impairment charge that occurred in
2009, it can be carried forward one year and must be offset by a capital gain. The
Company has determined that is more likely than not that the remaining deferred tax
assets will be realized and that an additional valuation allowance for such assets is
not currently required. The Company accounts for its uncertain tax positions under
the provision of FASB ASC 740, Income Taxes. At December 31, 2013 and 2012,
the Company had no reserves for uncertain tax positions.

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 within SAB 104 and FASB ASC 605 Revenue Recognition:

a.) persuasive evidence of an arrangement (principally in the form of customer sales

orders and the Company’s sales invoices)

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)

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.

reSuLtS of operationS
YEAR ENDED DECEMBER 31, 2013 COMPARED TO YEAR ENDED DECEMBER 31, 2012

Sales – The Company’s net sales increased 1.0% in 2013 to a record $17.5
million compared to net sales of $17.3 million in 2012. Domestic realized a 2.0%
sales increase as sales grew from $7.1 million in 2012 to $7.3 million in 2013,
as both chemical and emulsion sales were stronger in 2013 due to improved
distribution in the central region of the United States. Improved film distribution
in Asia also resulted in a 2.1% increase in Export sales versus 2012. IKONICS
Imaging realized a 3.4% sale increase in 2013 as equipment sales improved. The
equipment sales increase is partially related to the introduction of new equipment.

Partially offsetting these increases was a 29.8% decrease in Micro-Machining
mask sales related to the loss of a large customer. The 13.4% DTX sales decrease
is related to the 2012 sale of a DTX printer. There was no sale of a DTX printer
in 2013 and the Company anticipates that most future DTX printer sales will be
made directly by its strategic printer manufacturing partner and not the Company.

Gross Profit – Gross profit in 2013 was $6.9 million, or 39.7% of sales, compared
to $6.9 million, or 40.1% of sales in 2012. Gross margins were unfavorably
impacted by an increase in Micro-Machining production costs related to the
Company’s efforts to improve its production capacity and capabilities and a
decrease in sales volume as a large portion of Micro-Machining production costs
are fixed, dropping Micro-Machining gross margins from 5.3% in 2012 to negative
54.5% in 2013. IKONICS Imaging gross margins decreased from 54.0% in 2012
to 52.3% in 2013 as higher margin mask sales decreased while lower margin
equipment sales increased. These gross margin decreases were offset by an
increase in DTX gross margins from 74.8% in 2012 to 82.7% in 2013 and an
increase in Export gross margins from 26.8% in 2012 to 28.1% in 2013 as both
divisions realized a more favorable sales mix. Increased volumes helped to improve
Domestic margins to 44.1% in 2013 from 43.3% in 2012.

Selling, General and Administrative Expenses – Selling, general and
administrative expenses were $5.4 million, or 30.7% of sales, in 2013 compared
to $5.3 million, or 30.5% of sales, in 2012. The increase in selling, general and
administrative expenses reflects increased personnel and travel costs for Micro-
Machining related to improving, implementing and promoting its new technologies
and higher selling and promotional expenses for Domestic to support sales
initiatives in the Domestic screen markets. These increases have been partially
offset by a decrease in IKONICS Imaging selling expenses resulting from lower
staffing levels.

Research and Development Expenses – Research and development expenses
in 2013 were $649,000, or 3.7% of sales, versus $630,000, or 3.6% of sales,
in 2012. The cost increase is related to higher personnel and supply expenses.
Research and development expense in 2012 was impacted by a $23,000
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 were no
expenses related to the abandonment of patent application costs in 2013.

Interest Income – The Company earned $7,000 of interest income in 2013
compared to $12,000 in 2012. The interest earned in 2013 and 2012 is related to
interest received from the Company’s short-term investments, which consist of fully
insured certificates of deposit with original maturities ranging from 6 to 12 months.

Income Taxes – During 2013, the Company realized income tax expense of
$245,000, or an effective rate of 26.4%, compared to income tax expense
of $351,000, or an effective rate of 33.6%, for the same period in 2012. The
Company’s income tax expense and effective rate in 2013 was favorably impacted
by 2012 tax law changes related to research and development credits. Since the
tax law changes reinstating the credit were enacted in the first quarter of 2013,
the resulting tax benefit was not allowed to be included in the Company’s 2012 tax
provision under Generally Accepted Accounting Principles. Accordingly, the benefit
was recognized in 2013. The income tax provision for the 2013 and 2012 periods
also differs from the expected tax expense due to the benefits of the domestic
manufacturing deduction, 2013 credits for research and development and other
non-deductible items.

IKONICS CORPORATION | 2013 ANNUAL REPORTLiquidity 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, research and development
expenditures, and a one-time dividend distribution in 2012.

Cash and cash equivalents were $1,704,000 and $968,000 at December 31, 2013
and 2012, respectively. In addition to its cash, the Company also held $1,465,000
of short term investments as of December 31, 2013 and $1,443,000 of short-term
investments as of December 31, 2012. The Company generated $1,467,000 in
cash from operating activities during 2013, compared to generating $1,182,000
of cash from operating activities in 2012. Cash provided by operating activities
is primarily the result of the net income adjusted for non cash depreciation and
amortization, deferred taxes, and certain changes in working capital components
discussed in the following paragraph.

During 2013, inventories decreased by $124,000. Lower raw material levels
are related to the timing of purchases and efforts to tighten inventory volumes.
The $21,000 decrease in prepaid expenses and other assets is related to timing
of insurance payments while trade receivables decreased by $9,000. Accounts
payable decreased $62,000 due to the timing of payments to and purchases
from vendors while accrued liabilities decreased $5,000. Income taxes payable
decreased $62,000 and income tax receivable increased $16,000 due to the timing
of estimated 2013 tax payments compared to the calculated 2013 tax liability.

During 2012, inventories increased by $444,000. In addition to increased finished
goods levels, part of the inventory increase is related to increased raw material
purchases to take advantage of volume discounts and to protect against future
price increases. The trade receivables decrease of $121,000 is related to improved
collections. The $42,000 increase in prepaid expenses and other assets is related
to the purchases of equipment utilized for sales promotion. Accounts payable
increased $44,000 due to the timing of payments to and purchases from vendors
while accrued liabilities increased $58,000 due to the timing of the Company’s
payroll and customer prepayments. Income taxes payable increased $84,000
and the Company’s income tax receivable decreased $59,000 due to timing of
estimated 2012 tax payments compared to the calculated 2012 tax liability.

During 2013, investing activities used $820,000. Purchases of property and
equipment were $763,000. The majority of these purchases were made to improve
Micro-Machining capabilities. Equipment purchases were also made to upgrade
research and development equipment and facilities, including improvements to
both DTX equipment and equipment and facilities related to screen printing and
IKONICS Imaging. The Company realized $36,000 in proceeds from the sale of two
vehicles. Also in 2013, the Company incurred $71,000 in patent application costs
that the Company records as an asset and amortizes upon successful completion
of the application process. The Company also invested $1,815,000 in twelve fully
insured certificates of deposit during 2013. Twelve certificates of deposit totaling
$1,793,000 matured during 2013.

During 2012, investing activities used $172,000. Purchases of property and
equipment were $567,000, mainly for manufacturing equipment, mandatory
elevator upgrades and three vehicles. The Company realized $59,000 in proceeds
from the sale of three vehicles and on a like-kind equipment exchange. Also in
2012, the Company incurred $57,000 in patent application costs that the Company
records as an asset and amortizes upon successful completion of the application
process. The Company also invested $1,858,000 in nine fully insured certificates
of deposit during 2012. Eleven certificates of deposit totaling $2,250,000 matured
during 2012.

In 2013 and 2012, the Company received $89,000 from financing activities from
the issuance of 13,695 and 13,888 shares, respectively, of common stock from the
exercise of stock options. In 2012, the Company also declared and paid a one-time
special cash dividend of $1.00 per share. The total dividend paid was $1,998,000.

A bank line of credit exists providing for borrowings of up to $1,250,000 through
May 31, 2015. The Company expects to obtain a similar line of credit when the
current line of credit expires. The line of credit is collateralized by trade receivables
and inventories and bears interest at 2.5 percentage points over the 30 day LIBOR
rate. The Company did not utilize this line of credit during 2013 and 2012 and there
were no borrowings outstanding as of December 31, 2013 and 2012. 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 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 its low debt levels and available line of credit make it
unlikely that a decrease in demand for the Company’s products would impair the
Company’s ability to fund operations.

capitaL expenditureS

During 2013, the Company had $763,000 of capital expenditures. The majority of
these purchases were made to improve Micro-Machining capabilities. Equipment
purchases were also made to upgrade research and development equipment and
facilities, including improvements to both DTX equipment and equipment and
facilities related to screen printing and IKONICS Imaging in addition to a vehicle for
sales personnel.

In 2012, the Company had $567,000 of capital expenditures. Capital expenditures
in 2012 were mainly for manufacturing equipment upgrades to increase capacity
and improve product quality. The Company also incurred expenditures related to
mandatory elevator upgrades and the purchase of three vehicles.

The Company expects capital expenditures in 2014 of approximately $600,000.
The planned expenditures primarily will be for mandatory elevator upgrades,
manufacturing equipment necessary for anticipated Micro-Machining aerospace
business, other manufacturing equipment upgrades and vehicles for sale 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 all regions of the world,
including North America, Europe, Latin America, and Asia. The Company’s 2013
foreign sales of $5,642,000 were approximately 32.3% of total sales, compared
to the 2012 foreign sales of $5,523,000, which were 31.9% of total sales. The
foreign sales increase in 2013 was primarily due to an increase in Asian sales from
improved distribution.

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, 2013. Furthermore, the impact of foreign exchange on the Company’s balance
sheet and operating results was not material in either 2013 or 2012.

future outLook

Fiscal Year Ended December 31, 2013:

IKONICS has spent on average approximately 4% of its sales dollars for the past few
years in research and development and has made capital expenditures related to its
DTX and Micro-Machining programs. The Company plans to maintain its efforts in
this area to expedite internal product development as well as to form technological
alliances with outside experts to commercialize new product opportunities.

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

High

$ 13.74

17.99

18.98

19.45

Low

$ 7.92

12.00

16.06

14.25

$ 9.10

$ 7.03

9.35

9.45

9.39

7.54

7.70

7.75

Fiscal Year Ended December 31, 2012:

First Quarter

Second Quarter

Third Quarter

Fourth Quarter

As of February 23, 2014, the Company had approximately 596 shareholders.
Declaration and payment of dividends is within the sole discretion of the Company’s
board of directors. During the fourth quarter of 2012, the Company declared a
one-time special cash dividend of $1.00 per share, paid on December 31, 2012,
amounting to $1,998,475. This was the first and only cash dividend paid in the
Company’s history.

management’S report

The financial statements of IKONICS Corporation have been prepared by Company
management who are responsible for their content. These statements have been
prepared in accordance with accounting principles generally accepted in the United
States of America and, where appropriate, reflect estimates based on judgements of
management.

The financial statements have been audited by McGladrey LLP, an indepen dent
registered public accounting firm.

The Audit Committee of the Board of Directors, comprised of outside directors,
meets periodically with the independent auditors and management to discuss
the company’s internal accounting controls and financial reporting matters. Our
independent regis tered public accounting firm has unrestricted access to the Audit
Committee, without management present, to discuss the results of their audit, the
adequacy of internal accounting controls, and the quality of financial reports.

WILLIAM C. ULLAND

JON GERLACH

Chairman, President & CEO

Chief Financial Officer & V.P. Finance

The Company continues to make progress on its new Micro-Machining business
initiative. The Company has entered into agreements with several major aerospace
companies to determine the feasibility of using its unique technologies in the
production of military and commercial aircraft. The Company is currently supplying
products to the aerospace industry for use in the construction of new generation
commercial aircraft. Although sequestration of the Department of Defense budget
and delays in the launching of new commercial aircraft fleets could adversely affect
some of these sales, progress is being made on a number of in-house feasibility
projects, and the Company believes that several of these could lead to ongoing
business. In anticipation of this business, the Company is expanding its Micro-
Machining capacity and patent applications.

The Company is also continuing to make progress on its DTX business initiatives.
In addition to its growing 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 with its DTX customers on training,
production optimization, and product improvements. The Company has been
awarded European, Japanese and United States patents on its DTX technologies.
The Company has modified its DTX technology to enter the market for prototyping
and 3D printing.

Domestically, both the Domestic Chromaline Screen Print Product and its IKONICS
Imaging units remain profitable mature markets and require aggressive strategies to
grow market share. Although there will be challenges, the Company believes these
businesses will continue to grow and prosper. 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.

off-baLance Sheet arrangementS

The Company has no off-balance sheet arrangements except for a one-year storage
lease at $1,500 per month.

recent accounting pronouncementS

None

market for common equity and reLated
StockhoLder matterS

The Company’s Common Stock is traded on the Nasdaq Capital Market under the
symbol IKNX. The following table sets forth, for the fiscal quarters indicated, the high
and low sales prices for the Company’s Common Stock as reported on the Nasdaq
Capital Market for the periods indicated.

IKONICS CORPORATION | 2013 ANNUAL REPORTmanagement’S annuaL report on internaL controL over financiaL reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f ) under
the Exchange Act. Our internal control system is designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial
reporting includes those policies and procedures that:

• Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

• Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material

effect on the financial statements.

Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on management’s
assessment and those criteria, management believes that, as of December 31, 2013, the Company maintained effective internal control over financial reporting.

This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Our
management’s report of the effectiveness on the design and operation of our internal control over financial reporting was not subject to attestation by the Company’s
registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual
report.

WILLIAM C. ULLAND

JON GERLACH

Chairman, President & CEO

Chief Financial Officer & V.P. Finance

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, 2013 and 2012, and the related statements of income, 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, 2013 and
2012, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ McGladrey LLP
Minneapolis, Minnesota
March 5, 2014

baLance SheetS
DECEMBER 31, 2013 AND 2012
aSSetS
CURRENT ASSETS:

2013

2012

Cash and cash equivalents (Note 7) .............................................................................................................. $

1,704,300

Short-term investments ...............................................................................................................................

Trade receivables, less allowance of $62,000 in 2013 and $43,000 in 2012 (Notes 5, 7, and 8) .......................

Inventories (Note 8) .....................................................................................................................................

Prepaid expenses and other assets ..............................................................................................................

Income tax receivable .................................................................................................................................

Deferred income taxes (Note 2) ....................................................................................................................

Total current assets ....................................................................................................................................

PROPERTY, PLANT, AND EQUIPMENT, AT COST:

Land and building .......................................................................................................................................

Machinery and equipment ...........................................................................................................................

Office equipment ........................................................................................................................................

Vehicles .....................................................................................................................................................

Less accumulated depreciation ....................................................................................................................

1,464,878

2,050,853

2,554,942

103,687

16,400

150,000

8,045,060

6,123,890

3,781,282

722,567

237,194

10,864,933

5,230,837

5,634,096

INTANGIBLE ASSETS, less accumulated amortization of $535,421 in 2013 and $482,107 in 2012 (Note 3) .....................

322,647

14,001,803

967,943

1,442,939

2,060,312

2,678,864

124,983

142,000

7,417,041

6,063,965

3,219,598

700,062

237,488

10,221,113

4,759,235

5,461,878

305,357

13,184,276

LiabiLitieS and StockhoLderS’ equity
CURRENT LIABILITIES:

2013

2012

Accounts payable .......................................................................................................................................

532,294

Accrued compensation ................................................................................................................................

Other accrued liabilities ...............................................................................................................................

Income taxes payable ..................................................................................................................................

Total current liabilities .................................................................................................................................

DEFERRED INCOME TAXES (Note 2) ....................................................................................................................

Total liabilities ............................................................................................................................................

274,936

67,755

874,985

527,000

1,401,985

593,922

265,822

81,635

82,152

1,023,531

366,000

1,389,531

STOCKHOLDERS’ EQUITY:

Preferred stock, par value $.10 per share; authorized 250,000 shares: issued none

Common stock, par value $.10 per share; authorized 4,750,000 shares: issued and outstanding 2,012,170
shares in 2013 and 1,998,475 shares in 2012 (Note 6)

Additional paid-in capital .............................................................................................................................

Retained earnings .......................................................................................................................................

Total stockholders’ equity ............................................................................................................................

201,217

2,592,038

9,806,563

12,599,818

14,001,803

199,848

2,470,507

9,124,390

11,794,745

13,184,276

See notes to financial statements.

IKONICS CORPORATION | 2013 ANNUAL REPORT

StatementS of income
YEARS ENDED DECEMBER 31, 2013 AND 2012

NET SALES ...............................................................................................................................................

17,491,408

17,312,407

COST OF GOODS SOLD ...............................................................................................................................

10,553,553

10,367,563

2013

2012

GROSS PROFIT ..........................................................................................................................................

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ......................................................................................

RESEARCH AND DEVELOPMENT EXPENSES ....................................................................................................

INCOME FROM OPERATIONS ........................................................................................................................

INTEREST INCOME .....................................................................................................................................

INCOME BEFORE INCOME TAXES ..................................................................................................................

FEDERAL AND STATE INCOME TAXES (NOTE 2) ...............................................................................................

NET INCOME .............................................................................................................................................

EARNINGS PER COMMON SHARE:

6,937,855

5,368,400

649,325

6,017,725

920,130

7,043

927,173

245,000

682,173

Basic ......................................................................................................................................................................

Diluted ....................................................................................................................................................................

0.34

WEIGHTED AVERAGE COMMON SHARES:

6,944,844

5,282,187

629,776

5,911,963

1,032,881

12,050

1,044,931

351,000

693,931

0.35

Basic ......................................................................................................................................................................

Diluted ....................................................................................................................................................................

2,006,843

2,010,659

1,988,066

1,990,847

See notes to financial statements.

StatementS of StockhoLderS’ equity
YEARS ENDED DECEMBER 31, 2013 AND 2012

Balance At December 31, 2011

1,984,587

198,459

2,363,150

10,428,934

12,990,543

Common Shares

Stock Amount

Additional Paid-In
Capital

Retained Earnings

Total Stockholders’
Equity

Net income

Exercise of stock options

Cash dividend paid

Tax benefit resulting from stock option exercises

Stock based compensation and related tax benefit

Balance At December 31, 2012

Net income

Exercise of stock options

Tax benefit resulting from stock option exercises

Stock based compensation and related tax benefit

Balance At December 31, 2013

See notes to financial statements.

13,888

1,998,475

13,695

1,389

1,900

17,818

199,848

2,470,507

1,369

88,029

19,595

13,907

87,639

693,931

89,028

(1,998,475)

9,124,390

682,173

1,900

17,818

11,794,745

682,173

89,398

19,595

13,907

2,012,170

201,217 $

2,592,038

9,806,563

12,599,818

StatementS of caSh fLowS
YEARS ENDED DECEMBER 31, 2013 AND 2012

CASH FLOW FROM OPERATING ACTIVITIES:

2013

2012

Net Income ....................................................................................................................................................

682,173

693,931

ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:

Depreciation ...................................................................................................................................................

Amortization ...................................................................................................................................................

Stock based compensation ..............................................................................................................................

Net gain on sale of vehicles and equipment exchange ........................................................................................

Loss on intangible asset abandonment .............................................................................................................

Deferred income taxes ....................................................................................................................................

CHANGES IN WORKING CAPITAL COMPONENTS:

Trade receivables ............................................................................................................................................

Inventories .....................................................................................................................................................

Prepaid expenses and other assets ..................................................................................................................

Income tax refund receivable ...........................................................................................................................

Accounts payable ...........................................................................................................................................

Accrued liabilities ...........................................................................................................................................

Income taxes payable ......................................................................................................................................

568,791

53,314

13,907

(13,979)

153,000

9,459

123,922

21,296

(16,400)

(61,628)

(4,766)

(62,557)

489,206

54,653

17,818

(7,163)

23,122

30,000

120,635

(444,030)

(42,060)

59,322

44,390

58,074

84,052

Net cash provided by operating activities ......................................................................................................

1,466,532

1,181,950

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of property and equipment ...............................................................................................................

Proceeds from sale of equipment and vehicles ..................................................................................................

Purchases of intangibles .................................................................................................................................

Purchases of short-term investments ...............................................................................................................

Proceeds from sale of short-term investments ...................................................................................................

Net cash used in investing activities .............................................................................................................

(762,537)

35,507

(70,604)

(1,814,878)

1,792,939

(819,573)

(566,519)

59,500

(56,770)

(1,857,990)

2,250,054

(171,725)

CASH FLOWS FROM FINANCING ACTIVITIES:

Cash dividend paid .........................................................................................................................................

Proceeds from exercise of stock options ...........................................................................................................

Net cash provided by (used in) financing activities .........................................................................................

89,398

(1,998,475)

89,028

(1,909,447)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...................................................................................

736,357

(899,222)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .............................................................................................

967,943

1,867,165

CASH AND CASH EQUIVALENTS AT END OF YEAR ......................................................................................................

1,704,300

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

Cash paid for income taxes, net of refunds received of $13,026 and $61,650, respectively ..................................

171,139

967,943

177,626

See notes to financial statements

IKONICS CORPORATION | 2013 ANNUAL REPORT
noteS to financiaL StatementS
YEARS ENDED DECEMBER 31, 2013 AND 2012

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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 $1,248,000 and $1,246,000 higher
than reported at December 31, 2013 and 2012, respectively. The major components
of inventories are as follows:

Description of Business and Foreign Export Sales - IKONICS Corporation (the
Company) develops and manufactures 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. 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.

Raw Materials

Work-in-progress

Finished goods

Reduction to LIFO cost

Total Inventories

2013

2012

1,952,398

2,072,540

389,501

1,461,264

373,512

1,478,444

(1,248,221)

(1,245,632)

2,554,942

2,678,864

Foreign export sales approximated 32.3% of net sales in 2013 and 31.9% of net
sales in 2012. The Company’s trade receivables at December 31, 2013 and 2012
due from foreign customers were 32.5% and 34.4% of total trade receivables,
respectively. The foreign export receivables are composed 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 2013 or in 2012.

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.
Subsequent events have been evaluated through March 5, 2014, the date the
financial statements were issued.

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
market value because of the short maturity of these instruments. The money market
fund utilized by IKONICS 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 and 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, 2013 and 2012, respectively.

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 FASB ASC 830, Foreign Currency Matters. Foreign currency
transactions and translation adjustments did not have a significant effect on the
Balance Sheet or the Statements of Income, Stockholders’ Equity and Cash Flows
for 2013 and 2012.

Depreciation - Depreciation of property, plant and equipment is computed using
the straight-line method over the following estimated useful lives:

Buildings ............................................

Machinery and equipment ...................

Office equipment ................................

Vehicles .............................................

Years

15-40

5-10

3-10

Intangible Assets – Intangible assets consist of patents, licenses and covenants
not to compete arising from business combinations. Intangible assets are amortized
on a straight-line basis over their estimated useful lives or agreement terms.
Intangible assets with indefinite lives are assessed for impairment whenever events
or circumstances indicate the carrying value may not be fully recoverable by
comparing the carrying value of the intangibles to their future undiscounted cash
flows. To the extent the undiscounted cash flows are less than the carrying value,
analysis is performed based on several criteria, including, but not limited to, revenue
trends, discounted operating cash flows and other operating factors to determine
the impairment amount.

As of December 31, 2013, the remaining estimated weighted average useful lives of
intangible assets are as follows:

Patents ..............................................

Licenses ............................................

Non-compete agreements ...................

Years

14.3

3.4

1.5

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.

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 within SAB 104 and FASB ASC 605 Revenue Recognition:

(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)

Earnings per Common Share (EPS) - Basic EPS is calculated using net income
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.

(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)

(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)

Self-Funded Medical Insurance - Beginning in January 2012, the Company
moved from a fully insured to a self-funded medical insurance plan. The Company
contracted with an administrative service company or a “third party administrator”
to supervise and administer the program and act as the Company’s fiduciary and
representative. The Company has reduced its risk under this self-funded plan by
purchasing both specific and aggregate stop-loss insurance coverage for individual
claims and total annual claims in excess of prescribed limits. The Company records
estimates for claim liabilities based on information provided by the third-party
administrators, historical claims experience, the life cycle of claims, expected
costs of claims incurred but not paid, and expected costs to settle unpaid claims.
The Company regularly monitors its estimated insurance-related liabilities. Actual
claims experience may differ from the Company’s estimates. Costs related to the
administration of the plan and related claims are expensed as incurred. The total
liability for self-funded medical insurance was $55,000 as of December 31, 2013
and $54,000 as of December 31, 2012. The liability related to self-funded medical
insurance is included within other accrued liabilities in the balance sheet.

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. 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.

Shares used in the calculation of diluted EPS are summarized below:

2013

2012

Weighted average common shares out-
standing ...............................................

2,006,843

1,988,066

Dilutive effect of stock options ................

3,816

2,781

Weighted average common and common
equivalent shares outstanding ................

2,010,659

1,990,847

There were no anti-dilutive options at December 31, 2013 and 2012.

Employee Stock Plan - The Company accounts for employee stock options under
the provision of ASC 718 Compensation – Stock Compensation.

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, self-funded health insurance, and the valuation
allowance for deferred tax assets.

2. INCOME TAXES

Income tax expense for the years ended December 31, 2013 and 2012 consists of
the following:

2013

2012

Current:

Federal ..................................................

91,000

319,000

State .....................................................

Deferred ...............................................

1,000

92,000

153,000

2,000

321,000

30,000

245,000

351,000

The expected provision for income taxes, computed by applying the U.S. federal
income tax rate of 34% in 2013 and 35% in 2012 to income before taxes, is recon-
ciled to income tax expense as follows:

2013

2012

Expected provision for federal income taxes .

315,000

365,700

State income taxes, net of federal benefit ....

Domestic manufacturers deduction .............

Non-deductible meals, entertainment, and life
insurance ..................................................

Prior year adjustments................................

Research and development credit ...............

Other ........................................................

16,000

(20,000)

13,000

(32,000)

(45,000)

(2,000)

(400)

(31,800)

20,800

(3,300)

245,000

351,000

IKONICS CORPORATION | 2013 ANNUAL REPORT
Net deferred tax liabilities consist of the following as of December 31, 2013 and
2012:

The deferred tax amounts described to the left have been included in the
accompanying balance sheet as of December 31, 2013 and 2012 as follows:

Deferred tax assets:

Accrued vacation .......................................

23,000

25,000

2013

2012

Inventories .................................................

Allowance for doubtful accounts .................

Allowance for sales returns .........................

Capital loss carryforward ............................

Research and development credit carryforward

Less valuation allowance ............................

Deferred tax liabilities:

105,000

9,000

13,000

309,000

17,000

(326,000)

150,000

101,000

5,000

11,000

323,000

(323,000)

142,000

Current Assets

Noncurrent liabilities

2013

2012

150,000

142,000

(527,000)

(366,000)

(377,000)

$ (244,000)

At December 31, 2013 and 2012, the Company recorded a valuation allowance
of $326,000 and $323,000, respectively, related to Minnesota research and
development credit and U.S. Federal capital loss carryovers as the company believes
it is more likely than not that the deferred tax assets will not be realized. As of
December 31, 2013, the capital loss can be carried forward one year and must be
offset by a capital gain.

Property and equipment and other assets ....

Intangible assets ........................................

(468,000)

(59,000)

(324,000)

(42,000)

Net deferred tax liabilities ...........................

(377,000)

(224,000)

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, 2013 and 2012,
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 2010, 2011, 2012 and 2013.

3. INTANGIBLE ASSETS

Intangible assets consist of patents, patent applications, licenses and covenants not to compete arising from business combinations. 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 patent applications of $23,000 in 2012. No other impairment adjustments to intangible assets were made during the years ended
December 31, 2013 or 2012.

Intangible assets at December 31, 2013 and 2012 consist of the following:

December 31, 2013

December 31, 2012

Gross Carrying Amount

Accumulated Amortization

Gross Carrying Amount

Accumulated Amortization

Amortized intangible assets:

Patents .....................................................................

$ 455,068

(155,970)

$ 384,464

(141,447)

Licenses ...................................................................

Non-compete agreements ..........................................

100,000

303,000

(86,459)

(292,992)

100,000

303,000

(83,334)

(257,326)

$ 858,068

(535,421)

$ 787,464

(482,107)

Aggregate amortization expense:

For the years ended December 31

2013

2012

Estimated amortization expense for the years ending December 31:

$53,314

$54,653

2014 ..................................................

$25,000

2015 ..................................................

2016 ..................................................

2017 ..................................................

2018 ..................................................

23,000

20,000

18,000

In connection with the license agreements, the Company has agreed to pay royalties ranging from 3% to 5% on the sales of products subject to the agreements. The
Company incurred $19,000 of expense under these agreements during 2013, and $87,000 during 2012 which have been included in selling, general and administrative
expenses in the Statements of Income.

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,
2013 and 2012 was approximately $208,000 and $204,000, 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, Digital Texturing (DTX) and Micro-Machining. 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. Micro-Machining 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.
Export sells primarily the same products as Domestic and the IKONICS Imaging products not related to Micro-Machining or DTX. In previous periods, the segment designated
as Other included both Micro-Machining and DTX. Beginning in 2013, the Company began to report DTX and Micro-Machining as separate segments. 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, 2013:

Domestic

Export

IKONICS
Imaging

DTX

Micro-
Machining

Net sales ..................................................

$ 7,260,934

$ 5,641,544

$ 3,836,762

$ 407,193

344,975

Cost of goods sold .....................................

4,062,141

4,057,111

1,831,047

Gross profit (loss) ......................................

3,198,793

1,584,433

2,005,715

Selling, general and administrative*.............

1,307,154

578,084

977,574

Research and development* .......................

70,343

336,850

474,782

532,911

(187,936)

446,803

Unallocated*

Total

1,584,003

649,325

$ 17,491,408

10,553,553

6,937,855

5,368,400

649,325

Income (loss) from operations .....................

$ 1,891,639

$ 1,006,349

$ 1,028,141

$ (137,932)

(634,739)

(2,233,328)

920,130

For the year ended December 31, 2012:

Domestic

Export

IKONICS
Imaging

DTX

Micro-
Machining

Net sales ..................................................

$ 7,118,912

$ 5,523,177

$ 3,708,987

$ 470,205

491,126

Cost of goods sold .....................................

4,036,339

4,042,689

1,705,054

Gross profit ...............................................

3,082,573

1,480,488

2,003,933

Selling, general and administrative*.............

1,226,107

607,453

1,099,812

Research and development* .......................

118,349

351,856

493,631

465,132

25,994

314,803

Unallocated*

Total

1,540,381

629,776

$ 17,312,407

10,367,563

6,944,844

5,282,187

629,776

Income (loss) from operations .....................

$ 1,856,466

873,035

904,121

$ (141,775)

(288,809)

(2,170,157)

$ 1,032,881

* 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, 2013 and December 31, 2012 were as follows:

Dec 31, 2013

Dec 31, 2012

Domestic .......................................................

$ 1,012,057

928,698

Export ............................................................

IKONICS Imaging ............................................

DTX ...............................................................

Micro-Machining ............................................

Unallocated ....................................................

667,343

339,537

26,910

40,222

(35,216)

708,933

272,346

117,552

57,122

(24,339)

Total ..............................................................

$ 2,050,853

$ 2,060,312

IKONICS CORPORATION | 2013 ANNUAL REPORT6. 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 option 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 115,573 shares of common stock are reserved for
additional grants of options under the plan at December 31, 2013.

Under the plan, the Company charged compensation cost of $13,907 and $17,818
against income in 2013 and 2012, respectively.

As of December 31, 2013, there was approximately $20,000 of unrecognized
compensation cost 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 $89,398 for 2013 and $89,028
for 2012.

The fair value of options granted during 2013 and 2012 were estimated using the
Black-Scholes option pricing model with the following assumptions:

Dividend yield ...........................................

2013

Expected volatility .....................................

43.9%

Expected life of option ...............................

Five years

Risk-free interest rate ...............................

Fair values of each option on grant date .....

0.7%

$4.72

2012

41.8%

Five years

0.8%

$2.73

There were 4,250 options and 750 options granted during 2013 and 2012, respec-
tively.

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, 2013 and changes during the year then ended is presented below:

Options

Outstanding at January 1, 2013

Granted

Exercised

Expired and Forfeited

Outstanding at December 31, 2013

Vested or expected to vest at December 31, 2013

Exercisable at December 31, 2013

Weighted Average Exercise Price

Contractual Term (years)

Aggregate Intrinsic Value

Weighted Average Remaining

21,362

4,250

(13,695)

(500)

11,417

4,166

6.72

12.56

6.53

12.56

8.87

6.57

2.67

1.24

66,876

33,977

The weighted-average grant date fair value of options granted was $4.72 and $2.73 for the years ended December 31, 2013 and 2012, respectively. The total intrinsic
value of options exercised was $95,477 for the year ended December 31, 2013 and $32,650 for the year ended December 31, 2012.

The following table summarizes information about stock options outstanding at December 31, 2013:

Range of Exercise Price

Number Outstanding at

Weighted-Average Remain-

Weighted-Average Exercise

Number Exercisable at

Weighted-Average Exercise

December 31, 2013

ing Contractual Life (years)

Price

December 31, 2013

Price

Options Outstanding

Options Exercisable

$5.00-$5.99

$7.00-$7.99

$12.00-$13.00

1,500

6,167

3,750

11,417

0.31

2.24

4.31

2.67

5.00

7.56

12.56

8.87

1,500

2,666

4,166

5.00

7.45

6.57

7. CONCENTRATION OF CREDIT RISK

The Company maintains its cash balances primarily in two financial institutions. As of December 31, 2013, the balance at each 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. LINE OF CREDIT

The Company has a $1,250,000 bank line of credit that provides for working capital financing. This line of credit is subject to renewal on May 31, 2015, is collateralized
by trade receivables and inventories, and bears interest at 2.5 percentage points over 30-day LIBOR. There were no outstanding borrowings under this line of credit at
December 31, 2013 and 2012. There are no financial covenants related to the line of credit.

9. NON-MONETARY TRANSACTION

During 2012, the Company entered into a like-kind exchange with a customer where the Company and the Company’s customer exchanged digital texturing printers. In
addition to the Company receiving a printer from the customer, the Company also received $35,000. A loss of $16,000 was recognized by the Company on the exchange.

COMMON STOCK

ADDITIONAL FINANCIAL INFORMATION

Stockholders of record automatically receive quarterly earnings information, and
street name holders may do so upon written request. For a copy of the Form
10-K, as filed with the Securities and Exchange Commission, and other financial
information avail able at no charge to stockholders, please contact:

JON GERLACH
Chief Financial Officer

IKONICS Corporation
4832 Grand Avenue, Duluth, MN 55807
Phone: (218) 628-2217
email: jgerlach@ikonics.com

ANNUAL MEETING

The Company’s annual meeting will be held:

April 24, 2014 1:00 p.m.

Kitchi Gammi Club
831 E. Superior Street
Duluth, MN 55802

IKONICS Corporation common stock is traded on the Nasdaq Capital Market under
the symbol IKNX. For investment and stock information contact:

JON GERLACH
Chief Financial Officer

IKONICS Corporation
4832 Grand Avenue, Duluth, MN 55807
Phone: (218) 628-2217
email: jgerlach@ikonics.com

TRANSFER AGENT

WELLS FARGO SHAREOWNER SERVICES
PO Box 64854
St. Paul, MN 55164-0854

Shareholders with questions on stock holdings, transfer requirements and address
changes contact Wells Fargo Bank at: (800) 468-9716

AUDITOR

MCGLADREY LLP
801 Nicollet Mall, Suite 1100 West Tower
Minneapolis, MN 55802
(612) 573-8750

COUNSEL

HANFT FRIDE
1000 U.S. Bank Place
130 W. Superior Street
Duluth, MN 55802
(218) 722-4766

IKONICS CORPORATION | 2013 ANNUAL REPORTboard of directorS

corporate officerS

CHARLES H. ANDRESEN

Attorney

Hanft Fride

Duluth, MN

WILLIAM C. ULLAND

Chairman, President & CEO

Director Since 1979

CLAUDE PIGUET

Executive Vice President

LOCKWOOD CARLSON

President

Carlson Consulting Group

JON GERLACH

Vice President, Finance, CFO

Minneapolis, MN

Director Since 2009

RONDI C. ERICKSON

Chief Executive Officer (retired 2006)

PARNELL THILL

Vice President, Marketing

Apprise Technologies, Inc.

Duluth, MN

Director Since 2000

ROBERT D. BANKS

Vice President, International

ERNEST M. HARPER, JR.

Chief Tax Officer (retired 2010)

KEN HEGMAN

Vice President, Sales: North America

DAVID O. HARRIS

General Mills, Inc.

Minneapolis, MN

Director Since 2012

President

David O. Harris, Inc

Minneapolis, MN

Director Since 1965

DARRELL B. LEE

Vice President, Chief Financial Officer,

Treasurer, Secretary

MOCON, Inc.

Minneapolis, MN

Director Since 2012

H. LEIGH SEVERANCE

President

Severance Capital Management

Denver, CO

Director Since 2000

GERALD W. SIMONSON

President

Omnetics Connector Corporation

Minneapolis, MN

Director Since 1978

WILLIAM C. ULLAND

Chairman, President & CEO

IKONICS Corporation

Duluth, MN

Director Since 1972

$18,000,000

$16,000,000

$14,000,000

$12,000,000

$10,000,000

$8,000,000

$6,000,000

$4,000,000

$2,000,000

Net Sales 2009 – 2013

Net Income (Loss) 2009 – 2013

$1,400,000

$1,200,000

$1,000,000

$800,000

$600,000

$400,000

$200,000

- $200,000

- $400,000

2009

2010

2011

2012

2013

2009

2010

2011

2012

2013

IKONICS Five-Year History

2009

2010

2011

2012

2013

Net Sales

Pretax Income (Loss)

Net Income (Loss)

$15,121,617

$16,517,338

$16,780,262

$17,312,407

$17,491,408

$(11,360)

$1,553,920

$1,043,257

$1,044,931

$927,173

$(307,360)

$1,113,920

$698,257

$693,931

$682,173

Net Cash Provided by Operations

$1,374,114

$1,601,369

$793,532

$1,181,950

$1,466,532

Return on Sales

Return on Assets

Return on Avg. Stockholders' Equity

Debt to Equity

Diluted EPS

Stock price: High

Low

(2.0%)

(2.6%)

(2.7%)

8.8%

$(0.16)

$8.29

$4.00

$6.30

6.7%

8.5%

9.6%

7.8%

$0.56

$8.00

$6.30

$7.25

4.2%

4.9%

5.5%

9.1%

$0.35

$8.94

$6.90

$7.57

4.0%

5.3%

5.6%

11.8%

$0.35

$9.45

$7.03

$8.05

3.9%

4.9%

5.6%

11.1%

$0.34

$19.45

$7.92

$14.75

Weighted Average Common Shares Outstanding - Diluted

1,973,739

1,973,447

1,986,041

1,990,847

2,010,659

Total Assets

Total Liabilities

Total Stockholders' Equity

Capital Spending

$11,997,272

$13,141,931

$14,167,458

$13,184,276

$14,001,803

$971,186

$948,984

$1,176,915

$1,389,531

$1,401,985

$11,026,086

$12,192,947

$12,990,543

$11,794,745

$12,599,818

$90,313

$189,150

$621,598

$566,519

$762,537

4832 Grand Avenue Duluth, MN 55807 ph: (218) 628-2217 toll-free: (800) 328-4261 e: info@ikonics.com web: www.ikonics.com