CONTENTS
COMPANY OVERVIEW
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
IKONICS is a corporation with four important technology platforms: Ultraviolet (UV)
chemistry, film coating and construction, industrial inkjet printing and technical
abrasive etching. 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.
Market for Common Equity and
Related Stockholder Matters...................................................................................8
IKONICS’ key technologies are developed internally, and IKONICS believes it has a
strong patent and trade secret position. All manufacturing is done in Duluth.
Management’s Report............................................................................................8
Management’s Annual Report on
Internal Control Over Financial Reporting.................................................................9
IKONICS believes this range of technologies and markets, and its strong financial
condition, make IKONICS a very robust company that is buffered against many
vagaries of the market and the economy. IKONICS’ commitment to a range of new
technologies gives it substantial growth potential.
Report of Independent
Registered Public Accounting Firm......................................................................... 9
Balance Sheets....................................................................................................10
Statements of Income..........................................................................................11
Statements of Stockholders’ 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
2014 Net Sales...................................................................................$18,489,837
2014 Earnings per common share (diluted)......................................................$0.32
Company founded...........................................................................................1952
Employees..........................................................................................................75
NASDAQ Symbol..............................................................................................IKNX
Letter to SharehoLderS
The past year saw two of our new initiatives continue to gain momentum and position themselves for future growth. For the year, IKONICS Corporation experienced record
sales of $18,500,000, a 6% percent increase over 2013. Earnings were down 5% from 2013 to $649,000, or $0.32 per diluted share.
Fourth quarter sales for our two new businesses – DTX, which works primarily with the automotive industry, and Advanced Materials Solutions (AMS), which serves the
aerospace and electronics industries, were strong compared to the same quarter in 2013, and I believe sales for these businesses will continue to grow.
Our traditional Domestic screen print chemical business performed well for the year, helped by a partial return of manufacturing from China to the U.S. Our Export business
was hurt by the same reshoring and the strength of the U.S. dollar, resulting in both declining sales and margins. I anticipate the strong dollar and weakening Asian markets
to continue to impact our export sales in 2015.
In 2014, our IKONICS Imaging business unit had a very large film stocking order resulting in a 21% increase in IKONICS Imaging sales for the year. Although this remains a
profitable and robust business, I do not expect a similar large stocking order in 2015.
AMS incurred increasing expenses in 2014 as we geared up to meet anticipated orders. Beginning in 2015, these orders have finally begun to arrive, and we now have
three orders in house which I believe will be multiyear commitments. Additional orders are pending. These orders can always be canceled, but being chosen as a supplier
at the beginning of a program often leads to being a supplier for the life of the program. Some of these programs have a life expectancy of more than 20 years. I believe in
2015 we will see accelerating growth in sales with profits beginning in 2016. Our AMS electronic wafer business also continues to grow.
In the 4th quarter of 2014, our DTX business, which supplies texturing and prototyping technology primarily to the automotive industry, turned its first profit with a sales
increase of 132% over the same quarter of 2013. Although there may be some bumps in that growth rate, we are seeing broader market acceptance of this technology and
are both selling system consumables and printing transfer and prototype film in-house and selling them worldwide.
I believe that our strategic plan to gain new markets through creative combinations of our core technology platforms of ultraviolet photochemistry, film coating and
construction, technical abrasive etching, and industrial inkjet printing is beginning to pay off and will make IKONICS a unique and profitable technology company in the years
ahead.
WILLIAM C. ULLAND
Chairman, President & CEO
March 24, 2015
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1
SpeciaL note regarding forward-Looking StatementS
This 2014 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 2014 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.
in 2014 and 3.7% of sales, or $649,000, in 2013. A substantial portion of these
investments was in the Company’s AMS 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.
riSk factorS
The Company’s DTX and AMS 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 AMS initiatives involve new and unproven technologies
that might never achieve market acceptance. During 2014 and 2013, the Company
generated operating losses in both its DTX and AMS 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 AMS and DTX business
units. The Company spent 3.6% of sales, or $665,000, on research and development
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The Company’s AMS 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 AMS 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.
The 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 AMS and DTX
businesses. If the Company is unable to anticipate and respond to these developments,
its products or technologies could become uncompetitive or obsolete. Most of the
Company’s competitors in the AMS 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
IKONICS CORPORATION | 2014 ANNUAL REPORT 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 Domestic 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 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.
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.
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’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.
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:
Third parties may claim the Company infringes their intellectual property rights,
which could harm the Company’s business.
•rapid changes in government, economic and political policies and conditions, political or
civil unrest or instability, terrorism or epidemics,
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.
•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 2014, approximately 73% of the Company’s sales, including nearly all sales of its
Domestic 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
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3
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.
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.
Increases in prices and declines in the availability of raw materials could
negatively impact the Company’s financial results.
An active trading market for the Company’s shares of common stock may not
develop.
Certain 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 one manufacturer to make and sell DTX printers. If
the manufacturer 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 one company to manufacture and sell DTX printers. If the
manufacturer 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 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, 2014, the Company’s directors and officers collectively
beneficially owned approximately 33.77% 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:
•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;
•business acquisitions or divestitures; or
•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.
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IKONICS CORPORATION | 2014 ANNUAL REPORT 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.
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 2014 and 2013 and should be read in connection with
the Company’s audited financial statements and notes thereto for the years ended
December 31, 2014 and 2013, included herein.
criticaL accounting poLicieS and eStimateS
The Company prepares its financial statements in conformity with accounting
principles generally accepted in the United States of America. Therefore, the
Company is required to make certain estimates, judgments and assumptions that
the Company believes are reasonable based upon the information available. These
estimates and assumptions affect the reported amounts of assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the periods presented. The accounting 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. The Company also maintains a provision based on upon historical
experience and any specifically identified issues for any customer related returns,
refunds or credits.
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.
Income 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.
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)
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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, 2014 COMPARED TO YEAR ENDED DECEMBER 31, 2013
Sales – The Company’s net sales increased 5.7% in 2014 to a record $18.5
million compared to net sales of $17.5 million in 2013. IKONICS Imaging sales
grew $807,000, or 21.0%, to $4.6 million mainly due to a large initial stocking
order from its new distributor, JDS Industries. The Company expects continued
sales from JDS Industries, but not at the volume of the 2014 initial stocking order.
IKONICS Imaging sales have also been positively impacted by improved equipment
sales. Domestic sales increased 8.1% in 2014 due to improved emulsion sales
as a result of increased customer demand for existing and newly introduced
products into the Company’s traditional markets. DTX sales also grew from
$407,000 in 2013 to $423,000 in 2014 due to higher film sales. These sales
increases were partially offset by a 6.9% Export sales decrease due to lower sales
across all geographic regions. Asia and Europe realized the largest decreases in
2014 compared to the prior year due to poorer general economic conditions and
a weaker Euro. Also unfavorably impacting sales in 2014 was a 5.3% decrease in
AMS sales due to loss of a large mask customer.
Gross Profit – Gross profit in 2014 was $6.7 million, or 36.3% of sales, compared
to $6.9 million, or 39.7% of sales in 2013. Gross margins were unfavorably
impacted by an increase in AMS production costs related to the Company’s efforts
to improve its production capacity and capabilities. DTX costs also increased
in 2014 as the Company allocated additional resources, both personnel and
equipment, to produce textured prints. Some DTX resources used in the production
of textured prints were previously utilized in a selling and administrative capacity.
Domestic gross margins were negatively impacted by a less favorable sales mix as
sales volumes for lower margin emulsion sales grew relative to higher margin film
sales. The Export gross margin also declined from 28.1% in 2013 to 26.8% in
2014 due to both a stronger U.S. dollar and a less favorable sales mix. An increase
in sales volumes and a more favorable sales mix improved the IKONICS Imaging
gross margin in 2014 to 53.3% from 52.3% in 2013.
Selling, General and Administrative Expenses – Selling, general and
administrative expenses were $5.1 million, or 27.7% of sales, in 2014 compared to
$5.4 million, or 30.7% of sales, in 2013. The decrease reflects lower DTX selling,
general and administrative expenses compared to the same period last year as
internal resources, both personnel and equipment, previously involved with selling,
general and administrative duties were reassigned to the production of textured
prints in 2014. Selling, general and administrative expenses also benefitted from
lower IKONICS Imaging and Export promotional expenses.
Research and Development Expenses – Research and development expenses
in 2014 were $665,000, or 3.6% of sales, versus $649,000, or 3.7% of sales, in
2013. The increase is related to higher production trial and personnel expenses for
the year, partially offset by lower depreciation expenses. The increase in production
trial expenses was partially related to efforts to improve DTX consumable products
to meet customer requirements.
Income Taxes – During 2014, the Company realized income tax expense of
$270,000, or an effective rate of 29.4%, compared to income tax expense of
$245,000, or an effective rate of 26.4%, for the same period in 2013. The increase
in current year tax expense and effective rate from 2013 is primarily due to benefits
from prior year adjustments recognized in 2013 as well as higher research and
development credits generated in the prior year. The income tax provision for the
2014 and 2013 periods differs from the expected tax expense due to the benefits
of the domestic manufacturing deduction, credits for research and development and
other non-deductible items.
6
Liquidity and capitaL reSourceS
The Company has financed its operations principally with funds generated from
operations. These funds have been sufficient to cover the Company’s normal
operating expenditures, annual capital requirements, research and development
expenditures.
Cash and cash equivalents were $1.9 million and $1.7 million at December 31,
2014 and 2013, respectively. In addition to its cash, the Company also held $1.8
million of short-term investments as of December 31, 2014 and $1.5 million
of short-term investments as of December 31, 2013. The Company generated
$917,000 in cash from operating activities during 2014, compared to generating
$1.5 million of cash from operating activities in 2013. 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 2014, inventories increased by $76,000. In addition to increased finished
goods levels, part of the inventory increase is related to the timing of raw material
purchases. Trade receivables increased $45,000 related to the increase in sales
volumes. The $17,000 decrease in prepaid expenses and other assets is related
to a decrease in prepaid promotional expenses. Accounts payable decreased
$161,000 due to the timing of payments to and purchases from vendors while
accrued liabilities increased $31,000 due to the timing of the Company’s payroll.
The Company’s income tax receivable increased $122,000 due to timing of
estimated 2014 tax payments compared to the calculated 2014 tax liability.
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 2014, investing activities used $731,000. Purchases of property and
equipment were $434,000, mainly for improvements to AMS equipment, mandatory
elevator upgrades, two forklifts and two vehicles. The Company realized $62,000
in proceeds from the sale of land and two vehicles. Also during 2014, 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 $2.7 million in 18 fully insured certificates of deposit during 2014.
Eighteen certificates of deposit totaling $2.4 million matured during 2014.
During 2013, investing activities used $820,000. Purchases of property and
equipment were $763,000. The majority of these purchases were made to improve
AMS 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 $1.8 million in 12 fully insured
certificates of deposit during 2013. Twelve certificates of deposit totaling $1.8
million matured during 2013.
In 2014, the Company received $46,000 from financing activities from the issuance
of 6,083 shares of common stock from the exercise of stock options compared to
$89,000 the Company received from the issuance of 13,695 shares of common
stock from the exercise of stock options in 2013.
IKONICS CORPORATION | 2014 ANNUAL REPORT A bank line of credit exists providing for borrowings of up to $1.25 million through
May 31, 2015. The Company expects to renew this line of credit or 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 2014 and 2013 and there were no borrowings outstanding as of
December 31, 2014 and 2013. 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
In 2014, the Company spent $434,000 on capital expenditures. Capital
expenditures in 2014 were mainly for improvements to AMS capabilities, mandatory
elevator upgrades, two forklifts and two vehicles.
During 2013, the Company had $763,000 of capital expenditures. The majority of
these purchases were made to improve AMS 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.
The Company expects capital expenditures in 2015 of approximately $900,000.
The planned expenditures primarily will be for mandatory elevator upgrades not
completed in 2014, manufacturing equipment necessary for anticipated AMS
aerospace business, other manufacturing equipment upgrades and vehicles
for sales personnel. These commitments are expected to be funded with cash
generated from operating activities. The Company is also beginning to plan and
evaluate a potential building expansion to accommodate its AMS operations as the
Company’s current facilities are nearing full capacity. This expansion, along with the
expected 2015 purchase of the AMS equipment mentioned above will be dependent
on the Company’s AMS process proving its capabilities and increasing its market
acceptance among its customers base. The Company does not intend to proceed
with the expansion until the demand for its services is more certain. The timing and
cost of this expansion have not been finalized, but construction could commence in
2015. Any costs associated with this potential expansion are not included in the
Company’s estimated capital expenditures for 2015 discussed above.
internationaL activity
The Company markets its products in numerous countries in various regions of the
world, including North America, Europe, Latin America, and Asia. The Company’s
2014 foreign sales of $5.3 million were approximately 28.4% of total sales,
compared to the 2013 foreign sales of $5.6 million, which were 32.3% of total
sales. IKONICS experienced a decrease in foreign sales across all geographic
regions in 2014 due to due to poorer general economic conditions and a weaker
Euro.
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, 2014. Furthermore, the impact of foreign exchange on the Company’s balance
sheet and operating results was not material in either 2014 or 2013.
future outLook
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 AMS 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.
The Company continues to make progress on its new AMS 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. 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 AMS 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 in 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.
recent accounting pronouncementS
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Custom-
ers. ASU 2014-09 supersedes the revenue recognition requirements in Revenue
Recognition (Topic 605), and requires entities to recognize revenue in a way that
depicts the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled to in exchange
for those goods or services. ASU 2014-09 is effective for the Company in our fiscal
year beginning on January 1, 2017, including interim periods within that reporting
period and is to be applied retrospectively, with early application not permitted. The
Company is currently evaluating the effect that adopting this new accounting guid-
ance will have on our consolidated results of operations, cash flows and financial
position.
7
7
In August 2014, FASB issued ASU No. 2014-15, ‘Presentation of Financial State-
ments—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an
Entity’s Ability to Continue as a Going Concern, intended to define management’s
responsibility to evaluate whether there is substantial doubt about an organization’s
ability to continue as a going concern and to provide related footnote disclosures.
ASU 2014-15 is effective for the Company in the year ended December 31, 2016,
and interim periods beginning March 31, 2017, with early application permitted.
The Company does not anticipate a material impact to the financial statements once
implemented.
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.
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.
Fiscal Year Ended December 31, 2014:
High
Low
WILLIAM C. ULLAND
JON GERLACH
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal Year Ended December 31, 2013:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$ 31.02
$ 13.50
Chairman, President & CEO
Chief Financial Officer & V.P. Finance
29.00
27.20
17.82
$ 13.74
17.99
18.98
19.45
19.90
17.06
14.03
$ 7.92
12.00
16.06
14.25
As of February 19, 2015, the Company had approximately 699 shareholders.
Declaration and payment of dividends is within the sole discretion of the Company’s
board of directors.
8
IKONICS CORPORATION | 2014 ANNUAL REPORT management’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, 2014. 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, 2014, 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, 2014 and 2013, 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, 2014 and
2013, 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, 2015
9
9
baLance SheetS
DECEMBER 31, 2014 AND 2013
aSSetS
CURRENT ASSETS:
2014
2013
Cash and cash equivalents (Note 7) .............................................................................................................. $
1,936,214
$
Short-term investments ...............................................................................................................................
Trade receivables, less allowance of $49,000 in 2014 and $62,000 in 2013 (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 ....................................................................................................................
1,766,000
2,096,328
2,630,650
86,400
163,651
178,000
8,857,243
6,247,781
3,956,561
754,220
247,356
11,205,918
5,789,070
5,416,848
INTANGIBLE ASSETS, less accumulated amortization of $198,918 in 2014 and $173,143 in 2013 (Note 3) .....................
353,871
LiabiLitieS and StockhoLderS’ equity
CURRENT LIABILITIES:
$
14,627,962
$
2014
Accounts payable .......................................................................................................................................
$
371,181
$
Accrued compensation ................................................................................................................................
Other accrued liabilities ...............................................................................................................................
Total current liabilities .................................................................................................................................
DEFERRED INCOME TAXES (Note 2) ....................................................................................................................
Total liabilities ............................................................................................................................................
294,706
78,610
744,497
545,000
1,289,497
1,704,300
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
322,647
14,001,803
2013
532,294
274,936
67,755
874,985
527,000
1,401,985
COMMITMENTS AND CONTINGENCIES
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 2,018,253
shares in 2014 and 2,012,170 shares in 2013 (Note 6)
Additional paid-in capital .............................................................................................................................
Retained earnings .......................................................................................................................................
Total stockholders’ equity ............................................................................................................................
201,825
2,681,307
10,455,333
13,338,465
$
14,627,962
$
201,217
2,592,038
9,806,563
12,599,818
14,001,803
See notes to financial statements.
10
IKONICS CORPORATION | 2014 ANNUAL REPORT
StatementS of income
YEARS ENDED DECEMBER 31, 2014 AND 2013
NET SALES ...............................................................................................................................................
$
18,489,837
$
17,491,408
COST OF GOODS SOLD ...............................................................................................................................
11,786,608
10,553,553
2014
2013
GROSS PROFIT ..........................................................................................................................................
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ......................................................................................
RESEARCH AND DEVELOPMENT EXPENSES ....................................................................................................
INCOME FROM OPERATIONS ........................................................................................................................
OTHER .....................................................................................................................................................
INCOME BEFORE INCOME TAXES ..................................................................................................................
FEDERAL AND STATE INCOME TAXES (NOTE 2) ...............................................................................................
NET INCOME .............................................................................................................................................
$
EARNINGS PER COMMON SHARE:
6,703,229
5,124,764
664,999
5,789,763
913,466
5,304
918,770
270,000
648,770
Basic ......................................................................................................................................................................
Diluted ....................................................................................................................................................................
$
$
0.32
0.32
WEIGHTED AVERAGE COMMON SHARES:
6,937,855
5,368,400
649,325
6,017,725
920,130
7,043
927,173
245,000
682,173
0.34
0.34
$
$
$
Basic ......................................................................................................................................................................
Diluted ....................................................................................................................................................................
2,017,144
2,018,334
2,006,843
2,010,659
See notes to financial statements.
StatementS of StockhoLderS’ equity
YEARS ENDED DECEMBER 31, 2014 AND 2013
Balance At December 31, 2012
1,998,475
$
199,848 $
2,470,507
$
9,124,390
$
11,794,745
Common Shares
Stock Amount
Additional Paid-In
Capital
Retained Earnings
Total Stockholders’
Equity
Net income
Exercise of stock options
Tax benefit resulting from stock option exercises
Stock based compensation and related tax benefit
-
13,695
-
-
-
1,369
-
-
-
88,029
19,595
13,907
Balance At December 31, 2013
2,012,170
201,217
2,592,038
Net income
Exercise of stock options
Tax benefit resulting from stock option exercises
Stock based compensation and related tax benefit
-
6,083
-
-
608
-
-
45,379
25,475
18,415
682,173
-
-
-
9,806,563
648,770
-
-
-
682,173
89,398
19,595
13,907
12,599,818
648,770
45,987
25,475
18,415
Balance At December 31, 2014
See notes to financial statements.
2,018,253
$
201,825 $
2,681,307
$
10,455,333
$
13,338,465
11
11
StatementS of caSh fLowS
YEARS ENDED DECEMBER 31, 2014 AND 2013
CASH FLOW FROM OPERATING ACTIVITIES:
2014
2013
Net Income ....................................................................................................................................................
$
648,770
$
682,173
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation ...................................................................................................................................................
Amortization ...................................................................................................................................................
Stock based compensation ..............................................................................................................................
Net gain on disposal of property, plant and equipment .......................................................................................
Deferred income taxes ....................................................................................................................................
CHANGES IN OPERATING ASSETS AND LIABILITIES
Trade receivables ............................................................................................................................................
Inventories .....................................................................................................................................................
Prepaid expenses and other assets ..................................................................................................................
Income tax receivable .....................................................................................................................................
Accounts payable ...........................................................................................................................................
Accrued liabilities ...........................................................................................................................................
Income taxes payable ......................................................................................................................................
Net cash provided by operating activities ......................................................................................................
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ...............................................................................................................
Proceeds from disposal of property and equipment ............................................................................................
Purchases of intangibles .................................................................................................................................
Purchases of short-term investments ...............................................................................................................
Proceeds from sale of short-term investments ...................................................................................................
Net cash used in investing activities .............................................................................................................
635,607
25,775
18,415
(45,659)
(10,000)
(45,475)
(75,708)
17,287
(121,776)
(161,113)
30,625
---
916,748
(434,463)
61,763
(56,998)
(2,716,000)
2,414,877
(730,821)
568,791
53,314
13,907
(13,979)
153,000
9,459
123,922
21,296
(16,400)
(61,628)
(4,766)
(62,557)
1,466,532
(762,537)
35,507
(70,604)
(1,814,878)
1,792,939
(819,573)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options ...........................................................................................................
45,987
89,398
NET INCREASE IN CASH AND CASH EQUIVALENTS .....................................................................................................
231,914
736,357
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .............................................................................................
1,704,300
967,943
CASH AND CASH EQUIVALENTS AT END OF YEAR ......................................................................................................
$
1,936,214
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for income taxes, net of taxes received of $13,026 in 2013 ...............................................................
$
401,776
$
$
1,704,300
171,139
See notes to financial statements
12
IKONICS CORPORATION | 2014 ANNUAL REPORT
noteS to financiaL StatementS
YEARS ENDED DECEMBER 31, 2014 AND 2013
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Foreign Export Sales - IKONICS Corporation’s
(the Company) traditional business has been the development and manufacturing
of 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. These sales have been augmented with inkjet
receptive films, ancillary chemicals and related equipment to provide a full line of
products and services to its customers. In 2006, the Company began a major effort
to diversify and expand its business to industrial markets. These efforts now include
the Company’s Advanced Material Solutions (AMS) business unit, formerly named
Micro-Machining, which uses the Company’s proprietary process and photoresist
film for the abrasive etching of composite materials, industrial ceramics, silicon
wafers, and glass wafers. The customer base for AMS is primarily the aerospace
and electronics industries. Based on its expertise in ultraviolet curable fluids and
inkjet receptive substrates, the Company has also developed a patented digital
texturing technology (DTX) for putting patterns and textures into steel molds for the
plastic injection molding industry. The ultimate original equipment manufacturer
(“OEM”) for the Company’s DTX technology is primarily the automotive industry.
The Company offers a suite of products to the mold making industry. Industrial
inkjet printers, which are integral to the DTX system, are manufactured and sold by
a strategic partner. The Company’s business plan is to sell consumable fluids and
transfer films. For most markets these sales are direct to the mold maker. The DTX
technology is being expanded to prototyping where the Company’s technology offers
a unique combination of high definition and large format prints. 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.
Foreign export sales approximated 28.4% of net sales in 2014 and 32.3% of net
sales in 2013. The Company’s trade receivables at December 31, 2014 and 2013
due from foreign customers were 30.6% and 32.5% 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 2014 or in 2013.
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.
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 four to twelve months as
of December 31, 2014 and 2013, 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 Financial Accounting Standards Board (“FASB”) Accounting
Standard Codification (“ASC”) No. 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 2014 and 2013.
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 $1,315,000 and $1,248,000 higher
than reported at December 31, 2014 and 2013, respectively. The inventory reserve
for obsolescence was $11,000 and $15,000 at December 31, 2014 and 2013,
respectively. The major components of inventories are as follows:
Raw Materials
Work-in-progress
Finished goods
Reduction to LIFO cost
Total Inventories
2014
2013
$
2,020,151
$
1,952,398
407,964
1,517,151
389,501
1,461,264
(1,314,616)
(1,248,221)
$
2,630,650
$
2,554,942
Property, Plant and Equipment - Major expenditures extending the life of the
property, plant and equipment are capitalized. Repair and maintenance costs are
expensed in the period in which they are incurred. 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
3
Intangible Assets – Intangible assets consist of patents, licenses and covenants
not to compete arising from business acquisitions. Intangible assets are amortized
on a straight-line basis over their estimated useful lives or agreement terms. 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, 2014, the remaining estimated weighted average useful lives of
intangible assets are as follows:
Patents ..............................................
Licenses ............................................
Non-compete agreements ...................
Years
13.4
2.7
0.5
Impairment of Long-lived Assets – The Company reviews its long-lived assets,
including property, plant and equipment and intangible assets, for impairment when
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by those assets are less than the assets’ carrying amount. Any
impairment loss recorded is measured as the amount by which the carrying value
of the assets exceeds the fair value of the assets. To date, the Company has
determined that no impairment of long-lived assets exists.
13
13
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)
(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.
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.
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.
14
Shares used in the calculation of diluted EPS are summarized below:
2014
2013
Weighted average common shares out-
standing ...............................................
2,017,144
2,006,843
Dilutive effect of stock options ................
1,190
3,816
Weighted average common and common
equivalent shares outstanding ................
2,018,334
2,010,659
At December 31, 2014, options to purchase 1,250 shares of common stock with
a weighted average exercise price of $28.25 were outstanding, but were excluded
from the computation of common share equivalents because they were anti-dilutive.
There were no anti-dilutive options at December 31, 2013.
Employee Stock Plan - The Company accounts for employee stock options under
the provision of ASC 718 Compensation – Stock Compensation.
Recent Accounting Pronouncements - In May 2014, the FASB issued Accounting
Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers.
ASU 2014-09 supersedes the revenue recognition requirements in Revenue
Recognition (Topic 605), and requires entities to recognize revenue in a way that
depicts the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled to in exchange
for those goods or services. ASU 2014-09 is effective for the Company in our fiscal
year beginning on January 1, 2017, including interim periods within that reporting
period and is to be applied retrospectively, with early application not permitted.
The Company is currently evaluating the effect that adopting this new accounting
guidance will have on our consolidated results of operations, cash flows and
financial position.
In August 2014, FASB issued ASU No. 2014-15, Presentation of Financial
Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about
an Entity’s Ability to Continue as a Going Concern, intended to define management’s
responsibility to evaluate whether there is substantial doubt about an organization’s
ability to continue as a going concern and to provide related footnote disclosures.
ASU 2014-15 is effective for the Company in the year ended December 31, 2016,
and interim periods beginning March 31, 2017, with early application permitted.
The Company does not anticipate a material impact to the financial statements once
implemented.
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, 2014 and 2013 consists of
the following:
2014
2013
Current:
Federal ..................................................
$
332,000
$
91,000
State .....................................................
Deferred ...............................................
15,000
347,000
(77,000)
1,000
92,000
153,000
$
270,000
$
245,000
IKONICS CORPORATION | 2014 ANNUAL REPORT
The deferred tax amounts described left have been included in the accompanying
balance sheet as of December 31, 2014 and 2013 as follows:
Current Assets
Noncurrent liabilities
2014
2013
$
$
178,000
$
150,000
(545,000)
(527,000)
(367,000)
$ (377,000)
At December 31, 2013, the Company’s valuation allowance of $326,000 related to
a capital loss carryforward of $309,000 and a Minnesota research and development
credit of $17,000. During the fourth quarter of 2014, the Company reversed
$17,000 of the valuation allowance related to utilized capital loss carryforwards
and wrote off the remaining $292,000 of capital loss carryforward that expired
in the current year. The remaining valuation allowance balance of $30,000 at
December 31, 2014 relates entirely to Minnesota research and development credit
carryforwards that the Company does not expect to utilize and begin to expire in
2028.
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, 2014 and 2013,
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 2011, 2012, 2013 and 2014.
The expected provision for income taxes, computed by applying the U.S. federal
income tax rate of 34% in 2014 and 34% in 2013 to income before taxes, is recon-
ciled to income tax expense as follows:
Expected provision for federal income taxes .
$
312,000
$
315,000
2014
2013
State income taxes, net of federal benefit ....
Domestic manufacturers deduction .............
Non-deductible meals, entertainment, and life
insurance ..................................................
Prior year adjustments................................
Research and development credit ...............
Valuation allowance released on capital loss
utilized ......................................................
Other....................................
15,000
(33,000)
21,000
(1,000)
(31,000)
(17,000)
4,000
16,000
(20,000)
13,000
(32,000)
(45,000)
-
(2,000)
$
270,000
$
245,000
Net deferred tax liabilities consist of the following as of December 31, 2014 and
2013:
Deferred tax assets:
Accrued vacation .......................................
$
23,000
$
23,000
2014
2013
Inventories reserve .....................................
Allowance for doubtful accounts .................
Allowance for sales returns .........................
Capital loss carryforward ............................
Research and development credit carryforward
Accrued self-insured medical......................
Less valuation allowance ............................
129,000
4,000
13,000
-
30,000
9,000
(30,000)
178,000
105,000
9,000
13,000
309,000
17,000
-
(326,000)
150,000
Deferred tax liabilities:
Property and equipment .............................
Intangible assets ........................................
(462,000)
(83,000)
(468,000)
(59,000)
Net deferred tax liabilities ...........................
$
(367,000)
$
(377,000)
3. INTANGIBLE ASSETS
Intangible assets consist of patents, patent applications, licenses and covenants not to compete arising from business acquisitions. 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. There
were no impairment adjustments to intangible assets during the years ended December 31, 2014 or 2013.
Intangible assets at December 31, 2014 and 2013 consist of the following:
December 31, 2014
December 31, 2013
Gross Carrying Amount
Accumulated Amortization
Gross Carrying Amount
Accumulated Amortization
Amortized intangible assets:
Patents .....................................................................
$ 402,789
$
Licenses ...................................................................
Non-compete agreements ..........................................
50,000
100,000
(62,676)
(39,584)
(96,658)
$ 345,790
$
50,000
100,000
(46,692)
(36,459)
(89,992)
$ 552,789
$
(198,918)
$ 495,790
$
(173,143)
15
15
Aggregate amortization expense:
For the years ended December 31
2014
2013
Estimated amortization expense for the years ending December 31:
$25,775
$53,314
2015 ..................................................
2016 ..................................................
2017 ..................................................
2018 ..................................................
2019 ..................................................
23,000
20,000
20,000
18,000
16,000
In connection with the license agreement, the Company has agreed to pay royalties ranging from 3% to 5% on the sales of products subject to the agreements. The
Company incurred $16,000 of expense under these agreements during 2014, and $19,000 during 2013 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,
2014 and 2013 was approximately $213,000 and $208,000, 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 AMS. 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. AMS 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 and prototyping.
Export sells primarily the same products as Domestic and the IKONICS Imaging products not related to AMS or DTX. 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, 2014:
Domestic
Export
IKONICS
Imaging
DTX
AMS
Unallocated*
Total
Net sales ..................................................
$ 7,846,457
$ 5,249,843
$ 4,644,082
$ 422,646
$
326,809
$
Cost of goods sold .....................................
4,571,505
3,840,948
2,167,870
365,828
840,457
Gross profit (loss) ......................................
3,274,952
1,408,895
2,476,212
56,818
(513,648)
-
-
-
Selling, general and administrative*.............
1,353,509
549,254
918,337
166,724
425,087
1,711,853
Research and development* .......................
-
-
-
-
-
664,999
$ 18,489,837
11,786,608
6,703,229
5,124,764
664,999
Income (loss) from operations .....................
$ 1,921,443
$
859,641
$ 1,557,875
$ (109,906)
(938,735)
$
(2,376,852)
$
913,466
For the year ended December 31, 2013:
Domestic
Export
IKONICS
Imaging
DTX
AMS
Unallocated*
Total
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 ...............................................
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
-
-
-
-
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
* The Company does not allocate all general and administrative expenses or any research and development expenses to its operating segments for internal reporting.
16
IKONICS CORPORATION | 2014 ANNUAL REPORT
Trade receivables by segment as of December 31, 2014 and December 31, 2013 were as follows:
Dec 31, 2014
Dec 31, 2013
Domestic .......................................................
$ 1,068,170
$ 1,012,057
Export ............................................................
IKONICS Imaging ............................................
DTX ...............................................................
AMS ..............................................................
Unallocated ....................................................
640,464
254,483
86,507
85,170
(38,466)
667,343
339,537
26,910
40,222
(35,216)
Total ..............................................................
$ 2,096,328
$ 2,050,853
6. 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 115,989 shares of common stock are reserved for
additional grants of options under the plan at December 31, 2014.
Under the plan, the Company charged compensation cost of $18,415 and $13,907
against income in 2014 and 2013, respectively.
As of December 31, 2014, 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 $45,987 for 2014 and $89,398
for 2013.
The fair value of options granted during 2014 and 2013 were estimated using the
Black-Scholes option pricing model with the following assumptions:
Dividend yield ...........................................
2014
0%
Expected volatility .....................................
44.3%
Expected life of option ...............................
Five years
Risk-free interest rate ...............................
Fair values of each option on grant date .....
1.7%
$11.49
2013
0%
43.9%
Five years
0.7%
$4.72
There were 1,250 options and 4,250 options granted during 2014 and 2013,
respectively.
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, 2014 and changes during the year then ended is presented below:
Options
Outstanding at January 1, 2014
Granted
Exercised
Expired and Forfeited
Outstanding at December 31, 2014
Vested or expected to vest at December 31, 2014
Exercisable at December 31, 2014
Shares
Weighted Average Exercise Price
Contractual Term (years)
Aggregate Intrinsic Value
Weighted Average Remaining
11,417
1,250
(6,083)
(1,666)
4,918
4,918
916
$
$
$
$
8.87
28.25
7.56
7.77
15.78
15.78
9.81
3.31
3.31
2.23
$
$
$
33,126
33,126
9,846
The weighted-average grant date fair value of options granted was $11.49 and $4.72 for the years ended December 31, 2014 and 2013, respectively. The total intrinsic
value of options exercised was $107,639 for the year ended December 31, 2014 and $95,477 for the year ended December 31, 2013.
There were 3,000 shares of restricted stock granted and subsequently forfeited, prior to vesting, during the year ended December 31, 2014. There were no restricted stock
grants during the year ended December 31, 2013.
Restricted stock activity during the nine months ended December 31, 2014 was as follows:
Outstanding at January 1, 2014
Granted
Forfeited
Outstanding at December 31, 2014
Shares
Weighted Average Price
-
3,000
3,000
-
$
$
-
28.25
28.25
-
17
17
7. CONCENTRATION OF CREDIT RISK
The Company maintains its cash balances primarily in two financial institutions. As of December 31, 2014, 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, 2014 and 2013. There are no financial covenants related to the line of credit.
COMMON STOCK
ADDITIONAL FINANCIAL INFORMATION
IKONICS Corporation common stock is traded on the Nasdaq Capital Market under
the symbol IKNX. For investment and stock information contact:
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 30, 2015 1:00 p.m.
Kitchi Gammi Club
831 E. Superior Street
Duluth, MN 55802
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
18
IKONICS CORPORATION | 2014 ANNUAL REPORT board of directorS
corporate officerS
LOCKWOOD CARLSON
President
WILLIAM C. ULLAND
Chairman, President & CEO
Carlson Consulting Group
Minneapolis, MN
Director Since 2009
CLAUDE PIGUET
Executive Vice President
RONDI C. ERICKSON
Chief Executive Officer (retired 2006)
Apprise Technologies, Inc.
JON GERLACH
Vice President, Finance, CFO
Duluth, MN
Director Since 2000
ERNEST M. HARPER, JR.
Chief Tax Officer (retired 2010)
ROBERT D. BANKS
Vice President, International
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
19
19
®
Corporation
WWW.IKONICS.COM | (218) 628–2217
4832 GRAND AVENUE
DULUTH, MN 55807
20
IKONICS CORPORATION | 2014 ANNUAL REPORT $20,000,000
$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
$0
Net Sales 2010 – 2014
Net Income 2010 – 2014
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
$0
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
IKONICS Five-Year History
2010
2011
2012
2013
2014
Net Sales
Pretax Income
Net Income
$16,517,338
$16,780,262
$17,312,407
$17,491,408
$18,489,837
$1,553,920
$1,043,257
$1,044,931
$927,173
$1,113,920
$698,257
$693,931
$682,173
Net Cash Provided by Operations
$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
Close
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
$918,770
$648,770
$916,748
3.5%
4.4%
5.0%
9.7%
$0.32
$31.02
$13.50
$14.56
Weighted Average Common Shares Outstanding - Diluted
1,973,447
1,986,041
1,990,847
2,010,659
2,018,334
Total Assets
Total Liabilities
Total Stockholders' Equity
Capital Spending
$13,141,931
$14,167,458
$13,184,276
$14,001,803
$14,627,962
$948,984
$1,176,915
$1,389,531
$1,401,985
$1,289,497
$12,192,947
$12,990,543
$11,794,745
$12,599,818
$13,338,465
$189,150
$621,598
$566,519
$762,537
$434,463
4832 Grand Avenue Duluth, MN 55807 ph: (218) 628-2217 toll-free: (800) 328-4261 e: info@ikonics.com web: www.ikonics.com
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